Schindler Lifts (Hong Kong) Ltd. v. Ocean Joy Investments Ltd.

HCCT000081A/2001

HCCT 81/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 81 OF 2001

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Coram: Hon Ma J in Chambers

Date of Hearing: 24 September 2002

Date of Judgment: 10 January 2003

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J U D G M E N T

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The plaintiff's claim

1.By a summons dated 25 February 2002, the plaintiff seeks summary judgment in the sum of $1,166,100.00 and interest, being the balance allegedly due to it from the defendant in relation to some lift installation work that had been carried out by the plaintiff at the commercial development situate at 7-11 Li Yuen Street East, Central, Hong Kong.

2.The defendant was at all material times the employer under the said development. The plaintiff's claim is based on a letter of intent dated 8 June 1998 from LCT Associates Limited (the defendant's agent) to the plaintiff ("the Letter").

3.In the Letter, the plaintiff was informed that its tender for the lift installation nominated subcontract in relation to the said development had been accepted by the defendant (as the employer). The contract sum was stated to be $3,780,000.00.

4.The Letter went on to set out various terms of the plaintiff's engagement. The following terms should be noted:-

(1) By clause 9 thereof, it was expressly envisaged that the plaintiff would be a nominated subcontractor. It was to be nominated to the main contractor whose identity was to be later confirmed. That clause stated, "You [the plaintiff] shall be nominated to the Main Contractor, which is to be confirmed later, as a nominated subcontractor to carry out the work. You are required to enter into a sub-contract agreement with the Main Contractor".

(2) By clause 12 thereof, the plaintiff was required to provide to the defendant a performance bond in relation to its performance of the subcontract (which, as stated above, was to be made between the plaintiff and the main contractor).

(3) Clause 14 thereof, the clause on which the plaintiff's claim is crucially based, stated as follows:

"Until a formal agreement is prepared and executed between you and the Main Contractor, this Letter of Intent together with the correspondences listed in item 13 above shall constitute a binding Contract between you and the Employer."

5.At the time the Letter was issued and signed by both parties, the main contractor for the development had not as yet been appointed. Later in 1998 or early 1999, Free Form Construction Company Limited ("Free Form") was appointed the main contractor for the project. The written contract between the defendant and Free Form was dated 12 January 1999.

The issues in the present application for summary judgment

6.The plaintiff's case is simply put by Mr Geoffrey Shaw who appears on its behalf: the said balance of $1,166,100.00 is indisputably due under the agreement contained in the Letter.

7.The defendant raises a number of defences in its Amended Defence. Principally, its stance is that any agreement between the plaintiff and the defendant as contained in the Letter (which is denied), fell away once Free Form was appointed the main contractor and had entered into a contractual relationship with the plaintiff. Mr Thomas Lee, who appears for the defendant, submitted that this was so for the following reasons (and that there were therefore triable issues):-

(1) on a true construction of the terms of the Letter; alternatively

(2) by reason of the parties treating this as the position thus giving rise in law to an estoppel by convention.

8.The plaintiff joined issue with these submissions. Mr Shaw contended in the first place that there was no subcontract between the plaintiff and Free Form anyway. Even if there was, this did not mean that the agreement contained in the Letter became irrelevant because clause 14 was explicit in this respect: only if a formal agreement was executed between the plaintiff and Free Form would the agreement in the Letter fall away. Finally, it was argued that the facts in the present case did not bear out any estoppel by convention.

9.Three issues can therefore be identified for consideration in the present application for summary judgment:-

(1) Was there a subcontract between the plaintiff and Free Form?

(2) Even if there was, how does clause 14 of the Letter affect the position?

(3) Was there an estoppel by convention?

10.In deciding whether or not summary judgment should be given, I bear in mind the standard approach in such applications:-

(1) Factually, it has to be determined whether what the defendant says is believable, rather than whether its version of events is to be believed:- see Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, at 158 per Godfrey JA; Re Safe Rich Industries Limited, unreported, 3 November 1994, CACV 81/1994.

(2) As a matter of law, even if what the defendant says is believable, does it amount to an arguable defence in law?

Was there a subcontract between the plaintiff and Free Form?

