Fung Cheung v. Kwan Lee Construction Co Ltd
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CACV000136/1994 IN THE COURT OF APPEAL 1994, No. 136 _______________ H E A D N O T E _______________ Contract law - building sub-contract - collateral oral agreement - whether, in circumstances where court cannot order rectification of a written contract, there is room for importing oral terms.
IN THE COURT OF APPEAL 1994, No. 136 ___________
___________ Coram: Hon Litton, V.-P., Godfrey and Mayo, JJ.A. in Court Dates of hearing: 4, 6 and 7 April 1995 Date of delivery of judgment: 11 April 1995 __________________ J U D G M E N T __________________ Litton, V.-P.: 1. The appellant in this case, Kwan Lee Construction Co. Ltd. (Kwan Lee), was the main contractor for the development of four phases of a housing estate at Ngau Chi Wan in the late 1970s. The respondent Fung Cheung was the sub-contractor for the works. 2. The work sub-contracted to Fung Cheung covered three areas: (i) site formation and caissons; (ii) concreting for the superstructures; and (iii) drainage works. For this purpose the parties entered into 12 sub-contracts, covering the four phases of the development, the first of which was signed on 28 June 1977 and the last two, covering drainage works for Phases III and IV of the development, were signed on 4 July 1978. 3. The development has been completed long ago but the parties have not been able to finalize the accounts between them. Fung Cheung's claim 4. The writ was issued by Fung Cheung as the plaintiff and his principal claim for relief was stated as follows:
5. There was an alternative claim for damages for breach of the 12 sub-contracts. 6. Fung Cheung's statement of claim has gone through a number of amendments. When, eventually, the matter went before Kaplan J for trial in March l994, the main relief sought by the plaintiff was a series of declarations concerning the parties' rights and liabilities, to enable accounts to be properly taken by a Master pursuant to Order 43 of the Rules of the Supreme Court. 7. At first blush, it may seem odd that some 14 years after all the works have been completed, the accounts have still not been finalized. 8. What seems to have bedevilled the proceedings in the court below is the averment in para 7 of the amended Statement of Claim as follows:
Issue on appeal 9. In essence, Kaplan J found this averment proved to his satisfaction. There is now no appeal against this finding although, initially, such a challenge was made in the grounds of appeal, filed on behalf of Kwan Lee. The question before us on appeal turns on the effect in law of this finding. 10. Other grounds of appeal, particularly those involving the four concreting sub-contracts, have now fallen away, as has Fung Cheung's cross-appeal, and what we are left with in this court, unresolved, are the four drainage contracts. 11. The issue, after it has been honed down in argument, can be expressed thus:
or
Proper construction of the drainage contracts 12. There were, in fact, two contract documents covering the drainage works for the four phases. They comprise terms put forward by Fung Cheung and accepted by Kwan Lee. The contracts for Phases IIA and IIB were signed on 1 September 1977; those for Phases III and IV were signed on 4 July 1978. It is only necessary to set out the contract for Phases IIA & IIB as, for the purposes of this appeal, the September 1978 document was identical except that the "discounts" retained by Kwan Lee were less.
KWAN LEE CONSTRUCTION CO. LTD.
