MING KEE ASPHALT ENGINEERING LTD v. CHINA ROAD AND BRIDGE CORPORATION

HCA5495/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5495 OF 2001

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J U D G M E N T

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Introduction

1. Roads in Hong Kong require repair from time to time especially high speed roads for motorway.  The defendant, China Road and Bridge Corporation, is a road and bridge building company which held a type C Government contractor’s licence in 1999.  This permitted it to bid for Highways Department contract which involved maintenance work for high speed roads in Hong Kong.

2. On 5 February 1999, the defendant submitted tender to the Government for Highways Department contract number 16/HY/1998 for repair and maintenance works in the Hong Kong Island and the Eastern New Territories.

3. The plaintiff, Ming Kee Asphalt Engineering Limited, is a company specialising in laying asphalt and bituminous materials and providing related services to the road works construction industry in Hong Kong.  It had been a sub-contractor of the defendant in a previous contract number 08/HY/1997, which is commonly called the Chiu Hing contract in this trial.

4. On 10 March 1999, the defendant was notified that his tender for contract number 16/HY/1998 was accepted.  Shortly thereafter, there was a telephone conversation between Mr Chow Chung Ming, the director of the plaintiff and Mr Cheng Shui Ching, the site agent of the defendant.  A subsequent meeting was held at the office of one Mr Chir Sai Wing, the construction manager of the defendant, in Kwai Chung.  Mr Lee Tin Sung, the contract manager of the defendant also attended the meeting.  It was the defendant’s case that an agreement was reached at this meeting for the plaintiff to carry out the asphalt works subject to a 16.5% “straight-line” deduction of management fee.  The plaintiff, however, contended that the meeting was no more than a preliminary discussion on the sub-contract.

5. Road maintenance works are divided into sections which are different kinds of work on the same stretch of the road and they are not different sections of the road.  The main items are sections 9, 34, and 12.  Section 9 is basically concerned with bituminous paving.  Section 12 is basically concerned with thermoplastic road markings whereas section 34 is concerned with cold milling of the road surface.

6. Previously under the Chiu Hing contract the defendant deducted a certain but different percentage of management fee for different sections of the works.  For example under section 9 item, it was less 15.4% whereas under section 34 item, it was less 10%.  But under section 12 item, it was plus 35%.  This was what they called pricing with a different percentages for each item, i.e. “section-by-section” pricing. 

7. However Mr Cheng for the present contract proposed a straight-line deduction of management fee of less 16.5% for all sections.  Mr Chow emphatically denied there was any agreement there and then. 

8. Mr Chow was shown by Mr Cheng some documents which effectively compared the pricing of work carried out by the plaintiff for the Chiu Hing sub-contract with the proposed pricing of the present works.  Mr Cheng informed Mr Chow that the proposed pricing would be “similar”.

9. Mr Chow said that at the first preliminary meeting in March 1999, he had not been given any details of the scope of works at that stage.  The asphalt prices had not been ascertained either.  This actually constituted a significant proportion of the cost of this type work and Mr Chow was not in a position at that stage to agree a price for the works and according to him the prices fluctuated a lot.

10. According to Mr Chow’s experience, the adoption of a price calculation based on a straight-line deduction is unusual in the industry.  It is particularly so because work orders typically contain several sections incorporating different rates and quantities.  Had any final agreement been reached there and then, Mr Chow said pursuant to common practice in the asphalt industry, the terms would have been incorporated into a written contract which would be signed by the parties.  However no contract was prepared or signed at that stage and not even a draft one was prepared.  In fact no contract has been signed by the parties at all.

11. On 17 March 1999, the defendant and the Government executed a written Articles of Agreement in contract 16/HY/1995.  On 13 April 1999, the defendant signed a written supply agreement directly with Pioneer Asphalt and it is common ground between the parties that the defendant would pay Pioneer in the first instance and deduct the amount so paid from payments to the plaintiff.  The plaintiff itself, in fact, has a long and good relationship with Pioneer Asphalt.  Mr Chow had been involved in coordinating discussions between Pioneer Asphalt and the defendant in respect of the proposed supply of asphalt for the works of the present contract.  This led to the defendant signing an agreement with Pioneer on 13 April 1999 as aforesaid.  

