POON HAU KEI v. HO SHUI KEUNG AND OTHERS

Civil Appeal No. 214 of 1998

HEADNOTE

Employees' Compensation Ordinance (Cap. 282) ss.3 and 24(1). Whether a "management contractor" under a JCT standard contract that had been amended was in the particular circumstance a "principal contractor" liable to the employees of subcontractors.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1998, No. 214
(Civil)

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J U D G M E N T

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Nazareth V-P:

Introduction

1. This appeal concerns the question whether the 2nd respondent, Hsin Chong Construction Co Ltd Taylor Woodrow International Limited Joint Venture (HCTW), was a "principal contractor" in the construction project involved. It arises in the claim of the applicant/respondent ("Poon") for employee's compensation for personal injury sustained in the course of his employment by the 1st respondent on 5 January 1996. The appeal itself is against the decision of His Honour Judge To given on 6 August 1998 in the District Court granting Poon's application to join as the 2nd respondent in his claim for compensation upon the basis that it was the principal contractor to whom the 1st respondent was a sub-contractor. If HCTW was not a "principal contractor" within the meaning of that expression in the Employees' Compensation Ordinance (Cap. 282) ("the Ordinance"), the joinder cannot be sustained.

The facts

2. HCTW was employed by the Kowloon Canton Railway Corporation ("KCRC") as its Management Contractor in respect of the extension and renovation of the KCRC station building in Hunghom ("the Project"). For the purposes of the Project, KCRC appointed professional advisers ("the Professional Team") comprising an architect, a quantity surveyor and a contract administrator. Under the terms of the Management Contract between HCTW and KCRC, the former was required to cooperate with the Professional Team during the design stages, and in planning, programming and cost estimating for the Project. HCTW was required to provide certain services during both the pre-construction period and the construction period, which services were as listed in the Third Schedule to the contract. In particular, HCTW was required to manage, organise, supervise and secure the carrying out and completion of the Project including all the works or items of work to be carried out under and in accordance with the Works Contracts which the HCTW was required to enter into with Works Contractors. The Works Contractors were to be selected by agreement between HCTW and the architect/contract administrator. The works under the Project were allocated to a number of Works Contractors. Among these Works Contractors was General Engineering (HK) Co Ltd ("GE") which was engaged to carry out fire services installation work on the site. GE in turn subcontracted its scaffolding work to the 1st respondent who was Poon's employer.

3. HCTW's contention, as indicated, is that it was merely a managing contractor and not the principal contractor; that therefore it is not liable to pay the employee's compensation under s.24(1) and that accordingly its appeal should be allowed and the judge's decision set aside.

4. Mr John Kerr, who appeared for Poon before us and below, in essence submits that HCTW by the Management Contract undertook to ensure that the work was completed, and subcontracted the work to the several Works Contractors. I shall return to the detail of his submissions. It is, however, helpful to begin by first referring to the statutory and contractual provisions concerned.

Sections 3 and 24(1) of the Employees' Compensation Ordinance

5. These provide as follows:

"Section 3"

'Principal contractor' means a person referred to as a principal contractor in section 24;

'Sub-contractor' means

(a) any person who enters into a contract, express or implied, with a principal contractor to perform all or any part of the work which the principal contractor has undertaken to perform; and

(b) any other person who enters into a contract, express or implied, to perform all or any part of the work which a sub-contractor within the meaning of paragraph (a) has undertaken to perform.

Section 24(1):

'Where any person (in this section referred to as the principal contractor), in the course of or for the purpose of his trade or business, contracts with a sub-contractor for the execution by or under the sub-contractor of the whole or any part of any work undertaken by the principal contractor, the principal contractor shall be liable to pay to any employee employed by that sub-contractor or by any other sub-contractor in the execution of the work any compensation under this Ordinance which the principal contractor would have been liable to pay if that employee had been immediately employed by him ...'"

