China State Foundation Engineering Ltd v. Gold Brilliant Investment Ltd

HCCT 16/2020

[2021] HKCFI 309

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 16 OF 2020

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Before: Hon Mimmie Chan J in Chambers (Open to public)

Date of Hearing: 3 November 2020

Date of Decision: 8 February 2021

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D E C I S I O N

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Background

1.The Plaintiff seeks summary judgment on its claim against the Defendant for $9,528,300 under a cheque numbered 000201, drawn on the Bank of China and dated 17 February 2020 (“Cheque”).  The Cheque was presented by the Plaintiff for payment on 25 March 2020, and was dishonoured on 26 March 2020.  The Writ was issued on 6 May 2020, and the Order 14 Summons was issued on 25 May 2020 for judgment to be entered.

2.The Plaintiff was engaged by the Defendant, which is the developer of the Ho Man Tin Station Package One Property (“Development”) at a site in Kowloon (“Site”).  Under a Letter of Award dated 15 February 2018 (“LOA”), the Plaintiff was engaged to carry out the main contract works at the Site (“Works”).  The LOA states that the relationship between the Plaintiff and the Defendant with respect to the Works was to be governed by the terms and conditions agreed and referred to as the GCC and SCC.

3.It is not disputed that the Plaintiff commenced the Works on 1 March 2018, and that the original date for completion of the Works was 28 July 2019.  Interim payment certificates (“IPCs”) were applied for and issued in the course of the progress of the Works, the total amount certified by IPC 1 to IPC 16 being $124,710,300.

4.On 16 October 2019, IPC 17 was issued by the Architect, certifying that $9,528,300 was due to the Plaintiff.  The Plaintiff issued its invoice on 18 October 2019 for payment of the certified sum, and it is not disputed that the Cheque was issued for settlement.  Upon presentation and dishonor of the Cheque, these proceedings were instituted.

5.In opposition to the Plaintiff’s application for summary judgment, the Defendant asserts that it has a claim against the Plaintiff for liquidated damages in respect of the delay in completion of the Works, which claim can be set off against the sum payable under the Cheque (“Set-off Defence”). The Defendant further claims that the Cheque was delivered conditionally, and there was an agreement between the Plaintiff and the Defendant that the Cheque would not become operative unless and until the Plaintiff executed a formal contract for the Works, which the Plaintiff never did (“Alleged Agreement Defence”).

Set-off Defence

6.It is not disputed that if a legal set-off can be established, there is a valid defence to the claim under the Cheque (Safa v Banque de Caire [2000] 2 Lloyds Rep 600, at 606).  The issue in dispute between the parties is whether the Defendant’s claim to damages of $11,900,000 (certified as at 31 August 2019), for alleged delay in completion of the Works, is a liquidated claim (for which a defence of set-off is available), or an unliquidated claim (for which no defence of set-off can be raised).

7.Liquidated damages clauses are commonly used in the construction and building industry.  They are often agreed to be paid as damages for some breach of contract, and a typical liquidated damages clause provides that if the contractor shall fail to complete its works by a date stipulated in the contract, or any extended date, the contractor shall pay or allow the employer to deduct liquidated damages at the rate of $x per day or week for the period during which the works are uncompleted.

8.GCC 22 which governs the contract between the Plaintiff and the Defendant in this case provides that if the Plaintiff as the main contractor fails to complete the Works by the Date for Completion stated in the conditions, or within any extended time fixed under GCC 23 of the conditions, and the Architect certifies in writing that in his opinion the same ought reasonably so to have been completed, then the Plaintiff shall pay or allow to the Defendant as the employer a sum calculated at the rate of $350,000 per day (“Rate”), as Liquidated and Ascertained Damages, for the period during which the Works shall so remain or have remained incomplete, and the Defendant as employer may deduct such sum from any monies due or to become due to the Plaintiff under the contract.

