Yee Sang Metal Supplies Co v. Defag Construction Co and Another
Read the full judgment text of HCA 2212/1966 on BabelCite. This High Court CFI judgment was delivered on 3 January 1969.
1. The plaintiff firm has already obtained judgment against the first defendant firm in the full amount of its claim. That judgment remaining wholly unsatisfied, the present proceedings are between the plaintiff firm and the second defendant company. Such a trial began in March last before the late Creedon, J. and was adjourned. During the adjournment the profession and the parties to these proceedings suffered the untimely loss of Creedon, J., and the hearing before me was de novo.
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IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION ACTION NO. 2212 OF 1966 -----------------
----------------- Coram: Pickering J. Date of Judgment: 3 January 1969 ----------------- JUDGMENT ----------------- 1. The plaintiff firm has already obtained judgment against the first defendant firm in the full amount of its claim. That judgment remaining wholly unsatisfied, the present proceedings are between the plaintiff firm and the second defendant company. Such a trial began in March last before the late Creedon, J. and was adjourned. During the adjournment the profession and the parties to these proceedings suffered the untimely loss of Creedon, J., and the hearing before me was de novo. 2. Two issues arise for determination. The first concerns the liability or otherwise of the second defendant company to pay to the plaintiffs any sum over and above the figure of $884,000.00 which it is common ground has already been paid to them. The second issue, which will arise only if such a liability on the part of the second defendant company is established, relates to the quantum so payable. I am informed that the assessment of quantum will involve detailed calculations from scale plans of the amount of steelwork which has gone into an existing 16-storey building, and that the cost of such a survey by quantity surveyors will alone amount to $16,000.00. 3. With a view to a considerable saving of costs in the event of the plaintiffs being unsuccessful on the issue of liability, counsel on both sides asked me to determine the issue of liability before evidence was adduced on that of quantum. As the application was first put to me, I understood that I was being asked to deal first with liability and then to proceed to the question of quantum. On my issuing a caveat to the effect that if that procedure were adopted the parties must not expect to lodge an appeal with the Full Court on the single issue of liability before that of quantum was embarked upon - if indeed they would have any right so to do - it became apparent that counsel were not yet agreed upon the manner in which the issue of quantum (should it ever become a live issue) should be determined and that there was a possibility of this issue going either to arbitration, before a judge with a technical assessor or possibly going before the Registrar. 4. In support of their joint application counsel relied upon Order 33, Rule 4(2) which provides, inter alia, that in an action began by writ one or more issues may be ordered to be tried before the others. I was referred also to the case of Smith & Co. v. Hargrove & Co.(1), where it was held that where liability and also the amount of damages are disputed in an action, and the question as to the amount of damages is one of such detail or nature that it would probably be referred to some other tribunal than a jury, it is a proper exercise of discretion to order the question of liability to be tried and the question of damages to be postponed until afterwards. Reference was also made to the cases of Polskie Towarzys two Handlu Zagranicznego Dla Elektrotechniki "Elecktrim" Spolka Z Ograniczona Olpowiadziolnoscia v. Electric Furnace Co., Ltd.(2) and Gold v. Patman & Fotheringham, Ltd.(3). 5. It appeared to me that in the present case there existed a clear line of demarcation between the issue of liability and that of quantum and that the evidence required to sustain each of these issues was readily separable. Accordingly, applying the principles contained in the cases to which I have referred and having regard to the fact that the application was a joint application and to the possibility of a considerable saving in costs, I exercised my discretion to try the issue of liability before that of quantum and this decision is concerned only with liability. 6. The second defendant company is the registered owner of the property registered in the Land Office as Section A of Kowloon Inland Lot No.1571. By a written contract dated 27th October 1964 (which I shall refer to as the Principal Contract) the second defendant company contracted with the first defendant firm for the erection by the latter of a 16-storey building on that site. By a further written contract, dated 20th January 1965, which was in the Chinese language (and which I shall refer to as the Chinese Contract) the plaintiff firm contracted with the first defendant firm to carry out the steelwork on the proposed building. 7. The work on the site had a chequered history and at different times during the construction of the now completed building the second defendant gave notice of termination of the Principal Contract to the first defendants and vice versa. The differences arising out of these first two notices of termination were however resolved and I will record only that as a result of the second of them the completion date for the building was agreed to be set back to 20th September, 1966. Eventually the second defendant again gave notice of termination of the Principal Contract to the first defendants and this notice became effective on 3rd September, 1966, before the completion of the building. No other principal contractor was appointed in place of the first defendant firm. 8. The case was opened before me at considerable length. I will endeavour to epitomise, within a relatively short compass the almost one hundred pages of single-spaced typed transcript of the opening addresses. 9. In essence, the issue of liability depends upon the arrangements for payment made between the plaintiffs as subcontractor of the first defendants, the first defendants as principal contractor and the second defendant as site-owner. To arrive at an understanding of those arrangements it is necessary to refer to certain of the documents, comprising more than 300 pages, which were put before the court as four agreed bundles bearing the letters A, B, C & D respectively. I have considered all these documents and would observe that had greater selectivity been exercised upon them, the parties to this litigation would have had their judgment before now. 10. The Principal Contract, which comprises Bundle B, is a lump-sum contract for the erection of the building at a price of $4,692,000.00 and it contains a schedule of payments (page 41et seq.) totalling, oddly, only $4,500,000.00. Under Clause 27 of the Contract, provision is made for the issue of interim payment certificates by the architect to the scheme; thereafter the principal contractor, the first defendant firm, was to be entitled to payment on presentation of such certificates to the site-owner, the second defendant, within the periods of time specified in the Appendix. Under Clause 36, a sum of $100,000.00 was to be deposited by the first defendants with the second defendant as security. Clause 21 contained provision for the second defendant to determine the contract if the first defendants should fail "to proceed with the works with reasonable diligence and in accordance with the programme and time schedule". 