HIP HING CONSTRUCTION CO LTD v. HONG KONG AIRLINES LTD

HCCT 72/2021

[2022] HKCFI 622

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 72 OF 2021

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DECISION

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1.  This is the Plaintiff’s summary judgment application against the Defendant. 

2.  The Plaintiff was the main contractor engaged by the Defendant for the construction of the Hong Kong Airlines Aviation Training Centre (“Training Centre”) at Chek Lap Kok.  The Plaintiff claims against the Defendant for outstanding contract sum of HK$215,980,000 (plus interest) under a Supplemental Agreement dated 29 November 2018 (“Agreement”).  

3.  There is no dispute that the said sum is due and owing by the Defendant to the Plaintiff.  The issues here are: (a) the Defendant’s set-off or counterclaim against the Plaintiff for loss and damage suffered by reason of alleged defective building works at the Training Centre; and (b) the quantum of the Defendant’s claim.

Material facts

4.  The following pleaded facts are not in disputed. By a Letter of Acceptance dated 22 March 2017, the Defendant accepted the Plaintiff’s tender and agreed to engage it as the main contractor to carry out works for the construction of the Training Centre for a total contract sum of HK$1,248,405,498 (“Main Contract”). 

5.  Under GCC Clause 32, which was incorporated into the Main Contract, the contract sum would be payable by instalments upon the issuance of interim certificates by the Architect of the project. 

6.  From around early 2018, the Defendant was frequently late in making payments to the Plaintiff certified as due and payable by the Architect under GCC Clause 32.  Despite the Plaintiff’s repeated demands, D continued to default on its payment obligations.

7.  Under such circumstances, the Agreement came to be made whereby the parties agreed to revise the payment terms as follows:

(1)  The final contract sum for the works under the Main Contract was agreed at HK$1,203,580,000 (Clause 1);

(2)  The agreed final contract sum, together with the accrued interest and any new interest charge pursuant to the Agreement, shall be paid by the Defendant in accordance with a revised payment schedule (Clause 4).  Specifically, all remaining balance of the agreed final contract sum (including retention monies and total interests) shall be paid within 90 days from the issuance of the Occupation Permit for the Training Centre;

(3)  The Defendant agreed to pay additional interest at 15% p.a. for any further overdue payment not made in accordance with the revised payment schedule (Clause 5(4)).

8.  On 12 February 2019, the Occupation Permit for the Training Centre was issued.  In breach of the Agreement, Defendant has failed to pay the balance of the final contract sum (totalling HK$374 million) within 90 days thereafter, by 13 May 2019. 

9.  Between May 2019 and February 2021, the Plaintiff repeatedly chased the Defendant for the outstanding sums under the Agreement.  The Defendant admitted its payment obligations under the Agreement, but claimed that it was unable to meet the Plaintiff’s demands due to financial difficulty. 

10.  Between November 2019 and April 2021, the Defendant made partial payments to the Plaintiff totalling HK$158 million, leaving an outstanding balance of HK$215.98 million.

Set-off or counterclaim

11.  The Defendant says that there were, and still are, various defects in the building works at the Training Centre. The most serious defect concerns the water leakages at the basement, which comprised (i) basement screen walls constructed by the Plaintiff and (ii) the footings and raft slabs constructed by Kim Hung, the specialist contractor for foundation works. 

12.  According to the Defendant, in around June 2017, the Plaintiff agreed to “take over” the work done by Kim Hung under a “Takeover Agreement”.  By virtue of the Takeover Agreement, the Plaintiff is to be held responsible not only for its own works, but also the works of Kim Hung.

13.  The Defendant instructed two external consultants to propose remedial solutions for the water leakage problem.  The remedial proposals were forwarded to Mr Ching of Habour Century Ltd for an initial costs assessment. Based on an “oral costs estimate” provided by Mr Ching to the Defendant, the total remedial costs would be approximately HK$212 million.  Mr Ching has not provided a written estimate with costs breakdown.

14.  The Defendant further says that during the remedial works, it will not be able to use the Training Centre to train its pilots and staff, and consequently it will have to send its pilots and flight crew overseas to undergo regular training.  The total training costs were estimated at around HK$76.43 million.  There is no suggestion that any such training costs have been incurred.

15.  Apart from the water leakage problem at the basement, there were (and remain) various other defects in the Plaintiff’s building works at the Training Centre.  According to a preliminary report prepared by the Defendant’s in-house engineer, Mr Tsoi, the costs of the proposed remedial works were estimated at around HK$30.07 million.  All but one items were lump-sum estimates without adequate particulars or breakdowns.

Applicable principles

16.  The principles governing summary judgment are trite, and can be found conveniently summarised in HKCP 2022, vol 1, [14/4/9].  In a summary judgment application, the defendant must show that there are triable issues.  It has to satisfy the court that it has a real or bona fide defence which is credible or believable on the evidence before the court.  

