Sun Fook Kong (Civil) Ltd v. Wellead Construction and Engineering Co Ltd and Another

DCCJ 1354/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1354 OF 2004

(formerly HCA No. 2852 of 1999)

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BETWEEN

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Coram:  H.H. Judge Longley in Court

Date of Trial:  17^th September, 2004

Date of Handing down of Judgment: 25^th October, 2004

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JUDGMENT

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1.In this action the Plaintiff claimed the repayment of two loans in the sums of $381,393.46 and $359,682.54 advanced to the 1st Defendant under two loan agreements dated 2^nd November 1998 and 14^th November 1998 respectively.  Default judgment was entered against the 1st Defendant on 4^th February 2004.  In default of payment by the 1^st Defendant the Plaintiff now claims against the 2nd Defendant, a director of the 1st Defendant, under the terms of a personal guarantee given by him at the time of the two loans.

2.The background to this action is that the Plaintiff, a Civil Construction Company, had obtained contracts for two government projects.

(a)     Contract number NL 6 of 1995, Tung Chung Development Phase II B, Main Works (“the Tung Chung Contract) and

(b)     Contract No. CV 197/08 Maintenance and Repairs to Franchised and Licensed Ferry Piers and Other Port Works 1998 – 2000 (“The Ferry Piers Contract”).

3.Having obtained those contracts the Plaintiff subcontracted works under those contracts to the 1^st Defendant.

4.The works under the Tung Chung Contract were subcontracted to the 1^st Defendant under written subcontract No. 0020451703 (“the Tung Chung Subcontract”).

5.The works under the Ferry Piers Contract were subcontracted to the 1^st Defendant under Subcontract No. 002050S001 (“the Ferry Piers Subcontract”).  The terms of this latter subcontract were embodied in correspondence between the Plaintiff and the 1^st Defendant.

6.Under both subcontracts the Plaintiff was empowered to set off sums owed by the 1^st Defendant under one subcontract against sums due to the 1^st Defendant under the other sub contract.  The precise terms of these set off clauses are significant and I will come to them later.

7.It is not disputed that at the beginning of November 1998, the 1^st Defendant had incurred liabilities to the Plaintiff under the Ferry Piers subcontract which at that time were in the sum of $1,514,480.10 (but were later to rise substantially).  This was because the Plaintiff had inter alia paid wages of the 1^st Defendant’s employees and met other expenditure on its behalf.

8.On the other hand at the same time the 1^st Defendant was entitled to further interim payments (Interim payments (7) and (8)) in the total sum of $741,046, under the Tung Chung subcontract.

9.In the written agreement of 2^nd November 1998 it was agreed that this sum of $741,046 due under the Tung Chung Contract be set off against the sum of $1,514,480.13 owed by the 1^st Defendant under the Ferry Piers Subcontract, leaving a balance of $773,404.13 owed by the 1^st Defendant to the Plaintiff under the Ferry Piers Subcontract.  The significant part of that agreement for the purpose of this action was a provision that the Plaintiff was to make an “advanced payment loan” of $381,393.46, for the sole purpose of meeting its expenditure under the Tung Chung Subcontract.

10.Twelve days later on 14^th November 1998 the Plaintiff agreed to make a further advanced payment loan to the 1^st Defendant in the sum of $359,682.54.

11.The 2^nd Defendant was required personally to guarantee the redemption of both loans.

12.The three relevant clauses of the loans were identical save as to the figures involved.

13.Those terms in the loan agreement of 2^nd November 1998 were as follows:

“(6)     The loan of HK$381,393.46 shall be re-deemed immediately if there is any payment given rise from any subcontracts, namely 0020451703 (i.e. the Tung Chung Subcontract) or 002050S001 (i.e. the Ferry Pier Subcontract).  In the event that any contract payment cannot cover the total arrear plus any accrued interest that you owe to SFK, SFK would demand you to settle the total arrear.

(7)     Mr Kwan Wah Choi, HKID No. XXXXXXX(X) (i.e. the 2^nd Defendant) hereby agree to provide an unconditional and irrevocable personal guarantee the redemption of the above loan HK$381,393.46 plus any accrued interest to SFK by Wellead.