The Management Contract

6. A number of the provisions of the Management Contract were referred to. Some of these will have to be resorted to in addressing particular aspects of the submissions. However, the following suffice to indicate the flavour and general effect of the Management Contract. The agreement was entered into by KCRC, referred to therein as "the Employer" and HCTW, referred to therein as "the Management Contractor". Paragraphs (2) and (3) of the Recitals are as follows"

"Second	the Project comprises works or items of work to be carried out under Works Contracts by persons other than the Management Contractor in the manner hereinafter appearing together with such site facilities and services to be provided by the Management Contractor as are required by the Professional Team and recorded in the Fifth Schedule...
Third	the Employer and the Management Contractor have agreed that the Management Contractor will subject to the Conditions annexed hereto, co-operate with the Professional Team during the design stages and in the planning, programming and cost estimating for the Project and will secure the carrying out and completion of the Project, and in so doing shall include [the services set out in the Third Schedule]."

7. Article 1 provides that "for the consideration mentioned in Article 2 the Management Contractor will:

1 subject to the Conditions co-operate with the Professional Team during the design stages and in the planning, programming and cost estimating for, and in securing the carrying out and completion of the Project, and in so doing shall include the services set out in the Third Schedule including any alterations ...

2 subject to receipt of the written notice from the Employer under clause 2.1 and subject to the Contract Documents, set out, manage, organise, supervise and secure the carrying out and completion of the Project ..."

The judge's decision

8. The judge, having set out the submissions and ss.3 and 24(1) and his analysis of those matters, concluded his judgment in the following way:

"On the above analysis, I find there are evidence suggesting that HCTW entered into the Works Contracts in its own rights and capacity and not as agent of KCRC and it did so in the discharge of its obligation under the Management Contractor with KCRC. Under the circumstances, the inference that it has undertaken the works referred to in the Works Contracts could readily be drawn even though the intention was that it did not have to perform those works itself. Although there is no direct evidence that HCTW is the business or trade of a scaffolder, I think for the building industry involving so many different trades, one should take a broad approach. The fact that HCTW entered into such a Management Contractor and undertook to enter into various Works Contracts in relation to the Project must be some evidence to suggest that the Works Contracts, including the scaffolding contract, are ones in the course of or for the purpose of HCTW's trade or business.

On the basis of the affidavits and documents before me, I must find there is a triable issue that HCTW is the principal contractor within the meaning of the Employees' Compensation Ordinance. I therefore allow the application to join HCTW as the second respondent and grant the order in terms of Paragraph 1 to 6 and paragraph 8 of the Applicant's summons dated 25 April 1998. I think it is not unreasonable for HCTW to contest the application. I therefore make a costs order nisi that costs of the application including the costs of this hearing and that on 27 May 1998 be in the cause of the Employees' Compensation application."

Hockley v West London Timber and Joinery Co

9. It is not in dispute that s.24(1) is taken from s.4 of the Workmen's Compensation Act 1906. As the judge pointed out, s.24(1) is in identical terms to the provisions of s.4 save that "principal contractor" in s.24(1) appears as "principal" in s.4. This can conveniently be seen in Hockley v West London Timber and Joinery Company [1914]3 KB 1013 in the three individual judgments particularly that of Swinfen Eady LJ at p.1018, 1019, in which it was held that in order to bring a case within s.4:

(i) There must be work undertaken by the principal;

(ii) It must be in the course of, or for the purpose of, his trade or business; and

(iii) He must contract with another person for the execution of the whole, or some part , of the work.

This can be seen to be a helpful and plainly correct statement of the requirements of s.24(1). Both counsel adopt it in their submissions.

The submissions

10. The nub of Mr Horace Wong's submissions for HCTW is that his client did not undertake to perform any construction work but rather to manage and coordinate the construction work and to see that it was done. More than that, he says, that in particular it did not undertake scaffolding work nor did it delegate any scaffolding work to either GE or the 1st respondent. He provided a detailed analysis of the Management Contract and summaries of the roles thereunder of KCRC, the Professional Team, HCTW, and Works Contractors, demonstrating his contention.

