BUILDING LAW INFORMATION SUBSCRIBER SERVICE, BLISSLAW CASE OF THE WEEK

BACK-TO-BACK

The claimant contractor, Tim Lee, TL, was engaged by the defendant, Super King, SK, to undertake maintenance and renovation works at two shopping centres, which were under the management. The main contractor for the works was Wang Chung the employer, The Link, gave Wan Chung’s instructions by way of Work Orders, which were passed down from Wan Chung to SK, and on to TL

TL’s director, Mr. Chong, was keen to ensure that TL’s interim payments would be settled promptly. It was the first time that TL had worked with SK. SK’s previous dealings with Wan Chung had been on a “back-to-back” basis i.e. Wan Chung would pay SK when it had received payment from the employer after deducting a percentage to cover administration charges, overheads and profit.

TL contended that “back to back payment basis ....” was a reference to “the time of payment”. TL said that when it submitted bills for payment to SK, whatever works it actually completed as instructed to do so, SK would diligently forward the same to the employer for payment. When SK received payment, it was obliged to pay TL within a reasonable time under the contract as varied. TL said a term should be implied that SK was obliged to pay TL upon the completion of the works or within one month thereafter. TL drew a distinction between entitlement to payment and time for payment. TL argued that the expression “back to back payment” should be interpreted as referable only to the time for payment, and that TL’s entitlement was not made conditional upon SK being paid by Wan Chung. TL argued that it would have made no sense commercially for it to place its entitlement “at the mercy of The Links, the Main Contractor and [Super King]”.

The judge said that the interpretation of any term used in a particular contract must depend on the circumstances in which the agreement is made. In the present case, neither party suggested that the expression “back to back payment” had a particular meaning commonly understood in the industry. In the absence of any special industry usage, the judge did not think there was any applicable principle of law which favoured one interpretation over another. Ultimately, the court’s task was to ascertain objectively what the parties had meant by the use of that expression in the circumstances of the agreement. Each case would therefore be different.

In the present case, there was nothing in the factual background that warranted a finding that the expression “back to back payment” was referable only to the time for payment but not the entitlement as TL was arguing. The judge noted that TL had to engage workers and procure materials so that it would be in TL’s interest to be assured of security of payment. TL had argued that it would be unlikely that it would have accepted the risk of default by the employer or the main contractor. However, the judge concluded that if there were any risk it would be borne either by SK or TL. The judge didn’t think it improbable that TL would assume the commercial risk. It was simply a matter of allocation of risk.

The factual background gave no indication that SK had accepted the risk by assuming an independent obligation to pay TL. On the contrary, it seemed to the judge that Mr. Kwong’s assurance of SK’s close relationship with Wang Chung and that he did not foresee problem with payments, was given precisely to allay Mr. Chong’s concern over the risk that TL would have to bear under the “back to back” arrangement.

In the absence of a special industry usage, the judge found that the natural meaning conveyed by the expression “for the supply/installation of ... work in a back to back payment basis ....” was simply that TL would be paid when SK had received payment from Wan Chung for the relevant works. This was just one single obligation concerning payment, i.e. the obligation to pay when payment was received. There was no indication, whether from the language or the factual background, that the single obligation should be dissected into parts - one part as to entitlement and the other part timing; such distinction was rather artificial.

In addition, the argument was not supported by Mr. Chong’s own statement i.e.

“… The final bills should be assessed in a reasonable time and settled the soonest possible. Once the defendant received payment from The Link, we expected that we would be paid within a reasonable time, if not immediately.”

It had been Mr. Chong who had drafted the agreement; if a distinction between entitlement and timing for payment had ever been intended, it should have been set out more clearly.
 

 

Copyright: BLISS, the Building Law Information Subscriber Service 2012

 

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