11. A feature of the Schedule of payments was that the first defendant firm was to receive no payment, pending the construction of R.C.C. pile caps to the value of about $700,000.00. Although the first defendant's payments were then spread over 41 instalments, only the 1st to the 17th inclusive were the instalments referable to the R.C.C. structure for which the plaintiffs later became sub-contractor. 12. It is apparent from the figures at page 43 of the Principal Contract that the cost of the necessary steel bars for the work which, in the event, the plaintiff undertook to do, would amount to $1,306,180.00. 13. The Chinese Contract is contained in Bundle C (pages 141 to 143). This contract provides for $100,000.00 to be paid to the plaintiff firm on completion of the fixing work in respect of the foundation rods and foundation beams, for 10 separate payments of $50,000.00 each on completion of the reinforcement fixing work to the floor slab of each floor from the mezzanine floor to the 9th floor inclusive and for a further 10 separate payments of $45,000.00 each "from the 10th floor to the slab of the roof". The Contract further provided that all these payments were to be made direct to the plaintiffs by Messrs. Johnson, Stokes, & Master, solicitors for the second defendant. 14. A further Clause headed "Method of Weight Calculation" provided that the weight of the steel used should be calculated according to the scale-plans of the building, and the price for each 100 catties of mild steel round bars was to be $48.00 whilst that for the same weight of high tensile steel round bars was to be $55.00. It would thus appear, and indeed it was the evidence of the plaintiff's and the first defendant's representatives that they did not contemplate that the figure of $1,050,000.00, the total of the instalment payments contained in the Chinese Contract, represented the ultimate sum payable to the plaintiffs but rather that on completion of the work there was to be a final adjustment of accounts on the basis of the weight of steel used, calculated in accordance with the scale-plans of the building. 15. It was intended that the last twenty of the twenty-one payments specified in the Chinese Contract should coincide with and be effected from the first twenty payments due to the first defendant firm under the Schedule to the Principal Contract, it being stated in the Chinese Contract that "Each payment is to be made in accordance with Party A's payment dates.". It is to be observed however that under the Principal Contract the R.C.C. work would be complete at the time of the 17th payment; the 18th, 19th and 20th payments under that Contract relating to brickwork with which the plaintiff was not concerned. 16. A letter (Exhibit E) of the same date as the Chinese Contract, from the first defendants to the plaintiffs, reads as follows:-
17. This letter contemplates a separate and authoritative version of the Chinese Contract in the English language but no such version was ever executed. The letter also again refers to payment according to the amount of "iron" used, and contemplates that in addition to the tentative prices in the Chinese Contract, there should be a further payment to the plaintiff firm of $100,000.00 if the second defendant should promise to "lend" the first defendants $250,000.00 upon completion of the foundation works - a loan (or advance) which did not materialise. This $100,000.00 is not the same $100,000.00 as that appearing in the Chinese Contract as the first payment to be made to the plaintiff firm. 18. This additional $100,000.00 was not the only proposed variation and addition to the prices contemplated in the Chinese Contract, for by a letter of the 8th February 1965 (Document 150 in Bundle C) the first defendant firm irrevocably authorised Hessrs. Johnson, Stokes & Master, solicitors, (then acting for the second defendant company on whose behalf they were receiving periodical payments from the financiers to the scheme against architect's certificates) to pay to the plaintiffs not only the 10 payments of $50,000.00 each and the 10 payments of $45,000.00 each contemplated by the Chinese agreement, but also to pay to them, from the 21st payment due under the Schedule to the Principal Contract, the further sum of $70,000.00. That 21st payment under the Principal Contract was to be in respect of steel windows and, like the 18th to the 20th, was not referable to any work done or to be done by the plaintiffs. 19. Another variation arose when, by a letter of 14th January 1966 the plaintiffs and the first defendants jointly informed the second defendant that the Chinese Contract between the plaintiffs and the first defendants had been varied in that the plaintiffs were thereafter to receive only $40,000.00 under each of the 7th to 10th payments thereunder and only $36,000.00 under each of the 11th to 20th payments whereas they were to receive $230,000.00 at the time of the 41st and last payment due, under the Principal Contract on the issue of the Occupation Permit. In the result the total amount due to be paid to the plaintiffs under the Chinese Contract as varied, ignoring any final adjustments to be made on the basis of the weight of steel used, was $1,220,000.00. Of this sum $884,000.00 has been received by the plaintiffs. 20. In early February, 1965, there was a meeting at the Handarin Hotel between Mr. Yu, managing partner of the plaintiff firm and Mr. Cheng, managing director of the second defendant company, The meeting was arranged by Mr. Koo, the proprietor of the first defendant firm, but there is a conflict of evidence as to whether Mr. Koo himself was present at the meeting. Following this meeting, the plaintiffs wrote to the second defendant on the 5th of February (148 in Bundle C) in the following terms:-
21. The second defendant company replied to this letter by a letter of the 9th February, 1965, (152 in Bundle C) as follows:-
Tak Ming Middle School at