17.  Mr Chang SC, who appeared with Mr Kwan for the Plaintiff, submitted that it behoves the Defendant to particularise the amount of its set-off or counterclaim and to specify how it is made up or calculated, so that the court has the necessary material on which to make the proper order: China Life Insurance (Overseas) Co Ltd v Li Xiaoming, HCA 570/2017, 11 December 2017, [69].  Lack of particularisation makes it impossible the court to assess the merits of the defence, and the court may reject it as an arguable defence on this ground alone: Classic Star Investments Ltd v China Land Holdings International Ltd [2019] HKCFI 141, [47].

18.  On his part, Mr Cheuk, who appeared for the Defendant, emphasised that the court does not engage in a mini-trial on affidavits for the present purpose.  Further, where a defendant raises a set-off or counterclaim, the legal principles are as follows :

“An analysis of the authorities as to what orders should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely –

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of a set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on a claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less that the claim it set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim; and

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of parity between classes (b), (c) & (d) give the court freedom to response to the perceived justice of the individual case.”

See Mass Internatioanl Ltd v Hillis Industries Ltd [1996] 1 HKC 434, at 441G-442A.

Analysis

19.  The existence of relevant defects is not in dispute.  Indeed, there are contemporaneous documents, started from June 2018, which evidenced the discussions, joint inspections and rectification works over the defects. 

20.  For the present purpose, I believe that the court should focus on the water leakages at the basement (“Leakage”).  The Defendant’s evidence which concerns the other defects (see para 15 above) is quite unsatisfactory.  These were allegedly only discovered in August 2021, whereas the evidence shows that at least some of the defects were identified earlier.  Subsequently, there were rectification works carried out, which at least covered some of the defects, as well as joint inspections afterwards. 

21.  The burden is on the Defendant to identify what defects attributable to the Plaintiff remain outstanding and the costs (with sufficient particularities) of the rectification works.  I am not satisfied that the burden has been discharged in respect of these other defects.  The only exceptions are the 2 defects (“2 Defects”) the rectification of which by the Plaintiff was recorded as outstanding in the Plaintiff’s report dated 4 October 2021, which was produced after a joint inspection with Mr Tsoi of the Defendant, and sent to the Defendant 2 days later.

22.  Mr Cheuk submitted that various defects previously identified in the evidence, eg, exhibit “KT-8” were not referred to or dealt with in the said October Report.  I am not attracted by the submission.  It is for the Defendant to point out specifically what the outstanding defects and relevant costs of rectification are.  It is not for the court to look high and low to see which of the many items of alleged defects had or had not been dealt with over the years.

23.  Further, there was no reply from the Defendant to the October Report.  It was rightly pointed out by Mr Chang that if there was any other items of defect not dealt with, they would have been raised at the joint inspection which preceded the Report.  Mr Cheuk complained that the October Report was only filed in the reply evidence of the Plaintiff.  That would not inhibit the Defendant from seeking leave to adduce further evidence to address the new document.

24.  Furthermore, there is no demur to Mr Chang’s submission that if there are indeed other defects, they would be covered under a guarantee by the Plaintiff over its works. 

25.  In respect of the Leakage, there are important disputes on whether the problems are attributable to the works of the Plaintiff or that of Kim Hung and the quantum of the loss which flows from the Leakage. There is contemporaneous evidence consistent with the Defendant’s case that the Leakage was caused by the defective work of the Plaintiff.  Such factual contention can only be resolved with a trial.  

26.  For instance, on about 29 June 2018, the Structural Engineer carried out a site inspection together with the representatives of the Plaintiff and Kim Hung.  It was found that the water leakage was arising from the construction joint (“CJ”) between the structure of B1 level constructed by the Plaintiff and the raft footing constructed by Kim Hung, and there was water ponding at the CJ area of B1.  It was concluded that “the water leakage [was] due to the defects of the CJ during B1 construction works (outside raft footing area) by [the Plaintiff]”.  During the inspection, the Plaintiff agreed to open up the defective area in question for further verification and rectify the defects as soon as possible to prevent further deterioration of the condition. 

27.  It appears from the evidence that the Leakage was not resolved as anticipated.  On about 3 July 2021, Cementaid, a contractor instructed by the Plaintiff, informed the Plaintiff that PU injection could not resolve the Leakage.  This was because there were large pockets and cavities of air in the concrete wall.  Their conclusion was that the “concrete basement wall needs major overhaul to cure the [Leakage]”.  It is controversial whether the concrete wall was constructed by the Plaintiff.

28.  I am unable to agree with Mr Chang that the controversy over the concrete wall can be resolved by referring to the evidence before the court.  In particular, the court was referred to a set of 3D diagrams of the Plaintiff.  I am afraid that it is not at all clear to the court why the wall in question was the work of Kim Hung and not the Plaintiff. Also, there is some force in Mr Cheuk’s submission that the Plaintiff could have produced the Site Diary to show whether the wall was constructed by Kim Hung.   

