Creatiles Building Materials Co. Ltd. v. To's Universe Construction Co. Ltd.
Read the full judgment text of HCA 10677/1998 on BabelCite. This High Court CFI judgment was delivered on 10 September 2002.
1. This is an action in contract. The plaintiff, (Creatiles) is a company which specialises in the application of textured surfaces to buildings. The defendant, (To's) is a construction company. The parties entered into a contract for the supply and application of a textured surface coating to a building in Kowloon. Before the work was completed, and following an exchange of letters between the parties solicitors, Creatiles, contending that they had not been paid in accordance with the contract
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HCA010677/1998 HCA 10677 of 1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 10677 OF 1998 ____________
____________ Coram: Deputy High Court Judge Saunders in Court Date of Hearing: 27-31 May, 3, 4 & 6 June 2002 Date of Judgment: 10 September 2002 _______________ J U D G M E N T _______________ 1.This is an action in contract. The plaintiff, (Creatiles) is a company which specialises in the application of textured surfaces to buildings. The defendant, (To's) is a construction company. The parties entered into a contract for the supply and application of a textured surface coating to a building in Kowloon. Before the work was completed, and following an exchange of letters between the parties solicitors, Creatiles, contending that they had not been paid in accordance with the contract left the site. Subsequently this writ was issued alleging that To's had repudiated the contract by refusing to settle a progress payment claim. To's contend that Creatiles were not entitled to payment at the time they left the site. The submission by Mrs. Catton for To's is that the contract was a re-measurement contract and that accordingly Creatiles were not entitled to payment until the work had been measured. The facts that I now set out are not in dispute. 2.On 12 November 1997 Creatiles entered into a contract with To's to apply granite spray coating to the exterior of a building under construction by To's at Tai Nan St West Kowloon. The building occupies most of the block and for convenience the four elevations of the building may be identified by the streets they face. They are:
In the evidence the elevations were referred to variously by number or name of the street to which each faced. In this judgment I shall refer to exhibits by the bundle they were in and the relevant page number (e.g. C3 refers to Bundle C page 3). 3.The contract (C1) was in a simple form for the sale and purchase of products, the relevant terms of which may be conveniently set out as follows:
4.Samples of the granite spray had been supplied to To's architect for approval prior to the making of the contract. The deposit was paid by a cheque, post-dated to 22 November 1997, the cheque not finally clearing until 15 December 1997. Subsequently a mock-up was done using the approved color and the mock up was approved. Creatiles then proceeded to order the materials from the manufacturer and advised To's, by letter dated 15 January 1997, (C82), that the materials would be delivered by the end of February, and requested that cement and sand rendering be completed by then. This step was necessary because the rendering must be completed before the application of the undercoat or spray texture could be undertaken. 5.In late January 1998 Creatiles were instructed to change the colour of the granite spray from light beige as main colour and dark beige as the pattern colour to light beige only. On 18 February 1998 Creatiles entered into a sub-contract (C84-87) with Pak Lick Constriction Company Limited (Pak Lick) who were to carry out the application of the spray at the site. In early March 1998, on the instruction of To's, the colour was changed back to the original light and dark beige colour scheme. 6.On 27 March 1998 Creatiles warned To's that delivery of the goods would be on 2 April 1998 (C2). This was done to ensure that space would be available to place to goods. On 7 April 1998 the materials were delivered to the site by Creatiles. The goods were received for To's by its foreman Chan Kam Hung, who inspected the goods and signed the delivery note, (C3) acknowledging thereon in terms that
