GUARDIAN FIRE ENGINEERS & CONSULTANTS LTD v. LAW CHI SHUN t/a TECHNICOM ENGINEERING CO

HCCT95/2001
and HCCT8/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.95 OF 2001

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(By Counterclaim)

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(Consolidated pursuant to the order of Hon Burrell J
dated 10 December 2001)

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J U D G M E N T

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1. This action stems from the installation of fire service works during the construction of the Cheung Kong Centre in Central, Hong Kong. Originally there were two actions. They have been consolidated. The first in time was brought by "Technicom", a sub-sub-contractor against "Guardian" a sub-contractor for the balance of monies due to them under contract for fire installation works relating to the lower floors of the building (the "TOP 1" contract). Guardian defends that action and counterclaims. In the second action Guardian claims damages under a second contract which relates to the upper floors (the "TOP 2" contract). I shall refer to the parties, not as plaintiff and defendant but as Technicom and Guardian.

2. As is not unusual in cases of this type the evidence has involved a considerable amount detail. Technicom says it has been underpaid on both contracts, Guardian says the opposite and that Technicom failed to complete the TOP 2 contract. In spite of the passage of five years the parties have been unable to agree many items. The parties and their solicitors have made many attempts to reach agreement, both parties' expert quantity surveyors have met and done their best to settle matters, counsel at trial have had time to negotiate. The end result is that the parties remain opposed about a number of matters. Counsel have therefore, with commendable attention to detail, taken the court through an abundance of documentation such as Scott schedules, correspondence, invoices, delivery notes, memoranda, payment records, plans, pleadings, witness statements, reports and so on in an effort to crystallize the issues which remain, upon which the court is now required to make decisions.

3. I mention this so as to make two preliminary observations. Firstly, in this case experienced contractors, experienced quantity surveyors and experienced lawyers have all been unable to settle their differences, which are largely differences of quantum, over a five-year period. At trial, the witnesses on both sides have endeavoured to assist the court. It cannot be said that any witness was evasive or lacked credibility. The court is therefore left with a difficult task. On the one hand, the burden and standard of proof must be adhered to. On the other hand, the evidence on many of the issues has been evenly balanced. In such circumstances, a considered but robust approach is necessary in order to provide the parties with the one thing they have been unable to achieve themselves, namely, a decision. The evidence has involved an examination of thousands of documents, the judgment will not.

4. My second preliminary observation flows from the first. This has been a classic example of a case which, if it could not be resolved by the parties themselves, would have been bread and butter to an experienced non-legal arbitrator such as a quantity surveyor. In the absence of an arbitration clause or consent to an ad hoc arbitration, that cannot happen and I make no criticism that it did not happen in this case. I merely emphasise the suitability of such alternative methods of resolving disputes such as this one.

5. Throughout the proceedings this court has encouraged the parties to concentrate on the main issues and not to spend a disproportionate amount of time on relatively inexpensive items. Counsel and solicitors have responded as best they could. The result is that there are five primary issues (each with sub-issues) on TOP 1 and three primary issues on TOP 2. A key issue in TOP 1 is the value of variations. There were nearly 50 variation orders, of which 21 remain in dispute. Counsel's written submissions in opening and closing their cases exceed 100 pages of closely typed argument. Taking the extreme positions the parties are approximately $5,000,000.00 apart on TOP 1 and $1,500,000.00 apart on TOP 2.

BACKGROUND

6. Before I address each issue individually and give a decision as briefly as I properly can, I will outline the nature of the works and the nature of the disputes.

7. Both contracts involved the installation of fire prevention systems. In short, the system which results in ceiling sprinklers coming on in the event of a fire. On TOP 1 there is no dispute that there was a written contract and that the original contract work was done and paid for. The final terms of the TOP 1 contract are however not agreed. The parties also disagree about how the value of various variations should have been calculated. Technicom claims $7,725,000.00, Guardian admits $5,184,000.00.

