UBC (CONSTRUCTION) LIMITED v. SUNG FOO KEE, LIMITED

1991, No. CON-10

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

CONSTRUCTION AND ARBITRATION LIST

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J U D G M E N T

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Sears, J.:

1. This has been a long and complex action. It is a pity it was not case managed from an early date because considerable time might have been saved by isolating various issues which could have been tried very quickly. I have decided several preliminary matters in the course of this action which I hope has also saved some time.

2. The basic facts are that the Plaintiff who is a plastering subcontractor, on the 10th June 1988 entered into a contract with the Defendant, the main contractor, for a development known as Lam Tin. If you drive through the Eastern Harbour tunnel you see the last development of Lam Tin. They were also currently subcontractors for the Defendant at the site of Wah Ming. The Plaintiff alleges that as at the 31st December 1990, the date of an invoice, which is the material date as the parties agreed, there was due and owing to it some million dollars as a result of underpayments on the contract and as a result it suffered special damage in that it lost the opportunity to take on additional subcontract work.

3. I should emphasise that this allegation was an amendment that was brought into being quite late in the day after the issue of the writ and appears to have been brought in, according to Mr. Wong's evidence, after the litigation which had taken place in Wah Ming finished and he said he had more time to consider the Lam Tin contract.

4. This apparently straightforward allegation, has necessitated a detail examination of a number of issues, involving hundred of pages of witness statements, long expert reports on accountancy practice and construction matters and several thousand pages of documents. This judgment could therefore itself run to inordinate length, but I have sought to identify the principal issues and give the proves and facts to support the conclusion which I have reached and relate those to the law.

5. I have been given very helpfully by counsel a number of schedules which cut down the base material substantially and to which I shall refer without setting them out. I have had detailed written submissions which I have found helpful. I wish no disrespect if I do not deal with all the points raised. It is important in this type of complex litigation involving construction matters more suitable for an expert arbitrator than a judge to decide, to distill the important issues from the mass of documents and evidence which I have been given.

6. There was a claim, paras. 9(a)-(f) of the Statement of Claim arising out of non-payment for works, but this has been settled for $3m to the Plaintiff including interest and the satisfaction of the Defendant's counterclaim.

7. The principal issues to be decided in my judgment are:

(1) What was the amount of money unpaid to the Plaintiff on the 31st December 1990 and which should have been paid by the Defendant under the contract?

(2) Whatever that sum did it cause the Plaintiff to suffer economic loss by being unable to take on other work?

(3) Was it within the reasonable contemplation of the Defendant at the time of the contract that underpayment of a figure in the region of that found in issue (1) would cause the Plaintiff economic loss?

(4) If both the answers to (2) and (3) are 'Yes', what was that loss? If the answers to (2) or (3) are 'No', then the Plaintiff's claim fails.

8. The answer to issue (4) is only arrived at by first answering (2) and (3) as 'Yes' and then identify one or more heads of damage is falling within both causation and remoteness. Although issue (1) is a separate matter, issues (2), (3) and (4) are all inter-relevant and I deal with them separately for the sake, I hope, of some clarity.

9. Issue (1) involves the examination of two matters (a) what was factually the amount unpaid as at the 31st December 1990?, and (b) what was owing by the Defendant having regard to the terms of the contract and any other agreement between the parties as to additional works or obligations.

10. I deal with (a) first. The plastering works falling within subcontract, are found in the Bills of quantity and the specification. The Defendant can ask the Plaintiff to carry out extra works, these are documented "VOs", variation orders. Further, by clause 7 dayworkers can be hired by the Plaintiff on behalf of the Defendant. The substantial difference between the parties on VOs is whether the amount submitted by the Plaintiff on VO invoices were agreed by the Defendant, or whether the Plaintiff is only entitled to a quantum merit. I have already given a ruling on this and in the event of an appeal it forms part of this judgment, and the ruling I have made is that the amounts are to be ascertained on a quantum merit basis.

11. On schedule E1, are found the original conflicting figures, the Plaintiff - $1,028,983, the Defendant - $629,789. As a result of my earlier ruling, I find that the amount unpaid for contract for extra works was $717,000 odd, dayworks $49,721 is admitted by the Defendants. See schedule 5, and invoices 24, 25, 26, 28 and 36.