11.In my view, this is clearly a triable issue:-

(1) The Letter expressly envisages (indeed by clause 9 requires) that the plaintiff would enter into a subcontract with the main contractor. A number of obligations on the part of the plaintiff makes this assumption. Amongst them is the requirement that the plaintiff should provide a performance bond for the due performance of its obligations under such a subcontract.

(2) A performance bond dated 24 August 1998 was in fact provided by the plaintiff and ABN-AMRO Bank NV making express reference to the due performance of the plaintiff's obligations under the subcontract with the main contractor. This performance bond probably pre-dated the appointment of Free Form as the main contractor but there has been no suggestion that somehow this performance bond did not remain valid and effective once Free Form was appointed the main contractor. This would therefore suggest that a subcontract did exist.

(3) By a Warranty dated 5 August 1998, the plaintiff warranted in consideration of its appointment as a nominated subcontractor that it would carry out the subcontract works in accordance with the subcontract to be made with the main contractor. Again, there is no suggestion that this warranty remained anything other than valid and effective.

(4) I have been referred to numerous excerpts of correspondence between Free Form and the plaintiff over the course of the construction of the development. This correspondence seems to assume the existence of a contractual relationship between the plaintiff and Free Form.

(5) Payment for work done was apparently claimed by the plaintiff from Free Form during the course of the project, whether through payment certificates or otherwise. I refer in particular to a letter dated 31 January 2000 from the plaintiff to Free Form, in which reference is expressly made to "our Sub-Contract". It is also alleged in the Amended Defence and the defendant's affirmation evidence that payments were made by Free Form to the plaintiff at various stages of the works upon presentation of payment or valuation certificates.

(6) By a letter dated 28 September 2001, the plaintiff gave notice to Free Form that if the sum of $1,163,100.00 was not paid within seven days, legal action would be taken against Free Form. There is reference again in that letter to a "contract" in relation to the lift installation work carried out by the plaintiff.

12.There may be some dispute as to the exact terms of the subcontract between the plaintiff and Free Form, but the existence of a subcontract is a matter that ought to be tried.

The impact of clause 14 of the Letter

13.Mr Shaw argues with some conviction that even if there was a subcontract between the plaintiff and Free Form (which the plaintiff denies), the terms of clause 14 are clear. Unless there is in existence a formal contract that has been executed by the plaintiff and Free Form, the defendant remains liable to the plaintiff under the agreement contained in the Letter.

14.Mr Lee submitted that on a true construction of the Letter, the defendant's liability thereunder (if this existed in the first place) fell away once a subcontract was made between the plaintiff and Free Form.

15.I am of the view that the defendant's position here is likewise a matter that should go to trial for the following reasons:-

(1) The common intent of the Letter was arguably to commit the plaintiff as a subcontractor for the lift installation works even before the appointment of a main contractor. However, it seems always to have been envisaged that the plaintiff would be a subcontractor and that is the way it is described throughout the Letter. Further, as I have already remarked, there were obligations on the part of the plaintiff that assumed the existence of a subcontract with the Main Contractor.

(2) The Letter therefore arguably envisaged a situation in which, as with most building projects, there is a contractual relationship between the employer and the main contractor on the one part and between the main contractor and the subcontractor on the other. Clause 9 of the Letter required the plaintiff to enter into a subcontract with the main contractor.

(3) Commercially, one sees the desirability of separate contractual relationships between employer and main contractor, and between main contractor and subcontractor. In an often complex venture such as a building contract, the existence of different contractual regimes governing the terms of a subcontractor's engagement is more likely to give rise to difficulties in the practical implementation of that subcontractor's work than if his obligations were governed under only one such regime.

(4) The project in the present case and therefore the Letter are arguably to be seen in this light.

(5) In this way, even though the words of clause 14, if taken in isolation, may lead to the construction that Mr Shaw places on it, when taken in the context of the other provisions contained in the Letter (particularly clauses 9 and 12) and the general commercial considerations I have just referred to, the true construction of that clause may have to be seen in a different light. Mr Lee referred to the case of Stent Foundations Limited v Carillion Construction (Contracts) Limited (1999-2000) 78 Con L R 188 for the proposition that the absence of a formal executed subcontract is not decisive. The clause in the Stent case is of course of a different character to clause 14 in the present, but what that case does demonstrate at least is that it is important when construing contracts to look at the whole of the terms and at what is commonly referred to as the factual matrix.

