JAMES LAU & ASSOCIATES LTD. v. TOM IP & PARTNERS ARCHITECTS, ENGINEERS & DEVELOPMENT CONSULTANTS LTD. AND ANOTHER

HCCT55/2000
(formerly known as HCA16464/1998)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.55 OF 2000

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J U D G M E N T

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1. For many years prior to 1998 Mr James Lau Chi Wang, a registered structural engineer, and Mr Thomas Ip Fook Chuen, an architect and director of the 1st defendant firm of architects, were both personal and professional friends. Their friendship came to an end as a result of the alleged unpaid fees due to the plaintiff company which are the subject matter of this action.

2. The plaintiff, between 1993 and 1998, was engaged by the defendants (subject to the issue of the 2nd defendant's personal liability with which I deal later in this judgment) on many construction sites around Hong Kong. This action concerns nine of them. The professional services which the plaintiff provided fall, broadly speaking, into two categories, design works and site supervision. The plaintiff's case is that he has submitted invoices totalling $2,816,736.31 for this type of service, which remain unpaid. The plaintiff's case against Mr Ip personally, is based primarily, on oral warranties allegedly given by Mr Ip that he would be personally liable to the plaintiff for his firm's indebtedness. Such oral warranties were given during social meetings when Mr Lau and Mr Ip played badminton at the Craigengower Cricket Club.

3. A number of different and self contained issues arise on the pleadings. Two of those issues take up over $2 million of the $2.8 million claim. Unfortunately, counsel (Mr Graham Chu, for the plaintiff and Mr Anthony Houghton, for the defendants) have not been able to agree a list of issues. However, I shall follow the defendants' list which seems to encompass all the differences between the parties on the claim.

A. HOW WAS THE PLAINTIFF'S FEE FOR SERVICES RENDERED TO BE CALCULATED ON THE LOCKHART ROAD PROJECT?

4. The defence relies on the plaintiff's letter of 26 May 1992 which states :

"The fees are calculated at 0.8% of total construction cost.

Based on the present information, the estimated fee will be $76,500,000 x 0.8% = $612,000"

...

Adjusting of final cost ..."

5. The plaintiff's claim is for 0.8% of the final total construction cost (which was $201,185,370) namely $1,609,483.

6. The plaintiff contends that the letter of 26 May 1992 was an estimate, both parties knew the estimate was unrealistically low, the letter provides for an adjustment and the defendant wrote to the plaintiff on 8 March 1995 saying "... we will arrange a meeting with you to discuss about the fee adjustment very shortly."

7. As part of the defence case, it was suggested in evidence by Mr Ip that what was meant between the parties was that the 0.8% calculation was intended to be done on the "structural element" of the total construction cost. He said that the $76.5 million starting point was a reasonable reflection of the "structural element" in the total construction cost. I reject this argument. The letter does not say this. The idea was never advanced at the time nor during the many years that followed 1992. There was no reliable evidence to indicate that such a calculation method was used on other projects or in the trade generally.

8. Looking at the contract objectively as a whole and against the factual background, I construe the letter of 26 May 1992 to mean that the fee would be 0.8% of the total construction cost but that that fee would be subject to an adjustment. Both Mr Lau and Mr Ip gave evidence to the effect that $76.5 million was unrealistically low for the total construction costs and $201 million was unexpectedly high. Both gave evidence to the effect that, normally, there would be negotiations, hence the defence letter in 1995 stating "we will discuss the fee adjustment". In these circumstances I consider it proper and appropriate to approach the issue of quantum on this issue on a quantum meruit basis.

9. Mr Ip was asked what his first offer in negotiation would have been. He said $800,000. On a quantum meruit exercise such as this it is sensible to use round and approximate figures. A corresponding opening bargaining position of Mr Lau's would, logically have been lower than $1.6 million by a similar amount, $1.4 million. The median figure is $1.1 million.

10. The pleaded claim under this head is $997,483 which takes into account part payments already made. The court's quantum meruit assessment has resulted in a reduction of this claim by $500,000. The sum awarded to the plaintiff will be $497,483.

B. WHETHER THE 1ST DEFENDANT IS LIABLE IN RESPECT OF CLASSES A & C SUPERVISION FEES

11. There is no dispute that supervision was required by the Building Authority under the Buildings Ordinance. The different classes of supervision (A & C in these contracts) provided for different levels of expertise and qualifications. There is no dispute either (subject to one issue which I deal with in the counterclaim) that the plaintiff provided these services. There is no dispute either that on most of the contracts the plaintiff has been paid for these services. The major outstanding payment relates to the services rendered at one location, namely Tai Pak Terrace. The claim under this heading is $1,117,037.

