CHEUNG KWOK KEUNG t/a WAI PAK IRON WORK CO v. CHEUNG KWOK HUNG t/a KWOK HUNG IRON WORK

DCCJ 4654/2018

[2021] HKDC 464

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4654 OF 2018

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JUDGMENT

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Introduction

1.  Mr Cheung Kwok Keung (“Keung”) and Mr Cheung Kwok Hung (“Hung”) are identical twins and both of them carry on their respective sole proprietorship business in the same industry of metal works in Hong Kong. Despite their similarities, they decided to resolve their differences by way of this lawsuit.

2.  Their dispute arose from a construction project (“the Project”) which Chi Shing Construction Co. (“Chi Shing”), as the principal contractor, sub-contracted to Hung by a written subtract signed by the parties on 6 February 2017 (“the Subcontract”) and Hung in turn sub-sub-contracted part of the subcontract works (“the Works”) to Keung by an agreement (“the Agreement”). Keung now claims against Hung a total sum of HK$748,346.10 (“the Outstanding Sum”) being the outstanding charges for the Works and certain extra works done at the request of Hung (“the Extra Works”).

3.  Hung denies any liability as at the date of the Writ and makes a counterclaim against Keung for an indemnity from the claim made by Chi Shing arising from the alleged delay in the completion of the Works.

Parties’ respective pleaded cases

4.  Keung’s pleaded case is a simple contractual claim based on the Agreement. The Agreement is contained and/or evidenced by the following documents:

 (1)  A written schedule of rates (“the Schedule”);

 (2)  Drawings No. AS-01, AS-02, AS-03, AS-04 (Rev.-, Rev.-A and Rev.-B) prepared by S.T. Wong & Partners Limited, Consulting Engineers (“the Drawings”);

 (3)  Keung’s 2 written final payment accounts in Chinese both dated 31 October 2017 (“the Accounts”).

5.  The Project related to the mental works in the lift shafts of the passenger lifts in Cores C and D of the Hong Kong Polytechnic University (“the Site”). It is alleged that the agreed sub-subcontract sum is HK$2,301,996.10 (“the Agreed Amount”).

6.  It is further alleged that Keung completed the Works together with the Extra Works in or about October 2017.

7.  Keung charged Hung a total sum of HK$103,750 for the Extra Works calculated on daywork basis.

8.  Apart from the total sum of HK$1,657,400 (“the Paid Amount”), Hung has failed to pay Keung the balance of the Agreed Amount, i.e., the Outstanding Sum. Therefore, Keung now claims against Hung for the Outstanding Sum with interest thereon.

9.  In the Amended Defence and Counterclaim, Hung avers that in March 2017, he was engaged by Chi Shing as his subcontractor for the Project and the subcontract price was estimated to be around HK$1,998,202.00 excluding any extra manpower and variation order works. It was agreed between Chi Shing and Hung that the said subcontract price shall all be subject to the final assessment by Chi Shing on the total quantity ofworks/materials actually carried out/used by Hung and/or his sub-subcontractor including Keung (“the Subcontract Term”).

10.  As between Hung and Keung, Hung accepts that though Keung and he had not expressly agreed on the sub-subcontract price payable by Hung to Keung for the Works, it was their mutual understanding that a reasonable percentage of 15% of the assessed final contract price payable by Chi Shing would be retained by Hung as his administration cost and profit while the remaining 85% would be the sub-subcontract price for the Works payable to Keung.

11.  Furthermore, Hung avers that the sub-subcontract was subject to a trade practice in that a sum equivalent to 10% of the sub-subcontract price would be retained by the employer as security sum during the defects liability period (“the DLP”), namely, 12 months after the completion of the Project.

12.  The final contract price assessed and payable by Chi Shing was (1) HK$1,964,416.05 for the works under the Subcontract, (2) HK$119,150.00 for substitute works and (3) HK$217,648.76 for extra works totaling HK$2,301,214.81 (“the Assessed Final Contract Price”). Hung’s administration costs and profit thus amounted to HK$298,756.92.

13.  Hung alleges that Keung has failed and/or refused to complete some parts of the Works valued at HK$309,502.00 (“the Unfulfilled Works”) and these works had to be completed by another subcontractor of Hung.