(8)     The personal guarantee, Mr. Kwan hereby declare that any dispute in valuation of any subcontract payment between Wellead and SFK shall not be used as a defence or an excuse to delay or negate the redemption of the above mentioned loan plus any accrued interest.  It is therefore a strict liability that Mr Kwan shall immediately redeem the loan plus any accrued interest when so demanded by SFK.” (my italics)

14.I shall refer to these clauses as clauses 6, 7 and 8, although the identical clauses in the second loan agreement do not bear such clause numbers.  On the 1^st February 1999 the Plaintiff by a letter demanded repayment of the two loans (i.e. a total of $741,076).  It is the Plaintiff’s case that there has been no repayment of this loan by the 1^st Defendant.  By this action it therefore seeks to enforce the personal guarantee of the 2^nd Defendant.

15.Various defences were raised by the 2^nd Defendant in his amended defence and counterclaim, including a denial that these were loan agreements, absence of consideration, mistake, duress and non est factum.

16.Mr. Yee for the 2^nd Defendant, expressly abandoned all these contentions and the 2^nd Defendant’s counterclaim at the start of this trial and relied solely upon the allegation in paragraph 10(c) of his defence, that by virtue of the terms of the agreements the two loans had been redeemed.

17.For this argument he relies upon on the fact which is not disputed that on 30^th November and 30^th December 1998 the Plaintiff issued payment certificates to the 1^st Defendant in the total sum of $1,069,235.57 in respect of the 9^th and 10^th interim payments due to the 1^st Defendant under the Tung Chung subcontract.

18.Mr. Yee argues that on a true construction of clause 6 of the loan agreement (quoted above) the loans will be absorbed by the amount payable by the Plaintiff to the 1^st Defendant under the 9^th and 10^th interim payment certificates and are therefore redeemed, extinguishing any liability of the 2^nd Defendant as guarantor of those loans.

19.The matter in issue is therefore purely one of the construction of the terms of the two loan agreements.

20.One of the matters argued before me is whether clause 6 of the loan is an appropriation clause.  In other words, is the effect of the clause to appropriate any money owing from either of the two subcontracts to the repayment of the loan, or is its effect merely to identify the time when the loans become repayable? 

21.I am satisfied that by reason of the second sentence of that clause (which must be related to the first sentence) it is an appropriation clauses.  The “total arrear” referred to in the second sentence must be the total amount outstanding on the loan.  Bearing in mind the terms of clause 1 namely:

“(1)     Although two separate subcontracts namely 0020451703 at Contract No. NL 6/95 (i.e. the Tung Chung subcontract) and 002050S001 at Contract No. CV/97/08 (i.e. the Ferry Pier subcontract) are frequently referred to, this loan agreement is, in fact, a separate and self-contained contract between Wellead Construction & Engineering Co Ltd “Wellead” and Sun Fook Kong (Civil) Ltd “SFK”.”

the reference to “total arrear” cannot be a reference to the total arrears arising under the Tung Chung Subcontract and the Ferry Pier Subcontract.

22.The effect of clause 6 is to appropriate any payment arising from either of the subcontracts to the redemption of the loan. 

23.The principal issue in this trial has been whether on the proper construction of the loan agreements the $1,069,235.57 resulting from the payment certificates should be deemed to have been appropriated to the repayment of the loan or whether the sum should be first set off against the liability of the 1^st Defendant under the Ferry Piers subcontract and only any resulting credit balance appropriated to the repayment of the loan.

24.Mr. Tsang for the Plaintiff argues that the latter is the correct interpretation.  In particular he argues that the effect of clause 8 of the loan agreement and its reference to strict liability is that the 2^nd Defendant is under a strict liability to pay the loan or the balance of the loan as quantified by the Plaintiff without reference to the contractual position between the Plaintiff and the 1^st Defendant.  He prays in aid the cases of Hyundai Shipbuilding and Heavy Industries Co. Ltd. 1978 2 Lloyds Report 502 and Edward Owen v. Barclay Bank 1978 QB 159, in favour of such a construction.  He argues that the reference to “valuation of any subcontracts payment between Wellead and SFK” would cover assessment of what is owing after applying a set off between what is owed under one of the contracts with what is due under another.

25.I have borne in mind that what I have to construe are the words of the particular contracts in this case.