12. The 1st defendant resists the claim on three bases. Two of these defences appear in the pleadings as a result of an amendment to the defence made two days before the trial. Firstly, it is contended by way of defence that the contracts contained an implied term that the 1st defendant's liability to pay the plaintiff for Classes A & C supervision fees only arose when the 1st defendant had been paid by the developer for these services. In other words, an implied "pay when paid" term. Secondly, it is submitted that the contract whereby the supervision was provided is tainted with illegality and therefore unenforceable. The third defence is that the 1st defendant was only acting as an agent for the developers. I will deal with the agency argument first.

(i) Agency

13. In this case there is plainly a contract between the plaintiff and the 1st defendant. In some instances, the plaintiff's letter offering his services and setting out his scope of works has been signed by the 1st defendant. Where it has not been signed there is acceptance by conduct. The services were provided and payment is sought on the basis of the quotes referred to in the plaintiff's letters. They are unremarkable standard quotations which not surprisingly prompted no, or little, negotiations or debate at the time. It is worthy of note that these invoices were submitted between 1993 and 1995, requests for payment followed up to May 1998 when a final demand letter was sent. The grounds for refusal to pay commenced in June 1998.

14. Mr Chu, for the plaintiff, helpfully referred the court to passages from Sika Contracts Ltd v. Gill &Others 9 BLR at p.17 which, I agree, disposes of the point being made in this case. Per Kerr J :

" I was referred to a number of passages in Bowstead's Law of Agency, 14th edition, in particular, to articles 112, 115 and 116. It is unnecessary to read them. Their effect, which is indeed elementary in the law of agency, can be summarized as follows. First, a person who is in fact an agent, in the sense that he has somebody standing behind him, such as an employer or a principal, can nevertheless enter into a contract in such a way that, although in fact an agent, he becomes personally liable to the other contracting party. It therefore follows that the fact that Mr Gill was not acting beneficially for his own account, as would be the position if he had been asking somebody to carry out repairs to his own property, but that he was professionally engaged on behalf of a client, does not exclude the possibility of his being personally liable to a third party on a contract concluded by him in his own name.

The second principle is that, where the contract in question is in writing, as it is here, then the question whether or not a signatory has contracted personally or only as agent is a question of construction. One has to consider the signature and the contents in their context. The general rule is expressed as follows in Bowstead in the comment to Article 115 :

'If the contract is signed by the agent in his own name without qualification, he is deemed to have contracted personally unless a contrary intention plainly appears from other portions of the document.'

Then it goes on as follows :

'The mere fact that the agent is described as an agent, director, secretary, manager, broker, etc, whether by words connected with or forming part of the signature or in the body of the contract, and whether the principal is named or not, raises no presumption that the agent did not intend to contract personally; but here again an intention to contract as agent only may be gathered from the whole document and surrounding circumstances.'"

15. The fact that Mr Lau knew or must have known that there were developers behind Mr Ip who were the ultimate paymasters and that there was no profit element in the payments of Classes A & C supervision to Mr Ip is a red herring. The application of the above principle to the facts of this case make the 1st defendant liable (subject to the next two defences, to which I now turn).

(ii) Implied term

16. The re-amended defence pleads :

"Further or on the alternative, the Defendants state that it was an implied term of the agreements made between the Plaintiff and the 1st Defendant, implied so as to give business efficacy and/or to give effect to the unexpressed intention of the parties that the 1st Defendant would be liable to pay the Plaintiff supervision fees and when the same were paid by the developers to the 1st Defendant."

17. The factual basis behind this issue is the 1st defendant's evidence that in all projects where he has paid for A & C supervision, he had been paid by the developer first. The very large outstanding payment in respect of Tai Pak Terrace remains outstanding because he has not been paid by the developers.

18. In my judgment this defence must fail. In those projects where payments have been met there is no evidence in the correspondence or other documentation to suggest either directly or obliquely that the timing of the payment to the plaintiff is due to the fact that the 1st defendant has been paid by the developer. Again, the argument only surfaces for the first time many years after the presentation of the invoice.

19. A term may be implied into a contract if the following tests are satisfied :

"(i) It is reasonable and equitable.

(ii) It is necessary to give business efficacy to the contract. It will not be implied if the contract is effective without it.

(iii) It must be obvious and easily definable.

(iv) It must not contradict the express terms."

20. The implied term contended for does not meet these tests. The plaintiff's terms in its original letters provided expressly for payment "within 14 days" of presentation of the invoice. The implied term contradicts this. Further it is not required to give business efficacy to the contract. Neither can it be said to be obvious, when it only emerged as an argument so late in the day in the long chronology of these proceedings.