14.  In the circumstances, Hung avers that only HK$35,555.89 is outstanding after deducting of the Unfulfilled Works (HK$309,502), Hung’s administration cost and profit (HK$298,756.92) and the Paid Amount from the Assessed Final Contract Price.

15.  However, the said sum is still not payable because the DLP did not expire at the time of the pleading. It is not disputed that it has expired by the time of the present trial.

16.  In regard to the counterclaim, Hung alleges that upon the commencement of the Works in March 2017, Keung and Mr So of Chi Shing had made an oral agreement. Mr So was, and still is, the project manager of Chi Shing and he was in charge of the Project.  They agreed that 60 days would be a reasonable time for Keung to complete the Works. However, Keung and his workers stopped the Works and left the Site in late October 2017.

17.  As a result, due to the alleged delay and his failure to complete the Works with the 60 days or at all, Chi Shing seeks to claim against Hung for HK$600,000.00 as damages. Hung in turn makes a counterclaim against Keung for the like amount or such amount as Hung is liable to Chi Shing as full indemnity.

18.  In reply, Keung denies any agreement to carry out the Unfulfilled Works as alleged and they did not form any part of the Works. He further denies that there was any mutual understanding to the effect that Hung would be entitled to retain 15% of the final contract price assessed by Chi Shing as administration cost and profit.

19.  In addition, Keung denies any agreement in respect of the time frame for Keung to complete the Works within 60 days with Mr So or Hung.

Issues to be resolved

20.  After the parties’ closing submissions, I find the following issues to be of critical importance:

 (1)  What is the quantum of the charges for the Works and the Extra Works to which Keung is entitled in accordance with the terms of the Agreement (before any deduction) (“the Quantum Issue”)?

 (2)  Is Hung entitled to retain 15% of the said amount as his administration cost and profit (“the 15% Profit Issue”)?

 (3)  Were the Unfulfilled Works within the scope of the Works under the Agreement (“the Unfulfilled Works  Issue”)?

 (4)  Is the Agreement subject to the alleged trade practice such that 10% of the sub-subcontract price would be retained by Chi Shing as security sum during the DLP (“the Retention Monies Issue”)?

 (5)  Did Keung agree with Mr So to complete the Works within 60 days and if so, could Hung rely on their agreement to claim against Keung for an indemnity against any of his liability to pay Chi Shing liquidated damages under the Subcontract (“the Indemnity Issue”)?

 (6)  If so, was there any delay for which Keung should be liable (“the Delay Issue”)?

The Quantum Issue

21.  This issue entails an ascertainment of the terms of the Agreement. The Agreement was concluded orally and Keung received from Hung the Schedule and the Drawings for the purpose of the Works at the inception of the Agreement.

22.  There were factual disputes as to how Keung received Hung’s schedule of rates with higher unit rates sent to Chi Shing and the nature of that document. I agree with Mr Ho, for Keung, that it is a matter of no moment. Suffice it for me to indicate that I prefer the evidence of Hung in this regard. His version of events is supported by contemporaneous documentary evidence (including his email to Mr So).  The said document was only used as the first tender of Hung and was revised at the suggestion of Chi Shing. The revised figures appear in the Schedule.

23.  There is no dispute that the Schedule is applicable to the Works. It is also common ground that the Agreement was a re-measurement contract.

24.  In the Statement of Claim, there is no mention of any re-measurement. Hung first brought this up in the Defence and Counterclaim. He first pleaded the Subcontract Term indicating that the subcontract price among other things, was subject to the final assessment by Chi Shing. Then, he mentioned the assessment of the final contract price by Chi Shing.

25.  Keung in his Reply and Defence to Counterclaim has pleaded that he agreed to carry out the Works at the unit rate set out in the Schedule with the final quantities subject to re-measurement.

26.  It is pertinent to look at the definition of a re-measurement contract at this juncture.

27.  Mr Ho helpfully refers this court to the following passage in Chitty on Contracts - Hong Kong Specific Contracts (6^th edn, 2019)(§§8-007, 8-009):

“Under a lump sum contract, a contractor will receive payment of a single sum which has been agreed in advance upon completion of the whole contracts. Under this system, the design would be completed and the work would be quantified when a contractor submits its tender to the employer.

