In Sze Fung Engineering Ltd v Trevi Construction Company Ltd [2025] HKCA 278, the Court of Appeal (CA) allowed an appeal and set aside the Court of First Instance Judgment which had ruled that a back-to-back provision in a sub-sub-contract amounted to a pay when paid provision. The CA held that back-to-back is not a term of art and is an ambiguous term, the meaning of which has to be determined by examining its context and factual matrix. Here the CA concluded that the provision governed the timing of payment and did not mean that the sub-sub-contractor would only be paid if the sub-contractor was paid by the contractor higher up the chain.
Background
The action concerned a construction dispute regarding a project to build a new combined gas turbine unit at a power station (Project). CLP Power Hong Kong Ltd (CLP) was the employer of the Project and Leighton Contractors (Asia) Ltd the main contractor for civil, building, mechanical, electrical and plumbing works (Main Contract Works). The Defendant (Trevi) was a sub-contractor in respect of pipe and sheet pile walls and grouting work (Subcontract Works) and the Plaintiff (SF) was sub-sub-contractor for part of the sub-contract works, namely piling and pumping tests (SF Works).
The dispute
The dispute related to the interpretation of a “back-to-back” provision in Item 18 of the Quotation presented by SF to Trevi, which formed part of the sub-sub contract between them (SF Contract) and how it applied to SF’s claims for payment for remeasured works, variations, acceleration, aborted works and idling claims. The provision stated that payment was based on ‘back-to- back’ principle and to be released to SF within 3 days upon receipt of the same from client main contractor.
Court of First Instance (CFI) Judgment
The CFI Judge held that on a proper construction, Item 18 was a pay when paid clause, i.e. SF would only be paid if Trevi was paid for the work in question by Leighton.
Based on the pay when paid construction, the CFI Judge assessed the agreed variations, which were disputed on quantum, such that if Trevi was only paid a certain sum by Leighton, it would be the payment entitled to by SF. The disputed variations and loss of profits claims by SF were rejected because they were not certified and paid by Leighton. For the idling and acceleration claims, they were rejected because of lack of substantiation by producing the necessary particulars and evidence.
The appeal
The main issue in the appeal was the construction of Item 18 of the Quotation, which issue turned on whether the payment term “back-to-back” should be construed to mean “pay when paid” as held by the CFI Judge.
Proper Construction of Item 18
The CA said that although Item 18 referred to “back-to-back principle”, it was common ground that “back-to-back” is not a term of art. Clearly, the CA said, it is an ambiguous term. It could mean that the timing of payment to SF should follow the payment received by Trevi (subject to the 3-day gap), but it could also mean that apart from the timing of payment, SF’s entitlement to payment also depended upon Trevi getting paid. In other words, there was a condition to SF’s payment entitlement. These meanings represented the opposing constructions advanced by the parties. In light of its ambiguity, the CA said that the meaning of Item 18 had to be ascertained from the context and factual matrix.
The CA agreed with the proposition that it is a matter of the parties’ bargain and agreement on the allocation of risk, and there is no reason in principle why a properly drafted pay when paid clause should not be given effect to by the court. The issue, the CA said, was whether there was evidence that SF had assumed the risk of not getting paid by Trevi if the latter was not paid by the contractor higher up the chain. The proposition that SF had assumed the risk of non-payment by the contractor higher up the chain was not consistent, the CA said, with the difference in scope between the SF Works and the Subcontract Works. The CA also found that the subsequent conduct of the parties should be ignored in the construction exercise.
Court of Appeal decision
The CA concluded that Item 18, being a pay when paid clause, was not supported by the factual matrix and it followed that the construction by the CFI Judge was flawed. The proper construction of Item 18 was that the “back-to-back principle” governed the timing of payment.
Comments
“Back-to-back” is commonly found in many sub-contracts and sub-sub-contracts. Unsurprisingly, there is no definitive meaning of the term. As the Court of Appeal in this case explained clearly, the meaning of the term depends on the context and factual matrix. In this particular case, the scope of the SF Works and Subcontract Works were different i.e. Trevi did not sub-let all its Subcontract Works to SF and only charged a “management fee”, which is very common in total sub-letting arrangements. It is an important consideration in finding that “back-to-back” does not mean “pay when paid”. The rationale of this finding is not difficult to understand. In the case of total sub-letting, the sub-contractor does not carry out any work itself in the project and only acts as the conduit for payment from the upper tier contractor to the sub-sub-contractor, which is the essence of the “pay when paid” arrangement.
The Construction Industry Security of Payment Ordinance will become effective on 28 August 2025. After that, even if “back-to-back” means “pay when paid” on a proper construction of the terms of the contract, it will be void under the construction contracts to which the Ordinance applies.
For further information, please contact:
Joseph Chung, Partner, Deacons
joseph.chung@deacons.com
