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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
WS NO. 406 OF 2017
BETWEEN
AL-AMEEN CONSTRUCTION LIMITED
Plaintiff
AND
MATHEW HASU
Defendant
Waigani: Linge A J
2022: 18th March
CONRACT – lump sum construction contract – no provision for termination – termination for cause- change of ownership basis for termination of contract – lifting of corporate veil
The plaintiff is a duly registered construction company and was approved and listed by Bank South Pacific to carry out constructions sourced by it. The defendant chose the plaintiff to erect his house, which was a Kit House financed by Bank South Pacific. The plaintiff and the defendant entered into a Construction Contract on the 18 July 2016, and the plaintiff commenced work on the phase 1 of the project. The plaintiff invoiced the defendant for the first batch of payment however, the defendant terminated the Contract on the 21 March 2017 and made part payment thereafter resulting in the plaintiff suing for breach of contract and for the balance of the contract payment.
Held:
Termination of the contract is illegal, and the defendant shall pay K 20,441.80 to the Plaintiff being the balance of invoice he rendered.
Interest at 8% on the sum of K 20,441.80 from 21 March 2017 to date of entry to be paid by defendant.
Cases Cited:
Papua New Guinean Cases
Ayleen Bure v Robert Kapo (2005) N2902
Jimmy Malai v PNG Teachers Association [1992] PNGLR 568
Kappo (No.5) Limited v Hau & Ors [1998] PNGLR 544
Kurumbuk Ltd v Enfi (PNG) Co. Ltd, [2012] PNGLR 129
New Britain Palm Oil Ltd v Vitus Sukuramu (2008) SC946
Odata Ltd v Ambusa Copra Oil Mill Ltd National Provident Fund Board of Trustees, [2011] PNGLR 344
Podas v Divine Word University (2011) N4395
Pinpar Developer Pty Ltd & RH (PNG) LTD v T. L Timber Development Pty
Ltd (2006) N3075
Rex Tomara v Ok Tedi Limited & Ors N5821
Zanepa v Kaivovo & Ors (1999) SC623
Overseas cases
Briggs v James Hardie & Co. Pty Ltd & Ors [1989] 7ACLC 841
Chen v Butterfield & NZCLC 261,086
Gilford Motor Co Ltd vs Horne, [1933] Ch.935
Jones v Lipma [1962] 1 All ER 442
Trevor Ivory Ltd v Anderson (1992) 6 NZCLC, 611 [1992] 2 NZLR 517
RH PNG Limited v TL Timber Development Pty Ltd N3075
Counsel:
Mr A. Rake, for the Plaintiff
Mr S. Javati, for the Defendant
RULING ON MOTIONS
1st April, 2022
Facts
2. On the 28 July 2016, the Bank South Pacific (hereinafter “BSP”) approved K549,492.50 to assist the defendant, who is a staff of BSP, to purchase and construct his residential property located at Allotment 39, Section 151, Malolo Estate, Boroko, National Capital District.
3. At the material time the plaintiff, was a construction company approved and listed by BSP as a contractor recognized to carry out building construction activities funded by BSP.
4. On the 28 July 2016, the plaintiff and the defendant entered into a Construction Agreement for works including erection of picket fencing and construction of a four (4) bedroom residential house. The scheduled completion date was the end of September 2016.
5. On the 21 March 2017 defendant served letter of termination to the new management of the Plaintiff’s company.
6. The plaintiff alleges that the termination of the contract by the defendant was unlawful and commenced these proceedings on the 26 April 2017.
Evidence
7. The plaintiff relies on two affidavits:
(a) Affidavit of Roger Rali Wiyepe sworn on the 16 October 2019 and filed on the 18 October 2019; and
(b) Affidavit of Clementina Stikula sworn on the 20 August 2021 and filed on the 24 August 2021.
8. The defendant relies on affidavit of Mathew Hasu filed on the 29 October 2021 and the affidavit of Posa Kilroy also filed on the 29 October 2021.