9.It is not disputed in this case that the Works were not completed by the original Date for Completion on 28 July 2019.  Four notices of delay were issued by the Plaintiff and on 23 August 2019, the Architect of the Project issued a Non-Completion Certificate for the Works (“NC Certificate”), certifying that the Plaintiff had failed to complete the Works by 28 July 2019, that all claims for extensions of time had been addressed, and that pursuant to GCC 22, the Plaintiff should pay or allow to the Defendant a sum calculated at the Rate as Liquidated and Ascertained Damages for the period during which the Works shall remain incomplete.  The Architect further stated in the NC Certificate that the Defendant may deduct such sum from any monies due or to become due to the Plaintiff under the contract, without prejudice to any other rights and remedies of the Defendant for non-completion of the Works.  On 16 October 2019, the Architect stated that the Liquidated and Ascertained Damages calculated at the Rate for 34 days, up to 31 August 2019, were $11,900,000.

10.On behalf of the Plaintiff, Mr Wong submitted that the court should resist “the superficial attraction of the proposition” that the Defendant’s claim for liquidated damages for delay must be a liquidated claim. Mr Wong pointed out that in order to arrive at the amount of the alleged liquidated damages, only the daily Rate is a fixed liquidated component, whereas the other essential component is the assessment of the length of the delay.  The latter and essential component requires an estimate to be made by the Architect, based on his assessment of the fair and reasonable extension of time to which the Plaintiff is entitled.  Such estimate involves judgment of what is fair and reasonable, and is not mere arithmetic calculation, thus rendering the claim for liquidated damages for delay to be unliquidated. Counsel further pointed out that the assessment or estimate made by the Architect is reviewable by arbitration under GCC 35(3), and by the Court (W Hing Construction Co v Boost Investments Ltd [2009] 2 HKLRD 501, at para 99).

11.Mr Wong further highlighted the fact that the question of delay involved the parties’ dispute as to whether the delay fell within one of the qualified events which entitle the Plaintiff to fair and reasonable extensions of time in accordance with GCC 23.  The issues raised are not straightforward, and the parties had in October 2019 agreed not to resolve the dispute over extensions of time and the liquidated damages to which the Defendant may be entitled.  No reserve was made for liquidated damages when IPC 16 was paid on 12 November 2019.

12.A liquidated demand is described at para 6/2/4 of Hong Kong Civil Procedure 2021:

“A liquidated demand is in the nature of a debt, ie a specific sum of money due and payable under or by virtue of the contract. Its amount must either be already ascertained, or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a ‘debt or liquidated demand’ but constitutes ‘damages’.”

13.On behalf of the Plaintiff, it was contended that the contractual mechanism under GCC 22 renders the Defendant’s claim unliquidated, since it requires investigations beyond mere calculations.

14.There can be little debate, that the assessment of an extension of time application, and estimates of the impact of events on time for works to be done and the consequential delay, do involve judgment to be made by the architect, or any other party entrusted to do the estimate.  However, one cannot ignore the reminders made by the courts, in the authorities referred to by the parties, that the focus is on the consideration of the nature of the claim, and that a debt for a liquidated sum is a pre-ascertained liability under the agreement of the parties, calculated or ascertained in accordance with a contractual formula or machinery specified in the agreement.

15.I start with Onway Engineering Ltd v Shun Wing Construction & Engineering Co Ltd, unreported, HCA 88/2008, where Deputy Judge Carlson explained the meaning of a “liquidated pecuniary claim”.  At paragraph 23, the learned judge observed:

“In my judgment, one needs to be careful not to confuse the nature of a claim, liquidated or unliquidated, with the means by which the claim will need to be proved at the trial. Even with a liquidated claim the plaintiff may, depending on the type of case that it is, have to call evidence in support of how the claim is computed… As at the trial before Deputy Judge Muttrie, when the parties called expert evidence on the quantum of the claim, the same course will need to be taken in this case. In order to determine whether a claim is liquidated or not one needs to look at the basis of the claim. In many cases, where for instance, the amount sued for is based on a clearly quantified debt there will be no difficulty. Where the matter is not so clear cut, in the sense that the arithmetic needs to be done, the nature or character of the claim will still remain that of a liquidated claim.

