Leyland Engineering Ltd v. Winfast Engineering Ltd

DCCJ 1437/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1437 OF 2006

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BETWEEN

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Coram: Deputy District Judge Anthony Chow in Chambers (open to public)

Date of Hearing: 8^th September 2006

Date of Handing down Judgment: 13^th September 2006

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JUDGMENT

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1.There are two applications by the plaintiff against the defendant. The first application is for summary judgment under Order 14 rule 1. The second application is for interim payment under Order 29 rule 11.

The claim:

2.The plaintiff was the nominated electrical sub-contractor and the defendant, the developer of the Empire Kowloon Hotel.

3.The defendant, entered into a contract with Luen Cheong Tai Construction Co. Ltd. (the “Main Contractor”) for the whole of the construction work of the hotel. In turn, the Main Contractor entered into a sub-contract (the “Sub-Contractor”) with the plaintiff for the electrical installation work of the hotel.

4.In or about September 2002, the Main Contractor was in financial difficulties and went into receivership. The Main Contractor was wound up on 4/4/2005.

5.In a meeting on 2/11/2000, the defendant agreed with all sub-contractors, including the plaintiff, to step into the shoes of the Main Contractor, to discharge all of the Main Contractor’s obligations, inter alia, the Sub-Contractor. The new agreement was made partly oral, partly in writing and partly by conduct.

6.The defendant’s agreement include payment of, inter alia, the retention money retained and/or deducted under the Sub-Contract upon completion of the balance of the electrical installation works to the satisfaction of the architects.

7.The Sub-Contract work has been completed, the defect period has expired but the defendant refused to release the sum of $945,054.50, being the retention money, to the plaintiff.

8.Furthermore, the plaintiff’s claim for summary judgment is also based on trust. Clause NS-11.08 of the Sub-Contract states that the Main Contractor’s interest in the retention money, whether held by the developer or the Main Contractor, is held as trustee for the defendant’s beneficial interest.

9.As the defendant has admitted that there is a similar trust provision in the main contract, with the plaintiff holding the retention money as trustee in favour of the Main Contractor.  When the Main Contractor was replaced by the defendant under the new agreement, the two trusts merged, resulting in the defendant holding the retention money in the Main Contract in trust for the benefit of the plaintiff.

10.Alternatively, the plaintiff applied for an order against the defendant for interim payment in the sum of $472,527.25. The plaintiff states that by a written agreement dated 13/12/2000, evidencing part of the new agreement, the defendant agreed to pay directly to the plaintiff all contract payments as certified by the project architect.

11.On 2/7/2002, in interim certificate no. 29, the project architect certified payment of the sum of $472,527.25, being part of the retention money, as payable to the plaintiff.

12.Accordingly, the defendant has no defence to that part of the retention money certified by the project architect in interim certificate no. 29 and interim payment for $472,527.25 should be ordered.

The defence:

13.The defendant’s case is simple; in essence, the plaintiff did not agree to step into the shoes of the Main Contractor. The plaintiff and the Main Contractor only agreed that the plaintiff could pay all future contract sums directly to sub-contractors instead of to the Main Contractor.

14.The main contract and the sub-contract remained valid and separate contracts. As there is no privity of contract between the plaintiff and the defendant, the Main Contractor remains the only party liable to the plaintiff for the retention money under the sub-contract.

15.The Main Contractor also remains the sole trustee of the trust created under clause NS-11.08 of the Sub-Contract, while the plaintiff remains the trustee (with the Main Contractor remains the sole beneficiary) under a different trust created under the main contract. Again, as there is no privity of contract between the plaintiff and the defendant, the defendant is not liable to the plaintiff under the trust created under the sub-contract.

16.As to the alternative claim for interim payment, the plaintiff never agree to step into the shoes of the Main Contractor and had never agreed to pay any retention money, which is held in trust for the Main Contractor, to the plaintiff.

The law:

17.The legal principle is well known: The defendant must show that there are triable issues. He has to satisfy the court that he has a ‘real or bona fide defence.’ If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. [Para 14/4/9 Hong Kong Civil Procedure 2006].

18.Both of the plaintiff’s basis on its Order 14 application are predicated upon the new agreement provided the defendant had replaced the Main Contractor and entered into a direct contractual relationship with the plaintiff. The evidence of this new agreement was pleaded in paragraph 13 of the Statement of Claims as: “ … made partly orally, partly contained in writing and partly evidenced by the conducts of the parties.”

19.So far as the oral part is concerned, the plaintiff relied on the oral representation of the defendant’s Mr. Phileas Kwan, Mr. Eric Ng and Mr. Kelvin Leung to Mr. Wai Fai Yeung of the plaintiff, in a meeting at the defendant’s office.

20.In his affirmation dated 29/6/06, Mr. Kwan Po Lam, Phileas, specifically denied there was such an agreement. In paragraph 13 of his witness statement, Mr. Kwan stated:

“…pursuant to the new and only agreement made between the Defendant and the sub-contractors on the 2^nd November 2000 and the Defendant would pay them direct. Under no circumstances can the Plaintiff rely on this to require the Defendant to pay over the retention money retained by the Defendant from the Main Contractor pursuant to the terms of the Main Contract prior to 13^th December 2000.”

Clearly, there is a dispute on fact and a trial is required.

21.So far as the conduct part is concerned, the plaintiff relied on the fact that it had completed the sub-contract work; the architect monitored the plaintiff’s work; certification of the architect; the defendant settled the plaintiff’s claim for interim payments; the plaintiff’s submission of a claim for 50% of the retention money upon completion and the architect’s certification of the plaintiff’s claim.

