China Overseas Building Construction Ltd v. Profit Nation Development Ltd and Others

HCA002008/2003

HCA2008/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2008 OF 2003

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Coram: Hon Tang J in Chambers

Date of Hearing: 19 May 2004

Date of Judgment: 9 June 2004

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J U D G M E N T

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1.The plaintiff as main contractor and the 1st defendant as employer entered into a building contract to build a residential development at Tuen Mun Town Lot 424, Tsing Fat Street, Tun Mun, dated 24 October 2001. The contract is in the standard form private edition "with quantities" ("the Main Contract"). This is the Aegean Project. In Action 3521 of 2003, the plaintiff sues the 1st defendant on a dishonoured cheque in the sum of $11,402,800.00 arising out of the same project. In Action 2011 of 2003, the plaintiff sues True Gold Investments Ltd, a related company, the 2nd, 3rd and 4th defendants, as well as an additional defendant on similar claims in connection with the so-called Pinada Project. The applications in relation to all three actions were heard together. Separate judgments would be given at the same time in the other two actions.

2.Under the Main Contract , the plaintiff was entitled to be paid within 14 days from presentation of interim payment certificates ("IPC").

3.By a letter dated 12 August 2002, Lovells, acting for the plaintiff, wrote complaining about late certification by the architect and more importantly for the present purpose, late payment of IPC by the 1st defendant. The letter referred to IPC No. 8 which was payable on 14 May 2002 in the sum of $2,668,000.00, IPC No. 9 which was payable on 20 June 2002 in the amount of $2,293,000.00, IPC No. 10 which was payable on 23 July 2002 in the sum of $1,302,000.00 and IPC No. 11 payable on 19 August 2002 in the sum of $3,188,000.00, totalling $9,451,000.00. The letter demanded timely payment "failing which our client would take all further necessary actions". That was followed by a letter from the plaintiff to the 1st defendant dated 21 August 2002 headed "Final Demand" demanding payment of the sum of $9,451,000.00 by 5 p.m. Friday 23 August 2002 "failing which we will take all further necessary action".

4.By a written letter dated 22 October 2002 by Lovells referred to Clause 26(1)(a) of the Main Contract and that if the 1st defendant did not pay the plaintiff the total sum certified but unpaid within seven days of the receipt of the letter, the plaintiff would consider itself entitle to serve a notice of termination under Clause 26. There were other letters of complaint, for sample on 11 November 2002, a letter from the plaintiff to the 1st defendant relating to IPC No. 12 which was payable on 21 October 2002, a letter dated 7 January 2003 complaining about non-payment of IPC No. 13 which was payable on 19 December 2002, and on 7 January 2002, a complaint that IPC No. 15 was not paid on 25 December 2002.

5.The fact that the 1st defendant was late in making payment was acknowledged by the 1st defendant's letter dated 18 October 2002.

"...we understand that we are behind payment on the payment certificate and hereby propose the following repayment schedule for the outstanding sum of HK$9,950,000.00....."

namely the immediate payment of $2,668,000.00 followed by four instalments to be paid on 15 November, 2 and 17 December 2002 and 3 January 2003. The letter concluded by saying :

"As for your information, our project in Dongguan Chang An have been successful sold and we are in the process of repatriating the fund back to Hong Kong. Furthermore, there is a prospective purchaser in our luxury house in Bowen Road which is now under active negotiating to close the deal. We therefore would be grateful if you can grant us a little bit time to honour the above payments."

6.On 3 December 2002, Lovells wrote stating that an agreement had been reached between the 1st defendant and the plaintiff upon certain terms and conditions. The 1st defendant was asked to confirm the terms of such agreement by signing and returning to them a copy of the letter. That was not done.

7.Instead, the 1st defendant wrote on 3 January 2003, the translation of which reads :

"According to (our) record, (we) owed your company the construction costs in the sum of HK$16,210,800. After deducting the sum due to the nominated sub-contractors, the net amount due to the main contractor is around HK$15,090,500. ..."

The 1st defendant proposed payment of $10,000,000.00 on 28 January 2003 and the balance to be paid on 28 March 2003 "out of the project of Chung Shan". The 1st defendant also agreed to compensate a sum of HK$5,000,000.00 "for the extra preliminary overhead expenses," and asked the plaintiff to resume work as soon as possible upon receipt of the sum of $10,000,000.00.