12. The Plaintiff submits $327,415 was due and owing. This is the total sum under the invoices of $396,790 less $69,375, see the calculation on schedule 5 which having looked at the documents myself, I accept.

13. Mr. Clayton submits the sum $200,000 should be deducted for invoices 29 to 35 for work carried out after 31st December. He says that although there was an admission of $496,786 in the re-amended defence and counterclaim, this included that latter work. Having looked through all the invoices, in my judgment, the amount outstanding was $327,415 together with the $49,000 odd on which there is no dispute, the total amount outstanding therefore on dayworks was $377,000 odd. The total factual amount, therefore, having looked at all the invoices and the documents and having examined the schedules and listened to counsel, the total amount, I find, due and owing as at 31st December was $1,100,000 approximately which is as addition of 377 and 717, but I round it up and call it $1,100,000 approximately.

14. I turn to (b). This is the more difficult aspect. Although factually this amount of $1,100,000 was owing by the Defendants, were they contractually liable to pay it or some part by the 31st December 1990, the date of invoice 34? To understand what is between the parties it is necessary to set out briefly their conflicting approach and to appreciate contractual obligations and liabilities 1. extra works, these were works not covered in the contract, they range from VO.1 to VO.22. The details are found on schedule E1. The main issue on additional quantities is B17, external mosaic tiles. See also E1, which shows the Plaintiff's and Defendant's expert quantum merit valuation and they, and my decision, can be compared with the figures on invoice 34. The substantial differences are VO.1 some $114,000, VO.2 $54,500, VO.9 $35,000, VO.17-1 $61,500, VO.17-2 $41,000, VO.20 $9,000 and VO.21 $125,000. What has happened is that on invoice 34 the Defendant underpaid some $414,000 when compared with the valuation as decided by me on the VOs and some $120,000 for extra quantities which would make a total of some $535,000. The difficult question to answer is were they entitled to do this. The contractual position as the payment is governed by SC (special condition) 5. Although in somewhat convoluted language, its meaning in my judgment is clear. The last sentence was hand-written and added to the printed form. Although Mr. Szeto was an unimpressive witness, I accept his evidence that he caused this to be added as he wanted to ensure prompt and accurate payment. This is a contract in writing and therefore the Defendant is bound by it. Mr. Davie Lam, the Defendant's quantity surveyor, was an unusual witness, he was honest but his approach to valuing subcontract work was inflexible and somewhat arrogant. He admitted that he was very busy as he had three large projects going on. He said it was very common to have disputes between main and sub-contractors. Mr. Charlton said in similar language that it was a common occurrence. I have no doubt that where there are genuine disputes over minor matters they can be resolved later, but these were not, these were very substantial areas of dispute, for example, in VO.2 $59,000 was claimed. It was found later by the expert's valuation that $59,000 was due but only $5,000 was paid. The contractual position as to extra works are governed by GC8. This is not a method of interim payment. In my judgment, it was incumbent on the Defendant who had to re-verify the payment application within 7 days and pay within 14 days thereafter to do that. There is an obligation on them to investigate all matters on site for both the rate and quantity of extra works.

15. From my analysis of the evidence presented before me, there was probably a break down of communication between Mr. Szeto and Mr. Lam, but the Defendant's approach to its assessment for the VOs was, in my judgment, wrong and in breach of contract. On VO.2, despite the progress report of the 31st October 1990, Mr. Lam assumed only 2 gas flue openings were damaged. On VO.9, he said he did not have time to investigate these matters. On VO.17, Mr. Lam only allowed for 7 floors and despite progress report showing all work done allowed a paltry sum. On VO.19, Mr. Lam thought and still apparently does think, this is work outside the subcontract. On VO.21, he thought some of the work was covered in the daywork. Although today, that is some 4 years later, it is easier to seek to justify a low payment by having regard to all the disclosed documents and an opportunity to consider the reasons why and as Mr. Clayton in very eloquent submissions to me seeks also to justify the reasons why, I must look at the picture at the end of 1990. I must ask myself really as at that date what was going on. I have been much assisted by the evidence given in so far as the post-justification, but it is important in my judgment to examine the position at the end of 1990 and to examine the attitudes of the parties in coming to the decisions they were making. In my judgment, as at that date, Mr. Lam was adopting an unreasonable and high handed attitude to the Plaintiff's claims. He was extremely busy, I am sure, and he thought he was entitled either to guess what had occurred or to make the Plaintiff justify their value at some later date. He thought his staff would conclude, as he says, a commercial settlement. He underpaid $120,000 on mosaic tiling, even though he knew that the employer was paying his company by some 3,000 sq.m. more and he was paying the subcontractor. I have not set out the detailed evidence on these VOs which took up a lot of time nor on the extra quantities. If I did, it would necessitate this judgment running into several volumes more than the many I have in front of me, but I have had regard to all the evidence given and the documents and despite Mr. Charlton's assertion, and I accept that he is an experienced surveyor, that it is common to have disputes and the subcontractor must always wait. I have come to the conclusion that Mr. Lam was unreasonable in the stance he took and was in breach of contract and therefore the Defendant was in breach the contract in not paying some $535,000 odd for extra works and quantities.