A re-measurement contract provides for payment for work carried out by the contractor and the payment is measured and valued as the work proceeds. Under such a contract, there is no pre-agreed fixed sum for the whole contract works. Instead, it is a “measure and value” contract and the amount payable to the contractor is determined on completion by measuring the work done and valuing it according to contract rates set out in the bill of quantities or schedule of rates.”

28.  I further find assistance in Keating on Construction Contracts (11^th edn., 2021) at §4-028:

“A contract where the amount of work when completed is to be measured and valued according to a schedule, or formula, or at cost plus a fixed fee or percentage of the cost, or at a reasonable price, is usually described as a measurement and value contract and is contrasted with a lump sum contract. A schedule of the contract may be used where the nature of the work is certain but the extent of the work is not …”

29.  On the measurement of the Works and the Extra Works, neither side has adduced direct evidence. While Keung relies on the Accounts, Hung simply relies on the payment certificate dated 1 February 2018 issued by Chi Shing (“the Payment Certificate”). The assessment in the former is HK$2,405,746.10 (“Keung’s Assessment”) whereas the assessment in the latter is HK$1,991,712.81 (“Hung’s Assessment”).

30.  Neither Keung nor Hung has adduced evidence to cover the production of their respective assessments. Neither of them went through the items in their Assessments and explained to this court why such measurements should be preferred. Mr So testified for Hung merely stated that he had applied the re-measurement principles in his calculation of the figures in Hung’s Assessment. Under the Subcontract, the re-measurements should be carried out in accordance with the latest versions of Hong Kong Standard Method of Measurement of Building Works. On the other hand, Keung said nothing about his re-measurement at all.

31.  Mr Ho urges this court to adopt Keung’s Assessment and Mr Wong, for Hung, submits that Hung’s Assessment should be preferred. In the absence of any clear identification of their differences and relevant expert evidence justifying their respective re-measurements, this court is not in a position to determine the accuracy of the Assessments and decide on which one is to be preferred. Therefore, after hearing the parties’ closing submissions, this court expressed this concern to Mr Ho and Mr Wong and requested their assistance in this matter. Both of them has provided to this court their helpful written submissions.

32.  Mr Ho first refers to the pleadings and submits that the dispute between the parties is whether there is a term in the Agreement that Chi Shing alone and not Keung and Hung was to re-measure the quantities for the purposes of determining the sub-subcontract price of the Agreement. He says that the question is under the Agreement, who was to perform the re-measurement and not the figures in the Accounts and the Payment Certificate, which the parties do not dispute.

33.  I cannot accept his submissions and do not agree to his identification of the differences between the parties appearing on the pleadings.

34.  In the first place, Keung’s pleadings do not suggest that under the Agreement, he alone should and could undertake the re-measurements and his re-measurements are final and binding on the parties.

35.  On the other hand, Hung has merely pleaded that Chi Shing would assess the final contract price and it was the parties’ mutual understanding that 15% of the assessed final contract price paid by Chi Shing to him would be retained by him and he would pay the remaining 85% of the assessed final contract price to Keung. Hung does not suggest that under the Agreement, there was a term to the effect that Keung could not do the re-measurements and that the assessment of Chi Shing was final and binding.

36.  Indeed, throughout the trial, the parties did not make such allegations.

37.  In my view, it is only normal that a subcontractor should complete the re-measurement exercise himself to make his claim to his employer in a re-measurement contract. It is also normal that his employer would do his own re-measurement or engage other professionals to do so on his behalf to verify the claim of his subcontractor. Unless expressly agreed, neither of their re-measurements is final and binding.

38.  Thus, the issue is not confined to who should carry out the re-measurements. There is no agreement about the figures in either Keung’s Assessment or Hung’s Assessment.

39.  Returning to the pleadings, it can be seen that Keung has pleaded the sum of HK$2,301,996.10 as “agreed sub-sub-contract sum” and the sum of HK$103,750 as the price for the Extra Works.[1] The former is clearly a misnomer. It is the amount according to his re-measurement only and actually not an amount between the parties.

40.  In his Defence, Hung expressly denies the alleged amounts and puts Keung to strict proof of all the allegations in the relevant paragraph except the Paid Amount. Hung has made no admission to the re-measurements of Keung resulting in the Accounts.