22. It is the contention of the plaintiffs that the phrase "We shall pay you for the work done against our architect's certificates in accordance with the building contract 574" confers an obligation upon the second defendant to pay to the plaintiffs the outstanding amounts certified by the architect as relating to work done by the plaintiffs. The plaintiffs, their counsel argues, should not have to wait for their money because the architect has not issued his certificate in respect of work which has nothing to do with them. It is the fact that no architect's certificates were issued in respect of the 20th, 21st and 41st payments scheduled under the Principal Contract and relating respectively to brickwork, window-frames and the issue of the Occupation Permit although in fact, as is common ground, the building has been completed and the Occupation Permit issued. The second defendant, however, argues that the obligation to pay, if any, is to pay upon the certificates of the architect, some of which were never issued, although as already noted, the unissued certificates related to work which had nothing to do with the plaintiffs who had agreed in the Chinese Contract, as varied, to a schedule of payments tied to the Schedule in the Principal Contract in such a manner that the later instalments due to them were only payable upon the completion of work which could not be completed until after all the R.C.C. work was finished. In fact, all the R.C.C. work had been completed by the 5th of July, 1966, the date of the 17th architect's certificate. 23. Side by side with these private arrangements between the plaintiffs and the second defendant, other arrangements were being made through solicitors. I have already referred to the letter of the 8th February, 1965 (150 in Bundle C) from the principal contractor to Messrs. Johnson, Stokes & Master, "irrevocably" authorizing payment by these solicitors to the plaintiffs of, inter alia, 10 sums of $50,000.00 each and 10 of $45,000.00 each and I have related how, despite its description, this authority was amended by the plaintiffs and first defendants by letter of 14th January 1966. 24. It is apparent that the arrangement for payments to the plaintiffs through Messrs. Johnson, Stokes & Master on the authority of the first defendants, the principal contractors, contemplated the continued employment of the first defendants in that capacity whereas the undertaking contained in the second defendant company's letter of 9th February 1965 to the plaintiffs was directed to the situation which would arise should the first defendants cease to be employed by the second as principal contractors. In fact that latter eventuality occurred when the second defendant company served a second notice of termination of the Principal Contract upon the first defendants which became effective upon 3rd September 1966. 25. The plaintiffs rest their case upon the construction of the arrangement reached directly between the second defendant company and the plaintiffs and embodied in the two letters of the 5th and 9th February 1965 set out above. Paragraphs 7 to 12 of the Further Amended Statement of Claim, which purported to rest the plaintiffs' claim on other and alternative grounds including the arrangement for payment through Messrs. Johnson, Stokes & Master, have been abandoned by counsel for the plaintiffs. 26. I have said that the plaintiffs' case rests upon the construction of the two letters of 5th and 9th February 1965 and this was pleaded in the Further Amended Statement of Claim. At one stage Mr. Litton, counsel for the second defendant, elicited from the plaintiffs' managing partner, under cross-examination, the statement that what he was really suing on was an oral promise given by Mr. Cheng of the second defendant company at the Mandarin Hotel. Despite objection by Mr. Litton I permitted re-examination on this matter whereupon the witness said that he was relying on paragraph 2 of the letter of 9th February 1965 from the second defendant company and upon paragraph 13 of his Further Amended Statement of Claim and that he understood paragraph 2 of the letter to mean that if the first defendants discontinued their work under the Principal Contract then payment for all work done on the site by the plaintiffs would become the responsibility of the second defendant company. I would add that re-examination on this point was in any event hardly necessary, for even in its absence I could have attached only minimal weight to the answer of a layman as to the legal foundation of his case. He employs lawyers to put his case upon its feet and his counsel pleaded the letter of 9th February 1965 of set purpose. I could not have allowed that purpose to be set to naught and the plaintiffs' whole case distorted because of the isolated answer of a layman on a technical matter. It is my duty to decide the case in the light of the whole of the evidence and the evidence includes this very important letter and that whether or not the plaintiff firm's representative appears to appreciate its importance. Indeed in his opening speech for the second defendant company Mr. Litton himself very aptly said that I might well place more reliance upon the exchange of letters than on anything said in evidence in court. 27. It is the submission of counsel for the second defendant company that under the Principal Contract one of the obligations of the first defendants was to supply the material for and execute the steel reinforcement fixing work and that the subsequent sub-contract for that work contained in the Chinese Contract could not result in any privity of contract between the second defendant as site-owner and the plaintiff firm as sub-contractors. In support of this argument counsel quoted from Hudson's Building & Engineering Contracts where it is stated(4) that it cannot be over-emphasised that no privity of contract between the employer and the sub-contractor can arise out of a sub-contract concluded between the main contractor and the sub-contractor. Counsel further supported this argument by reference to a South African case, Concrete Construction, Ltd. v. Keidan & Co. Ltd.(5) in which the contract between the owners and the principal contractors contained a clause for the nomination of suppliers which was for all practical purposes identical with that in the Royal Institute of British Architects' standard form and in which reinforcement steel was billed as a P.C. item which is explained as an item to be supplied by a nominated sub-contractor. In that case at an interview at which were present a representative of the employer, the architect, the main contractor and the supplier, the latter was asked by the architect to reduce his prices but refused to do so. The supplier stated that he would require a deposit of £3,000 and complained about the main contractor being a slow payer, but was re-assured by the employer's representative who said that a substantial lean had been arranged and that the supplier would be paid monthly on the certificates issued to the main contractor by the architect. Subsequently, the architect wrote to the supplier stating that he accepted the tender on behalf of his clients, the employers, and that on acceptance of "this order" by the suppliers, a sum of £3,000 would be payable to them by the main contractors. The supplier replied stating "Our acceptance of your order is hereby confirmed". On the same day the main contractor wrote to the employer authorizing him to pay the £3,000 and debit the main contractor's account. 28. It was held by the South African Court of Appeal that in view of the language of the main contract, the architect was, for all practicable purposes, constituted the agent of the principal contractor for placing orders with nominated suppliers, and that the inference on the facts, in spite of the correspondence, was that the contract had been made between the principal contractor and the supplier and not with the employers. 