The basis of this claim is readily calculable by doing the necessary sums… The fact that a defendant may defend on the basis that less work was done than has been claimed for or that the work was done defectively as a whole or in part will not convert a liquidated claim into an unliquidated one.”

16.The meaning of a debt for liquidated sum was explained in further detail by Cheung JA in Re Grande Holdings Ltd [2016] 1 HKLRD 435, where His Lordship reviewed the decisions in McGuinness v Norwich and Peterborough Building Society [2012] 2 All ER (Comm) 265, In Ex p Ward (1882) 22 Ch D 132 and Revenue and Customs Commissioners v Maxwell [2011] Bus LR 707.  It is true that the “components” in Ex p Ward, Re Grande Holdings Ltd and Revenue and Customs Commissioners v Maxwell which were required for the ascertainment of the amount, being the market closing prices in Ex p Ward, the values of the derivatives in Re Grande Holdings, and the income and expenditure of a company for calculating the corporation tax payable in Maxwell, may be different to the components in the present case, Cheung JA highlighted in Re Grande Holdings that the distinguishing factor and the meaning of a liquidated debt is in its nature as a pre-ascertained liability under the agreement of the parties, by reference to a contractual formula or machinery specified by the parties themselves, and accepted by them as a genuine pre-estimate of the loss likely to be sustained on the occasion of a breach.  At paragraph 6.5 of his judgment, Cheung JA observed:

“In my view, a more useful statement on the meaning of a debt for a liquidated sum is that it is a pre-ascertained liability under the agreement of the parties. This includes a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery. This can be found in the judgment of Patten LJ in McGuinness v Norwich and Peterborough Building Society [2012] 2 All ER (Comm) 265. After reviewing the authorities, Patten LJ stated that:

These authorities indicate and I think establish that a debt for a liquidated sum must be a pre-ascertained liability under the agreement which gives rise to it. This can include a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, will produce a figure. Ex p Ward is the obvious example of that. Claims in tort are invariably unliquidated because they require the assistance of a judicial process to ascertain the amount due by way of damages. In some cases the calculation of the award will be straightforward and obvious but the unliquidated nature of the claim excludes it from being a good petitioning creditor’s debt which satisfies the requirements of s.267.

The most obvious use of the term ‘liquidated’ has been in relation to liquidated damages.  ‘Liquidated’ has been defined judicially as meaning the sum which the parties have by their contract assessed as the damages to be paid for its breach: see Wallis v Smith (1882) 21 Ch D 243 at 267 per Cotton LJ.  If a genuine pre-estimate of loss the provision is enforceable according to its terms.  I would therefore regard a claim for liquidated damages as one for a liquidated sum within the meaning of s.267 unless a claim in damages is excluded by the use of the word ‘debt’.  (Emphasis added)”

17.Cheung JA highlighted the fact, as found by Lord Neuberger in Revenue and Customs Commissioners v Maxwell, that the calculation of the liquidated sum is always subject to the right of a party to challenge it.  At paras 58 to 59 of his judgment, Lord Neuberger had observed:

“In this case, HMRC rely on the point that, as at the date that the company went into administration, the facts relating to the income and expenditure of the company were known for all the six relevant periods. Accordingly, runs their argument, it would have been possible, effectively as a matter of arithmetic, to calculate how much was owing by way of corporation tax in respect of those periods, and the total tax owing was therefore a liquidated and ascertained sum, subject always to the right of the company to challenge it. I see the force of that argument, but it seems to me that, as a matter of ordinary language, as at 9 September 2009, the amounts owing by way of corporation tax were not ascertained and liquidated (at least over and above the amounts specified in the company’s self-assessments). In order to calculate what was owing, one would have had to trawl through figures in the company’s accounts, investigate the law relating to EBTs and payments to directors, and carry out calculations which were not straightforward. In many damages claims, one could work out the amount likely to be assessed by the court, but that does mean that an unresolved damages claim is a liquidated or ascertained debt.