41.  In the circumstances, the actual value of the Works and the Extra Works very much remains a live issue. Keung has the burden of proof in regard to this key element of his claim. Keung must adduce sufficient evidence to prove the accuracy of the Accounts regardless of whether or not this court rejects the alleged deductions entitled by Hung and finds against him on any or all of the 15% Profit, the Unfulfilled Works and/or the Retention Monies Issues.

42.  Mr Ho highlights the fact that Hung raised no complaints about the contents of the Accounts and instead proceeded to compile his own invoice issued to Chi Shing by the incorporation of the Accounts in addition to other charges for assessment on 14 January 2018.

43.  I cannot accept this to be an unequivocal acceptance of the contents of the Accounts on the part of Hung. Hung could not really be expected to do his re-measurements to verify the Accounts (though he claimed to have done so under cross-examination for the first time) before he passed it onto Chi Shing for assessment. There is no reason why Hung cannot subsequently rely on the re-measurements of Chi Shing to challenge the accuracy of the Accounts. In doing so, it does not mean that Keung is bound by the Subcontract as a non-party and I am alive to the fact that he did not have the sight of the Subcontract at all.  

44.  As the matter now stands, there is no evidence to substantiate the figures in the Accounts. Those figures are not agreed by Hung. It is true that Hung did not adduce evidence to substantiate the figures in the Payment Certificate, either. However, this does not help Keung discharge his burden of proof. I am also aware that neither parties was cross-examined on the Accounts and the Payment Certificate but this cannot mean that the figures in these documents are accepted.

45.  The upshot is that Keung’s Assessment is not proved by adequate evidence. It is unfortunate that the parties did not think that they have to prove their respective assessments by proper evidence.

46.  However, I do not think that I should put a zero value on the Works and the Extra Works. Mr Wong indicates in his written closing submissions that Keung accepts Hung’s Assessment as his alternative position. Doing the best I can, I would adopt Hung’s Assessment to meet the justice in this matter.

The 15% Profit Issue

47.  Hung’s allegation that he was entitled to retain 15% of the Assessed Final Contract Price payable by Chi Shing is based on an alleged mutual understanding. Keung denies such a mutual understanding.

48.  Hung accepts that the parties had no discussion whatsoever about his administration cost and profit under the Agreement. He relies on two previous dealings to prove the alleged mutual understanding.

49.  First, in 2017, Hung sub-sub-contracted to Keung certain hoarding works at Tai Hung Fai Centre Phase I. The subcontract price was HK$3,057,940 and Hung paid Keung HK$2,600,000 as the sub-subcontract price. The difference was 15% of the subcontract price which Hung kept as his administration cost and profit.

50.  Curiously enough, in his witness statements, Hung did not make any allegation that he had ever told Keung the subcontract price or Keung had the knowledge of the same somehow. He did not allege that he had told Keung that the sub-subcontract price was actually 85% of the subcontract price and that he would retain the remaining 15% of the same as his administration cost and profit. It was only until his cross-examination that he first alleged that he had referred to Keung the quotation where the subcontract price was shown.  The quotation was never produced as evidence. This allegation was not even put to Keung. I cannot accept this last minute assertion.

51.  Keung’s evidence is that he had no idea of the subcontract price and his claim for the amount of HK$2,600,000 had nothing to do with the subcontract price. I have read his invoice dated 31 July 2017. Indeed, the said sum was actually a reduced amount from HK$2,690,000 and had nothing to do with the subcontract price. I accept his evidence.

52.  Next, Hung relies on another subcontract relating to metal works at the same place. It is totally irrelevant to the present dispute and cannot help his case at all. The difference between the subcontract price received (HK$424,325) and the sub-subcontract price he paid his subcontractor allegedly (HK$120,000) was not 15%. More importantly, the subcontractor was another legal entity and not related to Keung in any way.

53.  In any event, as rightly pointed out by Mr Ho, it is necessary to show consistency of a course of conduct so as to support an incorporation of a term by way of mutual understanding in a contract. What is required is a large number of transactions[2]. Two is definitely not enough.

54.  Lastly, Mr Ho draws my attention to the fact that even the solicitors of Hung in their first substantive reply letter dated 3 October 2018 alleged that a reasonable percentage only and not the 15% of the Assessed Final Contract Price should be retained by Hung. It tends to show that the alleged mutual understanding even did not exist as at the date of the said letter.

