Case update: Sze Fung Engineering v Trevi Construction Company - A Case Study on the Risks of Contractual Shorthand

A recent decision of the Hong Kong Court of Appeal (HKCA) provides an important reminder of the risks inherent in using shorthand in contract drafting.

While the case - Sze Fung Engineering Ltd v Trevi Construction Company Ltd [2025] HKCA 278 - did not lay down any new law, and concerns the interpretation of “pay when paid” clauses (which are generally unenforceable in English law construction contracts), it nonetheless serves as an interesting example of how courts are likely to approach ambiguous drafting, particularly when it comes to contractual entitlements, such as payment. Several aspects of the HKCA’s judgment echo the principles we discussed in a previous article on the John Sisk v Capital & Centric decision in 2025. 

Case facts  

The dispute arose in respect of a construction project to build a new gas turbine unit in the New Territories, Hong Kong. Leighton Contractors (Asia) Ltd (Leighton) had been employed in May 2017 as the main contractor for civil, building and MEP works. Leighton subcontracted the pile wall and grouting works (worth approximately HK$77 million) to Trevi Construction Company (Trevi), and Trevi further subcontracted piling and pumping tests (worth approximately HK$20 million) to Sze Fung Engineering Ltd (SF). 

SF had submitted a quotation to Trevi on 9 September 2017 when tendering for the piling and pumping tests (the Quotation). At Item 18 of the Quotation, the following statement regarding payment was provided: 

“Payment is based on ‘back to back’ principle and to be released to Sze Fung within 3 days upon receipt of the same from Client.”

SF commenced its works in September 2017 and only received a draft subcontract from Trevi on 19 January 2018. That draft subcontract was on equivalent terms to Trevi’s own subcontract with Leighton and contained a clear pay-when-paid clause at clause 18. However, SF ultimately declined to sign the draft subcontract on the basis that its works had already commenced and that there already existed a binding contract between Trevi and SF (including those terms set out in the Quotation). A dispute later arose as to whether SF was entitled to payment in respect of parts of its works which had not been certified and paid by Leighton to Trevi. SF subsequently brought claims for variations (both agreed and disputed), idling time, acceleration and loss of profit. 

At first instance, the judge found that, properly construed, Item 18 of the Quotation amounted to a pay-when-paid clause. Applying this construction, the judge assessed SF’s entitlements in respect of the agreed variations to correspond with amounts that Trevi had been paid by Leighton. The judge then went on to reject SF’s claims in respect of disputed variations and loss of profit because they had not been certified and paid by Leighton to Trevi. SF’s claims for idling and acceleration were also rejected, but due to a lack of substantiation. 

After reviewing the authorities on proper contractual construction, the HKCA overturned most aspects of the first instance decision, and SF’s variation claims and loss of profits claim were remitted back to the lower courts for determination. 

Court of Appeal Decision 

As noted by the first instance judge and affirmed as “trite” by the HKCA, contractual interpretation requires “the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties…”. With this in mind, the HKCA went on to note that the “back to back principle” as referred to in Item 18 of the Quotation is not a term of art and is ambiguous. On the one hand, and as argued by Trevi, it could mean that SF’s entitlement to payment was dependent on Trevi getting paid. On the other, as contended by SF, it could simply mean that the timing of any payment to SF ought to follow payment received by Trevi (subject to the 3-day gap). The HKCA ultimately settled on this latter interpretation for the following reasons:

1) Distinction between timing and entitlement

The HKCA disagreed with the first instance judge’s conclusion that Item 18 contained “plain and unequivocal”wording, and held that the judge ought to have distinguished between the time for payment and entitlement (or liability) to payment. For the HKCA, this was a matter of common sense: 

“The time of payment is generally understood to be the lifeline for contractors in the construction industry. It is unsurprising that there would be provision(s) in their contracts which governs the matter. On the other hand, the contractual payment they are entitled to is something different. It is sound common sense that this entitlement would not be lightly disturbed by the imposition of condition in the absence of clear words.”

The HKCA stressed that where a payment term is ambiguous, there must be adequate support before it can be concluded that both timing and entitlement are governed by the same term. While the court had been referred to a previous decision in which similar “back to back” wording was found to make payment conditional on the payor itself being put in funds (Massford (HK) Ltd v Wah Seng General Contractors Ltd, unrep, CACV 78/2005), it was recognised that each contract must be construed individually and that it was therefore unlikely that the construction of the contract in that case would be of assistance in construing any other. 

2) Factual Background 

Having taken as its starting point the principle that courts must look for clear words to support the interpretation that payment entitlement is subject to a condition, the HKCA went on to consider the background facts relied on at first instance. In the HKCA’s view, and contrary to the lower court’s decision, the factual matrix did not support the conclusion that SF had agreed to make its payment entitlement conditional on Trevi itself being paid. 

Regarding Trevi’s argument that SF was experienced in the construction industry and ought to be familiar with "back to back payment” and “pay-when-paid” provisions, the HKCA noted that this was at best neutral to the interpretation task, and that SF’s use of the term “back to back” in the Quotation rather than “pay-when-paid” terms arguably weighed against a pay-when-paid construction. 

Leighton had provided assurances to SF that it would “step in” if Trevi failed to fairly administer the contract, but the HKCA found that those conversations concerned non-payment of Trevi (and not the non-payment of Leighton) so had “nothing to do with pay when paid”. The HKCA also noted that Trevi was not party to these discussions and so this was not a matter known to both parties at the time. It was therefore not a relevant factual matrix for consideration when assessing the proper construction of Item 18 in the Quotation. 

The HKCA also found that the first instance judge had been wrong to consider the parties’ subsequent conduct as relevant to the interpretation of Item 18 in the Quotation. While subsequent actions may be considered in limited circumstances (such as to show whether there was a contract and what the terms of that contract were), this did not apply to case at hand. There was no dispute between the parties that Item 18 of the Quotations as part of SF’s contract, or that it governed payment obligations. The subsequent conduct of the parties therefore ought to have been ignored in the construction exercise. 

Since the HKCA had found that the factual matrix did not support the construction of Item 18 in the Quotation as a pay-when-paid clause, there was no compelling reason to depart from the starting point that payment entitlement should not be interpreted as subject to conditions without clear words. 

3) Commercial Common Sense

SF had also argued that interpreting Item 18 as a pay-when-paid clause would go against commercial sense, and this was accepted by the HKCA. While SF’s works ultimately formed part of the works that had Leighton had subcontracted to Trevi, the scope of Trevi’s and SF’s works were not identical. The HKCA found that the proposition that SF had assumed the risk of non-payment by the main contractor upstream simply was not consistent with the difference in scope between SF’s works and Trevi’s works. 

Conclusion

Ambiguous phrases can lead to uncertainty over critical issues like payment obligations, timings, and liability. When disputes arise, courts will construe such wording based on principles of contractual interpretation, and this may or may not align with the parties’ intentions.

To mitigate these risks, it is important to:

• Avoid ambiguous language: Replace shorthand with precise, unambiguous terms that clearly define rights and obligations. Even though the specific shorthand may be considered commonplace within the industry, its meaning will fall to be determined within the context of the contract as a whole.
• Express conditions explicitly: If key contractual rights and entitlements such as payment or performance are intended to be conditional, state this in clear, unequivocal language.
• Consider commercial realities: Draft provisions that reflect practical and commercially viable outcomes, reducing the likelihood of interpretations that undermine business objectives.

If in doubt, early engagement with legal advisors during drafting can help to prevent ambiguity and disputes, ensuring agreements stand up to scrutiny and deliver certainty for all parties.