8.On 16 January 2003, Lovells referred to the 1stdefendant's proposal dated 3 January 2003 and enclosed a draft Deed of Supplemental Agreement to be executed by the 1st defendant, Gold-Face Holdings Ltd the 2nd defendant, and Gold-Face Finance Ltd, the 3rd defendant.

9.Clause 4 of the draft provided for payment totalling $26,454,714.93 by the 1st, 2nd and 3rd defendants by instalments, the first $10,000,000.00 on 28 January 2003, $11,386,914.93 on 9 February 2003 and the last of $5,067,800.00 payable on 28 March 2003.

10.That was not acceptable to the defendants. On 24 January 2003, the defendants counter-offered payment of $15,090,500.00 by instalments, $5,000,000.00 on 28 February 2003, $5,000,000.00 on 17 March 2003 and $5,059,500.00 on 31 March 2003.

11.Clause 6 of the draft also required cheques representing each of the payments to be given by the 1st defendant upon signing of the supplemental agreement. It also provided by Clause 9 that the payments did not include payments for work done by nominated sub-contractors nor for material supplied by nominated suppliers. The defendants raised no objection to Clause 9.

12.Lovells responded by a letter dated 12 February 2003 and enclosed a revised Deed of Supplemental Agreement under which so far as Clause 4 was concerned, the sum of $26,477,414.00 became payable by four instalments starting from 28 February 2003 and ending on 15 April 2003.

13.That was also not acceptable to the 1st defendant. Their counter offer was faxed to the plaintiff on 28 February 2003 under which payment in the sum of $18,746,500.00 was to be paid by four instalments beginning with a $3,000,000.00 payment on 15 April 2003. There were further drafts exchanged between the parties. One amendment from the 1st defendant to the plaintiff dated 7 March revised the figure payable to HK$18,746,500.00.

14.To cut a long story short, eventually a Deed of Supplementary Agreement dated 24 March 2003 was made between the plaintiff and the 1st, 2nd and 3rd defendants ("the Supplementary Agreement"). This is the Supplemental Agreement sued upon in the claim. Under the Supplemental Agreement, the 1st, 2nd and 3rd defendants agreed jointly and severally to make payments to the plaintiff in the sum of $21,402,800.00 as to $10,000,000.00 on 30 April 2003 and as to $11,402,800.00 on 30 May 2003.

15.Clause 7 of the Supplemental Agreement recorded that :

"At the time when this Supplemental Agreement is signed, Profit Nation has provided two (2) cheques payable to China Overseas in the total sum of HK$21,402,800.00 (ie HK$10,000,000.00 plus HK$11,402,800.00) enabling China Overseas to receive cleared funds in accordance with the Payment Schedule."

16.Clauses 2 and 9 of the Supplemental Agreement are relevant and they provided :

"2.	Save as expressly amended by this Supplemental Agreement, all terms and conditions of the Main Contract shall remain in full force and effect, and the Main Contract and this Supplemental Agreement shall be read and construed as a single document. The Memorandum is hereby superseded and has no legal effect and shall not be binding upon the parties.
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9.	Upon clearance of a cheque in the sum of HK$10,000,000.00, China Overseas will, subject to the terms of the Main Contract and this Supplemental Agreement, continue to carry out and complete the Works in accordance with the Main Contract and this Supplemental Agreement. For any defaults or breaches or delays which have been committed/caused or which may have been committed/caused by China Overseas on or before 30 April 2003 ("the Defaults"), Profit Nation hereby waives its rights to make any present or future claims arising out of or in connection with or regarding the Defaults against China Overseas, including but not limited to any claims for Liquidated and Ascertained Damages against China Overseas. The "Date for Completion" in the Appendix to the Main Contract shall be inserted with the words "a reasonable date to be determined by the Architect in accordance with the Main Contract as amended from time to time" instead of the words "26 July 2002", and Profit Nation hereby grants an extension of time under the Main Contract allowing China Overseas to complete the Works in accordance with the revised Date for Completion. It is agreed that the revised Date of Completion is without prejudice to any other entitlements China Overseas may have under the Main Contract or this Supplemental Agreement or at law as from the date of this Supplemental Agreement."