Dayworks

16. Mr. Lam's evidence on this was somewhat startling. Mr. Graham describes it as cavalier or contemptuous. This seems to me a fair description. He said he did not deal with the first batch of invoices as they were small. He said he had been instructed to deduct some $200,000 on the basis of defective works. The certification I accept was haphazard, but I hold they were liable to reimburse the Plaintiff on receipt of signed certificates.

17. I am very grateful, as I have said before, for counsel for giving me written submissions because it has done two things. First of all, it focuses counsel's minds on the issues which they present to the court. Secondly, it focuses my mind on the way their submissions are put and identifies various matters. I have had regard to the evidence on dayworks and the method of documentation which I have described in somewhat haphazard. I accept that it appears that the batches of invoices, which were handed out could done in an unusual manner. Mr. Clayton has demonstrated to my satisfaction that, for example works said to be carried out in February have later invoice dates than works carried out in March and April. So it is clear to me that what was being handed over at time was indeed a bunch of documents, but Mr. Graham in his written submissions at page 8 paragraph 3.4 heading SFK liable to reimburse UBC for dayworks on receipt for signed certificate, in my judgment, is a very accurate assessment of the evidence which has been given. It corresponds with the approach which I consider appropriate in this type of case when there is some haphazard dealing going on between the parties and I would gratefully adopt what he has said in paragraph 3.4. In my judgment, I consider that a correct approach.

18. Having regard to all these matters therefore, in my judgment, there was no justification for not paying the dayworkers on time. It must be emphasised as I would have thought it to be pretty common knowledge that these are people that are hired to benefit the Defendant and it must also be within the knowledge Mr. Charlton, who is a very experienced surveyor, and he may be somewhat forgetful of what I call the day-to-day business of construction work in Hong Kong, but these dayworkers expect to be paid straight away. Sometimes they expect to be paid that day. If they are hired on a day basis, sometimes they expect to be paid at the end of the week. But I have no doubt at all that it is common knowledge and the Defendant well knew that the Plaintiff would have to paid these dayworkers virtually immediately and in my judgment they substantially underpaid as at 31st December for this obligation which fell upon the Plaintiff. I consider that the sum that was due and owing, having regard to the documents was some $377,000 worth of daywork. I therefore conclude on this aspect of the judgment that as at the 31st December 1990, the Defendant was in breach of contract in not paying by that date some $900,000, that is a mathematical addition of $534,000 plus $377,000, approximately $900,000.

Causation

19. I then turn to causation. The accountancy evidence given by the Defendant would indicate the Plaintiff company was always in overdraft, made little profit and the non-payment did not cause it to stop work. The Plaintiff's evidence was that the non-payment made all the difference and it directly caused it not to take on more work. It is clear from the documents that the Plaintiff was of the opinion, wrongly as I have held, that it was underpaid some $2m, whereas I must assume that the breach of contract was only $900,000 when deciding causation. Further the Plaintiff was engaged by the 31st December in substantial litigation over the Wah Ming site with the Defendant, see on this topic and the interesting judgment of Kaplan J. in UBC v. SFK [1993] 2 HKLR.

