Leung Shing on Construction Co. Ltd. v. Wing Hong Construction Ltd. and Another
Read the full judgment text of HCCT 85/2000 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 23 March 2001 before Hon Burrell J in Chambers.
Construction Law — Subcontractor payments — Payment arrangement disputes — Interpretation of special and varied agreements — Interim payment applications under Order 29 — Leave to defend under Order 14 — Security for costs applications — Oral versus written collateral agreements. The plaintiff sub-contractor Leung Shing On Construction Co Ltd entered a contract with Wing Hong Construction Ltd, later modified by agreements with Hung Kei Mechanical Engineering Co to share net income and payment arrangements. Wing Hong paid directly to Hung Kei post-May 2000, breaching the special payment setup and leading to supplier nonpayment with LSO liable to suppliers. The court examined whether interim payments should be made despite defendants’ leave to defend granted under Order 14. Citing authorities, the court held that with unconditional leave to defend, interim payments generally cannot be granted unless leave is conditional and the payment is sensible and desirable given the plaintiff’s precarious position. The court found triable issues as to contract terms and oral collateral agreements, making summary judgment inappropriate and granting conditional leave to defend contingent on interim payment. The 1st defendant's application for security for costs was refused balancing LSO's impecuniosity and claim merits, particularly as interim payment was ordered. The 2nd defendant's summonses for accounts and small final payments were dismissed to be resolved at trial. The court ordered an interim payment of HK$1.2 million to cover supplier claims, to be held by plaintiff's solicitors for that purpose, balancing multiple counterclaims and evidentiary issues. Costs were reserved accordingly.
Legal issues: Interim payment under Order 29 · Suitability of Order 14 applications for summary judgment · Security for costs under section 357 Companies Ordinance and Order 23 · Order 27 claim for $100,000 by 2nd defendant
Outcome: The court ordered an interim payment of HK$1.2 million to the plaintiff; dismissed the 1st defendant's application for security for costs; dismissed the 2nd defendant's summonses under Order 14 and Order 27; leave to defend granted to the 1st defendant conditional on payment of interim payment.
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HCCT000085/2000 HCCT85/2000 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS ------------------------
------------------------ Coram: Hon Burrell J in Chambers Dates of Hearing: 30 November 2000 and 16 March 2001 Date of Decision: 23 March 2001 ------------------------- D E C I S I O N ------------------------- 1. The plaintiff, Leung Shing On Construction Company Limited (LSO"), is a demolition sub-contractor. The 1st defendant, Wing Hong Construction Ltd ("Wing Hong"), is the main contractor and the 2nd defendant, Hung Kei Mechanical Engineering Co. ("HKME"), is the plaintiff's sub-subcontractor. 2. The original contract to carry out demolition work at a site in To Kwa Wan between LSO and Wing Hong was in July 1999. That contractual relationship was modified by three subsequent agreements, which the plaintiff describes as follows :
3. LSO contend that, effectively, these arrangements were carried out until April 2000. However, since May 2000, payments were made by Wing Hong directly to HKME without complying with the provisions of the special payment arrangement. Moreover, HKME have not paid suppliers with the money it received. Those suppliers had contracted with LSO and so are now suing LSO for payment, whereas, the money, so LSO contend, has been paid to HKME. 4. Arising out of this, a number of summonses are before the court. 5. Firstly, the plaintiff seeks orders that :
6. Secondly, the 1st defendant seeks an order :
7. Thirdly, the 2nd defendant seeks an order that :
8. The plaintiff's case, in outline, is firstly, that Wing Hong should not have paid all the interim payments since 5 May 2000 to HKME because LSO had notified Wing Hong that the special payment arrangement was not being performed by HKME (i.e. it was not paying the suppliers) and it should therefore be cancelled. Secondly, LSO contends that payments by Wing Hong to HKME after May 2000 are not valid contractual discharges of debts due from Wing Hong to LSO. LSO should now be paid some or all of those monies so that it can discharge its liabilities to its suppliers who have not been paid by HKME. Thirdly, LSO contends that its liability under the special payment arrangement and the varied agreement has been discharged as from the date of its notice to Wing Hong and HKME that the agreements were not being properly performed. Interim Payments 9. Of the six issues which arise from the three summonses, I consider it logical to deal with the plaintiff's application for interim payments first. The approach to be adopted is to ask : Will the plaintiff receive a substantial sum after taking into account every real likelihood that the sum claimed will be reduced by the defendants' contentions? 10. The relationship between Order 14 applications and Order 29 interim payment applications was considered in some detail by Browne-Wilkinson V-C in British & Commonwealth Holdings plc v. Quadrex Holdings Inc. [1989] 3 All ER 492 at p.508 :
11. The court ultimately held :
12. In the present case, Mr M. Side, for the plaintiff, submits an interim payment of at least as much as it is being sued for by its suppliers is both "sensible and desirable". The irony will be, in the particular circumstances of this case, that if no interim payments are made, LSO will inevitably go into liquidation, they will drop out of the picture in this action, their suppliers will not be paid and HKME, who received the payments (wrongly, it is submitted) will receive a windfall; there being no contractual relationship between HKME and the suppliers. Mr Side further prays in aid the fact that HKME have in fact paid two "suppliers" directly in spite of HKME's contention that they have no obligation to do so, thus demonstrating that the terms of the special arrangement were indeed as contended for by LSO. 13. LSO primarily relies on correspondence and documents in support of its case on the existence and meaning of the "special" and "varied" agreements. The defendants, on the other hand, rely on "oral" agreements to a different effect. Reliance on oral agreements in the face of correspondence and contemporary documents, will inevitably be regarded dubiously and viewed with an element of suspicion. More so, when the first allegation of an oral agreement comes after the event. LSO has also pointed to the clear written notices to the defendants that their agreements were not being performed. It relies also, on certain subsequent events (viz. payments made by HKME) as further evidence in support. The court also attaches some weight to the peculiar situation which has arisen in relation to LSO's highly vulnerable present position, as described above, when deciding if an award of some interim payments is "sensible and desirable". In short, I am satisfied that the first limb of the test - will LSO achieve a significant judgment against Wing Hong - has been satisfied. 14. The second question is how much should be paid. Mr Side has helpfully prepared three short schedules demonstrating the cash position in three different circumstances. Firstly, if all the money paid out by Wing Hong after 5 May 2000 were paid back to LSO. Secondly, if only the value of the retention money being held by Wing Hong plus the value of the variation works is paid to LSO and, thirdly, the same situation, using Wing Hong's figures. 15. The final schedule produces the smallest figure and is the one I propose to start with. The figures are as follows :