17.Both cheques have been dishonoured. The first cheque dated 30 April 2003 is part of the claim in this action. The other cheque for $11,402,800.00 became the subject matter of HCA 3521/2003 because, at the time when the present action was commenced, the second cheque had not been dishonoured. The 2nd and 3rd defendants are sued under the Supplemental Agreement. The 1st defendant is sued both under the Supplemental Agreement and on the cheque.

18.By a summons dated 29 July 2003, the defendants have applied to stay the proceedings for arbitration. On the other hand the plaintiff applied for summary judgment against the defendants.

19.The 4th defendant, Tai Chi Wah is sued under a Deed of Guarantee and Indemnity which is undated but signed by the 2nd, 3rd and 4th defendants. The plaintiff is no longer pursuing summary judgment against any of the defendants on the guarantee. So I say no more about it. There would be unconditional leave to the 4th defendant to defend.

20.The application for stay under the Arbitration Ordinance relies on the arbitration clause (Clause 35) in the Main Contract. I have to decide first, whether Clause 35 covers claims on the cheques. Secondly, whether it covers the plaintiff's claim against the 1st defendant under the Supplemental Agreement. Thirdly, whether Clause 35 covers the claims against the 2nd and 3rd defendants. These issues turn on the construction of Clause 35.

21.Clause 35 provides :

"(1) Provided always that in case any dispute or difference shall arise between the Employer or the Architect on his behalf and the Main Contractor, either during the progress or after the completion or abandonment of the Works, as to the construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (......), then such dispute or difference shall be and is hereby referred to the arbitration ...."

22.Clause 2 of the Supplemental Agreement provides :

"2.	Save as expressly amended by this Supplemental Agreement, all terms and conditions of the Main Contract shall remain in full force and effect, and the Main Contract and this Supplemental Agreement shall be read and construed as a single document...."

23.Mr Warren Chan, for the plaintiff has submitted that although Clause 2 of the Supplemental Agreement required the Supplemental Agreement and the Main Contract to be read and construed as a single document, it did not require it to be read and construed as a single contract. He submitted the contract referred in Clause 35 was the Main Contract and not the Supplemental Agreement. I am afraid I take a different view. I believe "contract" under Clause 35 must refer to "contract" as amended by the Supplemental Agreement, and that Clause 2 requires the Main Contract and the Supplemental Agreement to be read and construed as a single contract.

24.On the first issue, C.A. Pacific Forex Ltd v. Lei Kuan Ieong [1999] 2 HKC 571, a decision of the Court of Appeal provides guidance on the proper approach to be adopted. At page 575, Seagroatt J said :

"...A bill of exchange is not valid if it incorporates an arbitration clause. To hold that an arbitration clause referring to disputes arising from the underlying agreement, applies to bills of exchange would make 'a very substantial inroad upon the commercial principle on which bills of exchange have always rested.' Accordingly there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange into arbitration is to be rebutted....

It also offends what must in my respectful view be the logical consequence of the commercial principal-there must be an express inclusion of bills of exchange if such an arbitration clause is to bite in this way. Furthermore, as matter of business commonsense and efficacy, no right thinking merchant is going to agree to forego his rights on a dishonoured cheque. They cannot be taken away by implication.

The terminology of the arbitration clause relied upon by the appellants is 'in relation to any dispute between the Dealer and the Client.' Dispute is defined under r 2 (Pt 1) of the Leveraged Foreign Exchange Trading (Arbitration) Rules as 'any dispute relating to or arising out of a client agreement or ... any transaction that is regulated by the Ordinance.'

Applying the reasoning in all the cases considered and with a regard for the commercial principle governing bills of exchange, I have no doubt that the terminology of the clause is not precise and sufficiently encompassing to include bills of exchange such as the cheques in this case. There is nothing in it to show the manifest intention that any claim by the payee on a dishonoured cheque, drawn as an unconditional order to pay, should be in effect removed from the courts which can provide swift and efficacious remedy, and be subject to an arbitration procedure."

Godfrey and Rogers JJA agreed with Seagroatt J.

25.Seagroatt J relied on an earlier decision of the House of Lords, namely Nova (Jersey) Knit Ltd v. Kammgarn Spinnerei GmbH [1977] 1 WLR 713.