Plaintiff’s Submission
9. Mr. Rake of counsel for the plaintiff submits that upon near completion of phase one (1), which was to backfill, constructing drainage
and fencing as the area was swampy, the defendant terminated the contract by a notice of termination in writing containing the reasons
of the termination which is basically the changes in the directorship and management of the plaintiff.
10. Counsel submits that the Invoice served on the defendant on the 21 March 2017 for K37,441.80, although it did not amount to the 30% as stipulated for first payment
under the contract, the invoice reflects the amount of actual work done.
11. Counsel for the plaintiff submits that despite amendments not captured in the Statement of Claim, the K17,000.00 was paid out of the first invoice dated 21 March 2017 with balance still outstanding.
12. He further submits that there is no evidence of BSP undertaking any assessment or valuation of the works other that the defendant’s own letter annexed to his affidavit of 29 October 2019 stating as such.
13. In relation to the pleading in defence alleging breach of contract by the plaintiff, Mr. Rake submits that the conduct of both parties does not support such defence as both parties continued to work on the project outside of the time limit stipulated in the Contract. That both parties consented to go beyond the express term for the contract without any variation to the Contract.
14. On the issue of damages, Counsel submits that the balance of K20,441.80 with the interest is due to the plaintiff and further submit that other heads of damages should be addressed at the assessment of damages.
Defendant’s Submission
15. Mr. Javati of Counsel for the defendant submits that the plaintiff failed to comply with the Construction Agreement schedule and costs which warranted its termination for cause.
16. He contends that on the 24 April 2017 a payment of K17,000.00 was made to the account of the plaintiffs then lawyers Poya Lawyers as settlement of the plaintiff’s invoice dated 21 March 2017 on a Quantum Merit basis following BSP valuers had carried out a site inspection to assess and quantify the plaintiffs’ Invoice of 21 March 2017 in relation to stage 1.
17. He also submits that the plaintiffs’ Statement of claim in the Writ of Summons filed on 26 April 2017 does not clearly and succinctly particularize the particulars of breach of the terms of the contract or contract law that the defendant is alleged to have breached.
18. It is his submission that it is within the plaintiff’s rights to terminate the Construction Agreement under the common law principle that the employer has the right to hire and fire and terminate a contract at will for cause with no notice unless the requirement for notice and the right to be heard is an express term of the Contract.
19. He relies on the case of Rex Tomara v Ok Tedi Limited & Ors N5821 where his Honour Justice Cannings held:
“(4) An employee has no right to be heard before his employer decides to terminate his employment unless there is a term of the contract of employment
providing for such a right. No such right exists in the Constitution or any other written law or under the underlying law”
see also, New Britain Palm Oil Ltd v Vitus Sukuramu (2008) SC946.
20. In that case His Honour Justice Cannings reaffirmed the fire-at-will principle in Jimmy Malai v PNG Teachers Association [1992] PNGLR 568 which can be summarized as, an employer can hire and fire at will, with or without good reasons and without giving a right to be
heard. These are the general principles, which can be displaced by the terms of a contract of employment (e.g, in Ayleen Bure v Robert Kapo (2005) N2902. It says an employee has no right to be heard before being sacked unless his contract of employment says so. An employee has no
right to be terminated except for good and proper reason unless his contract cancels that right.
21. He submits that under the common law right to hire and fire, the law cannot force a reluctant employer to retain the services of an employee it no longer wants to employ. He cites Zanepa v Kaivovo & Ors SC623 which ruled:
“What the Public Service Act gives is the right to air any grievance about their employment, to someone other than their immediate
superior, but it does not take away the common law right to hire and fire, or the converse that the law does not force a reluctant
employer to retain the services of an employee that it does not wish to continue relationships with.”
22. On the case at hand, he submits that the Construction Agreement does not contain a termination clause nor an arbitration clause nor a clause to give notice of termination and therefore common law
principles of contract law apply in this case.