12. The plaintiff itself did not enter into any agreement with Pioneer because, according to Mr Chow’s testimony, it had not at that stage entered into any agreement with the defendant to carry out the subject works until early May 1999 on an order-by-order basis.  It is therefore not the defendant’s version that Pioneer preferred to enter into an agreement with the defendant rather than the plaintiff as the plaintiff is probably the largest and best-known contractor in this field in Hong Kong.  It had also contracted directly with Pioneer before.

13. It is Mr Chow’s case that he had only agreed on an order-to-order basis on the pricing of payments from the defendant to the plaintiff.  On this basis the defendant, on 29 April 1999 issued his first Works Order for Shing Mun Road.  In early May 1999, Mr Chow contended that he received the telephone call from Mr Cheng informing him that the plaintiff had been appointed by the defendant as its sub-contractor to carry out the works subject to deduction of a straight-line management fee.  However on the plaintiff’s case, Mr Chow on behalf of the plaintiff only agreed to lay asphalt on order-by-order basis.

14. The plaintiff began to receive Works Orders from the defendant from May 1999 onwards.  They were Works Orders Nos.1-149.  The first payment certificate was issued on 2 August 1999 and the first 13 payments were subject to a straight-line deduction of 16.5%.  

15. From the time the first payment was made in August 1999, Mr Chow was concerned about the management fee deduction.  It was unusual in this industry and he did not consider that it would leave the plaintiff with a sufficient or possibly any margin of profit.  He expressed his concerns to Mr Cheng on several occasions by telephone when he was informed that his company had a serious cash flow problem after working on this sub-contract.  He also raised the matter on several occasions with Mr Lee Tin Sung.

16. This matter was also raised by Mr Chir at a meeting in September 1999 which was convened in respect of an unrelated contract.  Mr Paul Lee, the administration manager of the plaintiff was also present when Mr Chir stated that Mr Cheng was upset by Mr Chow’s unwillingness to agree to the straight-line deduction of management fee and that the matter would have to be sorted out.  Later, Mr Chow asked Mr Cheng to arrange a meeting to discuss the problem.  The plaintiff contended that even by that stage, final agreement on payment terms had not been reached.

17. The meeting eventually took place as arranged on 27 October 1999 at the Shatin Regal Hotel.  The defendant however contended that the meeting did not take place until late December 1999 and early January 2000, and that an agreement was reached at that meeting to reduce the straight-line deduction percentage by 1% to 15.5%. 

18. The defendant’s version about this meeting is most telling in respect of the lack of credibility of all the defendant’s witnesses.  In their witnesses statements they put in a standard version of this meeting and all their statements have the same verbatim expression.  For example, in Mr Cheng’s statement paragraph 16, he said :

“16.        In or around December 1999/January 2000 at the request of Mr Chow of the plaintiff, the plaintiff and the defendant had a meeting in the coffee shop of Regal Riverside Hotel in Shatin.  Mr Chow and Mr Paul Lee of the plaintiff were present at the meeting.  I [i.e. Mr Cheng], Mr Lee, Mr Chir, Mr Wong [Wai Yin, the measurement coordinator of the defendant in the Chiu Hing contract] and Mr Kwok [Yat Wa, the contract manager of the defendant in the Chiu Hing contract] attended the meeting on behalf of the defendant.  The defendant and the plaintiff agreed at the meeting that their management fee under the agreement would be reduced to 15.5% as from 1 April 2000 at the request of Mr Chow of the plaintiff. 

17.         Accordingly, payment numbers 14-23 were all subject to the deduction of the revised management fee of 15.5%.”

19. Mr Chir said that this meeting was intended for Mr Chow to show his gratitude and to provide hospitality by treating them with a meal in order to thank the defendant for the two contracts.  However in the first place it was just a meeting to have tea involving $430 only for about seven persons; it is by no means a hospitality meal provided by Mr Chow. 

20. Secondly, Mr Chow could only provide the credit card receipt at the trial since his secretary could only retrieve the receipt lately.  Upon seeing the receipt, produced in court, all the defendant’s witnesses retrieved their version of the date of the meeting in late December 1999 and early January 2000.  Mr Cheng said cautiously that he could not remember the exact date.  Mr Kwok, in cross-examination, stated that he could not be sure of the date of the Regal Hotel meeting.  Originally the tendency of the defendant’s witnesses was to postpone that date as late as possible to the end of 1999 and Mr Cheng, Mr Kwok, Mr Chir and Mr Lee had a standard version in their statements concerning the date of the meeting and the contents thereof.  Eventually, all of them said they were not sure about the exact date of the meeting.

