HO KUEN FAI t/a SUN HONG ELECTRICAL ENGINEERING (a firm) v. KWOK YIU KWONG t/a 耀光電器工程 (a firm)

HCA 787/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 787 OF 2003

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J U D G M E N T

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1.  This action concerns a dispute between a sub-contractor (the Plaintiff (“Ho”)) and his sub-sub-contractor (the Defendant (“Kwok”)) over electrical works carried out on a construction site situated at District 111, Tin Shui Wai, New Territories (“the Site”).  Ho claims that Kwok has failed to perform rectification works and to repay an advancement made to him.  Kwok counterclaims against Ho for payment for work done and for loss of profits.  Ho and Kwok are the only witnesses in this trial.

Ho's Case

2.  Ho has been in the electrical work business for some 30 years.  In January 2001, Ho succeeded in tendering for the electrical works for 11 blocks of residential buildings to be erected on the Site.  Chun Wo E & M Engineering Ltd (“Chun Wo”) was the developer of the Site.  Yew Sang Hong Ltd (“YSH”) was the nominated electrical contractor and Ho became its sub-contractor.  Ho wanted to further sub-contract the works and for that purpose he had discussions with Kwok, who had worked for him as a sub-contractor on five previous occasions.

3.  Ho's evidence is that in late January 2001 he and Kwok reached an oral agreement (“the Agreement”) to the effect that all the electrical works YSH sub-contracted to him were sub-sub-contracted to Kwok, save that he would be supplying Kwok with the necessary materials.  In essence, Kwok was to supply all the manpower for the electrical works, which included the installation works in the switch rooms, the installation of MCB (miniature circuit breakers), light boxes, light switches, etc.  Ho said that he tendered for the works at HK$43m and the sub-contract price agreed with Kwok was HK$16,661,000 (“the Price”).  The Price was calculated based on HK$100 per electrical point, e.g., a light or an electric outlet, which worked out at HK$40,000 per floor.  In respect of the car park, “L shape shops” and kindergarten, the rate was HK$180 per point. 

4.  Ho said that after he had reached an agreement with Kwok, he wrote a simple document to record the same and handed that to Kwok.  That took place on the 20^th January 2001.  Later, on the 25^th January 2001, Ho signed and put his firm's chop on the document [Bundle of Documents (“B”)/p.3].  There was an attachment to that document [B/5], which contained a breakdown of the HK$40,000.  It was provided to facilitate the payment under the Agreement. 

5.  Kwok started work in January 2001.  He was paid by Ho on a monthly basis on either the 20^th or 21^st of each month.  Ho's evidence is that every month Kwok would tell him the amount he should pay.  He would look at the record supplied by Kwok of the amount of work done in a cursory manner and pay accordingly.  Ho said that Kwok kept a book on the Site to record the amount of work he had done.  Kwok would sign on it and Ho would pay him accordingly.  Ho maintained that he did not have any record of the amount of work done by Kwok, save for what was recorded in the “Salary Invoices”, e.g., B/98-100.  However, the information recorded in such documents was based on what Kwok had told him.  Ho would only check the main items of Kwok's claim, e.g., he would count the number of floors completed. 

6.  Kwok had four sub-contractors working for him on the Site (“Kwok's Contractors”).  In August 2002, Kwok's Contractors complained to Ho about not getting paid by Kwok and told him that they could not keep up with the construction schedule without having the problem resolved.  Ho took up the matter and spoke to Kwok about it. 

7.  Starting from June 2002, Ho received complaints about the quality of Kwok's works and follow-up works were required by reason of the quality problem.  The complaints originated from letters written by Chun Wo.  Such letters were sent to YSH who would immediately pass them to Ho to handle.  In turn, Ho would inform Kwok about the complaints.  In June and July 2002, Kwok dealt with the complaints in a “sluggish” way.  Thereafter, from August and September 2002 onwards, Kwok carried out little rectification work and did not try to resolve the problem seriously.