20. Mr. Samuel Wong, when giving evidence, said that it was a combination of factors which caused him not to continue to accept tenders. I find Mr. Wong a helpful and truthful witness. Although effectively such decision made the company stop trading, I do not consider it right that I should approach causation and remoteness on the basis that the company went out of business as Mr. Clayton submits. I am only concerned with their failure to take up additional work.

21. From table S2 page 256 bundle 2, by December the cumulative shortfall receipts over payments was over a million. The company bank overdraft are risen to $1.895m and with $95,000 over the bank line, see page 272. Mr. Wong's personal advances had risen to $3.171m. Subcontractors know they have to finance a new contract. The precise figure is difficult to assess. Mr. Li said that for the Woon Lee job for 30 days delay in payment some $774,000 would be required. Mr. Morrison in his long report, section 6 conclusions at page 117 sets out his conclusion. He says "in view of the above I consider the shareholder's decision as to whether to enter into new projects around the end of 1990 would have been influenced more by the litigation and cost thereof in respect of Wah Ming as opposed to the relatively small amount due in respect of Lam Tin". I do not consider that in the context of a business decision to take on more work that $900,000, as I find was contractually due and owing, is in the words of Mr. Morrison "a relatively small amount". In my judgment, it was a substantial amount for this company in assessing its chances to continue to accept tenders. Any reasonable sub-contractor of the size of the Plaintiff would have recognised that substantial capital was acquired to take on new work, particularly for the first month or so. I accept the evidence of Mr. Wong and Mr. Li that it would have been quite wrong for the shareholders, in particular Mr. Wong who really is the major active person in the company, to inject more capital, having regard to the financial position which the company found itself in and the cross-examination of Mr. Morrison by Mr. Graham who admitted in cross-examination that he would have advised Mr. Wong not to inject a further $1m of his own funds to enable UBC to take on another project. As I have said earlier, the figure I have found is contractually due and owing was $900,000 and, in my judgment, although Mr. Morrison spoke to $1m, it makes no difference at all. It would have been a wholly wrong matter for Mr. Wong to have injected $900,000 of his own money at that time.

22. The litigation over Wah Ming was obviously a factor, but when a payment of only $30,000 was received, although at the meeting in December 1990, Mr. Wong anticipated much more, having regard to the precarious financial position of the company, in my judgement, the underpayment of $900,000 was the dominant cause the Plaintiff did not accept further tenders. In colloquial parlance, enough was enough. Further, Mr. Wong's expectation as the future payment was seriously undermined, when after the meeting in December only $30,000 was paid. This would, in my judgment, have had a substantial impact on any reasonable businessman in Mr. Wong's position. In view of my findings under issue (4) I consider that the underpayment did cause the Plaintiff not to go ahead with the Woon Lee tender.

Remoteness

23. Much evidence was called and challenged as to whether Mr. Szeto had asserted that the Plaintiff was small and needed prompt payment. I consider it more probable that Mr. Szeto did say that the company was expanding and was able to take on two substantial contracts. The important portion of evidence, however, was the contract itself. SC5 demonstrates that the Defendant had specific knowledge of the Plaintiff's necessity to obtain prompt and accurate payment. Further the Defendant unlike any other main contractor, dealing with a subcontractor, had specific knowledge of the Plaintiff's record as it accepted the tender for Wah Ming. They knew that the Defendant was only being paid by them. Was it therefore reasonably foreseeable as at the date of the contract that underpayments of a substantial amount approaching $1m would lead to the Plaintiff not carrying out additional work? I have deliberately not framed that question as Mr. Clayton would wish to be, namely would it lead to the Plaintiff going out of business. Although, as I have said earlier, they did effectively stop work, in view of the findings I have made under issue 4, the only matter I need to consider is whether it was reasonably foreseeable that the underpayment of some $900,000 would cause them in December 1990 not to carry out an accepted tender.

24. Mr. Charlton, an experienced surveyor, gave evidence in his report that all subcontractors must expect and anticipate in their financial strategy that there will be disputed items so that payments may be undervalued. He estimated that it would not be unusual for some 10% of the contract price to be paid late. The general thrust of his evidence was that subcontractors were at the mercy of a main contractor and that they had to just grin and bear it. He said that they could always walk off site and they should expect bargaining and compromise for some items. Although quantity surveyors, or chartered surveyors, may be unaware of the words of Lord Salmon in Modern Engineering v. Gitlst Ash in the House of Lords in 1974 when that judge in his speech said "a cash flow is the live blood of commerce. This is particularly true in the contracting business in which many contractors have been ruined because of delays in payment by building owners. Many subcontractors have suffered the same fate because of delays by the contractors". In my judgment, the Defendant with the extent of their knowledge of the Plaintiff should have reasonably contemplated that underpayment of some $900,000 would have had substantial and severe effect on the acceptance of further subcontracts.

