Docstoc

THE “PAY WHEN PAID” ARGUMENT By Gregory Tung W http www jrk com hk E gregory tung jrknowles com http www jrk com hk Clause 33 7 of the new stand

Document Sample
THE “PAY WHEN PAID” ARGUMENT By Gregory Tung W http www jrk com hk E gregory tung jrknowles com http www jrk com hk Clause 33 7 of the new stand Powered By Docstoc
					      THE
“PAY WHEN PAID”
   ARGUMENT

      By Gregory Tung


    W: http://www.jrk.com.hk
E: gregory.tung@jrknowles.com




         http://www.jrk.com.hk
Clause 33(7) of the new standard form of nominated sub-
                       contract:-

“The Contractor is required to pay the Sub-Contractor the
amount included for him in each Interim Certificate, less
any amount properly deductible within 14 days, or such
other time as may be stated in the Sub-Contract, of the
Contractor receiving payment from the Employer.”

Compared with Clause 11(b) of the old “Green Form”:

“Within fourteen days of the receipt by the Main
Contractor of payment from the Employer against any
certificate from the Architect the Main Contractor shall
notify and pay to the Sub-Contractor…..”


                         http://www.jrk.com.hk
Thus both are Pay when Paid provisions. It is submitted
that the main contractor has no obligation to pay his
nominated sub-contractor unless and until he has
received actual payment from the Employer.




                        http://www.jrk.com.hk
Hong Kong Teakwood Works Ltd v Shui On
Construction Co Ltd [1984] HKLR 235


  Sub-Contractor claimed against the Main Contractor the
  amount due under two certificates of payment. The
  sub-contract had a clause in the following terms :

    “Within 14 days of the receipt by the Main Contractor
    of payment from the Employer against any certificate
     from the Architects, the Main Contractor shall notify
    and pay to the Sub-Contractor the total value certified
    therein.”




                          http://www.jrk.com.hk
The Main Contractor refused to pay the amount certified
as due to the Sub-Contractor, on the ground that the
Employer had, in exercise of the right under the main
contract, set off against the amount certified its claim of
liquidated damages.

The Sub-Contractor applied for summary judgment under
Order 14 and the main contractor applied for a stay.

The judge held that the words “receipt of payment” must
be given their normal meaning and that means receipt of
actual payment.




                           http://www.jrk.com.hk
Schindler Lifts v Shui On Construction (1985) 29
BLR 95


   A Sub-Contractor were engaged on a sub-contract
   form which provided “Within 14 days of the receipt by
   the Main Contractor of payment from the Employer
   against any certificate from the Architects, the Main
   Contractor shall notify and pay to the Sub-Contractor
   the total value certified therein.”




                          http://www.jrk.com.hk
The Employer deducted liquidated damages from
moneys due to the Main Contractor. As a result,
the Main Contractor contended that he was not in
receipt of payment and no obligation to pay the
Sub-Contractor had arisen.

Sub-Contractor applied for judgment under Order
14 and the Main Contractor applied for a stay.

The main contention of the sub-contractor was
that, he had not caused delay giving rise to the
deduction of LDs by the Employer. This was not
disputed.



                        http://www.jrk.com.hk
The Hong Kong Court of Appeal ruled that the words
“receipt of payment” in the sub-contract meant actual
receipt of money and that the amount actually received
must take into account any set-off of liquidated damages.
Therefore, the application for judgment under Order 14
was not successful.




                        http://www.jrk.com.hk
Brightside Mechanical & Electrical Services Group
Ltd & Anor v Hyundai Engineering & Construction
Co Ltd (1998) 41 BLR 110


  This is the first report from the courts of Singapore on a
  point which is familiar to the courts of Hong Kong.

  The sub-contract contained “pay when paid” clause :

   “Within 14 days of receipt by the Main Contractor of
   payment from the Employer against any certificate
   from the Architect, the Main Contractor shall …… pay
   ……”



                           http://www.jrk.com.hk
The judge held that the works are clear and
unambiguous and effect must be given to its
ordinary or normal meaning, namely that they
contemplate actual receipt by the Main Contractor
of the sum included in the certificate.




                     http://www.jrk.com.hk
Durabella Ltd v J Jarvis and Sons Ltd (2001) 1998 ORB 33

  Dispute    arose     over    a      pay      when        paid   clause.

  Jarvis was the main contractor on a project for the construction of
  36 apartments in London, for a developer. Durabella supplied and
  laid hardwood flooring as a subcontractor to Jarvis.

  The subcontract conditions included a pay when paid clause which
                                read:

    “Our liability for payment to you is limited to such amounts as we
    ourselves receive from the employer in respect of your works
    under this order”.

  Developer was disappointed with the performance of the main
  contractor, Jarvis, and terminated their contract. Dispute arose
  over payments due to Jarvis.




                                   http://www.jrk.com.hk
The dispute between Jarvis and the developer was
settled and a compromise agreement drafted. This
agreement stipulated that the developer was to pay
Jarvis a sum of money, in this case £550,000, in full
and final settlement of all claims arising out of the
development. However, the agreement included a
rather unusual term to the effect that no value was
included in the deal for works undertaken by
                     Durabella.