8.  Ho referred to a number of complaint letters from Chun Wo [B/120-141] and said that they constituted a small portion of such letters.  All the complaints were dealt with in the same way, i.e., Ho told Kwok about the complaint, Kwok failed to deal with them and Ho employed someone to carry out the necessary rectification work.  Ho explained that all the Chun Wo letters were written to YSH who was the nominated electrical sub-contractor and therefore the complaints were all concerned with electrical works.  Further, in respect of any complaints about outstanding or uncompleted works by Chun Wo, they all concerned Kwok's work. 

9.  Ho employed two companies to carry out the rectification works which Kwok had failed to perform.  One of them was International Engineering Co (“IEC”).  A total sum of HK$477,978 was paid to IEC [B/95-7].  The other contractor was Crownbest Engineering Ltd (“CEL”) and HK$300,000 was paid to CEL [B/88].  The aggregate of these sums, HK$777,987, constitutes Ho's claim against Kwok for rectification expenses.  However, it has been conceded after the cross-examination of Ho that Kwok should not be responsible for the sum of HK$300,000 paid to CEL given Ho's evidence that the expenses are not for rectification work.

10.  In October 2002, the problems with unpaid workers and defective works continued.  On the 20^th October 2002, Kwok applied for a monthly payment of over HK$1.2m (“the October Application”) [B/110].  It was double the normal monthly payment of HK$500,000 to HK$600,000.  For that reason and the fact that Ho heard about Kwok's Contractors not getting paid, Ho decided to check the payment application.  He discovered that the work done was only worth HK$600,000 odd.  However, Kwok insisted on getting paid in full and Ho told him that he was only prepared to make an advance to him for the balance of the sum.  Kwok told him that he would resolve the problem with his sub-contractors and make payment to the workers for their wages.  Two further documents were produced in respect of the October payment – a document on which Ho recorded the payment and advance made (in the sum of HK$630,000) [B/58] and a document produced by Kwok at Ho's request to record how the HK$1.2m was used [B/245].  Ho thought that the advance could later be set off against the payment for work done by Kwok, but Kwok abandoned the Works not long thereafter.

11.  Ho negotiated with Kwok's Contractors in October 2002 about hiring them to complete Kwok's works.  He began to hire them on about the 20^th November 2002 and paid them for their work directly.

12.  On the 23^rd November 2002, Ho made the last payment to Kwok.  On this occasion, he calculated the payment based on what had been done by Kwok.  His calculation is on B/113 and the salary invoice on B/112.  Subsequently, a document [B/246-7] was produced by Kwok at Ho's request showing how the November payment was used.  Ho's case is that he did not owe Kwok any money after the 23^rd November 2002, but he accepted at the end of re-examination that a sum of HK$200,380 was (and is) payable to Kwok for work done.  It is also Ho's case that there was no agreement on the August Works (see para. 24 below).  However, there is hardly any evidence from Ho on that matter, save that the profit margin should only be 2-3% “if the works were properly done”. 

13.  Ho said that after the November payment, Kwok was “sort of in a state of disappearance”.  He was not on the Site as he should have been to deal with the defects, etc.  Under cross-examination, Ho said that the last time he saw Kwok on the Site was in mid-December 2002.  However, Kwok did not carry out any further work on the Site after the 23^rd November 2002 and therefore Ho had to get CEL and other contractors to complete his works. 

14.  It is common ground that in December 2002, with the Labour Department's involvement, Ho had paid a total sum of HK$285,835 to Kwok's workers for outstanding wages owed to them by Kwok.  It is not disputed that Ho is entitled to be given credit for this payment. 