29. Applying the facts of that case to the present case, Mr. Litton argued that the suggestion in paragraph 13 of the Statement of Claim that in the event of the ouster of the first defendant firm from the site and a failure to reach an agreement between the plaintiffs and the second defendant company for the continuance of the Chinese Contract as between themselves, the second defendant would pay the plaintiffs for the work done on the second defendant's property, did not accurately summarize the exchange of correspondence. The plaintiffs' letter of the 5th February 1965 to the second defendant company, having posed the hypothesis that the first defendant firm was ousted from the site, went on "As for the money for the labour and materials for the reinforcement work, you, the owner, are requested to be responsible for the payment (of the same) to our company on the due dates out of the amount of the construction costs (allotted) to the contractor.". 30. Counsel argued that the phrase "Out of the amount of the construction costs (allotted) to the contractor" could only refer to the principal contractor, the first defendant firm, and to appreciate what was involved in that request a proper understanding of the engagement under the main contract was of paramount importance. What the request really envisaged was a situation in which the first defendant firm was ousted from the site at a time when it had completed the work due to be paid for under, say, the 9th scheduled payment, but had not received such payment. On the assumption that the plaintiffs had been paid the money due to them out of the first eight scheduled payments, when eventually an architect's certificate was issued in respect of the 9th scheduled payment an appropriate sum was to be deducted therefrom and paid to the plaintiffs, and this, counsel urged, was all the above-quoted sentence asked for. The certificates issued under the Principal Contract were certificates issued in favour of the principal contractor and nobody else, the whole scheme of the Principal Contract being that there were only two parties to that contract, the owner and the contractor. 31. It is counsel's contention that when in answer to the letter of the 5th of February, the second defendant company by its letter of the 9th February, 1965, (152 in Bundle C) wrote:-
this was not an undertaking to pay for any and all work done by the plaintiffs on the second defendant company's property as pleaded in paragraph 13 of the Statement of Claim; rather was it an undertaking to pay for works done on the site against the architect's certificates under the Principal Contract. These certificates did not certify the work of the plaintiffs or any other sub-contractor but that of the principal contractor, the first defendant firm, no matter by whom the work had actually been performed. The second defendant's position in the present case was actually stronger than that of the site-owners in the South African case, for in the latter case the site-owners, through their architect, took a direct part in the negotiations leading to the conclusion of the sub-contract, whereas in the present case the responsible officials of the second defendant company and the plaintiff firm had never even met until a few days before this exchange of correspondence, that is at a time long after the plaintiff firm had undertaken a binding obligation towards the principal contractor, the first defendant firm, in regard to the steelwork. Under the Principal Contract the first defendant firm had no right to be paid any money except after the issue of an architect's certificate. Such certificate was a condition precedent to payment under the building contract and all the second defendant company undertook by its letter of the 9th February, 1965, was that in the event of the first defendants being ousted, the second defendant company would make deductions from monies due to the first defendant firm under any outstanding certificate and pay those deductions direct to the plaintiff firm. It was inherently improbable that the construction of the letter pleaded in paragraph 13 of the Statement of Claim could be correct because the Prinoipal Contract was a lump-sum contract, so that the site-owners had no particular interest in the individual costing of the various items, e.g. steelwork, whereas the Chinese Contract envisaged a final adjustment of payments to the plaintiffs on the basis of the amount of steel used in the building. There was no reason why the second defendant company should assume an unascertained liability in respect of the steelwork. 32. Mr. Swaine, for the plaintiff, countered these arguments by saying that whilst no doubt the principles which have been held to preclude privity of contract between an owner and a sub-contractor are valid in general, there was no reason in law or logic why a building owner should not, if he so chose, contract direct with a sub-contractor. This in fact was what had happened at the Mandarin Hotel and in the letters of the 5th and 9th of February, 1965, which followed that meeting and there was privity of contract between the second defendant company and the plaintiff firm; in January 1965, the second defendant company had every reason to concern itself with the affairs of the first defendants, the principal contractor, since no progress was being made on the site and the site-owners were already paying interest to their financiers on an initial sum of $250,000.00, although that sum had not yet been advanced and was not due to be advanced until further progress was made on the site. Whilst Mr. Cheng of the second defendant company would have the court believe that relations between the second defendant firm and the plaintiffs were no concern of his, there was before the court incontrovertible evidence that he had been concerning himself with the affairs of sub-contractors and had gone so far as to enter into a direct written contract with the sub-contractor for concrete, guaranteeing the first defendant firm's liability to that sub-contractor (Pioneer Co., Ltd.) to a limit of $300,000.00, a guarantee which was subsequently enforced after the dismissal of the first defendant firm from the Principal Contract. By February, 1965, the second defendant company was in an unenviable position in regard to its proposed building and directly involved itself with the plaintiffs in much the same way as it had done with Pioneer Co., Ltd., with the difference that the latter company had had the sense to obtain a formal written guarantee whereas the relationship between the second defendant company and the plaintiff firm depended upon the construction of letters written between laymen. Mr. Koo of the first defendant firm had given Mr. Cheng of the second defendant company a copy of the Chinese Contract, the reason for that being, according to Mr. Koo, that Mr. Cheng had expressed interest and a wish to see it, whereas Mr. Cheng's version was that he had to see the sub-contract before he could comply with Mr. Koo's request to release to the plaintiffs the $100,000.00 which had been deposited by the first defendant firm as security with the second defendant company; the latter explanation was unconvincing, because Mr. Cheng had said in evidence, as his counsel had said in opening, that it did not matter to the second defendant to whom they paid the monies due under the building contract so long as they had the first defendant firm's authorization for such payments. 