1. Drainage works
2. Remarks
13. The contracts were written in Chinese and what is set out above is the English translation. The expression "to be paid according to the actual tendered company's BQ RATE/PRICE LIST" is the Chief Interpreter's translation of the Chinese characters used, being the closest approximation to the real sense of those words. 14. Obviously, the first task for the judge was to construe the parties' written contracts. If, upon a proper construction, the parties had, by the form of words used, made provisions for payment to the plaintiff for price increases in material and labour, there would be no room for inserting a collateral oral agreement to similar effect. 15. Sir John Swaine, Q.C., counsel for Kwan Lee, argues that the words "BQ RATE/PRICE LIST" contain two diametrically opposed concepts. "BQ RATE", he contends, refers to be rates for different items of work in Messrs Levett and Bailey's bills of quantity inserted by Kwan Lee for the purposes of their tender; "PRICE LIST" refers to the schedules submitted by Kwan Lee to the Government as employer under the main contract from time to time for the purposes of claiming increases in the price of material and labour. 16. What counsel's argument boils down to is this: Adopting "BQ RATE" as the correct English translation, it means that the parties have made no provisions in their written contract for price fluctuations; if "PRICE LIST" be the right translation, then the parties have indeed incorporated into their own written contract all the provisions for labour and material fluctuations in the main contract. Counsel argues that the judge had left this issue concerning the proper translation of the Chinese characters in the drainage sub-contracts unresolved; it is not open to us to decide the issue without entertaining further argument and, possibly, evidence. 17. If this was how the judge in fact left the matter, it would have been most surprising. It is difficult to imagine a trial judge proceeding to adjudicate on the issue of liability without deciding what the written contract meant. 18. The judge's broad conclusion was as follows: (i) the "oral agreement" pleaded in para 7 of the amended statement of claim was proved; (ii) the "pleaded term ... constituted a valid agreement in law and was part of or collateral to Mr Fung's promise to do the work"; (iii) where the sub-contract was silent, Mr Fung was entitled to claim payment for fluctuation. 19. As the other eight sub-contracts (dealing respectively with site formation and caissons, and concreting for the superstructure) clearly had provisions in one form or another for fluctuations, and were in that regard not "silent", the judge could only have meant by the expression "where the sub-contract is silent" to refer to the drainage contracts; and he could only have reached that conclusion - that the "oral agreement" was "part of" the written drainage contracts - if he had found those written contracts deficient in that regard: that is to say, that the expression "to be paid according to the actual tendered company's BQ RATE/PRICE LIST" gave Fung Cheung no entitlement to price increases for fluctuations. There would have been no point otherwise to his finding regarding the "oral agreement" in Fung Cheung's favour. 20. This view of the judge's finding is reinforced by his earlier reference to the caisson sub-contracts where the identical expression was used. In this regard the judge said:
21. This is an implied rejection of Sir John Swaine's point. If his argument in this court were right, there would have been a great difference in the result between the "two phrases". 22. Coming back to the written contracts for the drainage works, one sees that it was Kwan Lee who was to be responsible for the supply of cement. In essence, the risk which Fung Cheung took as regards price increases related to the cost of labour and of aggregates and fine sand used in the mixing of concrete. 23. The question before us, quite simply, is whether the judge was right in finding that the "pleaded term" in para 7 of the Statement of Claim was part of the written drainage contracts or was collateral to it and gave to Fung Cheung the entitlement as regards fluctuation which it claims. Collateral oral agreement 24. Obviously, where a trial judge has made findings of fact, after hearing oral testimony, an appeal court would be extremely slow in disturbing such findings. The limits to this court's jurisdiction are well-known and need no repetition. The difficulty in this case is to determine what precisely it was that the judge did find and how that finding squared with the written terms of the drainage contracts. 