23. Counsel also submits that there is sufficient evidence to prove that the plaintiff was in breach of the terms of the Construction Agreement and failed to perform terms of the Contract within the agreed scope of works and to the expectation of the defendant including the costs of cartage and haulage of materials from the Motukea wharf to the site at Malolo Estate 8 Mile, therefore the Agreement was terminated for cause and therefore plaintiff is not entitled to further payments from the defendant.
24. On the issue of lifting of the corporate veil, Counsel submits that this is an excuse by the defendant for the unconscionable conduct of its past Managing Director and its present Director in secretly changing ownership and management of the plaintiff company and selling the plaintiff company along with the defendants Construction Contract to Mr. Wiyepe the new director, without the decency and courtesy to inform the defendant and that the conduct of the late Mr. Kapinias and Mr. Wiyepe were dishonest with an element of fraud and therefore they cannot hide behind the notion of corporate veil.
25. Counsel cites Odata Ltd v Ambusa & National Provident Fund, [2001] PNGLR 344, (N2106) and quoted from His Honour Kandakasi J as he was then in Head note 4:
“The corporate veil may be lifted in a number of circumstances including when it is fair to do so in all of the circumstances and having regard to the extent of the control of the affairs of the company by whoever is behind it.”
26. Counsel refers to His Honour’s ruling where he held that our Companies Act is similar to the New Zealand Companies Act and adopted nine (9) principles relevant and appropriate for our jurisdiction for consideration on the issue of whether or not the corporate veil should be lifted. These 9 principles are:
1. The fundamental starting point is the importance of the doctrine of corporate personality and any suggestion to depart from it should be treated with caution.
2. The doctrine is to be applied unless the result is so unsatisfactory that it warrants a departure from it.
3. It is not possible and is undesirable to categorise the kind of circumstances in which there can be a departure.
4. It is appropriate to depart from the doctrine if a company or its personality is being used as a facade, stratagem or simulacrum
in an attempt to circumvent the reality of the situation (Woolfson v Strathclyde Reginal Council 1978 SC(HL) 90, Tunstall v Strathclyde Steigmann [1962] 2 QB 593).There is some difficulty with this because there is some difficulty in determining the true meaning of the word “facade”
and determining whether there was an intention to conceal the true facts which was a test developed by the decision in Chen v Butterfield (1996) & NZCLC 261,086.
5. In a contractual context there is a need for some element of fraud or sharp practice in that party’s conduct, or it must otherwise be unconscionable in the sense of equitable fraud to adhere to the doctrine (see Jones v Lipma [1962] 1 All ER 442, Golford Motor Co v Horne [1933] Ch 935).
6. The veil will not be lifted to allow for the application of the unanimous assent rule to hold a company liable by the actions of the shareholders acting unanimously.
7. It is not sufficient that the mere presence of the corporate veil leads to an inequitable or generally unfair result. The interests of commercial certainty dictate that a strong case is needed to lift the corporate veil (see Trevor Ivory Ltd v Anderson (1992) 6 NZCLC 67, 611; [1992] 2 NZLR 517).
8. The corporate veil may be lifted if a doing so is justified in all the circumstances of the case. The case on point is Creasey v Breachwood Motor Ltd [1992] BCC 638.
9. Where a statute provides either expressly or by implication for a lifting of the corporate veil, it may be lifted.
27. Mr. Javati also cites the Supreme Court ruling in Kappo Limited v Hau & Ors [1998] PNGLR 544 on the doctrine of corporate veil which was adopted in the Odata Ltd case (supra), that:
“It is sufficient for our purposes to simply state that the starting point is the doctrine laid down in Solomon v Solomon & Co.
Ltd (1897) AC 22. There has been a lack of judicial unanimity with regards to the general principles about the circumstances in
which the corporate veil may be lifted: see Briggs v James Hardie & Co Pty Ltd & Others (1989) 7 ACLC 841...”
