Hong Kong Teakwood Works Ltd v. Shui on Construction Co Ltd

HCA010969/1983

No. 10969 of 1983

O.14. Nominated subcontractor appointed under Hong Kong Institute Form 1968 Edition, claimed summary judgment against main contractor in respect of two Architects Certificates, one pre and one post writ. Building owners had exercised an alleged right of set off in respect of both certificates against main contractor. Held:- dismissing appeal from refusal of summary judgment.

No. 10969 of 1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon. Mr. Justice Hunter in Chambers.

Dates of Hearing: 20 & 21 March 1984

Date of Delivery: 21 March 1984

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JUDGMENT

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1. I have before me two appeals from Master Wilson who, on the 1st March dismissed an Order 14 summons taken out by the plaintiff, and on the defendant's application stayed the proceedings with a view to the whole matter going to arbitration.

2. This appeal is brought against both of these decisions but is common ground that the real issue is Order 14. There is no dispute that the remaining issues between the parties must be arbitrated. The only question now is whether this plaintiff is entitled to summary judgment under two architect's certificates.

3. Now the chronology which is relevant to this appeal is this. The defendants are the main contractors retained to construct the Regal Meridien Hotel. The plaintiffs are sub-contractors appointed under a sub-contract dated 9th July 1982, the sub-contract works being basically internal fitting out, furnishing etc. The two Architect Certificates are (1) for $853,202 issued on the 28th March 1983 and (2) a certificate of the 8th September 1983 for $1,025,301. Those are the two certificates upon which the Order 14 application is now founded. The other relevant dates are that the writ was issued on the 25th August 1983 i.e. before the second certificate; and the application for a stay was taken out on the 3rd October 1983. The original writ claimed the sum of money under the second certificate, and that claim was based upon a quantity surveyor's certificate or valuation. The Statement of Claim was amended on the 25th November last to bring in the second Architect's certificate.

4. Now the first question which arises is basically one of construction of Clause 11(b) of the contract which provides that "within 14 days of the receipt by the main contractor of payment from the employer against any certificate from the architect, the main contractor shall notify and pay to the sub-contractor the total value certified therein". Now it is common ground that the main contractor received the two certificates referred to. It is equally common ground that until very recently nothing whatever was paid in respect of those certificates. The reason for that was that the building owners set up against those two, and indeed two other certificates, an alleged set off in the sum of $10,900,000 arising from a claim for liquidated damages under the main contract. That claim is based upon the liquidated damages clause in the contract, and architect's certificates specifying when in the opinion of the architects the works ought to have been completed, as compared to the actual dates of practical completion.

5. The issue arising now under clause 11(b) of the contract is what constitutes "receipt ..... of payment". For the defendants, it said receipt of payment means cash or cheque, money and nothing else. For the plaintiff it said receipt of payment means cash or a mutual discharge of the obligation arising under the certificate, and that discharge can arise from the exercise of a set off. It said that the exercise of a set off by the building owner here, constituted or brought about a receipt of payment by the contractor of the monies due under that certificate. In further answer to that the defendants come back and say, "No," this could only be a discharge or payment if that set off is valid. We challenge the validity of the set off, and in order to show that this is payment, you, the plaintiff, must now satisfy the court that the set off is not only claimed, but validly claimed.

6. This clause derives, as does a great part of this contract, from forms that have been in use in the U.K. for some time. But in this particular respect there is a very material difference between the U.K. form which is known as the FASS green form, and the form used in Hong Kong. In the U.K. form the words used in the equivalent clause are these: "Within 14 days of the receipt by the contractor of any certificate from the architect, the contractor shall notify and pay to the sub-contractor." Now if the U.K. form had been adopted in Hong Kong is perfectly apparent that it would have had the effect contended for by Mr. Kaplan, because there is no doubt at all that the certificates were received. The effect of Mr. Kaplan's submission is that this alteration in the form as used in Hong Kong makes no difference in the circumstances of this case, if payment includes set off.

7. Now I start, as I think I must, from the premise that this major alteration in the form as adopted in Hong Kong, and which is also reflected in clause 27 of the common form of main contractors contract where it deals with nominated sub-contrators, was intended to bring about some change. Now the material words are "receipt of payment". I think that I must give those words their normal meaning. To me their normal meaning is receipt of actual payment, receipt of money. This seems to me to accord with the other phrases that one finds in these contracts. "Pay or allow" is one in the main contract, paragraph 22, which is followed by the words "the employer may deduct such sum from any monies due". I think that all these words contemplate a simple piece of arithmetic, and that the prima facie meaning of receipt of payment is receipt of money.