21. The developer of Tai Pak Terrace was Lucky Wealth. Thus it is the 1st defendant's case that he was waiting to be paid by Lucky Wealth before paying the plaintiff. The fact is that Mr Ip himself, was the owner, or substantial owner of Lucky Wealth. He was therefore waiting to be paid by himself. In August 1997, 999 out of 1,000 shares in Lucky Wealth were held by a company called Oxometric. A company search of November 1997 shows Mr Ip and his wife to be the only shareholders of Oxometric. It is true that an earlier search shows Oxometric to be holding only 30% of the shares in Lucky Wealth. This merely dilutes (but only slightly) the point being made by the plaintiff, namely, that the 1st defendant's plea of "I have not been paid" is disingenuous.

(iii) Illegality

22. The third ground for disputing liability, namely illegality, is, at best, ingenious and technical, at worst, an afterthought. Whichever it is, I find it to be unmerited.

23. The claim of illegality relates only to the Class C supervision. In relation to Class C the following condition applied :

"Class (C) Under the provisions of Buildings Ordinance section 17(1), the Authorised Person shall employ a suitably experienced person independent from the Contractor. He shall be resident full time on site (i.e. during the site working hours) during the carrying out of the caisson excavation works to check that the works are being carried out as specified. His inspection records shall be kept on site and made available for inspection by representatives of the BD and GEO. He shall submit regular reports to the AP/RSE, copied to the geotechnical engineer, BD and GEO. Prior to seeking consent, the name and professional details of the person proposed shall be submitted to the Building Authority for agreement."

24. The objection being taken by the 1st defendant is that in respect of the Tai Pak Terrace Project (and also at Bonham Road) the contractor was a company called Fong On Construction & Engineering Co. Ltd. This was a family business run by James Lau and his brothers. Employees of the plaintiff acted in a Class C supervisory capacity on these projects.

25. A number of points can be made in the plaintiff's favour on the issue :

(a) The provision providing criminal and/or civil sanctions for a breach of section 17, namely section 40(2) of the Buildings Ordinance, was enacted in 1996. The alleged contravention in this case pre-dated 1996. There was no evidence adduced as to the law before 1996.

(b) The Class C condition required the authorized person to employ an independent person. The authorized person was Mr Ip. If, therefore, there was a breach, it was primarily the defendants' breach. Mr Ip knew that Fong On was Mr Lau's company. No objection was taken by the Buildings Department. The Buildings Department could have revoked its consent to the employment of the Class C supervisors which were engaged, but it did not do so. In his witness statement Mr Ip stated :

"... this is the first residential project for the Plaintiff to work as a R.S.E. and a Building Contractor for piling/foundation and substructure and superstructure works. The building Contractor was Fong On Construction and Engineering Co. Ltd., and Mr. James Lau was the shareholder and director thereof. We had informed our employer of the arrangement and they had no objection to it."

(c) It does not automatically follow that an employee of James Lau & Associates is not independent of Fong On.

(d) In the plaintiff's amended reply the following is pleaded :

"Alternatively, if, which is denied, the said contracts for provision of Class C supervision services are void or unenforceable by virtue of illegality, the application of the maxim ex turpi causa non oritur actio would result in an unjust enrichment on the part of the 1st and/or 2nd Defendants, thereby entitling the Plaintiff to a quantum meruit for the Class C supervision services rendered."

26. Mr Chu cites in support of this plea passages from Mohamed v. Alaga & Co. (a firm) [1999] 3 All ER at page 707 onwards, a case which is distinguishable on its facts, but nonetheless of assistance on the application of principle, in particular where Lord Bingham CJ says :

"..... But the preferable view in my judgment is that the plaintiff is not seeking to recover any part of the consideration payable under the unlawful contract, but simply a reasonable reward for professional services rendered. I accept that as an accurate description of what on this limited basis the plaintiff is, in truth, seeking. It is furthermore in my judgment relevant that the parties are not in a situation in which their blameworthiness is equal. The defendant is a solicitors' firm and bound by the rules. It should reasonably be assumed to know what the rules are and to comply with them. If, in truth, it made the agreement as alleged, then it would seem very probable that it acted in knowing disregard of professional rules binding upon it. By contrast the plaintiff, on the assumption made (which I have no difficulty in accepting), was ignorant that there was any reason why the defendant should not make the agreement which he says was made. In other commercial fields, after all, such agreements are common. ....

.... In any event, however, there is a crucial distinction between a case in which a plaintiff is in effect suing on a contract of loan and a case in which the plaintiff is not suing on any contract but simply for the value of work done. On that limited basis I would for my part allow the appeal and reinstate the action to the extent of permitting the plaintiff to pursue a quantum meruit claim for reasonable remuneration for professional services rendered."