55.  I can, therefore, conclude that there was not a term in the Agreement that Hung was entitled to retain 15% of the Assessed Final Contract Price as his administration cost and profit. I do not accept that there was such a mutual understanding between the parties.

The Unfulfilled Works Issue

56.  Hung alleges that Keung failed to complete the Unfulfilled Works itemised in his pleading. I do not think it is necessary to set them out here.

57.  The simple answer of Keung to this allegation is that the Unfulfilled Works did not form part of the Works and he did not undertake to do the same. He did not ever charge Hung for the same and did not include the same in his claim.

58.  The Unfulfilled Works related to the machine room on the 3/F. Prima facie, it is outside the scope of the Project. Further, in the Drawings, such part germane to the machine room was deleted. This supports Keung’s contention.

59.  Under cross-examination, Hung agreed that he had not provided Keung any drawings of the Unfulfilled Works whereas he did so to his subcontractor who completed such works. Without such drawings, Keung could not have been entrusted with the Unfulfilled Works.

60.  In the premises, I find as a fact that the Unfulfilled Works did not form part of the Works. Hung is not entitled to deduct the alleged value of such works from Hung’s Assessment.

The Retention Monies Issue

61.  This is an academic issue as even in the case of Hung, the DLP expired after the commencement of these proceedings and Hung has become liable to pay the balance of the value of the Works and the Extra Works to Keung in any event. At most, it may have a bearing on costs.

62.  For completeness, I should dispose of this issue briefly. The allegation is that it is a trade practice that a sum equivalent to 10% of the contract price would be retained by the employer as security sum during the DLP, which is 12 months after the completion of the whole project.

63.  Hung has the burden to prove the alleged trade practice. Burton J in Durham v BAI (Run Off) Ltd (in Scheme of Arrangement) and Other Cases [2009] 2 All ER 26 provided the following summary of the requirements of a trade practice:

 (a)  It should exist at the date of the relevant contract;

 (b)  It does not contradict the terms of the contract;

 (c)  It is certain, notorious and universal and

 (d)  It is binding, in the sense that it is not simply a usage      

 which parties choose from time to time to follow.

64.  Apart from a bald assertion in his witness statement, Hung has not begun to adduce evidence to prove the existence of the alleged trade practice.

65.  Hung could not possibly rely on the answers given by Mr So under cross-examination about retention monies in this regard. Mr So is not an expert witness and in any event he accepted that he had little knowledge about the dealings among subcontractors.

66.  On the other hand, Hung’s evidence given under cross-examination disproved the alleged trade practice. He accepted that in the two other subcontracts mentioned above, there was no retention period or DLP.

67.  I understand that retention monies clauses are common in construction contracts but they are far from certain and universally applicable. Different circumstances call for different percentage of monies to be retained and different lengths of the retention periods and in some situations they may not exist at all. It is really down to the agreement between the parties as a matter of contractual freedom.  

68.  I, hence, refuse to accept the existence of the alleged trade practice and hold that Hung was never entitled to retain any percentage of the entitlement of Keung under the Agreement pending the expiry of the DLP.

The Indemnity Issue

69.  Hung’s case on this issue is premised on an alleged agreement made between Keung and Mr So upon the commencement of the Works that 60 days would be a reasonable time for Keung to complete the Works. In the particulars subsequently supplied, Hung avers that the alleged agreement was made orally at the Prosperity Centre of the Site in late February 2017.

70.  The pleaded case of Hung is that Keung commenced the Works in March 2017 and left the Site in October 2017 without completing the Unfulfilled Works in late October 2017.

71.  In light of Chi Shing’s claim for HK$600,000 as liquidated damages under the Subcontract, Hung asks for an indemnity from Keung against such a claim.

72.  In his Defence to Counterclaim, Keung denies the alleged agreement with Mr So. He avers that he accepted that he should complete the Works within a reasonable time.

73.  On this issue, Hung relies solely on the evidence of Mr So. He was not present when the alleged agreement was made. He himself was not involved in the creation of the alleged agreement and there is no allegation that he ever mentioned or discussed the alleged agreement with Keung.

74.  On the other hand, Hung points to a provision in the Subcontract (B(iii) thereof) stipulating that if he failed to compete the subcontract works on 25 May 2017, Chi Shing would charge him HK$12,000 per day as liquidated damages for the delay (“the LD Clause”).