8. To that it is objected strongly by the plaintiff, that this construction could have horrendous consequences, that it could operate most unfairly to a sub-contractor. Attention is drawn particularly to the fact that the same phraseology is used in clause 11(c) in relation to retention monies and 11(g) in relation to payment in advance of the final certificate. It is said therefore that the court should construe these words "contra proferentem", and put a construction on them which may depart from what I personally regard as the prima facie meaning giving an extended meaning to the word payment. I acknowledge that the word "payment" can be given an extended meaning. But I have the greatest difficulty in giving an extended meaning to the phrase "receipt of payment", and I have the greatest difficulty in seeing how that can be extended to cover set off.

9. I have been invited on this application to apply the principles in European Asian Bank v. Punjab and Sind Bank (1983) 2 All E.R. 508 and construe this contract on the basis that this is a point of construction which should be determined at this stage. I do not agree. There are some contracts which it is perfectly proper for the court to construe under Order 14. There are other contracts where in my opinion at least, slightly more mature reflection and mature consideration is necessary. I have in mind the phrase "detailed argument and mature considerations" used by Lord Diplock in American Cyanamid v. Ethicon (1975) A.C. 396, 407. I think that a building contract of this complexity is one. There are a great many documents, I have no doubt, which are in fact incorporated in this contract which I have never yet seen. Not only has a court in due course got to consider this sub-contract, it has also got to put it in the context of the main contract.

10. So I am not purporting at this moment to put any final construction upon this contract which remotely binds either party or any future adjudicator. It is quite unnecessary to do so. For the plaintiffs to succeed here, they have to satisfy me that the construction for which they contend is really the only construction, the right construction of this contract. For the reasons I have already given I cannot accept that. I think the more probable construction is the natural meaning of the words that I have indicated, and I think that is the more probable construction in this particular clause which deals with interim provision. Now whether in fact on mature reflection that is proved to be right, or whether that construction also governs 11(c) and 11(g) is not a matter with which I am concerned at this juncture. I think therefore for this purpose is sufficient for me to say; my prima facie construction of this clause is adverse to the plaintiff's interest and that is sufficient to dispose of this appeal. But since the matter will probably go further and someone might want to know what I would have done on the other issues I will make some comments upon them.

11. First I think that the plaintiffs here are in grave difficulty in relying upon the second certificate. Their writ was issued before that certificate was given. Their writ was issued, I think, at the time when no one had read 11(b) very carefully and realised it required payment rather than a certificate. I say that because there is no word in the Statement of Claim which asserts payment in the way that the matter has been put by Mr. Kaplan before me. The Statement of Claim simply refers to receipt of the certificate. I believe that the doctrine of relation back still governs, notwithstanding the observations of Brandon L.J. in Liff v. Paisley and another (1980) 1 All E.R. 621, and that the amendment of the 25th November relates back to the date of the issue of the writ which was the 25th August, and that therefore the plaintiffs cannot rely upon a post-writ certificate.

12. Secondly it seems to me that they are in some trouble, which they have created for themselves, by the plea of repudiation in this writ. I am minded to think that this plea is exceedingly unwise and probably ill-founded. But it is there. It does not seem to me that I can simply ignore it. They assert in that writ that the defendants had repudiated this agreement, the sub-contract, and that by the writ they have accepted such repudiation. Now if that be right, it follows that the defendants are "excused from further performance of the primary obligations of the contract". I have taken those words from paragraph 1629 of the current edition of Chitty on Contract. It seems to me that on that basis they are in grave trouble in saying that there is any obligation now under this clause 11(b) to pay this money as a payment under a certificate. The only thing that can be said is that this is payable by way of damages which is very different kettle of fish. So on those two points it seems to me that the plaintiff is in trouble.

13. The third point is, to my mind, far away and most difficult issue on this appeal, which is what is the position under this contract in respect of a prospective liability for delay. Delay is specifically dealt with in clause 8(a) of the sub-contract. Clause 8 (a) has a proviso which says that "the main contractor shall not be entitled to claim any loss or damage under this clause unless the architect shall have issued to the main contractor a certificate in writing stating that in his opinion the sub-contract works or the relevant sections thereof ought reasonably to have been completed within the specified period or with any extended period as the case may be."