28. Further, Counsel cites Pinpar Developer Pty Ltd & RH (PNG) LTD v T. L Timber Development Pty Ltd [1999] PNGLR 139, a decision of Kapi DCJ where he held,
“Having regard to all the authorities, I accept the principle that a parent company may be liable for the actions of a subsidiary
company provided that the subsidiary company was acting as agent of the parent company,
Alternatively, where the parent company in truth is in control of the subsidiary company and may or may not use the corporate veil for the purpose of fraud, or as a device to evade a contractual or other legal obligations, the parent company may be liable”
29. In the instant case, Counsel submits that the Court may consider fourth, fifth and eighth factors adopted in Odata v Ambusa & National Provident Fund for consideration:
(4) a company or its personality is being used as a façade, stratagem, or simulacrum in an attempt to circumvent the reality of the situation in that in this present case the change of ownership of the plaintiff company without the knowledge of the defendant tremendously altered the situation against the intention and understanding of the defendant at formation of the contract.
(5) In the contractual context here is a need for some element of fraud or sharp practice in that party’s conduct, or it must otherwise
be unconscionable in the sense of equitable fraud to adhere to the doctrine
(8) The corporate veil may be lift if a doing so is justified in all the circumstances of the case.
Finding of Fact
30. The contract is titled, Lump Sum Contract-For Simple-Construction AGREEMET between Mr. Mathew Hasu, And Al Ameen Constructions Limited. The contract was for the erection of one Bikman 4 -180H Model Building Construction Works. It was what is popularly known as a Kit House valued at K 549, 492.50.
31. The basic terms of the contract are:
(i) Effective Date” 15 July 2016;
(ii) Date of Completion: 10 weeks from signing to End of September 2016;
(iii) Contract value: K 141,835.10; and
(iv) Payment Terms: 5 stages (30%, 25%, 20%, 15% and 10%).
32. The contract has no termination clause and as a lump sum contract it is fixed on the 10 weeks completion period ending in September 2016. However, the contract continued beyond the completion date and the defendant appeared to have no issue with the delay and it is not in contention and thus can be inferred that the contract period was varied.
33. The contract was terminated by the defendant on the ground that the former Managing Direction of the plaintiff company, Wesley Kapinias, who signed the Construction Agreement, had transferred ownership and directorship of the plaintiff company to Roger Rali Wiyepe.
34. This is confirmed in evidence by letter dated the 20 March 2017 in which the defendant deposed that he hand delivered the said letter of termination to the plaintiff, presumably Roger Rali Wiyepe, at the Daikoku Restaurant at Konedobu on the 21 March 2017.
35. The reasons for the termination of the contract given by the defendant in the pertinent letter were:
“(i) that Al Ameen Constructions Limited has been sold to a new owner; and
(ii) the contract ceased when Wesley Kapinias, the Director of Al Ameen Constructions Limited sold the business to Roger Rali
Wiyepi.”
36. Apart from the above, the defendant did not give any other cause or grounds for termination relating to performance, quality of
work, failure to maintain schedule or lack of provision of materials.
37. Also on the 21 March 2017, the plaintiff served its first Invoice on the defendant for the first phase of the works in the sum of K 37,441.80 which is less that the 30% contractual amount stipulated in the contract. The 30% contract value should be K 42, 550.53.
38. On the 24 April 2017 the defendant paid K 17, 000.00 out of the Invoice of K 37,441.80, the balance outstanding is K 20,441.80.
Contract
39. The issue for my consideration is whether the termination of the Construction Agreement by the defendant is justified and lawful in law and if not, what are the consequences that flow from the termination.
40. The Absence of a termination clause is not a bar to termination. A construction contract can be terminated “for cause” when the other party cannot uphold his end of the contract. Grounds for termination for cause may include a contractor is behind schedule, substandard quality of work, inability to secure materials etc. Whatever the ground being alleged, the party alleging must include such in the termination notice.