Jarvis refused to offer any payment to Durabella for
the flooring work, drawing attention to the pay when
paid clause in the subcontractor and the wording of
the settlement agreement.



                        http://www.jrk.com.hk
3 issues were dealt with by the court:

1) Whether the terms of the subcontract between
   Jarvis and Durabella did contain the said pay when
   paid clause.

   The court found that the pay when paid clause did
   form part of the subcontract terms.




                         http://www.jrk.com.hk
2)   Whether or not Jarvis had been paid for Durabella’s flooring.

     Jarvis said they had not because their settlement agreement with
     the developer said no amount was included for the flooring.

     The court referred to the evidence given in the case between
     Jarvis and the developer and concluded that the clause in the
     settlement singling out Durabella’s work was included purely for
     Jarvis’s own purposes.

     Consequently, the court found that the settlement deed had no
     evidential value whatsoever in proving whether or not Jarvis’s had
     received payment for Durabella’s work.

     The court said the clause in question was devised with the
     deliberate intention of misleading Durabella, its advisers and the
     court, as to the developer’s position. Only after Jarvis’s solicitor
     was required to disclose the relevant correspondence and to give
     evidence was the deception exposed.

     The Court found that Jarvis had failed to establish that it had not
     been paid for Durabella’s work. Thus Durabella could get paid.


                                    http://www.jrk.com.hk
3) Finally, the Court considered the pay when paid
   clause was reasonable under the test of
   reasonableness under the Unfair Contract Terms Act
   (similar to HK’s Control of Exemption Clauses
   Ordinance).




                      http://www.jrk.com.hk
The judgement reminds of a few important points on pay when paid
                            clauses:-

• The judge reiterated that a contractor cannot rely on a pay when paid
  clause if the reason for non-payment is its own breach of contract or
  default.

• He also reminds us that there is no reason, in principle in English law,
  why the courts should not give effect to a properly drafted clause
  according to its true construction.

• There is nothing to prevent a contractor passing on to its subcontractors
  the risk of non-payment by the client (subject to the provision of the UK
  Construction Act which has no application in HK).

• One of the reasons for having a pay when paid clause is for financing.
  All work has to be financed until payment is received. So the clause
  clarifies that financing must continue until payment is received &
  relieves the contractor of any obligation it might otherwise have to the
  subcontractor.



                                   http://www.jrk.com.hk
Para 5-140 of Chittyon Contracts Hong Kong Specific Contracts:-


  “The meaning of the words “receipt of payment” in the HKIA Form
  Subcontract has been considered at the interlocutory stage in several
  Hong Kong cases [citing Hong Kong Teakwood (supra), Schindler Lifts
  (supra) and Chung Kiu Development Ltd v Sung Foo Kee Ltd [1995] 2
  HKC 777, CA]. Although not placing any final construction on the meaning
  of the words, the Hong Kong courts have leaned towards the
  interpretation that “receipt of payment” means “actual payment” by the
  employer and does not cover amounts set-off by the employer against
  main contract sums due to the main contractor. Further, receipt of
  certificates for payment does not necessarily mean receipt of payment
  [citing Nin Hing Electronic Engineering v Aoki Corp (1987) 40 BLR 107],
  and the set off of liquidated damages from payment also does not
  necessarily mean receipt of payment [citing Ryoden Engineering Cp Ltd v
  Paul Y Construction Co Ltd [1994] 2 HKC 578]. It would therefore seem
  that sub-contractors using the HKIA Form Subcontract in Hong Kong
  would only be entitled to payment from the main contractor on the latter
  receiving “actual payment” from the employer [further referring to Pyrok
  Industries v Chee Tat Engineering (1988) 41 BLR 127, Schindler Lifts -v-
  Shui On Construction [1994] 3 HKC 598 and Grand Choice Construction
  Co Ltd v Dillingham Construction (HK) Ltd (unrep CA No 27/1992)].”



                                 http://www.jrk.com.hk
“Bickerton Analysis”

 There exist certain special features and contractual nexus with the
 Employer, though short of a privy, unknown to domestic sub-contracting
 generally.

 (a) the nominated sub-contractor was hand-picked by the employer;

 (b) the employer negotiates the price directly with the nominated sub-
     contractor;

 (c) save for limited circumstances the main contractor cannot object to
     the nominated sub-contractor’s appointment;

 (d) the employer settles the final account directly with the nominated
     sub-contractor;

 (e) a mechanism introduced to allow disputes between the nominated
     sub-contractor and the employer to be resolved via the main
     contractor (the name-borrowing provision)…



                                 http://www.jrk.com.hk
Considering North-West Metropolitan Regional Hospital
Board v TA Bickerton & Son Ltd [1970] All ER 1039, Lord
Reid reasoned his judgment in the following famous
speech :-