33. According to the evidence of Mr. Yu of the plaintiff firm, counsel continued, he had obtained, at the meeting at the Mandarin Hotel, a promise from Mr. Cheng that the Chinese Contract would remain effective should the first defendant firm be ousted from the site, and obtained the further assurance that whilst the latter firm remained the principal contractor there would be paid direct to the plaintiff firm appropriate amounts out of the scheduled payments; when Mr. Yu wrote his letter of the 5th of February, 1965 (148 in Bundle C), he asked the second defendant firm for a written guarantee that the Chinese Contract would remain effective in the event of the ouster of the first defendant firm and, what is of more importance to the present case, went on to request that the second defendant company should be responsible for payment to the plaintiffs of construction costs out of monies allotted to the first defendant firm; in evidence, Mr. Yu said that this embodied his request at the Mandarin Hotel that as long as the first defendant firm remained the principal contractor, the second defendant company would continue payment to the plaintiffs out of the scheduled payments and, counsel argued, if that evidence is accepted, there is no room for the construction of paragraph 2 of the reply of the 9th of February, 1965, (152 in Bundle C), which counsel for the second defendant urged. 34. On the other hand, Mr. Cheng's version of the request as to payment contained in the plaintiffs' letter of the 5th of February, (148 in Bundle C) was that it embodied Mr. Yu's request that should the first defendant firm be ousted and the Chinese Contract not continued, or not be doemed to continue between the plaintiffs and the second defendant company, then the latter would assume responsibility for payment to the plaintiffs out of the scheduled payments contemplated by the Principal Contract. Such a construction, counsel urged, went contrary to the plain and ordinary meaning of the last portion of the letter read in the context of the whole document, the main purpose of which was to seek an assurance that in the event of the ouster of the first defendant firm from the site, the sub-contract would specifically remain effective; the last portion of the letter was merely a request that in that, the only contemplated event, the second defendant company would be responsible for payment for labour and materials for the R.C.C. work out of the amounts due to any principal contractor. 35. The second defendant company's reply to this letter on the 9th of February, 1965, provided for the contingency that there being no mutual agreement for the continuation of the sub-contract after any expulsion of the second defendant firm from the site, the owner should pay the plaintiff sub-contractors for the work they had done and obtain architect's certificates in respect thereof. 36. In support of this construction, the evidence of Mr. Yu of the plaintiff firm as to the meeting at the Mandarin Hotel was that he asked Mr. Cheng of the second defendant company to hold himself responsible for payment to the plaintiffs for the work done by them under the Chinese Contract with the first defendant firm and also that if the building work should be transferred to another contractor, the Chinese Contract entered into between the plaintiffs and the first defendant firm should remain effective. His letter of the 5th of February, Mr. Yu said, contained two requests, the first being for a written guarantee that if the building work was transferred to another principal contractor, the Chinese Contract should remain effective, and the second being that in the event of the first defendant firm remaining as principal contractor, then from the amounts due and payable by the second defendant to the first defendant, the sums due to the plaintiffs for their work should be deducted and paid to the plaintiffs. 37. According to Mr. Yu, Mr. Cheng agreed positively at the Mandarin Hotel to the continuation of the Chinese Contract should the first defendant firm cease to be the principal contractor, and in saying, in his letter of the 9th February, 1965, that in such an eventuality "we may by mutual agreement between your goodselves and ourselves continue the contract signed on the 20th of January, 1965, by your goodselves with Defag Construction Co.", Mr. Cheng was going back on his oral agreement at the Mandarin Hotel. His principal object at the Mandarin Hotel, according to Mr. Yu, was to ask Mr. Cheng to undertake to pay the plaintiffs all the money for work done by the plaintiffs on behalf of the first defendants in the event of the Principal Contract being discontinued. 38. There is a conflict of evidence as to whether Mr. Koo of the first defendant firm was or was not present at this meeting at the Mandarin Hotel. I find it unnecessary to resolve this conflict because Mr. Koo's evidence as to what is alleged to have transpired at the meeting is of no particular assistance and the main protogonists upon this issue are Mr. Yu of the plaintiff firm and Mr. Cheng of the second defendant company. 39. Mr. Cheng (who claimed that Mr. Koo was not present at the meeting) said that Mr. Yu's first request to him was that the second defendant should pay the plaintiffs direct instead of through the first defendant firm and that Mr. Yu went on to discuss the position which would arise should the first defendant firm be ousted from the site and requested that in that event Mr. Cheng should consider continuing the Chinese Contract as between the second defendant company and the plaintiffs. According to Mr. Cheng, he replied that he could not adopt any contract between the plaintiffs and the first defendant firm but that should the latter cease to be the principal contractors he might consider a new approach to the plaintiffs, his idea being that, in such circumstances, he would study the Chinese Contract and if he found it acceptable, continue upon that basis with the plaintiffs, whereas if that contract was not acceptable, new terms might be negotiated with the plaintiffs. 