The document specifically recorded that the colour of the primer was black. 7.On receipt of the goods being acknowledged, Creatiles sent to To's a debit note (C6) for the 30% of the contract price due on delivery of the goods in terms of the contract. Creatiles told To's that although the goods had been delivered the site was not yet ready for them to commence work. They were told by To's to wait for advice as to when work could begin. Payment of the debit note for $646,980 was not made immediately but 23 days late, on 30 April 1998, and then only after repeated demands by Creatiles for payment. 8.There is a dispute as to the precise day on which work commenced, and whether or not the site was completely ready for work to start. But on 8 May 1998 there was a site meeting attended by David Tsui and Tony Ng for Creatiles, Lai Siu King and Chan Wai Tong for Pak Lick and Chan Kam Hung for To's. There is a dispute as to what was agreed at the meeting but it is not in doubt that application of primer then began on the CPR1 elevation. There were, in total, 5 coats to be sprayed on each elevation: first, an undercoat of primer/sealer, then two coats of granite spray, then two coats of silicone/acrylic top coat. 9.On 21 May 1998 Creatiles issued a debit note, (C7), for $258,792. That sum is 20% of the balance of the contract price then due. That calculation of that sum was based upon the provision in the contract that the balance was due by interim payment during the work every 14 days, Creatiles being required to complete the work in 60 days, which would allow for 5 payments, one every 14 days over 4 periods and a final payment. The evidence of Albert Chan of Creatiles was that the debit note was issued for that sum at the request of To's quantity surveyor, a Mr. Ho. That was denied by Mr. Teddy To, but Mr. Ho was not called and there was no evidence from Mr. To that he had any personal knowledge of the circumstances in which the debit note was issued, and so I accept the evidence of Mr. Chan. Mr. Teddy To received the debit note and, at the time, raised no complaint about it. 10.The next day an issue arose as to the removal of protective plastic sheets on aluminum windows. Before the spraying could be done it was necessary to ensure that exposed surfaces that were not to be sprayed were protected. In some cases this was done by the simple technique of placing a wooden board over the area required to be protected so that the board was sprayed. The aluminum windows are supplied from the manufacturer with plastic sheeting covering the exposed areas. Creatiles relied upon that plastic covering to ensure that the exposed areas of the windows would not be subjected to spray. There was a great deal of evidence and argument as to whether Creatiles were entitled to rely on that plastic covering or whether they ought to have provided their own covering. There was similar evidence and argument as to whether To's were entitled to remove the covering before the spray application had been completed. 11.On 23 May 1998 there was another site meeting. Again there is a dispute as to what took place at the meeting. However Creatiles, by a written contract (C25-28), through an associate company Sinowell Engineering Ltd, (Sinowell) engaged another subcontractor, Maxim Painting Co. Ltd. (Maxim) to assist in the application of the spray coating. The contract price was $455,210. It was a specific term of the contract with Maxim that as To's removed the plastic protection sheets from the windows, Maxim would attach sheets to protect the windows from the application of the spray coat. As Maxim was to undertake half of the work it was agreed between Creatiles and Pak Lick that the contract price with Pak Lick would be reduced by 50% to $252,000. 12.The evidence of Creatiles' witnesses is that they pressed Mr. Teddy To to make payment of the progress payment account that had been submitted and that he agreed to arrange payment on or before 27 May 1998. That agreement was denied by Mr. Teddy To. When no payment was received by Creatiles by 3 June 1998 they went to their solicitors. A letter was written demanding payment of the sum of $258,792 by 1.00 p.m. on 4 June 1998 (C13). The letter stated that if payment was not made by that time Creatiles would be at liberty to treat the contract as having been repudiated by To's. To's solicitors replied by a faxed letter to Creatiles solicitors sent at 12.32 p.m. on 4 June 1998 (C16). No payment was made and the assertions in Creatiles solicitor's letter were denied without explanation. It was said that reasons would be given in a forthcoming reply. 13.On 5 June 1998 Creatiles left the site. On 6 June 1998 To's solicitors wrote to Creatiles solicitors (C109) asserting that by reason of Creatiles defaults, and their abandonment of the site, the contract was terminated. In that letter it was asserted that To's were not obliged to make the interim payment because:
No payment was made. 14.By a letter dated 29 June 1998 (C102) the architect purported to inform To's that the dark pattern strip on the CPR1 elevation was not in accordance with the approved colour and that the contrast was not consistent with the samples that had been provided. Mrs. Catton was obliged to acknowledged that no such advice had been given to Creatiles either during the time that they were on the site nor even after they left the site. 15.Creatiles issued the writ on 29 June 1998 and the statement of claim was filed on 28 July 1998. The claim is for the contract price less the cost of materials and the sums due to Pak Lick and Maxim, a net sum of $1,012,935. In the alternative the progress payment is sought. A defence and counterclaim were filed on 29 September 1998. The counterclaim, (in its final form) sought from Creatiles first, a sum of $126,070, said to be an overpayment for the materials supplied and work done, second, $42,620 for cleaning window frames and PVC pipes, said to have been wrongly stained with spray coating, and third, damages caused by Creatiles default and delay of $593,543. 16.The first question that must be determined is whether To's were entitled, on 4 June 1998, to withhold payment of the progress payment requested by Creatiles. The primary argument for To's was that the contract was a "re-measurement contract" under which the work was required to be measured and valued as it proceeded. In support of this proposition Mrs. Catton relied upon Chitty on Contracts 28th ed. Vol 2 para 37.010. Great care must be taken when relying upon this section of Chitty because on close examination can be seen that the learned authors are not dealing with contracts in general but with a specific type of construction contracts involving standard forms of contract in regular use in the United Kingdom. The statements as to "re-measurement contracts" in paras 37-010 and 31-133 relied upon by Mrs. Catton are all made in relation to these special pre-prepared contracts. It is right that a contract containing quantities in which the sum finally due to the contractor is to be ascertained by re-calculating each stated quantity from the actual amount of work performed may usefully be described, when such a provision is in the contract, as a "re-measurement contract", but, I reject the proposition that, as a matter of law, any contract containing an estimated quantity, and providing for progress payments at certain intervals during the term of the contract, must necessarily be so defined, and that the consequence of such a definition is that there must be a measurement before any progress payment can be made. 17.It is correct that a term may be implied into a contract to give "business efficacy". But such a term will not be implied if it is contrary to the express terms of the contract. In the present contract the parties have estimated the total area of the surface to be covered at 8,200 m2. They have anticipated that the actual area to be painted will, at the conclusion of the work, be determined to be somewhat more or less that that estimated. They have agreed that there will be a "final measurement" on the site and the contract price adjusted according to that measurement. I am unable, from that agreement, to imply an additional term that at the stage of each progress payment, there would be an additional measurement to determine the quantity applied and the amount due. The requirement for a "final measurement" implies that there would be only that one measurement and the adjustment, if any, made at the end of the contract. Had the parties intended that there be interim measurements the amount paid would have been determined as the job progressed and there would have been no need for a "final measurement" except to determine the final progress payment. 18.The terms of payment required progress payments at 14 day intervals over a contract that was to be completed in 60 days. Such a scheme allowed for the contractor to apply for progress payments on four occasions at 14 day intervals with the final payment on completion of the work. The clear implication is that five progress payments would be made, each representing 20% of the balance due under the contract. Had the contractor adhered to the time schedule the final payment would be 4 days after the fourth progress payment, but would be subject to the final measurement. It may be reliably assumed that the area to be covered would have been calculated by a quantity surveyor prior to the contract, and that consequently no major adjustment in the quantity, either above or below that estimated, would be required. The final payment, for four days work, but representing 20% of the balance due under the contract, can be seen to be well beyond the scope of a normal retention. That being the case, I am unable to say that "business efficacy" requires the implication of any additional terms in the contract. The progress payments were such that a substantial sum would be due at the completion of the work, certainly more than would be required to deal with any "over or under" quantity issue following the final measurement. 