Quantum

25. I turn to the last issue, issue no. 4 on quantum. I should start by saying that the Plaintiff in its re-amended Statement of Claim, claims very substantial amounts of money. This was on any view a gross overloading of its claim. Nevertheless, although I consider that the number of items were wrongly claimed, I am still entitled to examine them individually to see whether any are justified. I accept, on the evidence which I have heard, that the Plaintiff genuinely tendered for both the Woon Lee and the CKFC jobs and that both were accepted. The latter, however, was unusual in that the tender was in February 1990 and the work would not be carried out until about a year later. It was explained to me that this was not uncommon but I do find that rather unusual.

26. I do not consider, having regard to the financial position of the company and what was occurring at the end of 1990, that it was likely despite the duality of the Lam Tin and Wah Ming jobs that they would have carried out both Woon Lee and CKFC jobs. It was more probable that only one would have occurred having regard to the litigation over Wah Ming and the problems at Lam Tin. The poor capital position in 1990 and the long space of time envisaged in the CKFC job, in my judgment, the only damage which flowed from the Defendant's breach of contract and which was also reasonably foreseeable was the giving up of the Woon Lee job, this was for $11.131m. Mr. Lee in his report projected an estimated profit of 11.78%, and compared this with the general level of profit in the construction industry. This aspect was criticised by Mr. Clayton. That figure does seem to me to be on the high side having regard to the net profit achieved at Wah Ming and Lam Tin approximately 6.63%.

27. As I have said earlier in this judgment it is a great pity that an expert arbitrator was not chosen to decide this case rather than an unfortunate judge. I, of course, am not a chartered surveyor, nor am I an accountant, however, I can have regard to the evidence which has been produced with regard to the profit elements of these contracts and in my judgment, taking a more realistic figure, having regard to the vagaries of the construction industry and this particular firm, would be in the region of 9%. I, therefore, would assess special damage that flowed from the Defendant's breach and was reasonably foreseeable at 9% of $11.13m which I calculate, as $1,001,790, but that no doubt can be checked.

28. There is also a claim for storage space for the purposes of the Lam Tin litigation and a period claimed for 3 years at $3,000 a month was, Mr. Graham submits to me, reasonably contemplated. I have thought about this, because it seems to me on any view that a company, such as the Defendant, has got to have some space for litigation, but in my judgment, having regard to the evidence I do not think that was reasonably foreseeable. It may be it was caused by the breach of contract which I find there was. The other problem on this aspect is the currency of the Wah Ming dispute when no doubt that storage space was used for that purpose, I am left in some doubt on this aspect and I think in those circumstances, I am not satisfied on the evidence that this was in the reasonable contemplation and therefore I do not allow any amount of special damage for that claim.

Conclusion

29. I have not made extensive reference to authorities as there is no real dispute between the parties as to the court's approach. It seems to me a question of fact for the court to decide as to all the issues I have identified. If I have not referred to specific submissions or particulars of evidence, it does not mean that I have not had regard to them. At the end of the day, I have concluded that there was a large sum in the region of $900,000 due and owing to the Plaintiff by the end of December 1990, that this caused them not to take on an additional subcontract and that this event was reasonably foreseeable by the Defendant in the light of the specific requirements in the contract and its knowledge of the Plaintiff. Mr. Clayton submits that this is an unique claim. It is obviously unusual. He also submits that finding for the Plaintiff will cause problems in the field of the construction work in that employers and contractors may well have to anticipate claims if they delay payment. I am very mindful of that submission, but a court should not shrink from deciding cases which turn on their particular facts. I have been left, having examined the evidence as I have, in no doubt that the Defendant was in substantial breach of contract and that the damage suffered directly flowed from that breach. In those circumstances, the Defendant should be held liable for that damage.