Concorde Construction Co Ltd v. Colgan Co Ltd

HCCL000036/1984

Commercial Law - The. Standard Form of Building Contract, 1976 Private Edition (with Quantities), for use in Hong Kong, Conditions 15 and 30 - Whether the Employer is obliged to set aside retention monies in a separate trust fund for the benefit of the Main Contractor - When the Employer is entitled to make deductions from retention monies.

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By virtue of Condition 30 in the Standard Form of Building Contract, 1976 Private Edition (with Quantities), for use in Hong Kong, the Main Contractor was granted an interim mandatory injunction forcing the Employer to set aside retention monies deducted under interim certificates in a separate trust fund for the benefit of the Main Contractor. (Rayack Construction Ltd. v. Lampeter Meat Co. Ltd. 12 B.L.R. 30 followed).

The Employer could not be excused from its obligation to set up such a trust fund on the basis of any alleged entitlement on its part to make deductions in respect of the Main Contractor's failure to make good defects specified in a Schedule of Defects issued by the Architect pursuant to Condition 15, because the Main Contractor disputed that it was in breach of Condition 15, and the Employer's entitlement was still unsubstantiated.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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AND BETWEEN

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Coram: Hon. Rhind, J. (In Open Court)

Date: 23 May 1984

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JUDGMENT

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1. The application before me is concerned with whether an Employer under the Standard Form of Building Contract, 1976 Private Edition (with Quantities), for use in Hong Kong is obliged to set aside retention monies in a separate trust fund for the benefit of the Main Contractor, and if so, the circumstances in which the Employer can make deductions from that trust fund in his own favour.

2. As this is a matter which is likely to be of general practical interest to the construction industry in Hong Kong, I have adjourned my ruling on the summons before me into open Court.

3. The only parties directly involved in the proceedings before me are the plaintiff and the defendant to the original action.  That pair entered into a building contract together on the 24th March 1981. The plaintiff was the Main Contractor, whilst the defendant was the Employer.

4. Their agreement was in the Standard Form of Building Contract for use in Hong Kong issued under the sanction of the Hong Kong Institute of Architects, the Royal Institution of Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong, 1976 Private Edition (with Quantities). Under that agreement, Hsia & Associates were appointed as "the Architect". The works provided for under the contract were the construction and completion of a block of flats on a site owned by the Employer at 67, Repulse Road, Hong Kong, at the Contract Sum of HK$50,875,670.49.

5. In the usual way, the contract provided that the Employer should pay the Main Contractor under Interim Certificates issued by the Architect. Those certificates were to be issued at monthly intervals and honored by the Employer 14 days from presentation. It was provided that the amount of retention money was to be 10% of certified value, but subject to a limit for the Retention Fund of HK$1,773,283.52 plus the Retention Fund held in respect of nominated sub-contractors which had a maximum of HK$653,900. Thus, the overall maximum Retention Fund in respect of both the Main Contractor and nominated sub-contractors amounted to HK$2,427,183.52.

6. The provisions about certificates and payments are to be founded in Condition 30 of the Conditions annexed to the Articles of Agreement. As that Condition is of considerable importance for the purposes of the present application I set out the relevant parts of it:-

(6)         So soon as is practicable but before the expiration of three months from the end of the Defects Liability Period stated in the appendix to these Conditions or from completion of making good defects under clause 15 of these Conditions or from receipt by the Architect of the documents referred to in paragraph (b) of sub-clause (5) of this Condition, whichever is the latest, the Architect shall issue the Final Certificate. The Final Certificate shall state:-

and the difference (if any) between the two sums shall be expressed in the said certificate as a balance due to the Main Contractor from the Employer or to the Employer from the Main Contractor as the case may be. Subject to any deductions authorised by these Conditions, the said balance as from the fourteenth day after presentation of the Final Certificate by the Main Contractor to the Employer shall be a debt payable by the Employer to the Main Contractor or as the case may be as from the fourteenth day after issue of the Final Certificate shall be a debt payable by the Main Contractor to the Employer."

7. On the 6th December 1982, the Architect issued a Certificate of Practical Completion. Under Condition 15, that purported to have the effect of setting the Defects Liability Period of 12 months running. As Clause 15 assumed considerable importance in the application before me, I will set it out in full:-

8. The Occupation Permit followed on the 14th December 1982.

9. Prior to the Certificate of Practical Completion on the 6th December 1982, the Employer had paid the Main Contractor a total of HK$41,810,000. under seventeen Interim Certificates. By that stage, the limit of HK$2,427,183.52 for the Retention Fund had already been reached.