11. For Poon, Mr Kerr laid great stress upon the nature of Poon's claim, i.e. a claim for employee's compensation for injuries sustained in the course of employment. Likewise, he stressed the purpose of the Employees' Compensation Ordinance. As to the first of the requirements under s.24(1) of the Ordinance identified in Hockley, he submitted that HCTW did undertake to "secure the carrying out and completion of the project" and to "set out, manage, organise, supervise and secure the carrying out and completion of the project". It is clear, he submitted, that HCTW undertook to perform some of that work on the site, where it employed management personnel and stationed a site manager. Further, he says, HCTW subcontracted construction work to other parties by means of works contracts. It was in charge of the site. It controlled, managed and supervised the site and therefore undertook work on the site. It was, accordingly, a principal contractor and most importantly it subcontracted work to GE who subcontracted some of it to Poon's employer. Mr Kerr relied also on certain other provisions of the Management Contract. I turn, therefore, to the substance of the provisions of the Management Contract mainly relied upon by each side, and to analyse their effect.

Management Contract - analysis

12. The provisions of the Management Contract or their effect relied upon having already been set out, it remains to indicate the services that HCTW was to provide as set out in the Third Schedule, which are as follows: Planning and programming; monitoring works, contractors, preparation and work; instituting cost control; establishing good labour relations procedures; site management and quality control; and controlling and reporting on performance of works contractors.

13. Mr Wong stressed that all the foregoing provisions pointed to HCTW being required to provide management services and not to them undertaking any construction work; moreover, the second recital made it very clear that works contracts were to be carried out by persons other than the Management Contractor, i.e. HCTW. Mr Wong relied also upon other provisions of the Management Contract. However, it is convenient to pick up his theme in the context of the provisions relied upon by Mr Kerr in his submissions.

14. Mr Kerr pointed to the words "secure the carrying out and completion of the Project" in reference to what the Management Contractor was to do under both the recitals and Article 2.

15. However, it has to be said at once that properly read those words do not mean that HCTW was to carry out and complete the Project, but to secure that that was done. In that sense, those words seem to me to be consistent with HCTW's submission that it was merely the Management Contractor; they do not, in my view, support Poon's case.

16. Mr Kerr next pointed to Article 1.7 under the heading "Obligations of Management Contractor" which provides:

"Subject to clause 3.21 the Management Contractor shall be fully liable to the employer [KCRC] for any breach of the terms of this contract including any breach occasioned by any Works Contractor of its obligations under the relevant Works Contract."

On its face this would seem to support Poon's case, but on closer examination, clearly it does not. In that regard, I have had the advantage of seeing the judgment of Rogers JA in draft and adopt his reasons for rejecting that superficial position.

17. The Management Agreement also provides in Article 3.13 for the Management Contractor to keep a site manager. This is entirely consistent with HCTW's role as only a Management Contractor, and viewed in that way Article 3.13 does not lend any real support to Poon's case.

18. Article 3.21 provides for breach of Works Contracts by Works Contractors and the Management Contractor's and HCTW's obligations. There are references to Management Contractor taking all necessary steps to operate the terms of the Works Contract in dealing with breaches; and again, to securing the satisfactory completion of the Project; to meeting any claims properly made under the Works Contract Conditions by Works Contractors other than the Works Contractor responsible for the breach; for the employer to pay the Management Contractor all amounts properly incurred under the foregoing provisions; and to be entitled to recover from the Management Contractor all amounts recovered by the Management Contractor from Works Contractors; and also for the Management Contractor to be reimbursed by HCTW to the extent that the Management Contractor is unable to recover or deduct from a Works Contractor through arbitration or litigation if necessary. In the context of the entire Management Contract, I am unable to see anything in these provisions that lends material support to Poon's case. They are equally consistent with a Management Contractor's role by HCTW without any construction work being undertaken.