Kwok's Case

15.  Kwok's case is that the oral agreement he had with Ho was confined to the electrical works to be carried out on the first floors to the top floors at a price of HK$40,000 per floor (“the Agreed Works”).  In total, there were 410 floors in the 11 blocks on the Site.  He explained that for the individual items of work to be carried out, he would negotiate with Ho as to how much they should cost about 10 days prior to the commencement of the work and such costs would then be deducted from the lump sum of HK$40,000.  B/109 provides an illustration.  It was written by Kwok in August 2002.  It shows on the top line that various works of the value of HK$26,200 per floor (leaving a balance of HK$13,800), e.g., laying conduits in the floor slabs at HK$16,000 and installing the main lines at HK$1,200, out of the total contract sum of HK$40,000 had been carried out by that time.  The document also shows that 5 items of work were being quoted for price, e.g., installation of base plates for fuse boxes and installation of sockets, and that some of the quoted prices were marked down.  Unsurprisingly, Kwok said that the marking down was done by Ho.  It was stated at the bottom of the document that a balance of HK$4,800 was left after deducting the price of the 5 items of work (HK$13,800 – HK$9,000).

16.  Kwok confirmed that it was necessary to have an agreement on the price of the individual items of work because he had to be paid periodically and according to the amount of work done.  Hence, the agreed prices allowed Kwok to make his payment application to Ho based on what had been done.  Kwok also explained that although there was give and take in the price negotiations, he and Ho were well familiar with the amount of work required for any particular piece of work and therefore the difference in their prices was not huge.  Indeed, he and Ho had never failed to come to agreement on the prices.  Kwok said that he had never seen the document on B/3-5 until after these proceedings have started. 

17.  Kwok's case is that every time he received payment, there would be some record made of the amount of work carried out by him, e.g., B/105-6.  He said that he would accompany Ho to make random inspection of the work done before payment was made. 

18.  The October Application [B/110] is important.  It shows that, inter alia, work relating to the “MCB boxes” had, according to Kwok, been completed.  Kwok explained that such work was confined to the installation of the MCB boxes.  That item of work is referred to as “installation of base plate for fuse boxes” on B/109 and it was priced at HK$1,000 per floor.  The installation of base plates should not be confused with the installation of the components of the MCB boxes.  For the installation of components, it is referred to as “installation of fuse boxes” on B/109 and was separately priced at HK$1,000 per floor.  On B/110, there are two entries described as “work done on behalf” (“代工”).  Kwok explained that they were works carried out on the ground floor level on the Site and were outside the Agreed Works.  However, he agreed with Ho to do them and charged for them as “work done on behalf”.  The same applied to the installation of 270 pieces of florescent lights (although it was not described as “work done on behalf”). 

19.  According to Kwok, Ho had inspected the works covered by the October Application and he was duly paid the entire amount applied for.  Again, he had not seen the document on B/58 prior to the commencement of these proceedings.  Kwok said that October 2002 was a very busy time at the Site because of the impending Fire Services Department inspection, which explained the amount applied for in the October Application.  That inspection was carried out on about the 6^th November 2002. 

20.  Kwok's evidence is that after paying his sub-contractors on about the 26^th October 2002, they began to work for Ho.  He said that after the Fire Services Department inspection there was not much work left and by November 2002 he had completed 90% of the Agreed Works.

21.  On about the 23^rd November 2002, Kwok made another payment application to Ho.  For the period covered by that application, i.e., roughly a 30-day period before the 23^rd November 2002, Kwok was only left with the works of Blocks 10 and 11 insofar as the Agreed Works were concerned.  He was paid some HK$188,000 for the same.  However, on the back of the Salary Invoice [B/113], it was stated that “car park and public area will be calculated tomorrow”.  That was a reference to the works done by Kwok in the car park and public areas.  About HK$450,000 worth of work had been carried out in the car park and public areas as of the 23^rd November 2002.  Ho suggested that he would do the calculation on the next day and Kwok accepted his words.  However, Ho did not keep his words and prevaricated when chased by Kwok.  Kwok accepted in cross-examination that Ho did not owe him any money for his work until November 2002. 

22.  On the 17^th December 2002, Kwok saw Ho for the last time on the Site.  He chased for what was owed to him.  Ho became angry and said to Kwok that if he wanted payment, then he and his workers should not return to the Site.  That was the end of their relationship.