41. In such a situation the party seeking termination can do so without legal recourse from the other party. Alternatively, if the other party has not upheld a material component of the contract, he is said to be in breach of the contract and the opposing party is entitled as of right to terminate the contract for cause.
42. The only allegation the defendant raised that could be regarded as a potential cause for termination is the issue of costs of cartage and haulage of materials from the Motukea wharf to the site at Malolo Estate 8 Mile but it is not alleged in the termination notice as one of the causes for termination.
43. It is trite law of contract that a breach of an essential term of a contract gives right to the innocent party to terminate the contract. The party with the right to terminate then elects to terminate or keep the contract and in so doing preserves his right to be paid damages.
44. In this case, the reason or cause for the termination has nothing to do with any allege breach or shortcomings of the plaintiff relating to the scope and performance of the contract.
45. The termination can be categorized as termination without cause, as it was without allegation of any specific contractual breach or reasons but for convenience. However, as the contract did not
provide for termination for convenience, I find that there is no legal basis for the defendant to terminate the Construction Agreement.
46. Counsel for the defendant submits that it is within the right of the defendant to terminate the plaintiff under the common law
principle of right to hire and fire or the “fire-at-will” principle He cites the following cases: Rex Tomara v Ok Tedi Limited & Ors (2014) N5821, Jimmy Malai v PNG Teachers Association [1992] PNGLR 568, Zanepa v Kaivovo & Ors (1999)SC623 and New Britain Palm Oil Ltd v Vitus Sukuramu (2008) SC 946.
47. The above referred cases all essentially relate to contact of employment and employment under the Employment Act, chapter 373. I consider the principles highlighted are not applicable to buildings and construction contracts.
48. When the defendant terminated the contract, he specifically invited the plaintiff to render his invoice for payment on a quantum meruit basis. He stated that he will not pay for works done outside of the scope of work that arose due to miscommunication between the former owner and the plaintiff.
49. The defendant had accepted that the plaintiff is entitled to payment under the Construction Agreement. An inference can be drawn that the defendant had admitted that it was not within his contractual right to terminate but he did so anyway. He later took issue with the Invoice claiming it contains inflated costs and that he was prepared to pay only on a quantum meruit basis. This complaint is after rendering of the Invoice.
50. The plaintiff is not seeking damages for the illegal termination, but for the costs of wok undertaken under the contract including gravel, constructing drainage and fencing of the property as the land is swampy and not conducive for building erection. The defendant has not adduced evidence that prior to the rendering of the Invoice he opposed the above works. Under the circumstances, the plaintiff is entitled as of right under the contract for the works undertaken as deposed in evidence.
51. In Kurumbuk Ltd v Enfi (PNG) Co. Ltd, [2012] PNGLR 129, the Court held that “ If one party gives no specific instructions to the other party to the contract to perform additional works but stands by knowing that the other party is doing additional works and approves of the work being done, that amounts to an implied instructions to carry out those additional works, despite there being no express agreement as to price”
52. Therefore, pursuant to the contract the plaintiff is entitled to render its Invoice worth 30% for Phase 1 of the project. The amount of K 37, 441.80 contained in the Invoice rendered is less than the 30% allowable under the contract, is nevertheless based on contract performance up to time of termination.
Lifting of Corporate veil
53. In respect of the issue of lifting the corporate veil, it is trite and must be stated that a company enjoys a separate position
from its owners. The legal personality of a company is artificial and yet a legal person in law. Section 16 of the Companies Act 1997 clearly establishes the legal personality of a company as separate and distinct from its members or shareholders and directors.
54. When directors and shareholders in charge of company are implicated in illegality including fraud or activities outside the constitution of the company, the notion of lifting the corporate veil is then initiated. It involves disregarding the corporate personality of a company and looking behind the scenes to determine the perpetrator of the illegality.
