LAM KEE CONTRACTORS (a firm) v. CHOW MOON AND ANOTHER

Action No. 6039 of 1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is a claim brought by a sub-contractor against a main contractor, or rather the two partners in the main contracting firm. The contracting firm is Wing Fai Construction Company. On 24th March 1980 that Company entered into a main contract with Hong Kong Government No. 530/1979. Under that contract the defendants were obliged to perform a variety of services for Hong Kong Government, principally works of maintenance, repair and construction, for a period of two years from the 1st April 1980. The works had to be done when ordered by Hong Kong Government and were then performed at agreed contract rates. They took this form.

2. There were a number of rates set out by Government in the contract. What the contractor was invited to do in his tender, was to indicate which of the rates he accepted, which of the rates he objected to, and which of the rates he wanted modified. The modifications requested and agreed in this case varied from minus 50% to plus 50% of the Government's printed rate. This indicates the carefully structured nature of a contract of this character. The work with which I am concerned is desilting work and for that the defendants sought the contract rate plus 15%. The total works were estimated to be of value of $20M. In the result the figure I think came to nearer $70M.

3. Immediately after the main contract was made, Wing Fai entered into a series of sub-contracts. Two have been put before me with a firm called Wing Hing Contractors. Both sub-contracts were in the defendant's common form with manuscript additions and alterations. The first dealt with repair and maintenance of roads and road drainage. In that case the sub-contractor agreed to perform this work, as and when required by the main contractor, for the Government rate less 26%. The defendant were to pay the Government rate, after its receipt, and subject to deduction of a 26% management charge of fee, within a named period of time.

4. The second sub-contract relating to cleaning and desilting of drains. This is also made on the 1st April and expressed to last for two years. In this case the contract rate was the Government rate minus 35%. That was also required to be paid within 17 days of receipt by the defendants of that sum from Hong Kong Government.

5. Some criticism has been made in the course of this case of these varying rates, the differences, the profits and so on. There has been nothing put in evidence before me which would remotely justify me in criticising any of these figures at all. It is quite obvious that there was a lot of balancing of these rates between these various jobs, and I am quite satisfied the parties concerned know a great deal more about that than I ever will.

6. There were three partners in Wing Hing Contractors: a man called Fok Hon; a man called Wong Bong; and Mr. Tam Kwok Luen who has been the principal witness on the plaintiff's behalf in this claim. Wing Hing started this work, but gave it up at the end of June, and no longer attempted to fulfil its contractual obligations. There was comparatively little interruption in the actual working because a new group took over this desilting work - A group known as Lam Kee, the plaintiff group. The partners in the plaintiff group, I am told, were Mr. Tarn who was the surviving partner from wing Hing; two of his sub-partners in Wing Hing, a Mr. Law King Ching and Mr. Chan Ching Lam; and Mr. Fok Hon's son Fok Chi Lung. Now for reasons which I have not really started to understand, only two of those gentlemen were in fact recorded as partners in the Business Names Registration.

7. It is not in dispute that at least as from the 20th September this group was working; and that thereafter it did the job which Wing Hing had previously undertaken to do, and completed the contract. It was some months after the contract completion that the issue which has divided the parties first emerged. That is: what were the true contract rates for the job between the new sub-contractor, the plaintiff and the defendants.

8. The most unfortunate feature of this case is that there is not a single piece of paper which bears directly upon the party's contractual obligations. The work having restarted again in the summer of 1980, it simply went on. No one attempted to record the terms under which they thought they were then doing the job. I know it is common for judges to be pompous about how other people should run their businesses, when the truth of the matter is that few of us would last in business for longer than a week. But this is really a very very unfortunate incident in this case, because one piece of paper would have saved a hearing which has already lasted, I think, eight days.

9. Both parties had very good reason to record the terms they thought they had agreed on paper. Both thought they had agreed terms which were more beneficial to them than the original Wing Hing terms.

10. Mr. Tam, on behalf of the plaintiff, thought that he had, in July of 1980, reached an agreement with the defendants that his group should perform this work not for the Government rate minus 35%, but for the Government rate of minus 15%. Or putting the matter the other way round, for 85% of the figure not 65%. This is a very material increase which on the agreed figures for the total cost of this job comes to nearly $2M. So he had very good reason to put on paper the record of that very beneficial new rate.

11. Conversely Mr. Chow and Mr. Hui Hau Fai, the defendants both thought that they had made a very beneficial bargain. In this case they thought they made it with Mr. Fok Hon, one of the original partners. They had made it because Mr. Fok Hon had made that particular offer. He offered, they said, to forego fluctuations in respect of this contract. Fluctuation in this type of contract go like this. All the Government rates in the main contract are tied to a particular cost of living index level at a particular date, specifically in relation to labour costs and to a wide range of material costs. Then if the contractor performs the services at some subsequent date, and he can then show that the cost of living index has risen (which sadly in recent years had not been difficult) he then gets a higher rate from Government. This increase is known as "fluctuations", which is the word that has been used repeatedly through out this trial. The defendants thought that they had an agreement for this work to continue at the same rate, the basic rate, as wing Hing, i.e. 35% minus the fluctuation.