40. The witness, after first agreeing that at the Mandarin Hotel meeting, and indeed as early as the 20th of January, 1965, when Mr. Koo had given him a copy of the Chinese Contract, he appreciated that this contract amounted to a method whereby the plaintiffs were financing the first defendant firm, subsequently retracted this answer and claimed that he did not appreciate this until approximately six months later. Mr. Cheng further said that in the event of failure to agree upon the continuation of the Chinese Contract, he agreed that the second defendant company would pay the plaintiffs for the work done by them but only from monies which they had availed to pay the first defendant firm and subject to authorization by Mr. Koo of that firm; that be made no firm promise that in the event of the first defendant firm being expelled from the site, he would continue the Chinese Contract with the plaintiffs but he did ask Mr. Yu to write to him on this topic. When Mr. Yu wrote his letter of the 5th of February, he was asking for a written guarantee that in the event of such expulsion, the Chinese Contract should continue - and this was a request which had already been refused at the meeting at the Mandarin Hotel. Mr. Cheng was unable to agree that the only other matter (apart from a guarantee of the continuation of the Chinese Contract) which Mr. Yu had raised with him, was that if the first defendants remained as principal contractors, then the second defendant would pay the plaintiffs out of the allotted construction costs. That request as to payment also contemplated a situation in which the first defendants had ceased to be the principal contractors. 41. The second paragraph of his letter of the 9th of February, 1965, Mr. Cheng said, meant no more than that if, on the termination of the first defendant firm's contract, work had been performed by them which was not yet the subject of an architect's certificate, then the plaintiffs would be paid in accordance with the work they had done when the architect's certificate was available and in accordance with the scheduled payments to be made to the first defendants. The witness was at first unambiguous that he was not promising to pay for the work done in accordance with the schedule of payments in the Chinese Contract. 42. It was noticeable that in regard to the interpretation of this paragraph of his letter of the 9th February, 1965, Mr. Cheng shifted his ground more than once. Thus having at first said that he was not promising to pay for the work done in accordance with the schedule of payments in the Chinese Contract which "did not concern the second defendant", he subsequently said that what he had in mind was that he might have to pay to the plaintiffs the monies specified in the schedule to the Chinese Contract, subject to Mr. Koo's authorization. This latter statement accords ill with his earlier one and also with his evidence that at that date he had not familiarized himself with the contents of the Chinese Contract. Moreover this plen of ignorance is in itself in contradiction of the witness's earlier evidence that, having a copy of the Chinese Contract in his possession, he knew what payments to the plaintiffs were envisaged through the solicitors. At another stage the witness said that what he intended to convey was that the second defendant would pay the amounts which Mr. Koo of the first defendant firm authorized. This was apparently said despite the fact that the situation envisaged was one in which Mr. Koo would have dropped out of the picture and of course any such authorization must have been tied to the terms of the Chinese Contract. The paragraph in dispute makes no reference to the Chinese Contract or to authorization by Mr. Koo but promises payment for works done on the site against architect's certificates issued in accordance with the Principal Contract. Again, having first agreed that by this paragraph he was promising the plaintiffs no more and no less than the payments promised by the second defendant's letter to Messrs. Johnson, Stokes & Master of the previous day, he amended this answer in reply to a question as to what, in that event was the purpose of this paragraph, by saying that it was intended also to allay Mr. Yu's fears that in the event of the ouster of the second defendant company from the site, and despite the irrevocable authority given by that firm to the solicitors to pay certain sums to the plaintiffs, those sums might in fact be paid to the first defendants from whom the plaintiffs might have difficulty in extracting their money. This was as far as the witness could go in asserting any difference between the promise contained in his letter and the irrevocable authority granted by the first defendants to Messrs. Johnson, Stokes & Master for payments to the plaintiffs. The witness added that he did not regard the arrangement contained in paragraph 2 of his letter very seriously, considering it to be almost the same as that made through the solicitors. 43. Those conflicting interpretations must be considered in the light of the respective positions of the parties in early February, 1965. 44. The dominating cause, permeating the whole background of the situation in which the parties to this triangle found themselves, was the financial embarrassment of the first defendant firm as principal contractor. That firm had undertaken an onerous obligation in agreeing to perform $700,000.00 worth of work on pile caps before receiving any payment and the position was quickly reached in which little or no work was going on at the site so that Mr. Cheng had constantly to prod Mr. Koo about this. It was the first defendant firm's financial difficulties which caused it to sub-contract the steelwork to the plaintiffs on a basis of payment which amounted to a measure of subsidy by the plaintiffs to the first defendants throughout the duration of the construction of the building. Side by side with the first defendant firm's financial difficulties, the second defendant company was also under some strain in regard to its finances for completion of the building. It had the benefit of a building mortgage and a further charge form the financiers, Henry Fok Estates Ltd., but despite these arrangements found it necessary to enter into an agreement with the first defendant firm whereby 25% of the cost of the building might remain on mortgage. It was Mr. Yu's evidence, and I find as a fact, that at the meeting at the Mandarin Hotel his was not a one-sided approach and that Mr. Cheng was very anxious that the plaintiffs should not withdraw but should continue with the steelwork since the substitution of another sub-contractor might eliminate the measure of finance which was being provided by the plaintiffs to the first defendant firm, the principal contractors. Mr. Cheng, indeed, had every reason to meet Mr. Yu's requests so far as possible and did so by his letter of the 9th of February, 1965. 45. It is no doubt true, as counsel for the second defendant company urges, that no privity of contract between an employer and a sub-contractor arises out of a sub-contract concluded between the main contractor and the sub-contractor. Privity of contract so arising, however, is not the basis of the plaintiffs' claim and for that reason the case of Concrete Construction, Ltd. v. Keidan & Co., Ltd.(5) is largely irrelevant in the context of this case. To establish privity of contract with the second defendant company the plaintiffs rely, not upon their Chinese Contract with the first defendant firm, but upon the second defendant company's letter of the 9th of February, 1965, addressed to them and in particular upon the second paragraph thereof. I would say at once that in my view that paragraph amounts to the establishment of a direct contractual relationship between the second defendant and the plaintiffs and whilst the cases are not on all fours with the facts of the present case, I have derived same support for this view from Dixon v. Hatfield(6), Andrews v. Smith(7) and Smith v. Rudhall(8) all of which involved a finding of a direct contractual relationship between an owner (or his representative) and a subsidiary supplier. In essence however I rely upon the ordinary and natural meaning of the paragraph. 