26.As Sir George Jessel M.R. said in Aspden v. Seddon 1875 10 Ch. App. 394 at 397

“I think it is the duty of a Judge to ascertain the construction of the instrument before him, and not to refer to the construction put by another Judge upon an instrument, perhaps similar, but not the same.  The only result of referring to authorities for that purpose is confusion and error, in this way, that if you look at a similar instrument, and say that a certain construction was put upon it, and that it differs only to such a slight degree from the document before you, that you do not think the difference sufficient to alter the construction, you miss the real point of the case, which is to ascertain the meaning of the instrument before you.”

27.In my view it would be straining the construction of clause 8 too far to suggest the reference to “any dispute in valuation of any subcontract payment” would include a dispute regarding whether or not an amount due under one subcontract should be set off against what is owing under another.  It is clear from the manner in which the contract operated whereby the 1^st Defendant made application for an interim payment and the Plaintiff issued a “subcontractors payment certificate” which specifically referred to the valuation of the works performed that it was to this issue that clause 8 is directed.  It was designed to ensure that a dispute as to the valuation of works performed did not provide an excuse to delay the repayment of the loan.  I am satisfied that the reference in the last sentence to there being “a strict liability that Mr. Kwan (i.e. the 2^nd Defendant) shall immediately redeem the loan plus any accrued interest when so demanded by SFK” must be read in that context.  It does not entitle the Plaintiff to set off the amount due under one subcontract against the amount owing under another subcontract when considering whether there has been a payment which has wholly or partially redeemed the loan.

28.The question of whether the Plaintiff is so entitled turns firstly upon the construction of the first sentence of clause 6 “The loan …… shall be redeemed immediately if there is any payment given rise from any subcontracts namely 0020451703 or 002050S001”. (my italics)

29.The first question is therefore is whether either of the subcontracts has given rise to any payment.  For this one must look to the terms of the particular subcontract.

30.The Plaintiff’s payment certificate certifies the “amount due” in respect of particular works under the particular subcontract. If there is no provision in that subcontract providing for that amount due to be offset against amounts owing under another subcontract then the amount that is certified to be due under the Plaintiff’s payment certificate is “the payment given rise from the subcontract”.

31.There is a significant distinction between the terms of the two subcontracts.

32.The Ferry Piers subcontract has a clause (clause 16(ii)) in the following terms:

“(ii)     All damages (including liquidated damages), costs, charges, expenses, over-payments, debts or sums for which the Sub-contractor is liable to the Company under any provision of any other agreement or contract or sub-contract between the Contractor and the Company may be deducted or recovered by the Company from any monies due or which may become due to the Sub-contractor under this Sub-contract, including Retention Money.”

33.That clause would mean that the Plaintiff could deduct from any amount that was due to the 1^st Defendant by virtue of a payment certificate the amount it was owed by the 1^st Defendant under any other subcontract.

34.There is however no corresponding provision in the Tung Chung Subcontract, the subcontract under which the payment certificate certifies that $1,069,235.57 is due to the 1^st Defendant.

35.I am satisfied therefore that subcontract 0020451703 (the Tung Chung Subcontract) did give rise to the payment of $1,069,235.57.

36.The fact that there may have been a clause in the other subcontract (Clause 16(1) of the Ferry Piers contract) entitling the Plaintiff to offset the 1^st Defendant’s liabilities under the Ferry Piers contract against money due to the 1^st Defendant under other subcontracts is irrelevant for the purpose of deciding whether the Tung Chung contract has given rise to a payment.

37.For the reasons I have given I find that the two loans of $381,393.46 and $359,682.54 were discharged by the 2 payment certificates of 30^th November and 30^th December 1998.

38.I find that the 2^nd Defendant cannot therefore be liable as guarantor of those loans.

39.I accordingly dismiss the Plaintiff’s claim against the 2^nd Defendant and dismiss the 2^nd Defendant’s counterclaim against the Plaintiff.

40.I make the following order nisi as to costs that, unless either party applies to be heard on the question of costs within 14 days of the handing down of judgment, the 2^nd Defendant be awarded the costs of defending the Plaintiff’s claim and the Plaintiff be awarded the costs of defending the 2^nd Defendant’s counterclaim, such costs to be taxed if not agreed.