25. The "oral agreement" pleaded in para 7 of the Statement of Claim is not free-standing nor self-contained. If, by the "oral agreement", the parties meant that, thereafter, every time they should enter into a contract in the future, such contract would automatically contain the clauses as pleaded in sub-paragraphs (a) and (b) of para 7, that is not what the judge found. And if he did so find, it is contradictory to the undisputed facts. For instance, in relation to the concreting contract for Phase IIA, there were provisions to "compensate" Fung Cheung for increases in the cost of labour, but there was no "Anderson clause" in that contract - the clause providing for adjustment to the price for aggregate, sand and fine stone according to Anderson's current prices; yet one finds such a clause in the concreting contract for Phase IIB: the judge never held that the "Anderson clause" pleaded in para 7(a) of the statement of claim could be interstitially woven into the fabric of the concrete contract for Phase IIA, to make it in effect into a contract partly-written and partly-oral. That is common ground between the parties. 26. How, then, did the "oral agreement" get carried into the form of the drainage contracts? The judgment is silent on the point. Kaplan J merely said:
27. I am not satisfied that the drainage contracts necessarily required a fluctuation clause to make "commercial sense". Fung Cheung had no risk regarding any increase in the cost of cement, as this was supplied by Kwan Lee. There was no suggestion that the drainage contracts were to be fulfilled over a long period of time, exposing Fung Cheung to a high risk of increases in the costs of labour and aggregate. 28. The judge said that the "pleaded term ... constituted a valid agreement in law and was part of or collateral to Mr. Fung's promise to do the work". It is not clear what he meant by this. 29. Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at 47 gives an example of what is meant by a collateral contract:
30. Both by virtue of the pleading in para 7 of the statement of claim and from Mr Fung's testimony in court, it does not appear that the plaintiff's case accords with Lord Moulton's example. And Lord Moulton added at p47:
31. It seems to be Mr Fung's case, emerging from his testimony, that he was saying that the written drainage contracts were defective in that they failed to incorporate the agreed fluctuation clauses. Indeed, this is apparent from para 16 of the statement of claim where the plaintiff sought rectification as a relief. 32. If ultimately it was rectification of the written drainage contracts which Fung Cheung sought, and that was how the judge understood the case, then he failed to take into account a number of relevant considerations:
33. In my judgment, the "oral agreement" is far too vague, vis-à-vis the written drainage contracts, to have any legal effect. Declaratory relief 34. The declaration, embodying the judge's reasoning, is set out in these terms:
35. If Fung Cheung is not entitled in law to have an order for rectification of the written drainage contracts, it is difficult to see what other juridical plank exists for its "entitlement" to receive payment in respect of fluctuations regarding the drainage contracts. Conclusion 36. In my judgment, Kwan Lee must succeed on this appeal. To avoid doubt, and to facilitate the speedy taking of accounts by the Master pursuant to Kaplan J's judgment, I would, in place of para (ix) of the judge's formal order, make the following declaration: that, pursuant to the four drainage contracts, the plaintiff is not entitled to be paid additional sums for fluctuations in the cost of material and labour. Godfrey, J.A.: 37. Although we are differing from Kaplan J., I agree so completely with the judgment of my Lord, the Vice-President that I am satisfied it would serve no useful purpose to add anything of my own. Mayo, J.A.: 38. I agree entirely with what has been said by my Lords Litton and Godfrey. I would however like to make some observations myself. 39. The scope of this appeal and cross-appeal narrowed significantly as it proceeded. 40. The appeals relating to the contracts for concreting and caisson works and the cross-appeal were not concluded. This left the four contracts relating to the drainage works. 41. The issue which remained outstanding on these contracts was whether Mr Fung Cheung was entitled to the benefit of what has been described as a fluctuation clause. 42. If such a provision was included in the contracts Mr Fung would have been entitled to be reimbursed by Kwan Lee for increases in costs arising during the currency of the contracts covering the expenditure included in the provision. 43. One of the problems plaguing this litigation has been the difficulty in formulating the issues where there is disagreement between the parties. 44. The trial before Kaplan J was protracted as a consequence of successive attempts being made to agree what was outstanding between the parties. These attempts were to a large extent unavailing. Perhaps as a result of this Kaplan J's judgment to a large extent took the form of giving directions to the parties upon how various different claims should be dealt with when the account was taken. 45. This was not a satisfactory approach to the problems. 46. At a late stage in the appeal the court formulated an issue on the subject of fluctuations in respect of the drainage contracts in these terms.