19. Detailed consideration here of the payment provisions in s.4 of the Management Contract and Mr Kerr's submissions to derive support from them would be wholly disproportionate to any assistance that he is able to derive from them. I, therefore, do not intend to detail and canvass them. Suffice it to say that if anything they tend to support Mr Wong's contentions, particularly in relation to HCTW's remuneration by a lump sum payment described as "management fee" which seems to me to be inconsistent with payment to a principal contractor. The Management Contract also provided for the Management Contractor to sign contracts with Works Contractors. This, Mr Kerr appeared to suggest, demonstrated that HCTW, which did so, thereby subcontracted construction works. However, it seems to me plain upon any view of the entire Management Contract and its general scheme that HCTW was doing so in pursuance of the Management Contract as Management Contractor. More to the point, HCTW had not undertaken any of the work so contracted.

Miscellaneous submissions

20. To demonstrate the nature, function and role of a Management Contractor, Mr Wong referred the Court to pp.XX51-54 of Mcinnis' Hong Kong Construction Law which points to a management contractor as "an external management organisation" engaged by the client "to coordinate the design and construction phases of the project and to control the construction work". The Management Contract being based upon the standard terms of the JCT standard form of management contract, 1987 edition, subject to the amendments mentioned, that work obviously supports HCTW's case. However, for my part, such support and the role of HCTW as management contractor can be sufficiently seen from the Management Contract itself.

21. Quite apart from the Management Contract, a significant weakness in Poon's case is a total absence of any construction work having been subcontracted by HCTW generally, and more specifically to GE or the 1st respondent, Poon's employer.

22. Finally, mention remains to be made of the following points also relied upon by Mr Wong. HCTW, he pointed out, had a very limited role in selecting or placing contracts with Works Contractors. Moreover, he submits, the evidence points to GE being the principal contractor with reference to the 1st respondent. GE was the Works Contractor to carry out fire services installation work on the site and it was in the context of that, that the scaffolding work, in the course of which Poon was injured, was subcontracted to the 1st respondent. Indeed, after the accident, GE had filed an Employees' Compensation Form 2 notification acknowledging itself to be the principal contractor. That also was the view of the Labour Department. These also lend significant support to HCTW's case.

23. It can be seen from his judgment that the judge below relied particularly upon two matters he there mentioned in his judgment. First, that

"Under Article 1 of the Management Contract HCTW is required to enter into Works Contracts in its own capacity with Works Contractors and is fully liable to KCRC for any breach occasioned by any Works Contractor of his obligations under the relevant Works Contracts. By agreeing to enter to those Works Contracts and holding itself fully liable to KCRC, HCTW must have undertaken the works under the Works Contracts, albeit to be performed by Works Contractors".

From what I have already said, it seems to me that the judge was wrong in stating that HCTW was fully liable to KCRC for any breach occasioned by Works Contractors; the employer (KCRC) was to reimburse HCTW in the end. Also, with reference to the judge's conclusion, even if HCTW had undertaken full liability it does not necessarily follow that HCTW had actually undertaken the works in question.

24. The second factor was Mr Wong's apparent contention below that HCTW had contracted only as agent, which contention the judge rejected having regard to "clause 1.9 of the Works Contract Condition" which contract HCTW was required to use. This provided that

"nothing contained in the Works Contract shall be construed so as to ... create any privity of contract between the Works Contractor and the employer (except by way of and in the terms of the employer/Works Contractor agreement) or between the Works Contractor and any other contractor."

This, the judge, held was inconsistent with HCTW being an agent of KCRC. However that may be, this Court is not concerned in this appeal with whether HCTW can be held to be an agent of KCRC in relation to Works Contracts. For all the reasons I have given, I am satisfied that HCTW was not a principal contractor and that conclusion seems to me unaffected by the agency point relied upon by the judge.

25. Likewise, it does not seem to me that the affidavit evidence of Mr Lam Cheuk Yum, that HCTW in substance performed the duties normally exercised by a principal contractor, affects the conclusion that follows from the foregoing matters. In undertaking the construction of the entire project or individual parts, a principal contractor would also subsume the management role in relation to those works.

