25 September, 2012

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution – Hong Kong – Construction & Real Estate

 

Tim Lee Construction Engineering Co Ltd v Kwong Wah t/a Super King Engineering Co, HCCT 18/2010, 20 April 2012

 

The Link had engaged Wan Chung Construction Co Ltd ("Wan Chung") under a Term Maintenance Contract to carry out maintenance works at two shopping centres. Wan Chung engaged, the Defendant, Super King, as its sub-contractor, who in turn engaged the Plaintiff, Tim Lee, as a sub-sub-contractor. One of the issues before the court was the meaning of the term "back to back payment". The relevant contract stated that the agreement was for supply/installation of the works on a "back to back payment basis". Tim Lee argued that this term was a reference to the time of payment and that its entitlement was not made conditional upon Super King's receipt of payment from Wan Chung. The Court held that the interpretation of any contract term must depend on the circumstances in which the contract was made. Neither party in the present case had suggested that "back to back payment" had a particular meaning commonly understood in the trade. Absent special usage in the trade, the Court said, there was no applicable principle of law to favour one interpretation over another. Ultimately, its task, the Court said, was to ascertain, objectively what the parties had meant by use of that expression in the circumstances of the contract and that each case would therefore be different.

 

The Court said that there was nothing in the factual background of the present case which warranted a finding that "back to back payment" was referable only to the time for payment, but not entitlement. Being the contractor actually performing the works, Tim Lee had to engage workers and procure the supply of materials and it would be in Tim Lee's interests to be assured of security of payment. However, the risk of default (if any) by those higher up the contracting chain would either have to be borne by Super King (if Super King were to assume an independent obligation to pay Tim Lee) or Tim Lee itself. There was nothing inherently improbable about Tim Lee's assuming that commercial risk. It was all a matter of bargain and simply a matter of allocation of risk. The factual background gave no indication that Super King had accepted the risk by assuming an independent obligation to pay Tim Lee.

 

The Court said that absent special trade usage, the natural meaning conveyed by "for the supply/installation of … work on a back to back payment basis …." was simply that Tim Lee would be paid when Super King had received payment from its superior contractor. This was just one single obligation concerning payment, namely, the obligation to pay when payment was received. There was no indication, whether from the language or factual background, that the single obligation should be dissected into parts – one part as to entitlement and the other parttiming. The obligation for Super King to pay Tim Lee for work done would arise only after it (Super King) had received payment from Wan Chung, the principal contractor.

 

This case distinguished the judgment of Wo Hing Engineering Ltd v Pekko Engineers Ltd (HCA 5561 of 1996) (a Deacons case) which is often relied upon in support of the sub-contractor's claim, saying that the wording of contracts has to be considered separately in each case.

 

 

For further information, please contact:
 
Cheung Kwok Kit, Partner, Deacons
kwokkit.cheung@deacons.com.hk
 
 
 
 
 
 

 

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