47. Counsel representing both sides seemed to accept that if the court was able to provide an answer to this question it would resolve the outstanding issue on this appeal. In any event I consider in the context of the history of this litigation that if this question is answered simply it will provide a resolution of the only outstanding issue on this appeal. 48. There are two ways of attempting to find an answer to this question. The first is to consider the contractual terms which were agreed between the parties in the contract and determine as a matter of construction what the parties had agreed between themselves. 49. The second is to consider whether the oral agreement which is conveniently encapsulated in para 7 of the amended Statement of Claim has the legal effect claimed by Sir John Swaine Q.C. who was representing Mr Fung. 50. The drainage contracts were in a very simple form. Mr Fung had provided what has been described as an invoice and Kwan Lee accepted the terms proposed. The form of the document was as follows: " CHEUNG KEE CONSTRUCTION COMPANY KWAN LEE CONSTRUCTION CO. LTD.
1. Drainage works
2. Remarks
51. It would appear that on the face of it the contract cannot on any sensible construction be said to include a provision that Mr Fung is entitled to receive the recompense he is claiming for fluctuations in the various costs claimed. 52. Sir John Swaine submitted that it was also necessary to take cognisance of the oral agreement in March 1977 when Mr Fung and Mr Yu of Kwan Lee had discussed the question of fluctuations. Kaplan J had made a finding of fact that the parties had indeed agreed that Mr Fung should be entitled to receive fluctuations in costs incurred and this court should be very slow to interfere with such a finding. 53. While this is true it overlooks a number of difficulties. It seems to me that the main difficulty is that Kaplan J himself did not define with any satisfactory measure of precision what the oral agreement between these parties included. 54. He accepted as he had to that the oral agreement was inconsistent with a number of the written contracts which were later in time concluded between the parties. He attempted to deal with this problem by stating on page 16 of his judgment that where the contracts were silent on fluctuations the oral agreement should form part of the contract or be collateral to Mr Fung's promise to do the work. 55. What this approach overlooks is that on any careful analysis of all of the contracts it is clear that the parties did give detailed thought to the question of fluctuations and in some cases provision was made for fluctuations and in other cases there was no such provision. 56. In any event it would appear that Kaplan J was forced to accept that there may be situations where the oral agreement was inconsistent with the subsequent written contracts concluded between the parties. 57. This difficulty was compounded by the way in which Mr Fung gave evidence. We were taken through his evidence by Mr Harris who represented Kwan Lee. To say the least Mr Fung's evidence concerning the oral agreement was vague and inconclusive. Mr Fung was responding to leading questions which were put to him by his counsel and there was no satisfactory definition of the scope of the operation of the agreement. 58. Certainly the discussions which took place between Mr Fung and Mr Yu did not have the measure of clarity which Viscount Dilhorne had in mind when he was considering whether an assurance given might amount to a warranty at p 22 of IBA v. EMI and BICC (1980) 14 BLR 9:
59. I do not think that if the evidence is considered as a whole that it can be argued that the oral agreement constituted a separate collateral contract. Mr Fung accepted that the terms which were being discussed would later be incorporated into written contracts. This militates against the existence of a separate collateral contract. 60. Sir John Swaine attempted to surmount this problem by referring to the judgment of Roskill LJ at 1083 of J. Evan & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd. [1976]1 WLR 1078:
61. This is a correct statement of the law. The problem is that on the evidence which was before Kaplan J it was unclear as to what specifically had been agreed orally. One thing which was clear from the factual matrix was that the parties did subsequent to the oral agreement enter into written agreements some of which were inconsistent with the oral agreement. That being the case I do not think that Roskill LJ's observations can be of any assistance to Mr Fung. It is quite clear that the oral agreement was not intended to override provisions which would subsequently be incorporated into written contracts. 62. I am satisfied that the question which has been formulated must be answered in the negative.
Representation: Mr Jonathan Harris (M/S Bateson Starr) for Appellant/Defendant Sir John Swaine, Q.C. and Mr J.J.E. Swaine (M/S Simon Ng & Co.) for Respondent/Plaintiff |