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Atal Engineering Ltd v Evergreen Engineering and Construction Co Ltd
[2004] HKEC 786

"Shell borrowing" is a common practice in the Hong Kong construction industry in which a successful bidder for a contract subsequently sub-contracts the entire works. The main contractor remains liable to the employer and will be paid by the employer. The employer may not know that the sub-contractor is carrying out the entire works since the main contractor allows the sub-contractor to use its letterhead for correspondence with the employer. Sometimes, this permission may extend to the use of the main contractor's name in communications with sub-sub-contractors.

The District Court recently considered an issue arising from a shell borrowing arrangement in Atal Engineering Ltd v Evergreen Engineering and Construction Co Ltd.

Background

Evergreen had been awarded a contract for refurbishment of a branch of Hang Seng Bank. Evergreen sub-cpntracted the works to Wo Fung. It allowed Wo Fung to use its letterhead and chop and to represent itself as Evergreen. Wo Fung subsequently sub-sub-contracted air-conditioning ~nd ventilation works to Ata!. The sub-sub-contract was sent to Atal on Evergreen's lett~rhead and was signed by one of Wo Fung's er1)ployees who held himself out to be Evergreen!s contract manager. Atal issued invoices to Evergreen but was paid by Wo Fung using Wo Fung's cheques.

However, after Evergreen made final payment to Wo Fung, Wo Fung went into liquidation and was unable to pay Atal. Atal requested payment from Evergreen. Evergreen refused to pay, stating that its contractual relationship was with Wo Fung not Atal. Atal countered by stating that all communications relating to the contracting of the specialist works were by all appearances with Evergreen - the correspondence was on Evergreen's letterhead and the contract was signed by someone purporting to be Evergreen's employee. Atal accepted that it was paid by Wo Fung cheques but that it had assumed the cheques to be for Evergreen's administrative convenience.

The Decision

Carlson J noted that Evergreen had provided Wo Fung with its letterhead and company chop and had allowed them to be used in correspondence with sub-sub-contractors.

Although Atal was aware that shell borrowing was common in the building industry, it believed it had contracted with Evergreen. When Atal's solicitors had written to Evergreen demanding outstanding payments, the response, which had been drafted by Wo Fung and approved by Evergreen, explained that Evergreen could not pay until Hang Seng Bank paid them but did not state that there was no contract between Evergreen and Atal.

Carlson J concluded that the evidence overwhelmingly indicated that at the date that the contract was entered into, Atal believed that it was contracting with Evergreen and not Wo Fung. Even though Wo Fung may have actually done the subcontracting, it had done so on behalf of Evergreen which must be bound by its acts in allowing Wo Fung to hold itself out as being Evergreen. Judgment was given for Atal against Evergreen.

Analysis

This case illustrates how a contract formed by a sub-contractor acting as an agent for a main contractor may bind the main contractor.

Main contractors who sub-contract the entire works are usually well aware that they continue to be liable to the employer for proper performance of the contract. In general, however, their liability down the contractual chain will be limited to the sub-contractor to whom the works have been let. Nevertheless, if the sub-contractor holds himself out as acting on behalf of the main contractor and the main contractor consents to that holding out, the main contractor's liability may extend to sub-sub-contractors or consultants to whom the sub-contractor let elements of the works.