14. The plaintiffs' submission here is simple. Clause 8 they say is the clause governing liability for delay. No liability arises under that unless and until an architect's certificate has been issued. No such certificate has been issued. Until a certificate is issued the sub-contractor is not "liable". If the sub-contractor is not liable, then clause 13 of the sub-contract does not operate. Now that does constitute in my judgment a formidable argument. But the question, as I see it, for me under Order 14 is whether it is necessarily right, or whether there is an arguable counter which entitles the defendants in this case to leave to defend. In effect three things have been advanced.

15. The first is that a letter which the architect wrote on the 8th September 1983 constitutes a certificate. The material paragraphs in the letter are: "The information available is not complete, however on the basis of this information it appears that the plaintiffs should have completed their works by the 22nd July 1982". That is followed immediately by this paragraph "Should further information become available this opinion would be subject to review and thus this statement cannot be treated as being final". Mr. Walker submits that this constituted a certificate. I cannot accept that because of the phrase "this Statement cannot be treated as final". I think that an architect only gives something which constitutes a certificate for the purpose of this clause, if he is expressing an opinion which he is prepared to certify. I do not think that someone who says something is provisional only, can be said to be giving a certificate.

16. That view was shared by Mr. Walker's client at the time who pressed the architect for a certificate, and got on the 3rd October an answer which seems to me to be exceedingly unsatisfactory. The architect there quotes clause 27(d)(ii) of the main contract and says that a certificate is only called for if the contractor "fails to complete within the period specified in the sub-contract" or if he "fails to complete the sub-contract works within any extended period granted by the main contractor with the consent of the architect". The architect suggests that it is the second of those two alternatives which apply. It seems to me transparently obvious that the second did not apply; first because there had been no application for an extension and secondly because the architect knew full well that he had not consented to any such extension. In the absence of those qualifying conditions I do not understand how the architect can express the view he expresses in the last paragraph of this letter. It seems obvious to me that the first of those alternatives did apply, and that a certificate ought to have been issued by this architect to some effect. If that was the case the likelihood is that the certificate would have been along the lines of the letter of the 8th September.

17. So I am satisfied here that no certificate has in fact been granted, but I am equally satisfied that the defendants have an arguable case for saying that a certificate along the lines of the letter of 8th September ought to have been granted and that in an arbitration, the arbitrator might make a declaration to that effect. If the arbitration was to make a declaration to that effect it seems to me, that in equity at least, the defendants would have an argument for saying that that the certificate ought to have been issued at the relevant time which is before this date, in which case they can arguably say that the plaintiff should be treated as being liable to them as at the date when that certificate ought to have been issued.

18. Secondly it seems to me that they have got an argument on clause 3(b)(ii) of this contract. This says that the sub-contractor shall "indemnify the main contractor against any act or omission of the sub-contractor which involves the main contractor in any liability to the employer under the main contract". That provision is quite general in its terms. Now Mr. Kaplan says that this has to be cut down by the specific provisions of clause 8 because otherwise the proviso to clause 8 does not give the sub-contractor the protection it is intended to give. The plain intention of that proviso is that the person in the middle i.e. the architect, who is best able to assess the relative degrees of fault of various contractors and sub-contractors on site, has to express a judgment upon the delay or otherwise of the individual sub-contractor. I can see a great deal of force in that argument and as to the reasoning behind section 8(a) but I find it difficult on an Order 14 application to say that this contract has necessarily to be read in that way. To put it round the other way, I find it very difficult to say that this defendant has no argument that 3(b)(ii) does not stand independently of 8(a) regardless of the consequences.

19. So I think probably that if this point has stood alone, I would have felt constrained to conclude that there was a sufficient argument here to entitle this defendant to leave to defend. But I have only added that in case another court is interested. I found my decision on the first ground and on what I regard as the prima facie meaning of 11(b) of the contract. For those reasons in my judgment these appeals fail and must be dismissed.

Representation:

Neil Kaplan, Q.C., B. Yu (M/s Deacons) for Plaintiff.

A. Walker of M/s Lovell, White & King for Defendant.