23.  Kwok maintained that Ho was (and is) indebted to him for works done in the car park, ground floor areas and Blocks 6, 7, 10 and 11.  Such works are particularized in Annexure I [Bundle of Pleadings (“A”)/p.186A-C] (“Annex I”).  It has been conceded by Kwok in cross-examination that item 2 on A/186B was overstated – the sum of HK$105,600 should be reduced to HK$52,800.  In addition, Kwok claims a sum of HK$20,250 as outstanding payment for earth-wiring work.  The total amount claimed is HK$539,788.

24.  Further, Kwok said that in about August 2002 he had reach an agreement with Ho to carry out four items of work (“the August Works”) as follows :

(i)      Installation of earth wiring at HK$750 per floor;

(ii)     Checking and testing of meters and wiring to the meters before handover at $2,050 per floor;

(iii)    Checking and testing of lighting in common areas and the wiring of the residential units before handover at HK$2,600 per floor;

(iv)    Maintenance work for the electrical and lighting installations for 480 days after handover at HK$1,600 per floor. 

25.  Kwok said in cross-examination that the August Works were part of the Agreed Works and the cost of which would have to come out of the HK$40,000.  However, he also said that the testing “was not part of the construction work”.  Had he been allowed by Ho to continue to work on the Site, he would have earned a profit from the August Works at a 10% margin, i.e., 10% on the gross contract sum of HK$2,748,500.  Kwok's counterclaim for loss of profits is confined to the August Works.

26.  Kwok denied that he had any problem with his workers or sub-contractors.  His inability to pay them was a result of Ho's failure to pay him after the 23^rd November 2002.  In addition to Ho's payment of some HK$285,000 (see para. 14 above), Kwok had made a payment of HK$116,235 to his workers when the matter was handled by the Labour Department. 

27.  In cross-examination Kwok said that for those workers who were under his direct employment, they were paid two months in arrears.  In other words, the payments made in October 2002 were for work carried out in August 2002.  The reason was that Ho had not made any payment to him in February 2001.  However, the payment arrangement was agreed before the workers were hired and they never complained about it.  In respect of Kwok's Contractors, Kwok admitted that he owed them money to the tune of HK$50,000 to HK$60,000.  Whilst it is not entirely clear whether Kwok was indebted to each of his sub-contractors, it is plain that he was indebted to more than one of them.  The reason for the indebtedness was that from about May 2002, Kwok suffered a cost overrun in respect of the ground floor works and he used some of the money which should have been paid to his sub-contractors to pay for such cost.  The debts started as smaller sums, but accumulated over a number of months into HK$50,000 to HK$60,000.  However, Kwok was adamant that he had never heard any complaints from his sub-contractors about the debts as he had a long friendship with them and had promised to pay them after the Agreed Works were completed. 

28.  In respect of the document on B/245, Kwok said that he was asked by Ho to attend the Site on the 25^th December 2002 and account for the payment of wages to his workers and sub-contractors.  Accordingly, Kwok produced that document.  The document on B/246-7 was also written by Kwok, but it is unclear when that document was produced.  It appears likely that by late December 2002 the problem of unpaid wages had come to a head.

29.  Kwok said that he knew about both CEL and IEC as they both started to work on the Site in September 2002.  He understood that they were also Ho's sub-contractors, but their areas of work did not overlap with the Agreed Works at that time.  Kwok pointed out that the IEC invoices on B/96-7 showed that a substantial amount of work for installing the MCB boxes had been done.  That was part of the Agreed Works (installation of the components of the MCB boxes) and had been agreed between Kwok and Ho at HK$1,000 per floor [B/109].  However, Ho got IEC to do the work at HK$800 per floor as shown on B/96-7 (HK$80 x 10 units per floor).

30.  Finally, as regards complaints about the quality of his work, Kwok acknowledged in cross-examination that there were minor problems which he had duly rectified.  He pointed out that neither he nor his sub-contractors would allow any major quality problem to occur because of the cost implication.  Kwok said that he had never received any complaints about the quality of his work from Ho.