16. Wing Hong has a counterclaim. Failing a settlement and the matter goes to trial there will be a live counterclaim. An attempt must be made to give credit for it either wholly or in part. Mr Side has already accounted for $928,601 worth of backcharges in his schedule. There are other heads of counterclaim in addition to those conceded. They are for liquidated damages ($225,000), labour claims ($50,000) and a demolition licence ($626,000). I consider the safe course is to make a further reduction in respect of the labour claims and demolition licence. This would reduce the award to $1,435,535. The plaintiff, through its solicitors in correspondence, has consistently stressed that its motivation is to pay those suppliers to whom they are contractually indebted. In the Statement of Claim, writs against LSO from suppliers totalling $1,008,991 have been particularized. In an effort to recognize that the sole purpose of the interim award is to pay the suppliers (the necessary legal test having been satisfied), I make a further reduction so that the sum ordered is sufficient to meet these claims plus an extra amount to meet possible new claims and interest. I award $1,200,000. The sum shall be paid to the plaintiff's solicitors for use solely for the payment of LSO's suppliers. The plaintiff is aware, and the court has taken into account of the fact, that any interim payment is reversible at trial. At least the facts of this case enable the court to make an order by which the innocent suppliers should be paid. Order 14 applications 17. In view of the court's decision on interim payments, all Order 14 applications can be dealt with succinctly. The competing submissions on quantum in this case are somewhat complex. Not so complex that the court felt unable to make an interim payment, but nonetheless complex. 18. Counsel for both Wing Hong and HKME have submitted that a number of triable issues are apparent. Primarily, those issues concern the nature of, parties to and terms of the various agreements and the existence of collateral oral agreements. Even though LSO are not asking for a summary money judgement against the defendants, rather, they are seeking a declaration against Wing Hong and an indemnity against HKME, it seems to me not to be a suitable case for summary judgement. Fundamental to the defence is the existence of an oral collateral agreement. Reliance on oral agreements which, on their face, are inconsistent with the contemporaneous documents are shadowy and suspicious. However, the court is reluctant to dismiss them without giving the parties an opportunity of being heard on the matter. Thus, bearing in mind also, the fact that the court has awarded interim payments against the 1st defendant their leave to defend will be conditional upon its paying the interim payment within 21 days of this judgement. 19. HKME's application for Order 14 judgement for an account and a declaration against LSO was, to use Mr Cheung's expression, "to counter" LSO's application against them. As he concedes, there is an element of illogicality to submit that there are triable issues in LSO's claim against them but in same breath, say, there is no defence to their claim against LSO for an account and a declaration. To be fair, he does not pursue this matter with particular enthusiasm. An account will clearly be necessary in due course, but not now via an Order 14 summons. 20. The 2nd defendant does, however, pursue with enthusiasm its claim for $100,000 under Order 27, rule 3 based on the plaintiff's alleged admission of liability. In view of the overall complexity of the quantum issues, I find no merit in slicing off a relatively small amount and make it the subject of a separate judgement. The plaintiff's position is that it should be taken into account in the final analysis. This is the more attractive approach and I decline the application for this reason. The 1st defendant's application for security for costs 21. The 1st defendant's claim for security for costs is based on the plaintiff's impecuniosity. LSO does not deny that, at present, it is impecunious. A balance, therefore, has to be struck between, on the one hand, the prejudice to the 1st defendant in having the resist a claim from an impecunious plaintiff and, on the other hand, the prejudice to the plaintiff in having a bona fide claim stifled by being ordered to pay security. 22. The court has a discretion whether or not to order security. The principles to be applied when deciding whether or not to exercise the discretion were considered in Wing Hing Provision, Wine & Spirits v. Hanjun Shipping Co. Ltd [1998] 4 HKC at p.464 :
23. The court's view about the merits of the plaintiff's case, "without going into the merits in detail", can be inferred from the award for interim payments already made. It is further, more than probable, in this case, that an award of security will stifle the claim. The consequence of that has also already been noted, namely, an injustice to the suppliers who are not involved in this litigation. 24. A further factor which can be weighed in the balance is that LSO's present precarious financial situation has been brought about, either wholly or largely, by the facts which have caused them to sue the defendants. 25. To summarise, I make the following orders : On the plaintiff's summons :
On the 1st defendant's summons for security for costs : 26. The summons is dismissed with costs to the plaintiff. On the 2nd defendant's summons under Order 14 and Order 27 : 27. The summons is dismissed with costs to the plaintiff.
Representation: Mr Mark Lovell Side of Messrs Tanner De Witt, for the Plaintiff Mr Johnson Lam, instructed by Messrs Jesse H.Y. Kwok & Co., for the 1st Defendant Mr Adonis Cheung Kam-wing, instructed by Messrs Nie & Co., for the 2nd Defendant | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||