8. Guardian also claims that there should be four further reductions from Technicom's entitlement. Firstly the cost of materials supplied to Technicom. Guardian says materials to the value of $3,782,000.00 were supplied, Technicom says it received $2,034,000.00's worth of materials. Deductions 2, 3 and 4 are for smaller amounts and are dealt with as issues D, E and F hereafter. Their total value, on Guardian's case is under $800,000.00. On Technicom's case it is nil.

9. For TOP 2 there is a similar disagreement over the value of materials supplied. Guardian says approximately $2,000,000.00, Technicom concedes approximate $1,000,000.00. There is also a dispute as to whether the terms of the TOP 1 contract (whatever they may have been) automatically continued with TOP 2. Guardian says they did. Technicom's case is that it was only asked to carry out works on a floor by floor basis as required. The impact on the final quantum due to Technicom as a result of this issue is about $400,000.00. If Technicom is right it should receive $4,445,000.00, if not, it will receive $4,034,000.00.

10. I now turn to each issue.

TOP 1

(1) Issue A

11. Did items 5(g), (i), (l) and (o) of Guardian's letter dated 18 March 1998 form part of the TOP 1 contract?

12. Items 5(i) and 5(o) have no bearing on this case. I will therefore deal with 5(g) and 5(l) only. The letter said :

"g) Material delivery and hoisting charges from G/F to all services floors is your responsibility.

l) The employment compensation policy for the project should be responsible by your company. In order to have an easy and common procedures and management, the insurance is to be done by the main contractor on our behalf. A 1.5% will be deducted from the contract sum including all variation work."

13. Technicom did not sign this letter as confirmation of acceptance of its terms. Guardian's case is that its acceptance should be inferred from the fact that it commenced work. In this case I do not agree. Technicom objected in writing to clause 5(l) and I accept Technicom's evidence that clause 5(g) was specifically not accepted also. The cost of hoisting materials would not be a small item in a contract such as this and I accept that Technicom was concerned to exclude it from the original contract price and did so.

14. The court's decision on Issue A, as framed above, is no.

(2) Issue B

15. What is the value of the variation orders ("VOs") in dispute? I will deal with the variations still in dispute in numerical order.

(a) VO2

16. This variation concerns the value of overtime work done by Technicom staff. There are three sub-issues :

(i) How should the "normal working hour equivalent" for overtime work be calculated? Put another way, by how much, if at all, should Technicom benefit from a "fatigue factor" when calculating productivity during overtime periods? It is common ground that a deduction to the overall expenses of $2,112,675.00 has to be made as a starting point. Based on a 0% fatigue factor Guardian claims that $810,900.00 should be deducted. Technicom claims a 30% factor which would result in $482,470.63 being deducted. Both experts gave oral and written evidence on this matter. It was very interesting. The result is that I am satisfied that 20% is a reasonable factor. Therefore $551,395.00 should be deducted from $2,112,675.00 which is $1,561,280.00.

(ii) Whether Technicom is entitled to claim an overtime rate for supervisors higher than for ordinary workers?

Guardian's expert witness was unaware whether Technicom's staff included supervisors or not. I accept Technicom's evidence that it did. I also accept it is reasonable to pay their overtime at a higher rate. Technicom's claim for $170,250.00 under this issue is therefore reasonable.

(iii) Whether Technicom is entitled to meal and travel allowances?

Technicom seek a further $99,120.00 under this head. The fact that no documentation was produced, although not fatal, weakens this claim. I am not satisfied that it would be usual to pay such a claim and accordingly, I disallow it.

(b) VO3A and others

17. The two issues which took up most of time at trial were under this VO and also VOs 6, 7, 11, 12, 15, 17, 19, 31-34, 36-39A, 43 and 44. The first was a dispute as to whether the proper unit rate for the relocation of a considerable number of sprinkler heads was $450.00 per unit or $180.00 per unit. The second was whether or not Technicom had made a double claim for 2074 sprinkler heads. In other words, it had claimed for two jobs in respect of each sprinkler under different VOs whereas the work actually done was a single operation.