29.  However, I am unable to find any merit in the Defendant’s contention on the Takeover Agreement.  It is not supported by any contemporaneous document.  Self-evidently, it was a highly onerous and risky obligation for the Plaintiff to take on.  The Defendant’s suggestion that in return the Plaintiff was able to gain control of the Site and start its work earlier is quite unconvincing.  In particular, there is no indication that the Plaintiff would gain any financial reward, eg, some increase in the contract sum, for the onerous obligation. 

30.  Contrary to the Defendant’s case, the Site Handover Inspection Record showed that the Plaintiff accepted the Site on as-is condition from Kim Hung on 1 June 2017, and will allow the latter to access the Site for outstanding and defect rectification works within a reasonable time.  There was nothing to suggest that the Plaintiff had agreed to take over Kim Hung’s works and obligations.  Quite the contrary, the fact that the Plaintiff agreed to allow Kim Hung access to the site for outstanding and defect rectifications shows that Kim Hung remained responsible for its own outstanding and defective works.

31.  In the premises, I am satisfied that the Defendant has made out an arguable set-off or counterclaim in respect of its loss which arose from the Leakage.  I agree with the Defendant that its set-off or counterclaim arose out of the same project as the Plaintiff’s claim.  It would be “manifestly unjust to allow one to be enforced without regard to the other”: Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938, at 950D.

32.  Moving onto the quantum of the Defendant’s loss, there are 3 items :

(1)  Costs of proposed remedial works for the Leakage: HK$212 million;

(2)  Training costs for sending the Defendant’s pilots and staff overseas to undertake training: HK$40 million per year;

(3)  Costs of proposed remedial works for the 2 Defects.

33.  In respect of head (1), there can be no serious disagreement with the Plaintiff’s submission that the Defendant has failed to condescend to details as to how the figure of HK$212 million was calculated.  It was derived from an oral preliminary estimate provided by Mr Ching.  Such is the totality of the Defendant’s evidence on this item. 

34.  The Plaintiff has obtained a cost estimate report from an experienced quantity surveyor who assessed, with breakdown, that the proposed remedial works would cost only HK$21 million.  In light of such evidence, Mr Ching’s estimate appears manifestly excessive.

35.  As regards head (2), the Defendant claims that the mechanical and electrical plant supporting the flight simulator equipment in the Training Centre will have to be shut down when remedial works are being carried out to address the Leakage.  The Defendant will thus have to incur over HK$40 million per year to send its pilots and staff for training overseas.

36.  The Defendant’s proposed remedial works are limited to the ground floor and basement of the building.  The mechanical and electrical plants are controlled floor by floor and there is no satisfactory evidence to explain why the Defendant will not be able to use the other floors of the Training Centre for training.  The Defendant’s case that the whole Training Centre will be rendered unusable is little more than bare assertion.  It must be borne in mind that the Defendant is under a duty to mitigate its loss. Assuming that the mechanical and electrical plant has to be shut down, common sense dictates that mitigating measures can be put in place to, eg, minimise the down time and/or re-arrange the training hours.  Further, why would the training of other staff be affected assuming that the flight simulator cannot be used? 

37.  In any case, the breakdown for this claim for HK$40 million of training costs is not explained.  There is no information on where the staff will be sent, the number of staff currently retained by the Defendant and how many of them will have to be sent to training at any given time.  I am not satisfied that this very substantial loss has been made out on the evidence.  Put another way, I do not see this as a bona fide or believable claim. 

38.  Finally, there is no proper evidence for the requisite rectification works for the 2 Defects and the costs thereof.  The Defendant’s remedial costs estimates (B4/79/1222-1228) were all lump-sum items with no particulars or breakdowns.  It is not a matter of guesswork for the court based on such unparticularised estimates.  In the absence of the requisite evidence, the Defendant should resort to its right under the Plaintiff’s guarantee.

Disposition

39.  For these reasons, save for the sum of HK$21 million, there be summary judgment for the Plaintiff against the Defendant. The Plaintiff is to submit an agreed draft order for the approval of the court.  Such order should provide for directions for the further conduct of this action.  The burden of proof in the trial should fall on the Defendant to establish its set-off or counterclaim.  It should be reflected in the directions.  The costs of and occasioned by this application be to the Plaintiff, to be taxed if not agreed, with a certificate for 2 counsel. 

40.  Despite the partial success of the Defendant’s case, I ordered that it should bear all the costs of this application to reflect the strong disapproval of the court of the delay in the lodging of the Defendant’s skeleton arguments due to the extreme lateness in instructing counsel for this hearing.  The non-compliance with the PD had adversely impacted upon the preparation for this hearing by the court.  Such impact gave rise to further adverse ramifications on other commitments of the court and is not to be overlooked.

41.  I am grateful for the assistance of counsel.