22.None of these conducts however, is inconsistent with the defendant’s contention that the agreement to pay did not include the retention money.

23.As to the part that was written, the plaintiff relied on its claims for interim payments and the defendant’s corresponding payments. Again, none of these are incompatible with the defendant’s defence.

24.In this hearing, Mr. Chong, counsel for the plaintiff, placed much emphasis on two further documents. The first is a letter from Wellfull Engineering & Trading Company to the defendant, dated 14/7/2003. Specifically, Mr. Chong pointed to the sentence: “Your representative during the meeting had confirmed to us that payment will be made to us directly for the work done certified by the Architect for the rest of this project.” Mr. Chong reasoned that “work done” must meant all work done, including the retention money, which was also for work done.

25.The next document relied on by Mr. Chong, as being evidence that the defendant agreed to step in the shoe of the Main Contractor, was an agreement between the Main Contractor and the defendant. The agreement is short and states:

“Luen Cheong Tai Construction Company Limited (The Contractor) hereby agrees that they have no objection to the contract payment (The Payment) as certified by the Associated Architects Ltd. be directly made from Winfast Engineering Limited (The Employer) to the domestic sub-contractors, the domestic suppliers and the site staff including the site agent, the site foremen and the labours of the Contractor for the construction work of the hotel development at KIL11070, 62-62A Kimberley Road, Kowloon until the settlement of the final account for the superstructure contract as stipulated in the Letter of Acceptance between the Contractor and the Employer made on the sate of 2 November, 1999 counter-signed by the Contractor on 9 November, 1999 (The Letter of Acceptance).

For the execution of the payment procedure as stipulated in this agreement, the Contractor shall reimburse the administration and management costs to the Employer and the amount shall also be deducted from the Payment.

All terms and conditions of the Letter of Acceptance shall remain unchanged unless otherwise stipulated in this agreement.”

(Emphasis added)

26.The last paragraph of this agreement however, specifically stated all terms and conditions of the Letter of Acceptance, which was the main contract, should remain unchanged. This provision is clearly contrary to Mr. Chong’s contention that by this agreement the plaintiff intended to replace the main contractor.

27.In the second to last paragraph, the main contractor even undertook to reimburse the plaintiff for the plaintiff’s administration costs of paying the sub-contractors directly. Again, if it was intended that the Main Contractor would drop out of the picture, with the Plaintiff replacing the Main Contract under the Sub-Contract, there would be no need for the Main Contractor to reimburse the plaintiff for this costs.

28.There are ample other evidences that the plaintiff never intended to replace the Main Contractor. For example:

(a) All of the architect’s certificates, without exception, were addressed to the Main Contractor.

(b) In defendant’s letter to Ernst & Young Transaction Limited, the liquidator of the Main Contractor, dated 31/3/2006, it asked consent to release the retention money to the plaintiff.

(c) The liquidator’s replied they were “not at this stage prepared to consent to your proposed settlement payment…”.

(d) The liquidator’s letter dated 18/4/2006, demanded the defendant to pay the retention money to the liquidator and the liquidator would deal directly with the plaintiff.

(e) In an audit confirmation letter dated 8/11/2001, the plaintiff confirmed to the Main Contractor’s auditors that the Main Contractor owed the plaintiff  $945,054.50 in retention money.

29.Accordingly, the defence that there was no privity of contract between the plaintiff and the defendant because the main contract remained in full force and effect after November 2000, was clearly not “frivolous and practically moonshine” (Codd v. Delap (1905) 92 L.T. 510, per Lord Lindley at 511). There should be unconditional leave for the defendant to defend.

30.As to the alternative application for interim payment, in Goldco Development Limited v. Secretary for Justice, HCA 4219, 4220 and 4221/2003, Deputy High Court Judge Muttrie stated:

“The court approaches an application for interim payment in two stages. First, it must be satisfied that if the action proceeds to trial, the applicant will obtain judgment for damages (under rule 11) or a substantial sum of money (under rule 12), taking into consideration the likelihood of any set-off, cross-claim or counterclaim succeeding; and then if it is so satisfied, it will proceed to consider whether, in the exercise of its discretion, it should order an interim payment and of what amount, taking again into consideration any set-off, cross-claim or counterclaim claimed by the respondent….

In deciding the first stage, the test is whether the applicant will succeed in the claim at the trial, and not whether he is likely to succeed….”

31.After carefully considering all of the evidence submitted by the parties, I am far from satisfied that the plaintiff is likely to succeed at the trial, let alone will succeed at the trial. Accordingly, this application is dismissed as well.

32.Now I come to costs. The usual costs order in an unsuccessful Order 14 application is of course costs in the cause; however, Mr. Chang, counsel for the defendant, urged me to dismiss the plaintiff’s Order 14 application and award costs to the defendant.

33.Order 14 rule 7 states:

“If the plaintiff makes an application under rule 1 where the case is not within this Order or if it appears to the Court that the plaintiff knew that the defendant relied on a contention which would entitle him to unconditional leave to defend, then, without prejudice to Order 62 and in particular to rule 4(1) thereof, the Court may dismiss the application with costs and may require the costs to be paid by him forthwith.”

34.Although I have given the defendant unconditional leave to defend, I am however not satisfied the plaintiff knew that the defendant would rely on a contention that will allow it unconditional leave to defend.

Order:

Representation:

Mr K M Chong, instructed by Messrs Darin Leung & Partners, for the Plaintiff

Mr Jonathan Chang, instructed by Messrs Chan, Lau & Wai, for the Defendant