46. There is some authority for the suggestion that as consideration the plaintiffs could, if necessary, rely upon their implied promise to perform, for the benefit of the second defendant, their existing obligations to the first defendants, in the event of the first defendants ceasing to be the principal contractors (see Bret v. J.S. & Wife(9), Bagge v. Slade(10), Westbie v. Cockaine(11), and Moore v. Bray(12)). Such reliance is however unnecessary, since the plaintiffs can plead actual performance, they having completed all the steelwork within the time specified in the revised schedule of works (see Shadwell v. Shadwell(13), Scotson v. Pegg(14), and Chichester and wife v. Cobb(15)). This revised schedule (Exhibit F) came into existence as the result of an addendum to the Principal Contract (see p.127 of bundle "B") under which the first defendant firm withdrew its notice of tormination of the Principal Contract and agreed to complete the building within 100 days of the execution of the addendum, that is, by 20th September 1966. Under the revised work schedule the new date for completion of the R.C.C. work was 12th July, 1966 and its completion was in fact certified by the architect one week earlier than that date, that is, almost two months before the eventual final dismissal of the first defendant firm from the Principal Contract. 47. Interesting as is the ex post facto construction of the disputed paragraph by the laymen concerned with it, its meaning in the last resort is a matter for the court. The paragraph must be construed in the context of the whole of the letter embodying it and there would appear to be no reason for denying to the words of the disputed passage their ordinary and natural meaning, to which I now turn. 48. When the Principal Contract was terminated and the first defendant firm ousted from the site, the Chinese Contract, in so far as it remained unperformed, became incapable of performance in that no further architect's certificates would be issued to the first defendant firm so as to support the schedule of payments in the Principal Contract - and the payments under the Chinese Contract were dependent upon payments being made to the first defendent firm under the Principal Contract. 49. At the date of the first defendants' ouster however, all the R.C.C. work had been completed and had been certified by the architect as having been completed by or on behalf of the principal contractor who had been paid 75% of the price thereof. 50. Applying these facts to the paragraph the construction of which is so hotly disputed, the undertaking was to pay the plaintiffs for "the works done on the captioned site" and this can only refer to work done by the plaintiff firm. The work which had been so done was the whole of the steelwork. Payment, it is to be noted, was to be "against our architect, Mr. Eric Cumine's certificates in accordance with the building contract". Such certificates had been issued in accordance with the Principal Contract in respect of the whole of the steelwork. It seems to me that if, as Mr. Litton argues, the undertaking was to pay for work which had been completed at the date of ouster of the first defendants but which had not yet been certified by the architect under the Principal Contract, then a fortiori the undertaking embraced work which had not only been completed but had also been so certified. Moreover the undertaking was not to pay a proportion of the cost of the work done or to pay in accordance with the payments laid down in the Chinese Contract between the plaintiffs and the first defendants, but simply "to pay for". In other words, in the events which happened, the undertaking was to pay for all the steelwork covered by architect's certificates Nos. 1 to 17, that is, for the whole steelwork in the building with the Tinor exception of a cover to a water-tank which, the plaintiffs say, they have been unable to install because the second defendant would not permit them access to the roof for that purpose. 51. This appears to me to be the plain and ordinary meaning of the paragraph in dispute and it is immaterial that no architect's certificates 20, 21 and 41 were ever issued. These were intended to relate to work other than steel work and the agreement which the plaintiffs made to accept deferred payment of part of the money due to him for steelwork and for such deferred payments to be tied to the issue of architect's certificates for the completion of later work with which he was not concerned, was an agreement not with the second defendant company but with the first defendant firm. So far as the second defendant company is concerned its undertaking was to pay for work done on the site by the plaintiffs against architect's certificates. That work having been done and the relevant certificates having been issued, the liability of the second defendant company is complete. Its obligation is to pay to the plaintiffs any balance found to be due to them in respect of the work done on the site by the plaintiffs and the yardsticks to be used in the calculation of such a balance, if any, are the prices for mild steel bars and high tensile steel bars specified in the Chinese Contract the contents of which were available to Mr. Cheng at the time he wrote his letter of the 9th February 1965. 52. Moreover, I am satisfied that despite Mr. Cheng's present evasiveness, that construction accords with his intentions at the time he wrote the letter. There is evidence that he was concerning himself actively with the affairs of sub-contractors because he distrusted the ability of the first defendants to bring the Principal Contract to a successful conclusion. Thus by a letter of 6th July, 1965, (document 164 in C) addressed to the first defendants, after referring to an approach which the second defendant had made to the financiers for the accommodation of the first defendants, he continued" we are now even trying very hard to obtain other sources of financial aid in order to help you out of this difficult situation apart from the supports we have given to you regarding metal supplier and concrete supplier.". It is the fact that the second defendant had given an actual guarantee limited to $300,000.00 to the concrete supplier and the general tenor of this letter underscores the extent to which the second defendants were prepared to go in order that the construction work could proceed. Again in a letter of the 23rd July, 1965, to the architect the second defendants said "we were aware of the contractor's unsound financial position, therefore, we have gone so far as to give our guarantee to the metal supplier and concrete supplier for credit facilities entrusted to the contractor.". From these words it would appear that however Mr. Cheng now construes his letter of the 9th of February, 1965, in the middle of that year, he was under no illusions as to what he had promised the plaintiffs. His further letter of 1st February 1966 (Document 184 in C) is a flat contradiction of his evidence that he took no part in persuading the plaintiffs to accept deferred payments. 