18. There were many sub-sub-issues, many differences of opinion, many differences of job descriptions, many differences of recollection. It would serve no useful purpose to set out all the competing evidence and submissions. The court's ultimate evaluation of the evidence is that the issues are borderline. The financial consequences of taking one approach rather than another, in the context of this case, are fairly significant.

19. Not without some difficulty I have come to the conclusion that the value of the variations under all the above in issue should be calculated as follows.

20. On every sprinkler where Technicom claim $450.00 as opposed to $180.00 it succeeds. This however is subject to the court's second finding namely, that wherever Guardian has claimed that Technicom has duplicated a claim, it succeeds. I have had to consider and balance a considerable volume of evidence to reach this conclusion. In other words Technicom succeeds on the unit rate issue and Guardian succeeds on the duplication issue. Having applied these findings to all the sprinkler heads in issue, should there be any outstanding disagreements on quantum in relation to a residue of sprinkler heads, then, to those, Technicom's claimed rate shall apply. On the issue of $450.00 or $180.00 I was impressed with the evidence of Mr Wilson Law for Technicom. On the issue of duplication I was persuaded by the evidence of Mr T.S. Ng for Guardian.

21. The intended result of these conclusions is that Technicom is entitled to the higher rate but for a smaller number.

22. To complete VO3A issues (i) I accept that the figures of $452,247.90 for pipes and $41,257.71 for valves are reasonable and (ii) there should be no pro rata increase for testing and commissioning. It was included in the original scope of the contract.

(c) VO4, 20 and 23

23. The ceilings at the ground floor and upper ground floor are very high indeed. The dispute under these variations is whether Technicom is entitled to a higher rate because of the extra work involved in working at high levels. I prefer Technicom's evidence on this issue. Lobby ceilings in modern buildings are often exceptionally high. I am satisfied that the original tender drawings were either unclear and/or not brought to Technicom's attention at the material time. In either event, a high level lobby installation is significantly different a job from an ordinary office floor installation. Technicom would not have and did not agree to carrying out such works at an ordinary rate.

24. I allow Technicom's claim under VOs 4, 20 and 23.

(d) VO30

25. This VO is for an additional sum of $106,952.68 for fire hydrant work. On this issue I was again impressed by the evidence of Mr T.S. Ng for Guardian. I am thus persuaded that these works were not additional and were included in the original contracted works. I disallow this item.

(3) Issue C

26. Guardian submits that it should be credited for the cost of materials which it purchased, delivered and hoisted on site which Technicom used. The total cost of the supply and transportation of such material is $3,782,005.26. Technicom on the other hand says it should only be liable to pay for such materials which it actually used and it should not be responsible for transportation costs. The total value of the materials which Technicom concedes should be credited against Guardian's account is $2,034,449.17.

27. I have already decided that Technicom did not agree to the hoisting charges, under issue A. This issue is therefore now confined to the cost of materials only.

28. Technicom submits that some materials must have been used by other sub-contractors both while they were still on site and (in relation to TOP 2) after they left. Its case is therefore based on the argument it should only be liable for items for which there is documentary proof that it acknowledges receipt of materials which were for it exclusive use. Guardian on the other hand says that all materials supplied under this heading were for Technicom and were used by Technicom. Technicom has admitted the bare minimum, Guardian has claimed the absolute maximum. The reality is undoubtedly somewhere in between.

29. Guardian's case is weakened by two factors. Firstly, its claim for deductible materials has grown steadily as the litigation has progressed. Mr Poon for Guardian said this was due to "human error" when accounts were being checked and re-checked. A more likely explanation is that Guardian was investigating every conceivable avenue in an attempt to reduce the size of Technicom's claim against them. In my judgment the simple truth must be that in addition to the items actually signed for Technicom would have used a significant proportion of the materials not signed for.

30. To arrive at a suitable figure, the starting point is to reduce Guardian's claim by the amount of the hoisting charges. Guardian's net claim becomes $3,178,088.00. A median figures between this amount and Technicom's admitted amount is $2,606,268.00. This is the amount which should be deducted from Technicom's claim under this heading.