55. In this case, the defendant alleges and rely on three (3) of the 9 principles adopted in the Odata Ltd case (supra).
1. “(4) It is appropriate to depart from the doctrine if a company or its personality is being used as a façade, stratagem, or simulacrum in an attempt to circumvent the reality of the situation.
Counsel submits that in this present case the change of ownership of the plaintiff company without the knowledge of the defendant tremendously altered the situation against the intention and understanding of the defendant at formation of the contract.
3. (8) The corporate veil may be lifted if doing so is justified in all the circumstances of the case.”
56. Except for the first principle, Counsel for the defendant has not advanced any arguments for the second and third principles.
Courts have a duty to consider so as to ensure justice is served.
57. Put in perspective, the issue is whether, Al-Ameen Construction Limited is being used as a façade, stratagem, or simulacrum in an attempt to circumvent the reality of the situation.
58. The “reality of the situation” as postulated by Counsel “is the change of ownership of the plaintiff company without the knowledge of the defendant tremendously altered the situation against the intention and understanding of the defendant at formation of the contract”.
59. The change of ownership is a normal business deal. There is no evidence of any fraud or illegality involved in the transfer of the company. There is no evidence of any unconscionable conduct and what constitute that type of conduct. I have considered the test in Gilford Motor Co Ltd vs Horne, 1933] Ch.935, whether there is evidence sufficient to enable me to form an opinion that Al- Ameen Construction Limited is a sham or hoax and I return a negative verdict. It is my view that (Al-Ameen Construction Limited) is not a mere cloak, to push aside or ignore and to proceed to identify the culprit because I have not found any culprit.
60. In respect of the third (3)cited principle, “where the corporate veil may be lifted if doing so is justified in all the circumstances of the case”, I have considered whether in the interest of justice or in ensuring justice is served by my ignoring the corporate character and to look at the real situation behind the corporate veil, and my conclusion is that I have found no evidence of any illegality committed or alleged to have been committed by either Wesley Kapinias or Roger Rali Wiyepi at the time of termination or subsequently proven by evidence.
61. I have considered Odata Ltd v Ambusa Copra Oil Mill & National Provident Fund [2001] PNGLR 344, (N2106) and distinguished the facts and the rationale to this case. The rationale for piercing the corporate veil was to establish NPF level of control and it was established that it was running all the affairs of Ambusa Ltd as the landowners had no clue on how to run the business. An officer of NPF also conduced contract negotiations on behalf of Ambusa Ltd with Odata Ltd. The officer also signed the contract of Ambusa Ltd with Odata Ltd. His Honour held that, in those circumstances, the brain and skill behind the whole joint venture were provided by NPF. The Court therefore said the NPF should not be allowed to claim protection of its corporate veil.
62. In Pinpar Developer Pty Ltd & RH (PNG) LTD v T. L Timber Development Pty Ltd [1999] PNGLR 139, again a case dealing with a subsidiary and is distinguishable on the facts, the Court held:
“..., I accept the principle that a parent company may be liable for the actions of a subsidiary company provided that the subsidiary company
was acting as agent of the parent company, Alternatively, where the parent company in truth is in control of the subsidiary company
and
may or may not use the corporate veil for the purpose of fraud, or as a device to evade a contractual or other legal obligations,
the parent company may be liable”
63. In the end, I find that it is the defendant who has no regard for the separate legal personality of (Al- Ameen Construction Limited). He actually pierced the corporate veil when he terminated the Construction Agreement without any justifiable reason.
ORDER
64. Accordingly, I grant the following orders:
1. Termination of the contract is illegal, and the defendant shall pay K20,441.80 to the Plaintiff being the balance of invoice he rendered.
2. Defendant to pay Interest at 8% on the sum of K 20,441.80 from 21 March 2017 to date of entry.
3. Parties bear own costs.
_______________________________________________________________
Rake Lawyers: Lawyers for the Plaintiffs
Javati Lawyers: Lawyers for the Defendants
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