27. So also in our case, it was the 1st defendant who, as authorized person, employed the supervisors and the plaintiff, in truth is suing for services reasonably, properly and professionally provided.

28. For all these reasons, the 1st defendant is liable for all invoices presented for Classes A & C supervision.

C. WAS THERE AN AGREEMENT THAT THE CONTRACT SUMS FOR THE BONHAM ROAD PROJECT WERE REDUCED FROM $660,000 TO $560,000?

29. When giving evidence Mr Lau conceded that his partner must have made this agreement at the material time. By consent therefore, the plaintiff's claim is reduced by $100,000. This concession also provided an example of Mr Lau's frankness and candidness. I found him to be an impressive witness. He did not treat every question in cross-examination as a hidden trap. He answered questions, in my judgment, honestly and fairly. He had a good memory for and a good grasp of facts and events which, in some cases, went back many years. Although, Mr Ip, was also a respected and professional man, in most instances where there was a conflict of evidence or a difference in recollection, I preferred and relied on the evidence of Mr Lau.

D. WHETHER THE PLAINTIFF IS ENTITLED TO SUMS CLAIMED AS "ADDITIONAL WORKS"

30. In respect of a number of smaller items which the plaintiff invoiced as additional items, in some cases years after the original lump sum offer letter, the 1st defendant submits there is no liability to pay because they were "fixed price" contracts. This contention does not accord with the reality of the situation. It is necessary here, to deal with each item, albeit briefly. As a matter of principle a fixed price contract which sets out the scope of the works, does not preclude liability for future additional works which fall outside the original scope and which are carried out much later than the original works.

(a) For Tai Pak Terrace an invoice was submitted in 1997 for an extra $74,000. The original contract and scope of works was July 1995. It was for redesign work arising because of unforeseen caisson amendments. No complaint about the invoice was raised until after June 1998. Mr Lau's evidence on the matter persuades me that the 1st defendant is liable.

(b) At the Tung Lo Wan Road Project an invoice for $62,500 was presented, being the fee for a site investigation tender document. This followed a demolition report which was paid. Mr Ip's evidence was that the site investigation report was premature and had not been asked for. In any event, he was not awarded the contract. Mr Lau on the other hand gave evidence to the effect that it was requested and was done early at Mr Ip's request because he was anxious to get the job. The non-payment may have arisen because he did not get the job. The invoice was submitted in 1994. There was no denial of liability until 1998. I am satisfied the 1st defendant should pay.

(c) The plaintiff claims $36,000 as additional work at the U-Lam Terrace Project. The argument is the same as (a) above. The 1st defendant is liable.

(d) On the Bonham Road Project an extra $107,094 is claimed for a revision of loading schedule for foundation tendering and the column/wall layout plan as required by the Building Authority. Whether or not a task comes within the original scope of works is sometimes a borderline issue. In this instance, I think it may have been. I am not persuaded that it should be categorized as extra work. The original tender and the claimed extra work all come within a 12-month period (January - December 1994). I disallow this item.

(e) Island Road. $9,000 is claimed and allowed.

(f) Printing charges. $8,293 is claimed and allowed.

E. WHETHER MR IP, AS 2nd DEFENDANT IS PERSONALLY LIABLE

31. At C. above I said that, in most instances, I relied on Mr Lau's evidence. On the question of Mr Ip's alleged personal liability I find that Mr Lau's evidence, bearing in mind the onus of proof is on him, falls short of the standard required for this court to hold Mr Ip personally liable for all those items for which the 1st defendant has been held liable. His evidence was genuinely given but balancing against Mr Ip's account, I am not persuaded that Mr Ip made binding oral warranties in the changing rooms at Craigengower Cricket Club after an earlier morning friendly game of badminton.

32. There are two limbs to the claim against the 2nd defendant. Firstly, that there was a personal undertaking accepting a personal liability to pay and secondly, that the plaintiff always wrote letters to "Tom Ip & Partners, Architects" and that Mr Ip never pointed out to him that in fact he was dealing with a limited company.

(i) Personal undertaking : In addition to what I have already said Mr Houghton correctly points to Mr Lau's evidence which was, at its highest "I got the feeling he would pay me". Also, the occasions when words were said were entirely social occasions. I do not think that it was the intention of both parties that whatever was said (the evidence is unclear) formed the basis of a binding contract.

(ii) In relation to the correspondence, the 1st defendant's letterhead is unambiguous. The words "...Development Consultants Ltd" may be in smaller print but they are clear and obvious. The fact that Mr Lau did not realize that he was dealing with a limited company was his own mistake. He cannot rely on his own mistake. It was a mistake that should not have been made.

