China – Court Held That Pre-Bid Agreement Appointing Sub-Subcontractor Could Not Be Inferred.

15 September 2020

 

In the recent case of Redland Precast Concrete Products (China) Ltd v Permasteelisa Hong Kong Ltd, HCCT 35/2018, the Court had to decide whether a contract existed between the Plaintiff and Defendant whereby the Defendant agreed to appoint the Plaintiff as its subcontractor for works to be carried out on a project. The Plaintiff claimed that it had entered into a pre-bid agreement with the Defendant, that should the Defendant be awarded the subcontract works, the Defendant would sub-contract the works to the Plaintiff. The Defendant denied that such agreement existed. The Court held that no such agreement could be inferred from the documents relied upon by the Plaintiff as showing such agreement or from the parties’ conduct.   
 

Background
 

The Employer on the project awarded the Main Contract for the project to Hsin Chong Construction Company Limited (HC). On 22 October 2015, the Defendant was appointed as subcontractor for the design, supply, fabrication and installation of the curtain wall, skylight, precast ceramic façade system and LED lighting and associated works (Subcontract Works) and a formal Subcontract was signed between HC and the Defendant on 18 April 2016 (Subcontract).

Plaintiff’s Case
 

The Plaintiff’s case was that a sub-subcontract and/or agreement was made between the Plaintiff and Defendant, in respect of the part of the Subcontract Works, identified as the design, supply and delivery of the precast concrete façades (Works), which was to be integrated with the curtain wall forming part of the exterior façade system of the Subcontract Works. The Plaintiff claimed that it had agreed with the Defendant to undertake the Works for HK$79,432,305.
 

The Plaintiff claimed that it had entered into a pre-bid agreement with the Defendant, that should the Defendant be awarded the Subcontract Works, the Defendant would sub-contract the Works to the Plaintiff. The Plaintiff claimed that the pre-bid agreement was contained in and/or evidenced by: (1) a confidentiality agreement entered into between the Plaintiff and Defendant dated 10 June 2015; (2) the Defendant’s emails of 23 and 25 June 2015 (June Emails); (3) a letter dated 25 June 2015 from the Plaintiff (25/6 Letter); and/or (4) a pre-bid agreement which was made between HC and the Defendant dated 31 August 2015 (HC/Defendant Pre-bid Agreement). These documents are referred to below collectively as “4 Documents”.
 

The Plaintiff claimed that the Defendant was in breach of the Sub-subcontract when it terminated or repudiated it (by employing another subcontractor), by its letter to the Plaintiff dated 8 June 2016 and its email of 11 June 2016. The Plaintiff claimed to be entitled to the amount due under the Sub‑subcontract, or damages for the Defendant’s breach, or alternatively, to a reasonable price on a quantum meruit basis.
 

Defendant’s Case
 

The Defendant highlighted that the Plaintiff’s case was based on an agreement being inferred from the 4 documents and the parties’ conduct. It argued that such inference could not be made and that on the facts there was no pre-bid agreement reached and the Plaintiff and Defendant had merely been in preliminary discussions and still at the stage of evaluation as to the suitability of the Plaintiff to be the Defendant’s sub-contractor in respect of execution of the Subcontract Works.
 

Applicable legal principles
 

The Court referred to the applicable legal principles for deciding whether a contract can be inferred from the parties’ conduct, namely that the court will not imply a contract lightly and the conduct relied on must be unequivocally referable to the contract sought to be inferred. If the parties would or might have acted exactly as they did in the absence of a contract that would be fatal to a contract being inferred.
 

Did the 4 Documents constitute an agreement?
 

Confidentiality Agreement
 

The Defendant said that it was its standard practice and standard practice in the construction industry to ask potential sub-contractors to enter into a standard form confidentiality agreement for the purpose of preventing bidders divulging confidential information about the project to third parties during the tender stage. The Court said that the terms of the Confidentiality Agreement were clear. The parties acknowledged in the recital, that they were engaged in discussions and negotiations, whereby they were mutually exploring and evaluating the appropriateness and possibility of the Plaintiff’s involvement as the proposed specialist subcontractor of the Defendant in the tender for the Main Contract of the project. They further acknowledged and agreed, that the provision and exchange of information under the agreement would not commit or bind either party to any present or future contractual relationship, and further, that the Defendant had no obligation under the agreement to enter into any contractual arrangement with the Plaintiff – including but not limited to any pre-bid agreement for engaging the Plaintiff as the Defendant’s specialist subcontractor.
 