19.I have regard also to the fact that this contract was to be completed within 60 days. I do not put from my mind the allegation that Creatiles were behind on the work. But they had put on extra men, and even if they were behind it was clear that any delay would not be significant. The clear intent of a provision in such a short term contract that payments be made at 14 day intervals during the application of the coating was that the contractor would have a ready cash flow from which to pay its workers. It defies logic that in such a case the parties would have intended that each progress payment should be subjected to a time consuming and potentially expensive measurement before payment could be made. 20.Finally, it is not without significance that as at 21 May 1998, when the request for the progress payment was made more than 20% of the total work had been completed. The evidence from Creatiles' witnesses that To's quantity surveyor had approved the revised debit note as covering the work completed to date as 20% of the total work was not in any way challenged. Although it was not revealed until during the trial, it transpired that To's had a measurement undertaken shortly after Creatiles abandoned the site. That measurement, (P1), undertaken by Lacwin Consultancy Ltd., an apparently independent quantity surveyor, established that 34% of the work required under Creatiles' contract had in fact been undertaken by Creatiles. That the amount of work exceeded the amount of the progress payment, which tends to confirm the intention of the parties that the payment should be made upon demand without the need for a measurement. I record that the Lacwin report had not been disclosed to Mrs. Catton, who learned of its existence only during Mr. Teddy To's evidence. 21.For these reasons I am unable to imply into the contract a requirement that, prior to each progress payment, the work undertaken must be the subject to measurement. I accordingly hold that, by failing to make the progress payment requested, To's was in breach of the contract. 22.The argument made by To's solicitor that no progress payment would be due until one whole side of the building had received five coats was pursued at trial, but only faintly. Plainly the solicitor's contention that it was an express term of the contract could not be pursued for on any reading of the contract or the negotiations surrounding either the making of the contract or the events after the contract, there was no suggestion of such a term. Mrs. Catton was quite unable to say just how or even why such a term should be implied into the contract, whether to give it business efficacy or for any other reason. The argument must fail. There was no such term, express or implied. 23.It was contended by To's that Creatiles themselves were in breach of the contract. The contention relied upon an argument that work was not progressing at sufficient speed. The dispute as to payment arose soon after the request for the payment was made on 21 May 1998. The next day there were discussion between Creatiles Mr. Albert Chan and Mr. Teddy To. Despite a promise to pay the progress payment it was not made and Creatiles, over the next few days pressed for the payment while continuing the work. At the same time they were recording, in writing, to To's that there were delays with rendering which were making it difficult to continue the work. To's response was to complain, by letter dated 1 June 1998, (C 10-11). This complaint was repeated on 3 June 1998 (C 12). 24.Where a period of completion is provided in a contract two situations may arise. There may be room for the implication of a term that the contractor will proceed with reasonable diligence, or it may simply be the sole obligation of the contractor to complete the work within the period for completion: Chitty Vol 2 para 37-025. In this case it is not necessary to determine which situation applies to the contract. On 28 May 1998, before the demands for further workers, Creatiles had employed a second contractor to assist with the work. There is no evidence at all to suggest that, with the additional workers that had been put on, the contract could not be completed within the required 60 days, or, if not, within a short time thereafter. While late completion, if it occurred, might constitute a breach by Creatiles, entitling To's to damages, it is simply not possible to say that in June 1998 Creatiles were in breach in failing to proceed at an expeditious pace. 25.It does not follow that the breach of a contract will always entitle the other party to treat himself as further discharged. The rule is stated in Chitty Vol 1 para 25-001 in these terms:
The issue will be whether Creatiles, which plainly has an action for damages for late payment, were entitled to consider themselves released from further performance by To's breach in not making payment of the progress payment. Before that issue can be addressed it is necessary to consider Mrs. Catton's argument that Creatiles have waived any breach by To's. 26.The argument was that by continuing the work after having been promised payment on 22 May 1998, a payment that was not forthcoming, Creatiles waived To's failure to pay upon presentation. Where the innocent party, being entitled to choose whether to treat the contract as continuing, or to accept the repudiation and treat himself as discharged elects to treat the contract as continuing, he is said to have "affirmed" the contract: Chitty Vol. 1 para 25-002. This has been described as "waiver by election": see para 25-006. 27.The factual situation was as follows. The application for the progress payment was submitted on 21 May 1998. I accept the evidence of Creatiles' Mr. Albert Chan that Mr. Teddy To agreed to make payment on 22 May 1998. Mr. To disputed that, but wherever there is a difference between Mr. Teddy To and other witnesses I prefer the evidence of other witnesses. Mr. Teddy To was evasive and contradictory when giving evidence. It was necessary for me to specifically warn him as to evasion but despite that warning he continued to be evasive ion his answers. He was an unconvincing and unbelievable witness. The document he produce, "To-1" continued significant inaccuracies, and, in its omission to refer to the fact that rendering had not been completed on the 1/F to 5/F was deliberately misleading. It is clear that Mr. Teddy To was dishonest in his reports to the developer. That may be seen in report No. 12 dated 13 May 1998, where it was reported that all plastering from 2/F to R/F had been completed, at a time when the records show, and Chan Kam Hung admitted, that plastering work on 5/F downwards only began on 27 May 1998. In these circumstances I am unable to place any weight on the evidence of Mr. Teddy To. 28.Upon Mr. Teddy To's failure to make the payment as promised Mr. Albert Chan attended personally on him at his office demanding payment. It was eventually agreed by Mr. Teddy To that payment would be made on or before 27 May 1998. It is clear that, up to that time, there had been no waiver by Creatiles of the breach. Although they continued work they pressed in the strongest possible way for payment making it clear that they did not accept that payment should be delayed. On 3 July 1998 Creatiles' solicitors wrote to To's (C 13) demanding payment by 1.00 p.m. on 4 July 1998. That such a letter was written made it completely clear that the fact of non-payment had not been waived. On 4 July 1998 To's solicitors wrote refusing payment but stated no grounds for the refusal. Creatiles left the site the next day. In the whole of those circumstances I am satisfied that there has been no waiver by Creatiles of the fact of non-payment. 29.The proposition that mere breach of an obligation does not constitute repudiation is repeated in Hudson's Building and Engineering Contracts 11 Ed. Vol 1 4.221, in relation to non-payment in these terms:
Ms. Lan relied upon a passage from the judgment of Lord Blackburn in Mersey Steel & Iron Co v Naylor Benzon & Co (1884) 9 App Cas 434:
The passage continues:
I apply these principles in assessing the situation in relation to the non-payment of the progress payment. 30.To's solicitors letter of 4 June 1998 was unequivocal. The payment, despite being nearly two weeks late, was refused. The refusal was sent before the deadline of 1.00 p.m. It was an absolute refusal in the sense that no reasons were given for the refusal to make the payment. Reasons were only belatedly given, after the deadline had long passed. The only obligation on To's under the contract was make payments. I accept Ms. Lan's submission that an unequivocal and absolute refusal to make a payment that was plainly due, both in terms of the contract and in terms of the amount of work that had been completed, clearly evinced an intention on the part of To's not to be bound by the agreement. That must be especially so when the non-payment is calculatedly deliberate, communicated through a solicitors letter, and followed the delay in the cheque for the deposit being met, and the delay in payment for the materials. It is right that To's expected Creatiles to complete the painting in accordance with the contract, but they can expect that only if they are themselves willing to meet their obligations of payment in terms of the contract. That they were not prepared to do. 31.I accordingly conclude that To's failure to make the progress payment was a breach of the contract that entitled Creatiles treat the contract as having been repudiated by To's and that they were thereafter discharged from the performance of the contract. They were thereby wrongly deprived of the opportunity to make the profit that they would have made from the contract. 32.The profit that would have been made by Creatiles may be assessed by deducting from the contract price the costs of materials, and the contract price payable to Pak Lick and Maxim to make the application. The calculation is as follows:
That is the sum that Creatiles have lost as a result of To's wrongful repudiation of the contract. 33.To's have counterclaimed for damages contending that by virtue of Creatiles' delay they were unable to complete the contract with the developer in time, and that Creatiles ought to be liable for "site preliminaries and overhead costs". The issue is of course determined by the finding that To's had themselves repudiated the contract. But even if it had not, the evidence presented simply failed to establish that the whole of the delay on the project could in any way be attributed to the painting contract. It was originally intended that the materials would be delivered to the site by mid-February 1998. Although the materials were ready for delivery the site was not ready for the delivery until 7 April 1998. To's were already seriously in delay on the contract. Even then the site was not ready for the painting work to start and it did not get underway until the beginning of May 1998. Finally the whole basis on which the sum claimed was assessed was entirely unsatisfactory. Although assertions were made as to "site preliminaries and overhead costs" there was simply no evidence at all to substantiate the claims. The claim for damages for delay must fail completely. 34.To's further claim for an alleged overpayment. Again, the issue is determined by the finding that To's themselves had wrongly repudiated the contract. But even if it did not, it is clear from the Lacwin report (P1) that there had been no overpayment. To the contrary, taking into account the value of the materials and the work done, a further sum of $158,664 would be due to Creatiles, in addition to the progress payment that had been requested. 35.A claim was made by To's for the sum of $42,620 allegedly incurred in cleaning paint stains from aluminum windows. There was no evidence to support the claim which was sensibly abandoned at trial. 36.It was contended by To's that the wrong colour primer was used. They knew, from the moment that the materials were delivered to the site that black primer was to be used. That may be seen from Chan Kam Hung's signature to the delivery note (C3). Nothing can have been plainer when the work began that black primer was being used. It would have simply been obvious to all concerned. But no issue was ever raised by To's until after these proceedings began. There has been no suggestion at all that the use of black primer has in any way detrimentally affected the work. The suggestion that the wrong colours were used is equally untenable. The letter from the architect that was produced had, admittedly, never been shown to Creatiles. The architect's letter was the only evidence produced upon which To's relied to say that the finished job did not match the sample. But the colours themselves were not produced, nor was the architect called to give evidence and be cross-examined. There is simply no basis in either argument. 37.The final matter raised at trial by To's was that instead of two coats of silicone/acrylic top spray as required by the contract only one coat had been applied. This matter had not been raised in the pleadings and was raised in cross-examination of Creatiles witnesses and by Mr. Teddy To. The belated production of the Lacwin report made it clear that the claim was quite without any foundation and that two coats had been applied as required by the contract. The report records in terms that there were two coats of silicone/acrylic top coat. It is a demonstration of the way that Mr. Teddy To conducted this litigation in that he concealed from his counsel the Lacwin report, and pressed this argument, which he must have known, from that report, was doomed to failure. 38.A great deal of time was spent in the trial in examining issues as to the true commencement date of the contract, whether there was an implied term allowing an adjustment to the 60 day period for rain days, the precise date at which the site was ready for Creatiles to commence work, and the question of the removal of protective coverings to the windows. I have not found it necessary to reach any conclusion on these issues because they are simply irrelevant to the conclusions as to whether To's was in breach by failing to make the progress payment and whether as a result Creatiles were discharged form further performance. In adopting that course I accept Ms. Lan's submission that those matters are irrelevant. 39.There will be judgment for Creatiles for the sum of $1,012,935 on the claim. Judgement is entered for Creatiles on the counterclaim. There will be an order nisi that To's must pay Creatiles costs on both the claim and the counterclaim. In the event that any costs have been reserved in interlocutory matters those costs will go to Creatiles.
Representation: Ms. Gekko Lan, instructed by Messrs Hau, Lau, Li & Yeung, for the Plaintiff Mrs. Julie Chan Catton, instructed by Messrs Ko & Co, for the Defendant Appeal dismissed: see CACV384/2002 dated 27 March 2003 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||