53. It is significant also that when by their letter of the 7th September, 1966 (document 287 in C), the plaintiffs sought payment from the second defendants of the amounts due to the plaintiffs from the first defendants at the date of the termination of the Principal Contract, the reply from the second defendants (document 290 in C) was to the effect that they were not "at present" in a position to make proposals for payment or to confirm "the outstanding figures", whereas the reason for refusal to pay which was embodied in Messrs. Johnson, Stokes & Master's letter of the 18th of October (document 296 in C) to Messrs. Hastings & Co., solicitors, was that the plaintiffs had failed to comply with the conditions set out in the final paragraph of the second defendant's letter to the plaintiffs of the 9th of February, 1965. The suggestion at that time was not that the second defendant company was under no obligation of any kind to pay but that the plaintiffs were in default in the expeditious completion of the work and had not, in fact, completed in accordance with the schedule of works. That argument falls to the ground when it is appreciated that the schedule of works was amended to provide for completion of the R.C.C. work by the 12th July, 1966, whereas the architect's certificate, No.17, certifying the completion of all R.C.C. work was dated the 5th of July, 1966. 54. It was the case that at the date of execution of the Chinese Contract the first defendant firm was indebted to the plaintiff firm in the sum of $167,000.00. Some attempt was made by counsel for the second defendant company to suggest that the revision of the figures of the Chinese Contract from $1,050,000.00 to $1,220,000.00 by the addition of the two figures of $70,000.00 and $100,000.00 respectively was a subterfuge whereby the plaintiffs were to receive their $167,000.00 at the expense of the second defendants. The suggestion is speculative in the extreme and it does not bear scrutiny in the light of the fact that the Chinese Contract specifically provided for payment on the basis of the weight of steel incorporated into the building as assessed by reference to the scale plans. It was also the evidence of both Mr. Yu and Mr. Koo that each appreciated upon the signing of the Chinese Contract that $1,050,000.00 was an inadequate figure inserted for convenience because it could be made to tally with payments due to the first defendant firm under the Principal Contract. It will be recalled that Exhibit E, the letter providing for an additional payment to the plaintiffs of $100,000.00 should the financiers agree to an advance of $250,000.00 upon the completion of the foundation works, came into existence simultaneously with the Chinese Contract. I do not consider that even if the suggestion of the invention of an underhand method of paying the $167,000.00 had any substance, it would be material, except as to credit, upon this issue of liability and I am not at the moment concerned with quantum. In any event, I find the suggestion to be wholly, without foundation. 55. Another contention on behalf of the second defendant company was that if it was to be held liable to the plaintiffs under their present claim, the result would be that the second defendant company was being made to pay twice on the architect's 17th certificate relating to the completion of the R.C.C. work. Were that contention valid, I think the answer to it would be that if a person binds himself to pay twice for particular work, there is no reason why he should not be held to his undertaking. In fact, however, the suggestion of double payment goes much too far, since, for example, under the Principal Contract foundation work valued at $700,000.00 was not to be paid for upon its completion but the payments were to be spread over 41 instalments culminating with the issue of the Occupation Permit; the whole scheme of payments was such that the first defendant firm was financing the work throughout and to a not inconsiderable extent; further, the schedule of payments provided only for payment by the second defendant to the first of 75% of the amount shown in each architect's certificate and the remaining 25% was not to be payable until, at the earliest, the completion of the building. There is not evidence before me that this remaining 25% has ever been paid so that the suggestion that the second defendant company would be paying twice for the R.C.C. work is by no means established. In any event, this judgment is concerned only with liability, and the issue of quantum will be decided by reference to the amount of steel incorporated into the building. There is thus no possibility of the plaintiffs being paid more than once for their work and even if it should transpire that the second defendant has put itself in a position where it has to pay, between two different, parties, something in excess of 100% of the value of the R.C.C. work, the plaintiffs are not to be held responsible for that situation. 56. Finally, the plaintiffs' claim includes a fixed sum of $3,000 in respect of transportation charges incurred at the commencement of the reinforcement work. This item was said by Mr. Yu of the plaintiff firm to have been incurred because "they" had left no room at the site to bend the metal in the manner necessary with the result that the metal rods had to be removed elsewhere for this processing and thereafter re-transported to the site. There was no elaboration of the term "they" but it would appear that it was the responsibility of the first defendants, the principal contractors, to ensure conditions at the site suitable for the various sub-contractors to carry out their work and the failure of the first defendants to establish such conditions for the bending of metal rods has not been shown to be in any way attributable to the second defendant whom I find to be free from any liability under this head of damage. 57. The second defendant company is however liable to the plaintiff firm for the balance, if any, of the price of work done on the site by the plaintiff firm in excess of the sum of $884,000.00 already received by the plaintiffs. The amount of any such balance is a matter for future determination and, at counsel's request, there will be liberty to either side to apply for directions regarding the manner of such determination. Costs to the plaintiff firm. Representation: Swaine (Hastings & Co.) for Plaintiffs. Litton (Johnson, Stokes & Master) for 2nd Defendant. Judgment handed down. (1) 16 Q.B.D. 183. (2) 1956 (2) ALL E.R. 306. (3) 1958 (2) ALL E.R. 497. (4) 9th Edition, p.579. (5) 1955 (4) S.A.L.R. 315. (6) (1825) 2 Bing. 439. (7) (1835) 2 C., M. & R. 627. (8) (1862) 3 F. & F. 143. (9) (1600) Cro. Eliz. 755, pl.20. (10) (1616) 3 Bulst., 162. (11) (1631) 1 Vin. Abr. 312, pl. 36. (12) (1633) 1 Vin. Abr. 310, pl.31. (13) (1860) 9 C.B. (N.S.) 159. (14) (1861) 6 H. & N. 295. (15) (1866) 14 L.T. 433. |