10. When Interim Certificate No.18 came to be issued on the 20th December 1982, it was for a sum of HK$1,110,000. That Certificate has never been honoured. Nor has Certificate No.19, dated the 21st February 1983, which was for an amount including the release of one moiety of the Retention Fund.

11. After the Defects Liability Period expired on the 6th December 1983, the Architect delivered a Schedule of Defects to the Main Contractor. That Schedule of Defects was delivered on the 20th December 1983, and it called on the Main Contractor to make good the scheduled defects before the 7th January 1984. That direction from the Architect has not been obeyed by the Main Contractor.

12. Meanwhile on the 19th March 1983, the Main Contractor had commenced the present action against the Employer, claiming, inter alia, the amounts still unpaid under Interim Certificates Nos.18 and 19. In addition, the Main Contractor also claims HK$293,504.01 in respect of monies allegedly due for site formation, and HK$7,366,927.99 in respect of alleged disruption and delay caused by the Employer in relation to the building works.

13. In its Defence and Counterclaim, the Employer seeks to hold the Main Contractor responsible for at least HK$2,082,049 worth of alleged defects in the building. As pointed out on the Employer's behalf before me, the alleged cost of putting the alleged defects right comes to an amount not far different from the Retention Fund. In addition, the Employer claims other substantial amounts. In particular, the Employer disputes that practical completion has ever taken place, and on that basis, claims over HK$7 million under Condition 22 as liquidated damages for delayed completion. There is a further sum of over HK$11 million claimed for lost rental opportunities, and a figure of HK$174,000 for compensation paid to tenants as the result of alleged defects in the building.

14. By its Reply to the Defence and Counterclaim, the Main Contractor makes it clear that it disputes any liability to the Employer in respect of defects. Those items in the Schedule of Defects which are its responsibility will be made good within a reasonable time, so the Main Contractor pleads, and it goes on to say it intends to complete them in accordance with its contractual obligation. The Main Contractor does not accept that all the defects in the Architect's Schedule of Defects are its responsibility, nor does it accept that only allowing it until the 7th January 1984 to make good the defects was reasonable.

15. By the present summons, which was filed on the 9th April 1984 the Main Contractor seeks the following relief:-

16. In order to underpin that summons, a further application has been made to me on the Main Contractor's behalf that the prayer of the Statement of Claim should be amended by adding the following paragraphs:-

17. To anyone familiar with the case of Rayack Construction Ltd. v. Lampeter Meat Co. Ltd.,⁽¹⁾ the application now made on the Main Contractor's behalf for this amendment and consequential relief will have a familiar ring. That case concerned the J.C.T. Standard Form of Building Contract, 1963 Edition (1977 revision), private Edition, which in all material respects, for present purposes, is identical to the contract now being considered by the Court. A difference of no consequence is that in Rayack the builder is referred to simply as "the Contractor" instead of "the Main Contractor".

18. It was held in that case that Condition 30(4) (a) imposed on the Employer a clear obligation to appropriate and set aside in a separate trust account the sums retained under Condition 30(3). Two important passages reveal the effect of that judgment and the reasoning behind it. At page 37, this is what the Judge had to say:-

"In my judgment, condition 30(4), construed in the context of the articles of agreement as a whole, does impose an obligation on an employer to appropriate and set aside as a separate trust fund a sum equal to that part of the sum certified in any interim certificate as due in respect of work completed which the employer is entitled to retain during the defects liability period. Unless condition 30(4) is construed as imposing such an obligation, it cannot, as I see it, have any practical operation. Further, condition 30(4) refers to he Contractor's beneficial interest therein', and the predicated beneficial interest could only subsist in a fund so appropriated and set aside."

Then at page 38 there is the following:-

"If sub-clauses (3) and (4) of condition 30 are read together, it is in my judgment clear that the purpose of the provisions for retention under the terms of condition 30(4)(a) is to protect both employer and contractor against the risk of insolvency of the other. The employer is protected by his right to retain a proportion of the sum certified as due in respect of work done against the risk that claims in respect of any failure to carry out the architect's instructions or in respect of delay or other breaches of the contractor's obligations will, in the event of the contractor's insolvency, rank as unsecured debts. The contractor is protected by the provisions of condition 30(4)(a) against the risk that his claim for payment of monies retained by the employer will similarly rank as an unsecured debt, save only for the lien conferred by the proviso to condition 26(2). Thus, both are protected if and to the extent that the employer carries out his obligation to set aside as a separate trust fund a sum equal to the retention monies. The contractor must be exposed to some degree of risk jeopardy if that is not done. It would in my judgment be wrong that he should continue to be exposed to this risk until the trial of the action."