75.  Further, Hung relies on an operation plan created by Mr So in light of the alleged agreement and he says it showed that the Works were expected to be completed within 60 days.

76.  I have reviewed the evidence of Keung and Mr So. I prefer the evidence of Keung and find that no such agreement was ever made between Keung and Mr So.

77.  I accepted Keung’s evidence that he only met Mr So at the Site in late March or early April 2017 for the first time when he was asked to do certain variation works. He could not have made the alleged agreement in late February 2017.

78.  The Subcontract was concluded in early February 2017, long before the alleged agreement was made. The commencement date and the completion date were respectively stipulated to be 6 February 2017 and 25 May 2017. The position of Chi Shing was already safeguarded by the LD Clause. There was no contractual relation between Chi Shing and Keung.

79.  Against this background, I see no reason why Mr So and Keung, especially the latter, would find it necessary to make a separate agreement in relation to the time period within the Works had to be completed.

80.  If Mr So had ever found it necessary to make such an agreement, I see no reason why he did not find it necessary to reduce the alleged agreement into writing. Mr So never suggests that Chi Shing and Keung had had a good working relationship beforehand and could place its trust in Keung dispensing with the need of a written agreement. I reject his evidence.

81.  Furthermore, the first documentary evidence of Chi Shing’s claim for liquidated damages is a letter of Chi Shing dated 19 January 2018. There, Mr So made no mention about the alleged agreement at all and he merely referred to the Subcontract. He did not even mention the 60-day period. I find its present complaint about delay to be suspicious.

82.  In the circumstances, I find that there was no agreement between Chi Shing and Keung as to when the Works had to be completed or as to the length of the reasonable time for the Works to be completed.

83.  Having made this factual finding, the Indemnity Issue and the Delay Issue become superfluous. Strictly speaking, I do not need to deal with them. For completeness, I should briefly give my view thereon.

84.  First and foremost, even if Mr So and Keung had made the alleged agreement, Hung cannot, as a matter of law, enforce the same as a non-party thereto. On the other hand, being a non-party to the Subcontract, Keung could not be bound by the LD Clause. 

85.  Further, I accept the explanation of Keung that the Extra Works undertaken by him made it impossible for him to complete the Works within 60 days. Hung asked Keung to do the Extra Works and he cannot be heard to complain about the inability of Keung to complete the Works within 60 days.

86.  I accept the evidence of Keung that throughout his execution of the Works at the site, he heard no complaint about any delay by Hung or Chi Shing. Hung in his witness statements did not allege that he had complained about any delay, either. I am not convinced of the genuineness of the present complaint about delay.

87.  I come to the conclusion that I should find against Hung on both the Indemnity Issue and the Delay Issue.

Conclusion and order

88.  In light of the foregoing analysis, I conclude that the total value of the Works and the Extra Works should be HK$1,991,712.81. I hold that the Unfulfilled Works were not part of the Works and Keung was not contractually bound to complete the same. I further hold that Hung is not entitled to retain 15% of the said sum as his administration cost and profit and there was nothing about retention of monies in the Agreement.

89.  Thus, Keung is entitled to recover from Hung the balance of the sub-subcontract price in the sum of HK$334,312.81 (HK$1,991,712.81 – HK$1,657,400). I enter judgment against Hung in the said amount accordingly.

90.  I further order that Hung do pay Keung interest on the said sum at 1% over prime from 26 September 2018[3] to the date of the Judgment and thereafter the judgment rate applies.

91.  On the other hand, I find against Hung on the Indemnity Issue and the Delay Issue and conclude that Keung is not required to indemnify Hung against any claim of Chi Shing. In the result, I dismiss the counterclaim.

92.  Costs should follow the event. I make an order nisi that Hung should pay Keung his costs of this action including any previously reserved costs with certificate for counsel.

93.  This is an unfortunate case involving twin brothers. The legal position of Hung could have been much improved had he given serious consideration to their contractual relationship and adopted appropriate safeguards. Nevertheless, contractual principles remain the same for the parties regardless of their blood relationship and upon the application of such principles, I have come to the foregoing conclusions.

94.  It remains for me to thank both Mr Ho and Mr Wong for their helpful assistance in this matter.