26. Finally, there remains the nature of the application before the judge below. It must be regarded as the making of a claim against HCTW. Even if so viewed, upon the evidence and material before this Court, the claim must clearly fail. In those circumstances it should be dismissed unless there is some other evidence forthcoming. That possibility was carefully probed by this Court. All that Mr Kerr felt able to suggest was that discovery might lead to something but he was not able to indicate its nature or what it might be. Pure speculation of that sort could not justify the continuation of the claim. I would accordingly allow the appeal, set aside the order below and in lieu substitute an order refusing leave to make the amendment.

27. There appears to be no good reason not to make the usual order for costs and I would accordingly make an order nisi that HCTW is to have its costs of the appeal and of the application below.

Mayo JA:

28. I have read the judgments of Nazareth, V.-P. and Rogers, J.A. in draft and am in agreement with them. There is nothing that I can usefully add.

Rogers JA:

29. This is an appeal from a decision of H.H. Judge To handed down on the 6th August 1998 whereby he allowed an amendment to the proceedings under the Employees Compensation Ordinance to join Hsin Chong Construction Co. Ltd. Taylor Woodrow International Ltd Joint Venture (HCTW) as 2nd Respondent.

30. The material allegation which was the basis of the amendment is as follows :-

"1(b) At all material times, the 1st Respondent was a sub-contractor within the meaning of the Ordinance to a principal contractor within the meaning of the Ordinance, namely, the 2nd Respondent."

31. Although the application which was being considered was an application to amend the pleadings and join a party, since apart from the question of duplication of proceedings, there would be no apparent difficulty in separate proceedings being commenced against HCTW, I approach this matter in a similar way to an application to strike out the proceedings, namely that the Applicant should be entitled to pursue his claim however implausible or improbable his chances of success unless the Respondent can demonstrate shortly and conclusively that the Applicant's claim is bound to fail.

32. The Applicant in the case is a scaffolding worker who was injured when he fell from scaffolding at the platform of the Hung Hom Kowloon Canton Railway Station. His direct employer at the time was Keung Kee Scaffolding Eng. who is the 1st Respondent. The 1st Respondent was apparently a sub-contractor, either directly or indirectly, of General Engineering (HK) Co. Ltd. (GE). The site was of course owned by the Kowloon Canton Railway Corporation.

33. The decision in this case appears to me to turn upon the construction of section 24(1) of the Employees' Compensation Ordinance, Cap. 282 and in particular on the meaning of the word "undertaken" as it appears in that section. That reads :-

"24(1) Where any person (in this section referred to as the principal contractor), in the course of or for the purpose of his trade or business, contracts with a sub-contractor for the execution by or under the sub-contractor of the whole or any part of any work undertaken by the principal contractor, the principal contractor shall be liable to pay to any employee employed by that sub-contractor or by any other sub-contractor in the execution of the work any compensation under this Ordinance which the principal contractor would have been liable to pay if that employee had been immediately employed by him ......"

34. Section 3 of the Ordinance defines a "principal contractor" as meaning "a person referred to as a principal contractor in section 24" and "sub-contractor" as meaning :-

"(a) any person who enters into a contract, express or implied, with a principal contractor to perform all or any part of the work which the principal contractor has undertaken to perform;"

35. The issue between the parties arises because of the nature of the arrangement between HCTW and the Kowloon Canton Railway Corporation (KCRC). We have been shown the contract, or at any rate part of it, which was entered into between the two parties. It is entitled a Management Contract. The recitals recite how the KCRC wishes to have what is termed "the project undertaken" and the Second Recital reads :-

"The project comprises works or items of work to be carried out under Works Contracts by persons other than the Management Contractor in the manner hereinafter appearing together with such site facilities and services to be provided by the Management Contractor as are required ....."

36. The Third recital reads that the parties :-

"have agreed that the Management Contractor will subject to the Conditions annexed hereto cooperate with the Professional Team during the design stages and in the planning, programming and cost estimating for the Project and will secure the carrying out and completion of the Project and in so doing shall include .... (the services set out in the Third Schedule)."