" In the Nova (Jersey) Knit case the House of Lords considered two discrete points. The first was that the agreement to arbitration did not extend to the claims before the court, namely claims on bills of exchange. It was held that the arbitration clause, which was in a partnership agreement, did not extend to cover claims on bills of exchange."

(Per Clarke J in Halki Shipping Corporation v. Sopex Oils Ltd [1997] 1 WLR 1268 at 1275.) Halki Shipping Corporation v. Sopex Oils Ltd was not concerned with this point.

Hence, Seagroatt J said at 757 H :

"The position had not be altered by the English Court Appeal's decision in Halki Shipping Corp. v. Sopex Oils Ltd [1998] 1 WLR 726 which distinguished the House of Lord's decision."

26.As a matter of construction I do not believe Clause 35 covers claims by the plaintiff against the 1st defendant on the cheques. I do not think it matters that Clause 7 in the Supplemental Agreement recited the fact that the two cheques had been provided by the 1st defendant to the plaintiff.

27.Clause 8 of the Supplemental Agreement provided :

"Upon any cheque being dishonoured, the balance of the sum of HK$21,402,800.00 then outstanding shall become immediately due and payable by Profit Nation, Gold-Face Holdings and Gold-Face Finance (jointly and severally amongst themselves) to China Overseas."

28.Now the plaintiff sues the 1st defendant on the full sum of $21,402,800.00 under the Supplemental Agreement. This is caught by Clause 35 and must be stayed for arbitration. This is academic because in HCA3521 of 2003, the judgment of which will be delivered at the same time, judgment would be entered in the plaintiff's favour against the 1st defendant in the sum of $11,402,800.00, on a dishonoured cheque.

29.I turn to consider the third issue, namely, whether the claim against the 2nd and 3rd defendants under the Supplemental Agreement are covered by Clause 35.

30.Clause 35 referred in terms to dispute or difference "between the Employer or the Architect on his behalf and the Main Contractor".

31.Mr Clifford Smith submitted that by necessary implication Clause 35 should be read as including the 2nd and 3rd defendants and any disputes or difference between them and the employer.

32.I do not believe it is permissible so to read Clause 35. Moreover, having regard to the purpose and nature of the Supplemental Agreement, I do not believe the parties intended that the obligations of the 2nd and 3rd defendants towards the plaintiff should be referred to arbitration. Just as, in my opinion, they never intended that any claim on the cheques should be referred to arbitration.

33.I turn to consider the plaintiff's application for summary judgment, and the defences relied on by the defendants.

34.The first and most important is duress. Duress is a possible defence to an action on the cheques and on the Supplemental Agreement.

35.The defendants relied on the evidence of Lim Hau Chun, in particular, his third affirmation. This defence is encapsulated in para. 18 of the defendants' skeleton argument : "It will be seen from these passages that the plaintiff refused to proceed with both the Aegean Project (Profit Nation), and the Pinada Project (True Gold) unless the new contractual arrangements, including the guarantees, were made. Crucially, a large number of units in the Pinada Project had been pre-sold and the Group of companies headed by Gold-Face Holdings Ltd (a listed company) faced a disastrous financial situation in view of the plaintiff's wrongful refusal to continue with the work. The new contractual arrangements were entered into as a result of pressure amounting to economic duress :

Chitty on Contracts, (29th ed.) Vol. 1 : paras. 7-013; 7-015 and 7-023.

Dimskal Shipping Co. SA v. ITWF [1992] 2 AC 152 at 165.

36.Duress, of course, requires a coercion of the will and in deciding whether there has been coercion :

"... it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it." Pao On v. Lau Yiu Long [1980] AC 614, at 635B-F.

37.Mr Smith accepts that it is essential to his case of duress that illegitimate pressure was used. However,

" Threatening to carry out something perfectly within one's rights will not normally amount to duress; for instance, a party who relies on his existing contractual rights to drive a hard bargain is not, on that ground alone, guilty of economic duress. ..."

(see Chitty on Contracts, (29th ed.), Vol. 1, General Principles puts page 527, para. 7-036.)