12. The first question I have to decide is a pure question of fact and is which of those two accounts I prefer. Because the defendants likewise denied emphatically that they ever came to any agreement with Mr. Tam such as he asserts.

13. Now I have had the opportunity of seeing Mr. Tam and Mr. Chow, particularly, in the witness box for some days each, and I listened as carefully as I could to their evidence. I have to make a choice between the two. I have come to the conclusion, without any real hesitation at all, that Mr. Chow was the more impressive witness of the two. on the whole I prefer his evidence, and that of the 2nd defendant, to that of Mr. Tam. That is an overall general impression. There are a number of particular points which I would desire to make, in support of it.

14. The first is that I simply cannot accept what Mr. Tam says about his being in a powerful negotiating position. What he told me in substance was this. He made this successful agreement because he was in a powerful position, because the original rate of 35% was quite insufficient. The contract had been entered into upon the basis that a free dump would be available at a site at Butterfly Bay. This had in fact proved to be wrong because the dump had been unwilling to accept the residue which Wing Hing was offering. This was a complete change of circumstance which made their original Wing Hing Contract totally unsupportable. This was recognised by Wing Hing and by the defendants. The defendants were desperate to get the job done or else they were going to be liable for forfeiture and penalties from Hong Kong Government. They therefore were agreeable to very much more beneficial terms.

15. The first thing I say about that, is that I simply do not agree, and I cannot accept that Mr. Tam was in fact in a strong negotiating position. He was one of the partners in the defaulting partnership. He was exposed to a personal liability. If what he tells me about the risk factor was right, it was a very real personal liability. I do not believe that there was any desperation for finding a contractor at this time at all. I am quite satisfied that the reasonable settlement which was in fact reached between the two interests, the defendants and Wing Hing in the months that lay ahead, came about because the defendants then thought that they had a satisfactory replacement contract; not a replacement contract such as Mr. Tam was suggesting had been made, which would have been very much more expensive to them.

16. Secondly during Wing Hing's time, Wing Hing retained a sub-contractor by the name of Ng Lam. Mr. Tam was asked a number of questions in cross-examination about this, and gave what, at the end of the day, I could only describe as some deliberately misleading half truths, before the full story came out. That was that in the Yuen Long area this sub-contractor was doing the work; that the bulk of this work arose in the Yuen Long area; that he was doing it not for 65%; but for 59% of the Government; and that that rate included disposal. Now that evidence seemed to me flatly inconsistent with a total change of situation, which must have affected Ng Lam in the same way as it affected Wing Hing; or of any unacceptable loss to Wing Hing in respect of this work, who were going to get 6% of the cost without having to do very much.

17. Finally there is the parties behaviour between September 1980 and the end of 1982. After the initial ebb and flow, the pattern of payment settled down at or just below 65% of the White Bills which the defendants were, from time to time, submitting to Government for payment. Now as I have said the difference between 65% and 85% was very considerable in this case. It amounted to something like a million dollars at a very early stage in the contract. The White Bills were all copied to the plaintiff. This differential was palpably obvious to them. Indeed having said something else earlier on, Mr. Tam said that he was adding up the White Bills every 15 days, and carrying forward a running total. In those circumstances the short fall between what he was receiving, and what he thought he was entitled to was enormous. I find it is impossible to accept that he would have behaved in the way he did if he really thought that he was entitled to 85% and not 65%.

18. In those circumstances I reject Mr. Tam's contract, and his account. I basically accept the account that the defendants have given me of their conversation with Fok Hon in July 1980, and that they then thought that they had come to a contract with him which excluded fluctuation. Why Fok Hon made this offer I know not, and he has not been called by either party to give evidence. For my part I find it difficult to disassociate the offer from his own personal expressed position as a former partner in Wing Hing.

19. That leads me to the next and crucial question, which is: Does this contract, which I find was in fact made between Fok Hon and the defendant, bind the plaintiffs? Or to put it in the other way: Had fok Hon, the plaintiff's authority, to enter into this contract? Because Fok Hon at the time said he was representing or making the offer on behalf of his group, which was then totally unspecified. Now a number of points seem to me to arise on this.

20. First, there is no evidence that Fok Hon's group in fact existed at that time at all; or if it did, who was in it? It is by no means certain that this was not a typical case of a man obtaining a contract on behalf of a group, and then looking around thereafter to find persons to perform it.

21. Secondly there is no evidence that the plaintiff group existed at that time. The earliest date shown on any document is, I think, the 1st August; and the Business Registration refers to commencing business on the 8th August.

22. Thirdly there could have been no holding-out of Fok Hon by anybody at that time because the holding-out has to come from the alleged principal and not from the agent himself.

23. Fourthly I cannot see any evidence of any agreement existing at that time between Fok Hon and anybody, from which Fok Hon could have derived authority expressed or implied.

24. Next, there is no evidence that Fok Hon was ever a partner in the plaintiff's firm. Indeed the inference appears to be that he deliberately stayed out of this himself and inserted his son instead.

