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Ascertaining terms of oral contracts

This case concerned a dispute between a sub-sub-contractor (Luen Fat) and a sub-contractor (Hung Yip) about the terms of a contract between them, whereby Luen Fat undertook certain box culvert works under a Government contract.

It was not in dispute that Hung Yip had paid Luen Fat a total of $16,418,285.20 for its work under the sub‑sub‑contract, but Luen Fat claimed that it should have been paid a further $2,272,329.75. Hung Yip’s case was that it had not paid the latter sum because the contract between them included a pay‑when‑paid term, meaning that Luen Fat had no right to payment until Hung Yip itself had been paid by the main contractor, Wing Fai Construction Co Ltd (Wing Fai) and that it had not been paid by Wing Fai prior to Wing Fai being wound‑up.

It was Luen Fat’s case that there was no pay‑when‑paid provision and that the term as to payment was simply that it was due within 45 days after the receipt of the application for payment by Luen Fat.

The case turned primarily on a single issue, namely, whether or not it had clearly been agreed between Luen Fat and Hung Yip that Luen Fat was to be paid on a pay-when-paid basis. The difficulty in this case was that the events in question took place almost 16 years previously and Hung Yip’s case was that the pay-when-paid provision had been orally agreed between Luen Fat’s sole proprietor (Chan) and Hung Yips director (Kwan).

To reach its decision, the court examined various contemporaneous documents between the parties, in order to test the reliability of Chan and and Kwan’s oral evidence given in court.

By examining contemporaneous correspondence between the parties setting out their respective understanding of the agreement, the court concluded that the parties had agreed a Special Condition that Luen Fat would submit an application for payment for work done on site by the end of each month and that Hung Yip should pay the same within 45 days after receipt of the application. The Court held that this could not be construed as meaning payment on a pay-when-paid basis and could not be interpreted (as contended by Hung Yip) as permitting Hung Yip a further 45 days to pay Luen Fat after it had been paid by Wing Fai.

The Court in reaching its decision followed the case of Penta-Ocean Construction Co Ltd v CWF Piling & Civil Engineering, holding that a clear special condition to a contract takes precedence over general provisions, so that here, the Special Condition (which did not provide for pay-when-paid) prevailed over any general references to the contract with Wing Fai, upon which Hung Fai relied.

In the Pentra case, the court had held that “ ….there must be a bias in favour of specific agreement reached by the parties….notwithstanding the presence of another general clause in the standard form subcontract providing that the general clauses in the standard form subcontract shall prevail over any other terms and provisions in the other contractual documents.”  In Penta, another case was cited in which the court held that the deliberate act of the parties introducing a variation or modification, must on any principle of construction take precedence over the general words of a General Condition, which was in no way intended to preclude the parties from entering into whatever contractual arrangement they might want to vary or modify what would otherwise have been the applicable provisions contained in the General Conditions or Special Conditions of Contract.

Accordingly, judgment was entered in favour of Luen Fat for the sum claimed.

Although it is trite that an oral contract is enforceable in law, it is sometimes difficult to prove its existence in court. This case is an example of where the court had to consider the reliability of the oral evidence about what happened some 16 years ago. It is also interesting to note that the parties argued whether there was a “pay when paid” provision in their contract. It appears that the parties and the judge accepted that if such provision existed, the contractor would not be liable for paying its sub-sub-contractor if the sub-contractor did not receive payment from the main contractor (who in this case had been wound up). In other words, no distinction was sought to be drawn between “pay when paid” and “pay if paid” clauses.  For more on the meaning of “pay when paid”, please see our previous articles on the subject.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427

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