33. I do not find Mr Ip to be personally liable. The claim against the 2nd defendant must fail.

Counterclaim

34. In the re-amended defence and counterclaim damages of $917,500 plus damages for negligence were claimed. At trial this was reduced to a claim for $586,000. This is made up as follows :

(a) Bisney Road

(i) A sum of $150,000 is claimed being the fee charged by Mr C.S. Tam who took over as the registered site engineer when Mr Lau left because he had not been paid. This item must be disallowed for two reasons. Firstly the necessity for a new RSE arose because of the 1st defendant's failure to pay the plaintiff. Moreover, much of Mr Tam's fee relates to continuing supervision work which is required in any event and for which the plaintiff cannot be liable after he has left the job.

(ii) A sum of $65,000 is claimed for administration costs arising out of the plaintiff's refusal to provide a report to the Buildings Department. All the 1st defendant's letters to the plaintiff reminding him to provide such a report post date the plaintiff's final demand letter for his fees which finally sealed their "falling out". Had the plaintiff's fees been paid the need to engage Mr C.S. Tam and incur these extra administration costs would not have arisen.

(iii) A sum of $22,500 is claimed arising out of a complaint, in August 1996, from the Buildings Department, that there were occasions when no Class C supervisors were on site. In fact, the plaintiff answered the complaint satisfactorily with one letter. The 1st defendant claims that 18 hours were spent in rescheduling personnel because of this complaint. I cannot accept this. I accept Mr Lau's evidence that the complaint was not merited, it was answered and the 1st defendant would have been put to little or no expense as a result.

(iv) $32,750 is claimed which relate to charges for time spent by employees of the 1st defendant because of the plaintiff's alleged failure to submit drawings for an external staircase at the Bisney Road Project. These charges arose, if they arose at all, after Mr C.S. Tam had been engaged and in the light of the plaintiff's evidence, I reject the claim.

(v) In relation to Tai Pak Terrace, two sums are counterclaimed. The first is a sum of $27,000 for extra administration costs as a result of the plaintiff's inadequate supervision services and as a result of a need to resubmit shoring plans. The second sum is for $51,750, which is a similarly formulated claim, arising out of the plaintiff's alleged late submission of structural plans for an external staircase. Again, the plaintiff's evidence is accepted. It seems that the Buildings Department accepted the explanations given in relation to the complaints about supervision. As far as the shoring plans were concerned I accept it did not form part of the contract between the parties. In any event, the eventual re-submission of the plans did not affect the progress of the project. As for the external staircase plans, the delay was not the plaintiff's fault and in any event they were approved in good time, before the issuance of the occupation permit.

(vi) Finally, $237,000 is claimed because of a problem which emerged at the Bonham Road Project because a beam had been constructed in the ceiling which caused the headroom to be less than 2.3 metres. In fact, the beams remained, after discussions with the employer, and the problem was solved. The plaintiff explained that this was not his problem. It was an architectural design problem, not the responsibility of the structural engineer. Mr Ip's evidence was that the plaintiff "had made a structural mistake in designing a beam ... ". On this particular issue, I find Mr Lau was in error. There is no doubt that the structural plans did not, in fact, conform to the Architect's requirement and also did not conform to the Building Regulations. It is not right for Mr Lau to simply say "Not my problem". I allow this item in the counterclaim but because of Mr Lau's general observations about the number of hours claimed in all the different heads of counterclaim, I am sure that the 194 hours claimed here is excessive. In my judgment, it would be fair and reasonable to reduce it to 100 hours at $1,500 per hour (the rates actually claimed vary between $2,000 and $500 per hour). Thus $150,000 will be allowed.

Interest

35. In this case, I consider the appropriate rate of interest should be prime plus 1% from the date of the writ.

Summary

36. On the claim there will be judgment for the plaintiff against the 1st defendant in the sum made up as follows :

Issue A -		$497,483	-
Issue B -		$1,117,037	-
Issue C -		$560,000	-
Issue D -	(a)	$74,000
	(b)	$62,500
	(c)	$36,000
	(e)	$9,000
	(f)	$8,293
		$2,364,313
		========

37. On the counterclaim there will be judgment for the 1st defendant against the plaintiff for $150,000.

38. The net sum due to the plaintiff is $2,214,313.

39. In view of the small amount of the judgment on the counterclaim, I make a costs order nisi in the plaintiff favour against the 1st defendant. He has been substantially successful on both the claim and the counterclaim. The 2nd defendant is awarded his costs against the plaintiff.