Assessment of Credibility

31.  It is common ground that the dispute before this court is entirely factual.  I have no doubt that Ho is a thoroughly unreliable witness.  Mr Hung is right to have described Ho as a “hopeless witness; … evasive; even simple questions he would avoid giving direct answer”.  Ho was not able to provide a satisfactory answer to any issues of importance.  I shall deal with some of those issues.

32.  Ho is a businessman of considerable experience and I can see that he has some understanding of the English language.  His evidence concerning the document which evidenced the oral agreement he had with Kwok [B/3] is extraordinary.  In an affirmation filed on the 25^th February 2004 in support of his summary judgment application, Ho stated that he had sent the original of that document (“the Original”) to Kwok [A/137-8, paras.5-6].  In answer to the request by Kwok's solicitors made in April 2005 that Ho should verify on affirmation as to the whereabouts of the Original, Ho's solicitors refused to entertain the request and relied upon the said affirmation as having provided the answer [B/248-9].  Ho's witness statement filed in September 2005 also stated that the Original was given to Kwok [A/163, para.14] and Ho confirmed such evidence in cross-examination.  However, an original of B/3 has been produced by Ho's solicitors in court, Exhibit D6.  Insofar as it may be suggested that Ho had written two copies of B/3 and given one to Kwok (which is what he said when cross-examined about B/58), I find such suggestion very difficult to accept when photocopying was so readily available.

33.  When asked in cross-examination to identify from A/186A (part of Annex I) the items of work which had not been done as opposed to not having been done properly, Ho said that the battery-operated lights on the G/F and 1/F of the car park, items 7 and 15, had not been done.  He relied upon the bill of CEL [B/88], which contained a reference to the battery-operated lights in the shop, two electric meter rooms, telephone room and water meter room, in support of his evidence.  When I asked him how those locations correlated with the car park, Ho gave an incomprehensible answer despite having the question carefully explained to him.  Eventually, on the 2^nd day of the trial, Ho conceded that the works set out on B/88 were not rectification work at all.  Further, when Ho was asked about Annex I, he took an extraordinarily long time to examine that document.  He said that he had only looked at that document in a cursory manner previously (There is no issue that the contents of Annex I have been available to Ho (in handwritten form) for a very long time.).  He had only looked at a few “big sums” and found that the works were not done; and the document was then ignored. 

34.  These evidence reflect very poorly on the honesty of Ho.  The alleged action was not that of a normal businessman and he has been deliberately evasive in cross-examination.  Indeed, there were two occasions where I have to record in my notes that the answer given by Ho was incomprehensible. 

35.  I also reject Ho's evidence that he carried out no checking on the work completed by Kwok.  That is simply not what normal businessmen do.  Further, Ho's witness statement stated that he “retained a few engineer and supervisor to monitor the work done” [A/165, para.24]. 

36.  In respect of the alleged advancement of HK$630,000, Ho has also been quite inconsistent with his case.  The specifically endorsed writ filed on 3^rd March 2003 pleaded that “by various oral agreements made between [Ho] and [Kwok] from about August 2002 to October 2002 …, [Ho], at [Kwok's] request, agreed to advance to [Kwok] the total sum of HK$916,465” [A/2B, para.6].  Ho's affirmation filed on the 5^th January 2004 repeated the assertion that the advancements were made over August to October 2002 [A/118, para.7].  In his witness statement, Ho stated that that on or about the 21^st October 2002 Kwok asked him for a loan as he was unable to pay his employees and the sum of HK$630,000 was lent to Kwok, because that was all Ho had at the time.  None of the above is consistent with what Ho has said in this court. 

37.  Further, Ho gave no satisfactory explanation for why he did not deduct the November payment of HK$188,000 [B/113] against the alleged advancement.  When pressed, Ho said that he had in fact overpaid Kwok to the tune of over HK$1m which he knew on the 18^th November 2002, i.e., prior to paying Kwok the HK$188,000.  Such evidence is repugnant to common sense.