Thus, in my opinion, in respect of all six periods, any corporation tax claimed to be due, over and above the self‑assessments, was not a liquidated ascertained sum, until HMRC had issued notices of amendment.  However, once such notices were issued, I consider that the sums therein were liquidated and ascertained sums, in the amounts specified in the amendments (albeit subject to the possibility of challenge by appeal for tax purposes and assessment for voting purposes at meetings): Taxes Management Act 1970, sections 59D(1) and 55(1)(a)(2)(a).  The fact that the sums so specified were subject to appeal and stay applications would not, in my view, undermine that conclusion: to hold otherwise would involve confusing ascertainment with unchallengeability.”

(Emphases added)

18.In Tian Yao (Xiamen) Property Development Company Limited v Chan Shu Chun HCMP 2396/2015, 18 February 2016, Barma JA applied the same principles, to hold that a claim for excess sales proceeds as profits under a sales agency agreement was one for a liquidated debt.  At paragraph 19 of the judgment, His Lordship explained:

“It is clear from Mr Hung’s description of the steps needed to work out the amount of the excess sale proceeds that all that is involved is a series of arithmetical operations, based on a formula specified in the contract. True it is that some of the inputs may need to be supplied, and may even be the subject of dispute (as is the case here in relation to the number of apartments sold), but that does not alter the nature of the claim from liquidated to unliquidated.

… The fact that further information was required in order to establish the amount of the debt or liquidated demand, and that there might be some dispute as to what the position actually was, or indeed that the calculations required under the contract to ascertain the amount might be complicated, did not make the claim in question an unliquidated one. What was important was that once the inputs were known, the amount due was ascertainable by a process of calculation specified by the parties in their contract, without the need for further agreement from the parties, or assessment by the court by reference to the general legal principles, thus going beyond what was provided for by the contract.” (Emphases added)

19.The identification of the inputs for components may be complicated, but once identified, the application of the formula specified in the contract does not involve any further assessment by the court.  In Lee Kwok Wing v Chung Chuen Mei [2012] 4 HKLRD 917, Deputy Judge Lisa Wong SC (as Her Ladyship then was) explained that the process of “assessment” refers to the process by which the court decides, in accordance with legal principles, the amount of damages or compensation which should be paid to a plaintiff to address any wrong done by the defendant’s breach.

20.In my view, the factors highlighted by Mr Wong on the Plaintiff’s behalf, that the calculation of the liquidated sum is dependent on the Architect’s value judgment and his assessment of what is fair and reasonable by way of extensions of time and what represents the period of delay, go only to show that the Architect’s assessment and computation of the period of delay, and his resulting calculation of the liquidated damages, may not be final, and may turn out to be wrong, because of the matters in dispute between the Plaintiff and the Defendant.

21.However, as the courts have made it clear, to be a liquidated sum, the quantified debt does not have to be undisputable, or unchallengeable (paras 57 and 59 in Revenue and Customs Commissioners v Maxwell, para 6.12 of Re Grande Holdings, and paras 19 and 20 of Tian Yao). There is nothing in GCC 22 which states that the certification of either the period during which the Works remained incomplete, or the amount of liquidated and ascertained damages calculated, is final and binding.  Any interim payment based on the interim payment certificates, and any deductions made therein by the employer, may be challenged and reopened for determination by the court or arbitrator in accordance with the dispute resolution mechanism under the contract.  The Architect’s assessment of delay, based on any extension of time granted, is not final, and the final payment due to the Plaintiff in respect of the Works will ultimately be determined, with account given for any wrongful deductions made by way of liquidated damages, or otherwise.  As Mr Wong pointed out, the parties agreed under GCC 35(3) that in a dispute between the parties which arise under their contract, the arbitrator has the express power to open up, review and revise any certificate and to determine all matters in dispute as if no such certificate, opinion, decision had been given by the Architect.