(6) It is therefore arguable that clause 14 merely requires the existence of a binding subcontract between the plaintiff and the main contractor before the defendant's liability falls away. At trial, the Court will have to examine those considerations I have briefly alluded to above. The factual matrix may well have to be looked at.

Estoppel by convention

16.Even if Mr Shaw's construction of clause 14 is correct, the defendant's case on estoppel by convention should also go to trial. As pleaded, the estoppel relied on is the common assumption on the part of the plaintiff and the defendant that "they did not have or after the end of 1998 no longer had, a binding agreement with each other and that the plaintiff entered into the Sub-Contract with Free Form Construction Co. Ltd.".

17.Estoppel by convention arises when parties have acted on an agreed assumption as to a state of facts or of law (which includes the construction of a document):- see Chitty on Contracts (28th Edition) Volume 1 at paragraphs 3-100 to 3-103; Amalgamated Investment & Property Company Limited v Texas Commerce International Bank Limited [1982] QB 84, at 120H-122D, 126A-B, 130G-131A; The Vistafjord [1988] 2 Lloyds Rep 343, at 349(2)-353(1); Hiscox v Outhwaite [1992] 1 AC 562, at 574H-575H; Yuen Ching Yuen v Union Insurance Society of Hong Kong Limited [1998] 2 HKC 294, at 304-5.

18.I should perhaps highlight two aspects of estoppel by convention:-

(1) The requirement that the mistaken assumption be a common one means that the assumption must have been communicated between the relevant parties. In other words, both parties must share the mistaken assumption and conduct themselves on this basis. It will not be sufficient for each party to have acted independently of each other, albeit on the basis of the same assumption. However, as Chitty points out at paragraph 3-102 referring to The Vistafjord at 351(1), such communications may be effective by the conduct of one party being made known to the other.

(2) As to the proposition that estoppel by convention may not apply to future dealings, it is important to note that this is tied up with questions of unconscionability, justice and equity. These concepts are relevant to determine the extent to which a party will be bound by an estoppel by convention: see The Vistafjord at 351(2)-352(2).

19.The following facts and matters in the present case are relevant and should go to trial:-

(1) I have earlier in relation to the issue of the existence of a subcontract between the plaintiff and Free Form referred to a number of factual instances in support of the defendant's case. The same facts are relevant to the estoppel by a convention defence.

(2) The facts seem to show an acceptance by the plaintiff that it was with Free Form (and they alone) with whom the plaintiff should communicate in terms of ongoing matters in relation to the project as well as payment. Indeed, it would appear that throughout the project, the plaintiff looked to Free Form for payment and indeed got payment from them.

(3) The communications between the plaintiff and Free Form were copied to the defendant so it is clear that the defendant was fully aware of what was happening as far as the plaintiff and Free Form were concerned. This deals with Mr Shaw's submission that there were no communications of the mistaken assumption between the plaintiff and the defendant.

(4) On the defendant's part, it has dealt with Free Form on the basis that the plaintiff's costs were included in Free Form's claim for payment against the defendant. Mr Liang Zhi Cheng, a director of the defendant, deposes to the fact that the sums claimed by the plaintiff were included in the statement of final account under the main contract between the defendant and Free Form.

(5) As far as considerations of unconscionability, justice and equity are concerned, this can only be determined at trial. Only then will the court be in any position, after hearing the witnesses and studying the full extent of the documentary evidence, to determine the precise nature of the relationship between the plaintiff, the defendant and Free Form.

Conclusion

20.For the above reasons, I order that the defendant should be given unconditional leave to defend the present action.

21.Although Mr Shaw appeared to accept that costs should follow the event, in view of the order sought by the defendant being unconditional leave to defend, I shall make an order nisi that the costs of and occasioned by the plaintiff's application be costs in the cause.

Representation:

Mr Geoffrey Shaw, of Messrs Deacons, for the Plaintiff.

Mr Thomas Lee, instructed by Messrs Simmons & Simmons, for the Defendant.