38.The defendants' complaints consist mostly of assertions. The allegation of "wrongful refusal to continue with the work" is a mere assertion. No attempt has been made to explain the correspondence referred to in paragraphs 3-14 above. The allegation that the plaintiff was guilty of delay or of defective work is of the flimsiest kind.

"It is of course trite law that O.14 proceedings are not decided by weighing the two affidavits. It is also true that the mere assertion in an affidavit of a given situation which is the basis of a defence does not, ipso facto, provide leave to defend; the Court must look at the whole situation and ask itself whether the defendant has satisfied the Court that there is a fair or reasonable probability of the defendants' having a real or bona fide defence."

(Per Ackner LJ B.N.P. v. Costa de Naray [1984] 1 Lloyds Rep. 21 at 23, Col. 1.)

39.Mr Smith also relied on the terms of the Supplemental Agreement to show duress. But the terms were as one would expect where the employer was in financial difficulty and had been in default of substantial payment over a substantial length of time.

40.It is also said that although under the Main Contract payments to nominate sub-contractors and suppliers were included in the Main Contract, in the Supplemental Agreement the amount which the 1st defendant had agreed to pay had excluded payments due to nominated sub-contractors and suppliers. This is relied on as an indicia of duress or unfairness in the terms of the Supplemental Agreement. The simple explanation for this is that the figures arrived at in the Supplemental Agreement were based on payment certificates issued by the architect which did not include payment for nominated sub-contractors and suppliers. So there is nothing in this point.

41.Furthermore, the allegation of duress was only made when affirmations were filed in these proceedings. That is notwithstanding letters of demand had been sent to the defendants by solicitors then acting for the plaintiff on 30 May 2003, and that receivers and managers were appointed by the lenders on 20 May 2003.

42.I do not believe the defendants have set up a sufficient or credible defence of duress.

43.The other defence relied on is set-off. It is said that the 1st defendant is entitled to set-off for liquidated damages in the sum of $32,184,000.00 and unliquidated damages in the sum of $64,171,858.00.

44.Mr Smith has accepted that the claim for liquidated damages which depends on certification by the Architect cannot be made out. He also accepted that there is no defence (apart from duress) to the claim on the cheque.

45.Mr Chan's answer is that claims for unliquidated damages, if any, were waived by Clause 9 of the Supplemental Agreement. Absent duress, Clause 9 must be given its effect. In any event, there is only the flimsiest evidence on delay or defective work. Sufficient facts and particulars must be given to show that there is a triable issue. I am not satisfied that there is a triable defence of set-off.

46.As I have held above, the plaintiff's claim against the 1st defendant on the cheque in the sum of $10,000,000.00 succeeds but that the plaintiff's claim against the 1st defendant for the balance of $11,402,800.00 would have to be stayed for arbitration. However, having regard to the judgment in HCA3521 of 2003 which would deliver at the same time, a stay would be academic.

47.The plaintiff's claim against the 2nd and 3rd defendants is based on the Supplemental Agreement. I have already held that Clause 35 does not apply to this claim.

48.For the above reasons, I order :

(1) Judgment against the 1st defendant in the sum of $10,000.000.00 with interest at 1.75% per annum above the prime lending rate adopted by HSBC from time to time, from 29 January 2003 until judgment, thereafter at the judgment rate until payment.

(2) Judgment against the 2nd and 3rd defendants in the sum of $21,402,800.00 at 1.75% per annum above HSBC's prime lending rate from time to time, from 29 January 2003 until judgment, thereafter at the judgment rate until payment.

(3) Stay of the plaintiff's claim under the Supplemental Agreement against the 1st defendant for arbitration under Clause 35 of the Main Contract.

(4) Save as aforesaid, the defendants' summonses dated 29 July 2003 be dismissed.

(5) Unconditional leave to the 4th defendant to defend with costs in the cause.

49.The parties are to make their representations on costs in writing and I direct that failing agreement, the plaintiff's submission on costs be lodged within 7 days, the defendants' submission within 7 days thereafter, and the plaintiff's reply, if any, within 3 days thereafter.

Representation:

Mr Warren Chan, SC and Mr Law Man Chung, instructed by Messrs Lily Fenn & Partners, for the Plaintiff

Mr Clifford Smith, instructed by Messrs Gallant Y.T. Ho & Co., for the Defendants