With these express provisions in mind, and taking into account the fact that the burden was on the Plaintiff to establish the existence of the pre-bid agreement, the Court said that it required very convincing and unequivocal evidence to accept that, notwithstanding the parties’ acknowledgment contained in the Confidentiality Agreement, they had indeed entered into and concluded the pre-bid agreement. The Court will not, it said, imply a contract lightly, in the absence of conduct which is unequivocally referable to the contract sought to be inferred.
 

June Emails
 

The Plaintiff relied on emails which it said evidenced the existence of the pre-bid agreement, in particular, an email from the Defendant stating that the Defendant was working on the pre-bid agreement for the Plaintiff to team up with the Defendant and HC and asked for the Plaintiff’s best offer based on such pre-bid agreement.
 

The Court said that the June emails were equivocal, and did not show the conclusion of any agreement between the Plaintiff and Defendant. The Defendant had only said that it was reviewing the pre‑bid agreement which it had received from HC and was working on a pre-bid agreement with the Plaintiff.  There was no mention of the terms of the proposal for the “teaming up” of the Plaintiff with the Defendant and HC. The email did not express any commitment to the inclusion of the Plaintiff’s precast concrete panel works in the Defendant’s contractual arrangement with any main contractor, including HC.  “Teaming up”, the Court said, is itself a general and vague term and does not invariably have the meaning that the Plaintiff contended it had i.e. that should the Defendant be awarded the Subcontract, it shall “sublet the Subcontract work” to the Plaintiff.  The Plaintiff, HC and the Defendant may “team up” in different ways, to work on the Project, the Court said.
 

25/6 Letter
 

The Plaintiff relied on a Letter of Intent which it was asked by the Defendant to issue to it, confirming its willingness to act as the Defendant's key domestic supplier for the provision of the precast concrete facade panel fabrication if the contract was awarded to the Defendant. The Plaintiff argued that the Defendant’s request for such letter showed that the intention was for the Plaintiff to be the Defendant’s subcontractor if HC was awarded the main contract and the Defendant was awarded the subcontract.
 

The Court said that there was no unequivocal agreement expressed by the Defendant that it would enter into a contract with the Plaintiff if the Defendant was awarded the Subcontract.
 

The matters relied upon by the Plaintiff as evidence of the pre-bid agreement were consistent, the Court said, with the Defendant considering whether the Plaintiff was a suitable subcontractor to be proposed as a specialist subcontractor, and for inclusion in the tender for the Main Contract and under the Plaintiff’s scope of works. The conduct was just as consistent, the Court said, with there being no pre-bid agreement between the parties. The 25/6 Letter was not sufficient to tilt the scales in favour of the existence of the pre-bid agreement contended for. It only committed the Plaintiff to act as the key domestic supplier for the provision of the precast concrete panel works. The Defendant’s request for the Letter of Intent from the Plaintiff, was not conduct which was unequivocally referable to the existence of the pre-bid agreement. 
 

HC/Defendant Pre-bid Agreement
 

The Court said that this Agreement added nothing to the evidence. It was by itself simply an agreement made between the Defendant and HC, on its own terms and conditions, and made no provision for any commitment by the Defendant or the Plaintiff to enter into a sub-subcontract. Even in the absence of a pre-bid agreement between the Plaintiff and Defendant, the Court said, the Defendant would just as likely have entered into the HC/Defendant Pre-bid Agreement.
 

Court’s Decision
 

The Court concluded that there was no pre-bid agreement made between the Plaintiff and Defendant, contained in and/or evidenced by the 4 Documents.
 

Post-tender period and work done
 

The Plaintiff relied on the fact that, after the award of the Main Contract to HC and Subcontract to the Defendant, the Plaintiff had prepared and submitted mockup samples, produced manufacturing quality plans, prepared and submitted information, plans and drawings and attended meetings and workshops from December 2015 to June 2016, all of which the Plaintiff claimed was work performed within the scope of the Sub-subcontract. The issue was whether such conduct was consistent only with there being a Sub-subcontract.
 

The Court did not accept that the parties’ conduct after the award of the Main Contract to HC in September 2015 and award of the Subcontract to the Defendant in October 2015, was unequivocally referable to the existence of a pre-bid agreement or a binding Sub-subcontract between the Plaintiff and Defendant. The Court said that the submission of the Plaintiff’s 4th quotation on 8 January 2016 (Quotation 4), the meetings held between the Plaintiff and Defendant and Plaintiff’s submission of technical details and samples, were equally consistent with the Tender Analysis being conducted by the Defendant on the Plaintiff’s capabilities and suitability as a possible subcontractor for the Works.
 