22.After careful review of the authorities, I uphold the correctness of the “superficially attractive proposition” to which Counsel had referred, and conclude that the Defendant is entitled to deduct and set-off its claim of liquidated damages for delay, against the Plaintiff’s claim under the Cheque. This is particularly so since the Architect had already issued the NC Certificate on 23 August 2019.  Once that certificate was issued, the sum calculated by multiplying the Rate to the period of delay from 28 July 2019 can be ascertained, to become a liquidated and ascertained sum, which was also on 16 October 2019 ascertained up to 31 August 2019.  The fact that the sum could be challenged and reviewed by the court or in arbitration, and are not final, does not undermine the conclusion that the sum was liquidated.

23.Where the Defendant can show an arguable set-off, it is entitled to leave to defend to the extent of the set-off, and the Court has no discretion (para 14/4/14 Hong Kong Civil Procedure 2020).

Alleged Agreement Defence

24.I am not satisfied that the Defendant has any arguable or credible defence of conditional delivery of the Cheque.

25.The clear principle of law is that parole evidence cannot be admitted to add to, vary or contradict a written instrument (Lewison on The Interpretation of Contracts, 2004 edition, para 3.07, citing Jacobs v Batavia and General Plantations Ltd [1924] 1 Ch 287).  The Cheque is a written contract in itself, and as such, extrinsic evidence outside the contract will not be admitted to prove that some particular term had been omitted or included.

26.Under section 21 of the Bills of Exchange Ordinance, the delivery of a bill may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.  The Defendant seeks to rely on the correspondence between the Plaintiff and the Defendant, to show that the Defendant’s delivery of the Cheque to the Plaintiff was conditional upon the Plaintiff’s execution of the formal contract for the Works, which the Plaintiff had not done so since the LOA was issued and despite the Defendant’s repeated requests.

27.Even if the emails sought to be relied upon by the Defendant are admissible for the purposes of section 21, and are admitted, they do not clearly show that the Cheque sent to the Plaintiff on 18 February 2020 was conditional, as the Defendant claims, or at all.

28.The Defendant’s evidence is that after the LOA was issued on 15 February 2018 and countersigned, possession of the Site had been given to the Plaintiff, Works had commenced and interim payments were made, but the formal contract had not been signed.  In December 2019, after IPC 16 had been paid, the Defendant issued a reminder to the Plaintiff to sign the formal contract documents.

29.IPC 17 was presented by the Plaintiff on 21 October 2019, and on 15 January 2020, the Plaintiff issued a further reminder to the Defendant for payment.  On 16 January 2020, Ms Leu of the Defendant (“Leu”) sent an email to the Plaintiff, stating that as the Defendant’s bank had been chasing it for the signed contract documents, and since the contract documents had not yet been signed by the Plaintiff, the release of payment to the Plaintiff might be jeopardized.  Leu concluded the email by stating:

“We hereby notify you that the release of payment is subject to your positive response to sign and return back the contract documents as soon as possible without any further delay.”

30.No response was received from the Plaintiff, and on 22 January 2020, Leu sent another email to the Plaintiff, stating:

“… we reiterate again that the release of payment is subject to your quick response to sign and return back the contract documents as soon as possible to fulfill the bank’s requirement.”

31.The email was again ignored, and on 6 February 2020, after receiving the Plaintiff’s payment reminder for IPC 17, Leu emailed the Plaintiff, stating:

“… please help to handle the contract documents promptly so as to facilitate the release of payment by the bank. Your immediate action to sign and return the duly signed contract documents is necessary.”