38.  In contrast, I find Kwok to be an honest witness.  He is forthcoming and spontaneous in answering questions, and he is willing to concede when he is wrong.  Most importantly, I find that Kwok's evidence is consistent with the available documents.  I find his evidence on the scope of the Agreed Works consistent with the records of the “work done on behalf”.  In other words, such works clearly fall outside the Agreed Works. 

39.  Kwok's evidence on the works he had done in support of the October Application (and in contradiction to the alleged advancement) is supported by his record which showed an increase in the number of workers hired during the period in question and by the fact that the Fire Services Department inspection was carried out in early November 2002. 

40.  The Schedule produced by Mr Hung on the “money received and paid between June and November” [2002], which is based on the documents, shows that Kwok had been consistent in paying out to his sub-contractors a big portion of what he had received from Ho from June to October 2002 (they started working for Ho thereafter).  In the premises, it is unlikely that Kwok had a problem with them due to non-payment.  Further, I find merits in Mr Hung's submission that the total amount of money eventually paid to the workers to settle their dispute in December 2002, HK$402,027 (see para. 26 above), matches well with what was owed by Ho to Kwok in November 2002, HK$450,000.  Therefore, it was Ho's failure to pay Kwok the HK$450,000 which resulted in the dispute.

41.  Finally, Kwok has provided the only plausible reason to explain why his relationship with Ho came to an abrupt end.  Ho was motivated by the opportunity to maximise his profits by hiring other contractors at lower rates to carry out the remainder of the works.

Rectification Works

42.  Ho's lack of credibility plainly undermines this claim.  In addition, I am simply unable to correlate Chun Wo's complaints with IEC's bills [B/95-7].  Equally, I am unable to correlate IEC's bills with the Agreed Works (save for the installation of the MCB boxes which has been explained in para. 29 above).  Those bills do not suggest that the works in question were rectification works. 

43.  I am alive to the possibility that Kwok had not completed all the necessary rectification works by the time he was stopped from working on the Site.  However, there is no satisfactory proof before me and I must reject this claim in its entirety. 

Advancement

44.  Given my rejection of Ho's evidence, this claim also fails.

Payment for Work Done

45.  Mr Wong, who appears for Ho, has made a valiant attempt to discredit Kwok's claim, save for the sum of HK$200,380 which has been admitted.  With respect, I am not persuaded by Mr Wong.  I see no real problem in the proof for this claim and I find in favour of Kwok accordingly.  After giving credit to the payment of HK$285,835, Kwok is entitled to the sum of HK$253,953 (HK$539,788 – HK$285,835) under this head.

Loss of Profits

46.  I accept this part of Kwok's case as well.  I am aware that the August Works add up to HK$7,000 per floor which exceeded the balance of HK$4,800 left of the HK$40,000 (see para. 15 above).  However, Kwok said that the testing work was not part of the construction work.  I believe that explains why some of the August Works fell outside the Agreed Works. 

47.  On the other hand, I am not convinced that Kwok would have achieved the projected profit margin of 10%.  It is obvious that any delay or problem encountered during work would easily eat into the profit margin.  Mr Hung accepts that I am entitled to make an assessment of what would have been the likely profit margin based on the evidence and by taking into account the realities in life.  I believe that a profit margin of 7% is more realistic.  The amount I award under this head is HK$192,395 (HK$2,748,500 x 7%). 

Conclusions

48.  I dismiss Ho's action and award Kwok the sums of HK$253,953 and HK$192,395 under his Counterclaim.  On the issue of interest, I bear in mind that there is a question of when the profits of HK$192,395 would have been earned.  I order that Kwok is entitled to interest on those sums of money at prime rate plus 1% from the date of the filing of the Writ herein, 3^rd March 2003, until the date of Judgment and thereafter at Judgment Rate until payment.  The costs of this action, including the costs of the Counterclaim, are to be paid by Ho to be taxed if not agreed.