37. The amended Third Schedule is lengthy and it includes such things as preparing the Project programme for acceptance by the Professional Team; reporting on the availability and relative suitability of alternative materials and components and generally, it consisted of planning, programming, preparing and monitoring the execution of the relevant works. HCTW also had to control costs and was responsible for site management and quality control. Most importantly however, HCTW was required to place contracts with Works Contractors and Suppliers. It appears however that HCTW had no choice as to the selection of the Works Contractors since the contracts were placed in accordance with instructions from the KCRC. The contracts followed the standard forms of the Joint Contracts Tribunal.

38. During the course of the argument, attention was focussed, amongst other things, on Clause 1.7 of the Conditions. That provided that HCTW would be liable to the KCRC for any breach of the terms of the Contract including any breach occasioned by the breach by any Works Contractor of his obligations under the relevant Works Contract.

39. Even on a reading of that Clause alone, it does not indicate that HCTW had undertaken any construction work itself. It had merely undertaken to contract with the Works Contractor to have the work carried out and to supervise the carrying out of the work. Furthermore, the responsibility assumed under Clause 1.7 has to be read in the light of Clause 3.2.1 of the Conditions of Contract which provides how matters will be dealt with when disputes arise in relation to work carried out under the Works Contract. The material effect of those provisions is that the HCTW would not be liable for defective work or other breach committed by the Works Contractor but would have to account to and in the appropriate circumstances be compensated by the KCRC in respect of claims for or against the Works Contractor.

40. It would be impossible to set out all the provisions of such a lengthy contract but I have endeavoured to set out the important provisions which have been relied upon before us and also any others to which my attention has been drawn.

41. In summary, the work undertaken by HCTW as Management Contractor does not include any construction work by HCTW. Although HCTW was required to enter into contracts with Works Contractors, the Works Contractors would not be sub-contractors within the meaning of section 3 of the Ordinance because they would not be undertaking work which HCTW had undertaken to perform. They would be undertaking work which HCTW had undertaken to contract to have performed, which is something different.

42. If one then turns to section 24, the first part of the quotation above would not be satisfied because HCTW would not have contracted with a "sub-contractor" for the reason I have given, namely that the Works Contractors were not contracting to do work which HCTW had undertaken to perform; hence, in this case, GE would not be a "sub-contractor" within the meaning of section 3 of the Ordinance. Furthermore, the words "work undertaken" as appearing in the fourth line of section 24(1) must in my view, be read as "undertaken to be performed by the principal contractor" because that is the only way of reading section 3 and section 24 consistently.

43. The fact that HCTW may have undertaken some of the responsibilities which are normally undertaken by a principal contractor does not begin to affect the proper construction of the section which, in my view, requires an examination of what the alleged "principal contractor" has undertaken to do and what the supposed "sub-contractor" has undertaken to do. It is not suggested that any work which fell within the relevant Works Contract is work which HCTW had undertaken to perform. The Applicant, on the other hand, was unfortunately injured whilst carrying out work which fell within the relevant Works Contract.

44. It does not avail the argument of the Applicant to say that in many large building contracts, the principal contractor who has undertaken to perform the work may himself intend to sub-contract all the work. The question under section 3 is what work has the alleged "principal contractor" undertaken to perform. If a person (A) contracts with another (B), that that other (B) shall do work which is not work which the former (A) has undertaken to perform, the second person (B) is merely a contractor but he is not a sub-contractor at least within the meaning of the Employees' Compensation Ordinance.

45. What HCTW has undertaken to do is to secure the carrying out of work as is referred to in Recital 4 of the contract with the KCRC. But the one thing which the contract is clear about is that HCTW have not undertaken to perform the work themselves.

46. The fact that HCTW may, for example, be "in possession of the site" does not afford responsibility under the Employees Compensation Ordinance, whatever other statutory provisions may be in point.

47. In my view, therefore, the claim against HCTW under the Employees Compensation Ordinance is not sustainable and for that reason, this appeal should be allowed and there should be an order nisi that HCTW is to have their costs here and below.

Nazareth V-P:

48. The appeal is accordingly allowed, the judge's order set aside, in lieu we substitute an order dismissing Poon's application to join HCTW as the 2nd respondent, and finally, we make an order nisi that HCTW is to have its costs of the appeal and of the application below.