(4) Issue D

31. Guardian seeks reimbursement of $460,000.00 paid by them to labourers of Technicom's sub-contractor, a company called Ming Sun pursuant to a settlement agreement.

32. I have come to the conclusion that this sum should not be deducted. The reasons being that, as is admitted by Guardian, the labourers in question were not Technicom's; secondly, I accept Mr Wilson Law's evidence that he did not agree to such a deduction being made and thirdly, Guardian's case as pleaded in their counterclaim, was not consistent with their case as it emerged in evidence.

(5) Issue E

33. Should Technicom be liable for 1.5% of all works done for the cost of insurance? As I have already decided in Issue A that item 5(l) of Guardian's letter of 18 March 1998 was not agreed, Technicom is not liable for this sum.

(6) Issue F

34. This issue is whether Technicom rectified the defects and if not, what are Guardian's reasonable costs for making good the outstanding defects.

35. I am satisfied that some defects were left outstanding and rectified by Guardian. Their claim is supported by their expert witness, Mr Spencer Kwan. The original documentation supported a much larger claim of over $300,000.00. I agree with Mr Kwan's evidence that the sum actually claimed, namely $168,875.00 is reasonable.

TOP 2

(7) Issue G

36. What was the scope and/or terms of the TOP 2 contract?

37. I have concluded that Technicom's terms of employment for TOP 2 were different from that for TOP 1. When the TOP 1 works started it was not known whether Technicom would carry on as the sub-contractor for TOP 2. The 18 March 1998 letter was only intended to apply to TOP 1 and there was no documentation to suggest that the terms of that letter were to be incorporated into a contract for TOP 2 when the time came to commence that work. Moreover, as I have already decided, the entire terms of that letter were not agreed by Technicom. Terms which were not agreed for TOP 1 could not form the basis of a contract of TOP 2.

38. I accept Mr Law's evidence for Technicom that the position at the conclusion of the TOP 1 works was by no means certain. Guardian was endeavouring to get the works done as quickly as possible to meet programming deadlines. There were numerous sub-contractors on site. The situation was confusing. I accept that Guardian kept Technicom on for TOP 2 works on a piecemeal basis. Guardian was keeping its options open so as to ensure speedy progress of the works. It did not want to risk committing itself to a fixed price contract for a certain number of the higher floors.

39. I accept that many discussions took place. However, at such discussions agreements were reached on matters such as unit rates and what part of the works and on which floor Technicom was required to continue. There was no written contract. No attempt was made by Guardian to submit one neither was a programming schedule agreed.

40. Technicom is therefore entitled to the value of the works it did, as claimed, namely $4,445,660.00.

(8) Issue H : Insurance

41. For the same reasons as in Issue E above, Guardian fails on this issue.

(9) Issue I

42. Deduction for materials supplied to Technicom and, cost of transportation and hosting. This is the same issue as Issue C under TOP 1.

43. As I have already deducted the cost of hoisting ($603,912.00) from the claim under TOP 1 I will not deduct it again because it represents the total cost for both TOP 1 and TOP 2. What remains is to calculate the median figure between what Guardian claims and what Technicom concedes. That figure is $1,482,387.00.

44. It is now possible for the court to do a final calculation in relation to TOP 2 but not TOP 1.

QUANTUM

(1) TOP 2

(2) TOP 1

46. Because of my decision under Issue B it remains for the parties to make the final calculations. On the other issues I have made a final determination on quantum. The final result on TOP 1 should be a payment due to Technicom in the region of $3,000,000.00.

47. Hopefully the parties will now agree a figure and submit a consent order.

COSTS

48. Costs may remain an issue depending on the outcome of the final determination of the TOP 1 quantum.

49. In order to avoid further costs of a hearing on costs I propose to make a nisi order in respect of the whole action which is intended to reflect the degree of success and failure on all the various issues which have been ventilated.

50. I make a global nisi order that Guardian do pay 70% of all Technicom's costs arising out of both actions.