The Confidentiality Agreement, the Court said, clearly set out the parties’ acknowledgment and agreement that they were not bound to any present or future contractual relationship save for carrying out and continuing with the negotiations on the involvement of the Plaintiff as a proposed specialist subcontractor in the tender for the Main Contract. The Court found that the parties’ negotiations on the terms of the Plaintiff’s involvement and appointment as the Sub-subcontractor, and the work carried out by the Plaintiff after the award of the Subcontract to the Defendant, were not unequivocally referable to the fact that a binding Sub‑subcontract had been concluded. Such work was, on the balance of probabilities, part of the continuing process of due diligence and Tender Analysis conducted by the Defendant, as to the appropriateness of appointing the Plaintiff as its subcontractor.
 

The Court therefore concluded that there was no pre-bid agreement and no Sub-subcontract made between the parties such as would entitle the Plaintiff to any payment.
 

Quantum meruit claim
 

Having found that there was no contract between the parties, it followed that there was no breach or wrongful termination of contract, as alleged. The Plaintiff claimed as an alternative, payment of a reasonable price for the works carried out on a quantum meruit basis.
 

The Court had found that the work carried out by the Plaintiff was not work done for the Project but rather for the purpose of the Tender Analysis and due diligence carried out by the Defendant, and for its objective of obtaining and securing the Sub‑subcontract from the Defendant. The work carried out by the Plaintiff was not requested by the Defendant in contemplation of the Sub-subcontract being executed, nor in anticipation of the execution of the Sub-subcontract, the Court said.
 

There was no express reservation of the parties’ negotiations being “subject to contract” in this case, but the terms of the Confidentiality Agreement made it clear that the parties were not committed to any present or future contractual relationship, and that there was no obligation on the Defendant’s part to enter into any agreement with the Plaintiff. The work was performed by the Plaintiff in 2016 after it had been invited to submit its quotation to assist in the Defendant’s evaluation of its bid. By then, the Defendant had also unequivocally stated its position in a letter of 6 January 2016, that there was no pre‑bid agreement, nor any binding commitment to the Plaintiff. The Defendant had also stated in the letter that there was a tender analysis being undertaken, in which the Plaintiff’s knowledge of the project would be taken into account. Even in the Plaintiff’s own letter of 26 February 2016, the Plaintiff had shown that it was acutely aware of the fact that there was no Sub-subcontract awarded to it, when it stated that it would only update the MQP once the Defendant awarded the contract to it. It could hardly be said that both parties confidently expected at the time that a formal contract was bound to eventuate.
 

Significantly, the payment condition for work carried out by the Plaintiff which had been included in the draft letter of intent was deleted by the Plaintiff on 12 April 2016. The Defendant cannot be taken to have understood that any services carried out by the Plaintiff would have to be remunerated in any way. In the circumstances, the Court found that that there was no implied agreement that the work carried out by the Plaintiff should be paid on a quantum meruit or any other basis.
 

Estoppel

The Plaintiff also claimed that the Defendant was estopped from denying that there was a Sub-subcontract between them because by requiring the Plaintiff to perform and carry out the Works, the Defendant had made a clear and unequivocal promise or representation to the Plaintiff, that the Sub‑subcontract existed, or that the Works were performed by the Plaintiff as subcontractor, and alternatively, that the parties had acted upon a common assumption of the existence of the Sub- subcontract. However, the Court held that the essential element of a clear and unequivocal representation, for the doctrine of estoppel by representation to operate, did not exist.
 

Comments
 

In construction projects (even for larger projects), it is not uncommon for a contractor to start working even before the formal contract is signed. If the employer changes its mind later, a dispute is bound to arise about liability for payment for the work done by the contractor.
 

This judgment highlights the difficulties of recovering payment from the other party when no formal contract has been signed. The conventional thinking is that the contractor in such situation should at least be entitled to recover its cost and expense incurred for the preparatory work on a quantum meruit basis. Usually, the preparatory work is done at the request of the other party on the understanding that it will be reimbursed if no contract is entered into between the parties. Here, the Court found that such understanding did not exist due to the nature of the work done and deletion of the payment condition in the draft letter of intent.