25. Now I agree with Mr. Mok that the relationship between all these parties was close and incestuous and there were a lot of cross-relationships between them. That may give rise to suspicion. But suspicion is one thing, evidence is another. I can find no basis for any finding that Fok Hon had in July authority actual implied or ostensible from the plaintiffs.

26. It seems to me that there is support for that conclusion from a slightly unusual source. After this dispute blew up, and for the first time the claim to be entitled to Government rate minus 15% was put on paper in a letter of 18th February 1983, Mr. Chow sought out Fok Hon and spoke to him about the agreement that he had originally made. Mr. Chow told me that although Fok Hon was then prepared to assent to the contractual terms about which Mr. Chow spoke in evidence, and was prepared to sign a statement which was in fact produced, he declined to sign the first draft of the statement which was the draft which recorded this specific agreement about fluctuations. He was quite prepared to sign a statement to the effect that the contract was to be Government rate minus 35%. He declined to sign the statement that it was Government rate minus 35% and minus fluctuations. He declined to do that upon the basis that he was not a partner in the plaintiff company.

27. In those circumstances it seems to me that the only approach open to the defendants here, is to say that the agreement they rely upon, made with Fok Hon, was ratified or adopted by the plaintiffs. It has to go something like this: that Fok Hon made his agreement on behalf of a group; that group was later identified as the plaintiffs: and that Mr. Tam on behalf of the plaintiff group later adopted Fok Hon's contract.

28. In support of that plea the defendants rely upon the events particularly of the 20th September. Now it may be that there had been some earlier formal introduction of Mr. Tam to the 2nd defendant, but I accept what the 1st defendant tells me that this was the occasion upon which with Mr. Fok Hon introduced Mr. Tam to him personally, as the person who was going to carry out this contract. It is plain on that occasion that two receipts came into existence. The first was a receipt given by Lam Kee Contractors for $40,000 and that was signed by Mr. Tam and Mr. Fok Hon. The second was a receipt given by Wing Hing for $20,000 signed by the three partners, Fok Hon, Tam and Wong Bong.

29. Two things were suggested by Mr. Tam in respect of this neither of which I accept. The first was that on that occasion he made it clear to the people there that Fok Hon was not a partner. The second was that Fok Hon's signature was only added to the document, expressly at the defendant's request, because they were making the cheque payable to Hong Kee and not to the plaintiffs because the plaintiffs then had no bank account. The hollowness of the second point is shown particularly by the subsequent receipts given in respect of Hong Kee cheques. But rejecting all that as I do, all this document does is to show that Fok Hon was then purporting to act for Lam Kee, purporting to give a receipt for Lam Kee and was apparently authorised by Lam Kee to do that. It does not take the matter any further than that. In order to show that Mr. Tam ratified or adopted the Fok Hon contract it must be shown that Mr. Tam did so with full knowledge of the material facts i.e. full knowledge of the terms of that contract.

30. This seems to me to be where the defendants fail. First because there is simply no evidence that Mr. Tam knew them; and secondly because Fok Hon's behaviour in relation to the subsequent statement, which I have already referred to, is I think quite as consistent with concealment from Mr. Tam as with anything else. So in my judgment, although I am prepared to accept on the facts that the defendants thought they had a contract with Fok Hon, that contract does not bind the plaintiff.

31. It follows that each party has failed to establish the variation for which it contended from the Wing Hing terms. Now it seems to me plain that a contractual relationship existed between these two parties. This contractual relationship started to subsist from August or at the latest September 1980. It is equally obvious that the terms of that contract can only be implied from the party's behaviour. The single most important fact in that respect is that both parties went ahead and completed the work, after Wing Hing failed. The only safe inference which I think can be drawn from this, is that they completed the work on the Wing Ring terms, unless otherwise agreed, and I have rejected any suggestion of other agreement. It is only this inference which in my judgment is clearly consistent with the conduct of both parties. It is this which seems to me consistent with the payment pattern I have already referred to. There was evidence about discussions on fluctuation, and these discussions nearly resulted in the defendants conceding these fluctuations as an act of grace. but these discussions were, in my judgment, far too equivocal to found any finding of exclusion of fluctuations by conduct.

32. So my conclusion is that this work was done by the plaintiffs on the same terms as Wing Hing were employed upon. That means that they were entitled to 65% of the total Government payments which the defendant received under the main contract, including the cost of living index adjustment. Now most usefully and sensibly all the figures in this case had been agreed. I would like to pay a particular tribute to counsel for having brought that about, and indeed for their helpfulness throughout this case.

33. It seems to me on the agreed figures that the plaintiffs are entitled to 65% of the agreed total of $7,491,286.10 and my machine tells me that 65% of that is $4,869,335.90. From that there falls to be deduced the payment of $4.37M plus the $96,000 which are agreed at the bottom of the page. I totalled those and came to $4,466,218.60. If you deduct that from my percentage calculation I arrive at the figure of $403,117.30. If those figures are arithmetically correct that is the sum to which the plaintiffs are entitled by way of judgment.

After argument

34. There will be judgment for the plaintiff for $403,117.30 with interest at 13% per annum from 1st March 1983 until today, when the automatic rate takes over, and with costs.