19. True, I am not bound by that decision, nor am I bound by the decisions in Re Arthur Sanders Ltd.⁽²⁾ and in Re Jartay Developments Ltd.⁽³⁾ which followed it.  However, as the principle in the Rayack case commends itself to me as good sense which produces a fair result I consider it should be followed in Hong Kong when construing the Standard Form of Building Contract for use here. The result will be that a contractor here wi11 be able to insist upon the employer setting aside retention monies in a separate trust fund for the benefit of the contractor.

20. In the case before me, the Main Contractor was entitled to insist that as retention money was held back by the Employer under each of the Interim Certificates, it should have been paid into a separate trust account. This has not been done, and the question now arises whether there is anything special about the circumstances of the case before me which could have the effect of excusing the Employer from fulfilling the obligation imposed upon him by Condition 30(4)(a) to set up such a trust fund.

21. It will be observed from the terms of Condition 30(4)(a) that the Employer has the right of recourse to the trust fund in order to deduct money due from the Main Contractor.

22. If in fact there is money now due from the Main Contractor to the Employer, it would be utterly pointless for the Court to order the Employer to set up a trust of the retention monies, but then to allow him to withdraw money from that fund under the recourse provision. In such circumstances, it would obviously be far more sensible to short-circuit the whole process, and to hold that although the Employer, strictly speaking, should have. set aside the. retention monies in a trust fund as the Interim Certificates were paid, it would, nonetheless, be futile to order that now, if, on paying the money into the trust fund the Employer could withdraw it immediatley.

23. According to the Employer, the matters relied on by it in its Defence and Counterclaim are such as to give rise to a right of recourse for amounts which exceed the retention money.In particular, the amount the Employer claims for defects would by itself come close to extinguishing the trust fund.

24. I do not think that an employer is entitled to have recourse to the trust fund of retention monies simply on the strength of his own belief that he has a good claim which entitles him to such monies. The Court cannot countenance a situation where the Employer would, in effect, be the judge in his own cause and able to say when he would make deductions from the retention monies. Allowing the employer to free the retention monies from the trust whenever the employer claimed entitlement to a set-off would drive a coach and horses through the whole system of protection which Condition 30(4)(a) seeks to set up.

25. As a matter of common sense, the employer can only be permitted to deduct substantiated claims for liquidated amounts from the retention monies. How the employer will substantiate his claims depends on the circumstance. The best substantiation of all will be where the contractor admits that money is due to the employer. In those circumstance it is clearly right, that the employer should have immediate recourse to the trust money.

26. Whether the employer's entitlement will be sufficiently substantiated when he has the backing of the Architect's Certificate that money is due to the employer is a matter on which I would prefer not to reach a decision until the point has been fully argued before me, if and when it arises.

27. Certainly, the Employer has an arguable case, judging from the material so far before the Court, but, nonetheless, its contentions about the Main Contractor's responsibility for defects and in relation to the other disputed matters are "speculative", in the sense that it is a matter for speculation whether the Employer will ultimately succeed in proving its contentions. In the Rayack case, the Court would not allow what it described as a "speculative" set-off to defeat the contractor's request. that the retention monies should be set aside as a separate trust fund.

28. Injunctions, are never granted as of right. That is elementary.  However, as pointed out in Redland Bricks Ltd. v. Morris ⁽⁴⁾ at 664, they are granted "as of course" in certain familiar situations which keep recurring. In my view, an injunction should normally be granted "as of course" to force an Employer to set up a trust fund of retention monies where Condition 30(4)(a) applies, and where there are no substantiated heads of deduction to which the Employer is entitled to have resort.

29. As the Redland Bricks Ltd. case shows, the Courts are reluctant to grant some types of interim mandatory injunction, and, in some situations, will only do so where the plaintiff shows a very strong probability upon the facts that grave damage will accrue to him in the future. The type of situation covered by the Redland Bricks Ltd. approach is one where the defendant is called upon to carry out positive remedial work, as for example, where a mandatory injunction is sought to force a defendant to erect a barrier to prevent a threatened land-slip. That type of interim mandatory injunction is very different from the one sought here, and clearly different principles will apply.