21. In fact at the meeting a detail discussion took place primarily between Mr Wong Wai Yin of the defendant and Mr Paul Lee of the plaintiff.  Mr Wong made a detail comparison of the Chiu Hing contract and the present contract on the back of a paper tablemat which was produced in court.  Mr Kwok, under cross-examination, agreed that the discussion actually concerned with the 16.5% deduction because Mr Paul Lee had not attended the earlier meeting in March 1999 and did not understand how the 16.5% deduction was calculated.  Mr Cheng also agreed under cross-examination that the discussion took place because “the fokies” said it was not very clear that the section-by-section method was the same as the straight-line deduction and by “the fokies” he meant Mr Chow and Mr Paul Lee.

22. Mr Wong Wai Yin, under cross-examination on Day 8, stated that he wrote out the calculations because Mr Chow said Mr Paul Lee could not understand the percentages.  Mr Chir under cross-examination on Day 9 said that he understood that the calculation exercise was carried out because Mr Paul Lee did not understand.  I agree with the plaintiff’s submission that given the number of representatives from the defendant and given that efforts had been made to arrange the meeting at a time when they could all attend, the meeting was obviously a serious one as agreed eventually by Mr Chir in cross-examination on Day 9.

23. Further the defendant’s contention that at the meeting there was agreement of reducing the percentage to 15.5% is wholly irreconcilable with the handwritten calculations at PL1, Bundle of Annexures to witness statements, p.225.  There was no mention of 15.5% in the handwritten calculations at all.  If there was such an agreement, one would have expected that the meeting would eventually conclude by writing an agreed percentage of 15.5% at the back of the tablemat. 

24. Further, it is also inconsistent with the unchallenged evidence that Mr Paul Lee, subsequent to this Regal Hotel meeting, carried out an extensive comparison exercise with his colleague Mr Charlie Tsang, by comparing the Chiu Hing rates with a straight-line deductions varying from 15% to 16.5% at PL2, Annexures Bundle, p.232.  There was no reason for him to do this exercise had any agreement be reached at 15.5% deduction.

25. Further, there was also some confusion on the defendant’s case as to how the agreement came to be made.  Mr Cheng said that the 1% reduction was in response to Mr Chow’s complaints about traffic and environmental matters.  Mr Lee Tin Sung sated that it was because the plaintiff had been doing a good job and he approved the deduction as it was a small amount.  He did not mention any complaints by Mr Chow.  Mr Wong however said that the amount was calculated on the basis of the difference between Chiu Hing contract and contract 16 as demonstrated in the handwritten calculations.  The calculations had been canvassed in considerable detail in the course of the trial and there can be no doubt that they constituted a comparison exercise between Chiu Hing contract and contract 16.  There was no reference any way in the document to 15.5% as aforesaid.  There was no attempt by any of the defendant’s witnesses to justify or explain it. 

26. I accept the plaintiff’s submission that the position is very clear.  Mr Wong had been brought in to help to try to convince Mr Paul Lee and through him Mr Chow that a straight-line management fee of 16.5% would be the same as a section-by-section deduction.  However, both Mr Chow and Mr Paul Lee were not so convinced and no agreement was reached at the Regal Hotel meeting.  It was only subsequently that Mr Cheng proposed a rate reduction and in fact applied that from April 2000.  Thus the plaintiff’s invoice of 11 April 2000 started to show 15.5% deduction.  It is in line with Mr Chow’s evidence under cross-examination on Day 2 that Mr Cheng telephoned him only after the Regal meeting and proposed a reduction to 15.5% after April 2000.  Mr Chow had not agreed to the percentage but adjusted his invoices accordingly.  By the time the April invoice was issued Mr Chow knew that the deduction would be at least 15.5%.  He and his staff did not have to wait for the relevant payment certificate before completing the invoice to reflect the deduction as they knew that would be applied for the time being. 

27. In conclusion, on balance there was no agreement of any kind at the Regal meeting and hence Mr Paul Lee made a lengthy accounting exercise at PL2 in November 1999 to make the comparison.  In the end, the version put forward by all the defendant’s witnesses in respect of the Regal Hotel meeting had demonstrated that, on a balance of probabilities, the plaintiff’s witnesses, Mr Chow and Mr Paul Lee are more credible than all the defendant’s witnesses.