32.In response, the Plaintiff only issued another reminder for payment of IPC 17, leading Leu to send an email on 14 February 2020, to state:

“We do not want to repeat again and again our reply as attached. In order to facilitate our release of payment, your prompt action to sign and return back the contract document is necessary. The hurdle of release of payment is caused by your side.”

33.After the email of 14 February 2020, the Defendant issued a letter to the Plaintiff, to put on record that the Plaintiff had refused to execute and return the formal contract, and demanded for the executed contract documents within 7 days.  The Defendant claims that there were also messages exchanged between representatives of the Plaintiff and the Defendant, the Defendant indicating in these messages that it was still awaiting the signed contract from the Plaintiff.  From these messages, it is in fact clear that on 12 February 2020, the Plaintiff already stated in no uncertain terms to the Defendant that the Plaintiff would not be signing and returning the formal contract.

34.The Defendant also claimed that on 17 February 2020, Leu spoke with Ms Ho of the Plaintiff, in the course of which Leu proposed that a copy of a cheque for $9,528,000 would be provided to the Plaintiff, but this was rejected by Ho.  Leu then proposed that the actual cheque would be provided, but that the Plaintiff should wait before presentation.

35.Then, on 18 February 2020, the Cheque was delivered to the Plaintiff.

36.On the Defendant’s case, having regard to the emails, messages and Leu’s conversations with Ho, “there can be no doubt that the Cheque was provided to the Plaintiff on the basis that it did not take effect unless and until the Plaintiff’s execution of the Formal Contract”, and that it meant that the Plaintiff should not present the Cheque for payment unless and until it had signed the formal contract.  From that, the Defendant goes on to claim, in the affirmation of Wong Kin Ming, that the parties had mutually understood and agreed that the Cheque was not to become operative unless and until the Plaintiff executed the formal contract.

37.The emails and messages relied upon by the Defendant go nowhere near to establishing that the Cheque was delivered with the alleged condition attached, that the formal contract should be signed and returned.  Even on Wong’s narrative of the telephone conversation between Leu and Ho on 17 February 2020, there was no mention of the execution and return of the contract documents when the provision of the Cheque was proposed.  The only possible condition that could arguably have been attached was that the Plaintiff had to wait before presenting the Cheque for payment.  On the facts, the Plaintiff did wait until 25 March 2020.

38.The Defendant’s emails of 16 and 22 January and 6 February 2020 only referred generally to “the release of payment”, with no specific reference to the Cheque, nor to the delivery of the Cheque on 18 February 2020.  It was only on 19 March 2020, that the alleged existence of a condition of the Cheque, that the executed contract documents should be returned, was raised by the Defendant in its letter, for the first time.

39.The emails and messages relied upon by the Defendant also fail to demonstrate that the Plaintiff had on its part agreed to any conditions sought to be imposed by the Defendant, whether in relation to the release of payments, or to the delivery of the Cheque, at all.  As Counsel for the Plaintiff submitted, the extrinsic evidence only shows the unilateral attempts made by the Defendant to impose conditions on the Plaintiff.  The mere acceptance of the Cheque was unequivocal as conduct of the Plaintiff referable to or evidencing the alleged agreement on the condition.  The Plaintiff’s acceptance of the cheque can be consistent with there being no contract between the parties to the effect contended for by the Defendant.  There is no evidence of any “mutual agreement” as alleged.

40.My conclusion is that the Defendant’s assertions as to the conditions and agreement for the delivery of the Cheque are unbelievable, and do not support any triable issue or arguable Alleged Agreement Defence, and I do not grant leave to defend on this ground.

Disposition

41.On the Order 14 summons, I grant leave to the Defendant to defend on the Set-off Defence, with an order nisi that the costs should be in the cause.

42.Parties should submit within 14 days agreed directions for the further conduct of the action.

Mr Jonathan Wong and Miss Leticia Tang, instructed by M/S J Chan, Yip, So & Partners, for the plaintiff

Mr David Chen, instructed by Deacons, for the defendant