   “[nominated sub-contract] work was to be part of the
   contract work and so the contractor’s tender was made up
   of the sum for which it offered to do its part of the work
   together with the prime cost sums settled by the employers.
   The employers obtained tenders from specialists, selected
   by them for the prime cost work, and then, when they had
   made their contract with the contractor, they instructed the
   contractor to enter into a contract with the sub-contractor
   whom they nominated in terms which they dictated, having
   settled those terms with the nominated sub-contractor.
   Then, if the sum to be paid to the nominated sub-contractor
   differed from the estimated prime cost sum, as it almost
   certainly would, the contractor contact price for the whole
   work was adjusted to take account of this difference …



                             http://www.jrk.com.hk
… Subject to a very limited right to object, the principal
contractor is bound to enter into a contract with the employer’s
                          nominee…

…No one suggests that the principal contractor has any
concern with the prime cost work until it is required to make a
contract with a nominated sub-contractor. It would be a clear
breach of contract by the employers if their failure to nominate
a sub-contractor impeded the contractor in the execution of its
own work.” (underlining added).




                             http://www.jrk.com.hk
Note Lord Reid’s repeated emphasis on the
contractor’s lack of concern with the nominated sub-
contractor’s price, which is firstly negotiated by the
employer at the tender stage and finally settled also by
him during the final account stage. This being the case,
the main contractor shall not be taken as underwriting
the nominated sub-contractor’s solvency.




                        http://www.jrk.com.hk
Thus, Viscount Dilhorne in the same case said:-

  “The employer’s contention that, on a nominated sub-
  contractor repudiating its contract, the contractor
  immediately became liable in damages for the failure
  to carry out the sub-contract work was strenuously and
  persistently argued.     This would mean that the
  contractor had entirely underwritten the execution of
  the sub-contract, that it had guaranteed its
  performance by a person whom it had had no part in
  selecting and was liable in damages, which might be
  very heavy, to the employers which it might be unable
  to recover from the nominated sub-contractor if that
  sub-contractor had repudiated owing to bankruptcy or
  liquidation.”




                         http://www.jrk.com.hk
Concurring in Lord Reid and others, Viscount Dilhorne
opted for an additional reasoning, deducing his
decision from an analysis of the parties’ probable
intention at the time of contract, viz:-

   “I think it inherently improbable that any sensible
   contractor would undertake such an open-ended
   commitment. I cannot think that that was the
   intention of the parties at the time the contract was
   entered into and I do not think that, under this
   contract, it has done so.”




                          http://www.jrk.com.hk
The main contractor does not underwrite to the
employer the absolute performance of a nominated
sub-contractor and its solvency. Lord Reid and other
law lords attributed this decision to their finding that the
main contractor has had no part in the nominated sub-
contractor’s selection and has no concern either with
his sub-contract price – which is a matter between him
and the employer.




                          http://www.jrk.com.hk
By the same token, Bickerton can be relied upon to
support the proposition that the main contractor does
not underwrite to the nominated sub-contractor the
Employer’s performance and solvency. The main
contractor cannot be taken to guarantee to the
nominated sub-contractor the Employer’s performance
in relation to its payment obligation respecting the
prime cost work.




                       http://www.jrk.com.hk
RESPONSE TO OPPONENT’S AUTHORITIES

The relevant clause in Smith & Smith Glass Ltd v Winstone
Architectural Cladding Systems Ltd [1992] 2 NZLR 473 read:
“We will endeavour (this is not to be considered as a
guarantee) to pay these claims within 5 days after payment to
Winstone Architectural Ltd of monies claimed on behalf of the
Sub-Contractor.”

Wo Hing v Pekko (1998) contained the clause “This contract
is based on back to back basis including payment terms.”

Both cases are on clauses with different wordings from the
Hong Kong nominated sub-contract forms in issue and it is
difficult to see how these cases could assist interpretation of
the Hong Kong nominated sub-contract forms.




                             http://www.jrk.com.hk
Yiu Wing Construction Co Ltd v Ryoden Engineering Co
Ltd (2001) was a case on seeking leave to appeal. The
court will give leave to appeal against an arbitration
award if it is obviously wrong in law. Thus a high
threshold is required. In that case, the arbitrator
considered that “receipt of payment” included the
Employer’s set off. He found that there was no set off and
the main contractor had received money. The court
refused to grant leave to appeal because it did not think
the arbitrator was obviously wrong. The court did not say
the arbitrator’s view against “pay when paid” was correct.
The court just considered the arbitrator was not obviously
wrong, nothing further.



                          http://www.jrk.com.hk
As to the case Chinney Construction Co. Ltd. v Po
Kwong Marble Factory Ltd (December 2003), what the
court said was only oblicta dicta and provided no
guidance as to the interpretation of the payment
clauses under Hong Kong nominated sub-contract
forms.




                      http://www.jrk.com.hk
IN CONCLUSION, it is submitted that under Clause
33(7) of the new nominated form of sub-contract or
Clause 11(b) of the old “Green” form, the main
contractor has no obligation to pay his nominated sub-
contractor unless and until he has received actual
payment from the Employer.




                        http://www.jrk.com.hk

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:93
posted:8/17/2011
language:English
pages:29
Description: Sub Contractor Breach of Contract document sample