28. Having found that the plaintiff’s witnesses are more credible everything falls into place.  It was not until April 2000 that Mr Chow, Mr Paul Lee and Mr Lo of the plaintiff met Messrs Cheng, Chir, of the defendant at a meeting at the Tsuen Wan office in respect of matters unrelated to the present case.  It was only at this meeting that the draft agreement between Victory Way and the plaintiff was given to Mr Chow.  In other words, it was not the case that the draft agreement was given to Mr Chow earlier in or about October/November 1999 as contended by the defendant.  In clause 4 thereof it was still wrongly stated that the payment shall be from the defendant to one Dixie Way Engineering Limited which was only a party in an earlier sub-contract.  The draft agreement was never executed by the parties and it was never agreed between them.

29. By the end of 1999, the plaintiff discovered that it was experiencing serious cash flow problem.  Hence, the plaintiff, in the absence of any agreement, was at liberty to make proposals of revised pricing which it did by its letter of 15 January 2000.  It was not an attempt to seek additional payment for work already done, but was only an adjustment in respect of new orders.  It was an attempt by the plaintiff to seek a reasonable compromise.  The terms offered in the letter are not unreasonable.  The plaintiff proposed that in respect of the remaining two orders, there should be no management fees for section 9 and section 34 items.  The defendant responded by its letter dated 19 January 2001 and denied having any sub-contract with the plaintiff.  It further said that the sub-contractor was Victory Way Engineering Ltd.  

30. In the end I accept the plaintiff’s submission that, given the defendant’s disingenuous response to the plaintiff’s letter of 15 January 2001, the plaintiff was entitled to cease work.  The bulk of the works had already been done as 149 orders had already been completed.

31. The defendant’s response was not to offer a counter proposal and in fact not to negotiate at all.  It simply withdrew to a position which it knew was a false one, i.e. that it had no contractual arrangement with the plaintiff, in order to avoid negotiations with a sub-contractor who had come to an unbearable position. 

32. As I accept the plaintiff’s version that it was working on an order-to-order basis, it therefore had no obligation to carry out the two remaining Work Orders.  The defendant just issued road closure orders on its own volition for 21 January 2001 in an attempt to show that the plaintiff was in breach of the contract.  In the end, the plaintiff was entitled to treat the contract, even if it was a term contract, as discharged.  The plaintiff was entitled to cease work, in the absence of any agreement as to any reasonable remuneration.

Reasonable remuneration

33. Having found for the plaintiff that it was working on an order-to-order basis only and there was no scale of remuneration fixed, the law imposes an obligation to pay a reasonable sum.  This principle is well established in construction cases : Hudson’s Building and Engineering Contracts Vol.111^th Ed. para 8-104[vi]; and Chitty on Contract Vol.1, 28^th Ed. para 30-185 :

“8-104 Hudson

       ‘Particular examples of quasi contractual liability in Quantum meruit in the context of construction contracts include cases :

[vi]Where work is done in expectation of agreement which is never reached.’ [citing British Steel v Cleveland Bridge and Engineering Co. [1984] 1 All E.R. 504]

       The Principle was applied in Foley v Classique Coaches Ltd [1934] 2 KB 1

       ‘In order to give effect to what both Parties intended the Court is justified in implying that, in the absence of agreement as to price, a reasonable price must be paid, and, if the Parties cannot agree as to what is a reasonable price then arbitration must take place.’  [Per Greer LJ at p.11]”

34. In the end, I do not accept the defendant’s submission that the plaintiff is in repudiatory breach.

Conclusion

35. By reason of the aforesaid matters I would find all the issues in favour of the plaintiff who is therefore entitled to the following relief as claimed, namely :

(1)     A declaration that there was an agreement between the plaintiff and the defendant for the carrying out of asphalting works pursuant to contract C16/HY/1998;

(2)     An account and enquiry of sums due and owing by the defendant to the plaintiff on a quantum merit basis to be assessed;

(3)     Payment of all sums found to be due to the plaintiff together with interests to be given after the aforesaid enquiry and accounts were made;

(4)     The defendant’s counterclaim is dismissed;

(5)      Liberty to the parties to apply; and

(6)     An order nisi for costs of the action and the counterclaim to the plaintiff.