30. The mere fact that the words "mandatory injunction" are used does not have the effect of putting the Court in a strait-jacket which deprives it of the necessary flexibility to do justice in the instant case before it. American Cyanamid Co. v. Ethicon Ltd.,⁽⁵⁾ the leading case on injunctions, has recognised at page 511F that there may be "special factors" which can affect the balance of convenience, an approach which gives the Courts flexibility in deciding whether to grant or withhold injunctions. How the Redland Bricks Ltd. approach is not of universal application in deciding whether or not, to grant mandatory injunctions is apparent from such cases as De Falco v.Crawley Borough Council .⁽⁶⁾ There the Court had this to say:-

"I have no doubt therefore that the court may properly exercise its discretion to grant a mandatory injunction on an interlocutory application in an appropriate case. In considering what principles should govern the exercise of this discretion, I do not think much assistance is to be derived from authority. In particular I am satisfied that the principles expounded by Lord Diplock in American Cyanamid Co. v. Ethicon Ltd. governing the grant of prohibitory injunctions on interlocutory applications have no relevance to the case we are considering. A dispute between an applicant who claims entitlement to be provided with accommodation, and a local authority who dispute that entitlement, exhibits sufficiently unusual features to make a comparison even with other types of litigation where a mandatory injunction may be granted on an interim application difficult and possibly misleading. I think the appropriate principles can only be derived from a consideration of the likely consequences to the parties to such a dispute of granting or withholding relief."

31. In deciding whether to grant or refuse an interim injunction the principle which commends itself to me most of all is the one to be found in Cayne v. Global Natural Resources⁽⁷⁾ where it was held. that the Court should approach the case on the broad principle of what it can do in its best endeavour to avoid injustice, and to balance the risk of doing an injustice to either party.

32. The attraction of granting an interim mandatory injunction for the purpose of setting up a trust fund where Condition 30 applies is that it forestalls the risk of injustice to the Main Contractor if the Employer becomes insolvent, while at the same time protecting the Employer against the defaults or insolvency of the Main Contractor through the device of retention money. The contention on behalf of the Employer that it would suffer an injustice if it turned out ultimately that money was due from. the Main Contractor was met by the countervailing argument which could be advanced for the Main Contractor to the effect the Main Contractor can also suffer an injustice if it turns out ultimately that there is a sum due to it from the retention monies. The beauty of Condition 30 is that it preserves the position of both the Employer and the Main Contractor, pending the resolution of disputes between them.

33. Based both on general principles and on the particular authority of the Rayack case, no obstacle stands in the way of the Court to hinder the issue of a mandatory injunction for the purpose of enforcing compliance with the Employer's obligation to set up a trust fund of retention monies pursuant to Condition 30.

34. That the Employer has not been shown to be in financial difficulties in the present case is no answer to the Main Contractor's demand that a trust fund should be constituted. It can equally be said that there is no evidence to show that the Employer is financially sound. The Court simply has no information, whether favourable or adverse, on the Employer's financial health. In such circumstances, the Main Contractor is entitled to seek the protection afforded to him by Condition 30(4)(a). It is ridiculous to suggest that the Main Contractor can only insist on the trust being set up if it can adduce evidence of some shakiness in the Employer's financial position. If the Main Contractor had to wait till such evidence was forthcoming it would often by then be too late to take steps which would result in the fund being secured. Rather than requiring the Main Contractor to show that the horse is showing signs of bolting, the Courts allow it to take steps to have the stable door shut while there is still no suggestion of anything being amiss. In asking for a trust fund to be set up, the Main Contractor is merely acting prudently.

35. In granting equitable relief such as a mandatory injunction, the Court will not come to the aid of those it regards as unworthy of its assistance. This idea embodied in the maxim : "He who comes to Equity must come with clean hands."

36. It was submitted on the Employer's behalf that the Main Contractor's hands could not be regarded as sufficiently clean, because he had not complied with the Architect's Schedule of Defects within the time and to the extent specified by the Architect. It hardly lies in the mouth of the Employer, however, to start complaining about those who do not obediently follow the Architect's directions. When it suited the Employer, it disregarded the Architect's Certificates, and now the Main Contractor is doing the same. Challenging an Architect's Certificate does not cruse dirt to adhere to the hands of a party so doing, in my opinion. As Architect's Certificates are not conclusive, I see no reason why Equity should withhold its favours from one who embarks on such a challenge.

37. In view of the foregoing, I allow the Main Contractor to make the amendments it seeks to the prayer of its Statement of Claim and grant a mandatory injunction together with the other orders sought by paragraphs 1, 2 and 3 of the summons.

38. I will now hear the parties as to costs.

(1)    12 B.L.R. 30

(2)    17 B.L.R. 125

(3)    22 B.L.R. 134

(4)    (1970) A.C. 653

(5)    (1975) 1 All E.R. 504

(6)    (1981) 1 All E.R. 913

(7)    (1984) 1 All E.R. 225

Representation:

Mr. Ribeiro (instructed by Masons & Marriott) for the plaintiff/applicant

Mr. Ronny K.W. Tong (McKenna & Co.) for the defendant