W. HING CONSTRUCTION CO LTD v. TSANG FUNG TAK t/a TAK KEE & ENGINEERING CO.

HCA1659/2003

IN THE HIGH COURT OF THE

 HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1659 OF 2003

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JUDGMENT

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Introduction

1. In mid 2000, the Highways Department invited tender for works in widening the North-bound carriageway of the San Tin Highway at San Tin Interchange.  The plaintiff was successful in its tender and entered into the main contract with the Highways Department for the works in September 2000.

2. The plaintiff’s case on liability is straightforward.  It says that the defendant was a sub-contractor of the works, pursuant to a Sub-contract Agreement dated 26 October 2000, and that the defendant repudiated the sub-contract by a letter dated 16 December 2000, which unequivocally intimated a unilateral abandonment of the works.  The plaintiff accepted the repudiation and thereafter took over the completion of the works within the extended time allowed under the main contract, but suffered loss and damage; hence, the claim.

3. The Defence filed on behalf of the defendant raises only one positive defence, that the plaintiff agreed to a cancellation of the sub-contract some time in December 2000.  The defendant pleaded that the letter of 16 December 2000 was prepared at the direction of the plaintiff.

4. However, the Further and Better Particulars of the Defence revealed another defence : it is alleged that initially, the defendant was to be engaged as a foreman at HK$10,000 per month; but later, the plaintiff proposed that the defendant should serve as a nominee of the plaintiff and as an apparent sub-contractor of the plaintiff to be remunerated on 5% of the contract price, out of which the defendant was to pay back 3% to the plaintiff.  It is alleged that under this arrangement, the plaintiff will engage labour and purchase materials in the name of the defendant and that the plaintiff would pay wages and price of materials directly to workers and suppliers whilst the defendant would only be working as a site foreman under the supervision of the plaintiff’s staff.

The trial and the evidence

5. The defendant did not appear at the trial.  Counsel for the plaintiff produced an affirmation of his instructing solicitor to the effect that the defendant was informed of the hearing date by his former solicitor.  In the circumstances, the plaintiff elected to proceed.  Three witnesses were called.  Mr Kam Kwai Wa, the senior project manager of the plaintiff gave evidence in support of the claim on liability.  On quantum, the plaintiff called Mr Kwok Cheuk Keung, an in-house quantity surveyor and Mr Andrew Ngo, a chartered quantity surveyor who has produced a report on the quantification of the plaintiff’s claim.

Liability

6. Mr Kam Kwai Wa was one of the persons who negotiated the sub-contract with the defendant and had general supervision over the progress of the works.  His evidence is that prior to the subject agreement, the defendant had previously been engaged by another company in the group as a sub-contractor in a project for the expansion of the car park in the Tiger Balm Garden and had performed satisfactorily.

7. Mr Kam gave evidence that the rates and quantities in the plaintiff’s tender were in fact copied from the tender submitted by the defendant to the plaintiff for the sub-contract.  He told the Court that the agreement between the plaintiff and the defendant was that the plaintiff was to have 5% of the contract sum as profits and to cover the plaintiff’s overhead in supervising the work.  It can be seen from the agreements produced to the Court that the rates and quantities in the two bills of quantities are identical and that the difference in the two bills is the result of exclusion of certain items from the sub-contract.

8. In the bills of quantity in the main contract, the following figures appear :

Preliminaries	$1,650,400
Roadworks	$4,120,780
Landscape works	$   126,120
Daywork and Provisional items	$     99,800
Sub-total	$5,997,110
Contingency Sum	$   600,000
Grand Total	$6,597,110

(All references in this judgment to “$” are to HK$.)

9. In the bills of quantity in the sub-contract, the following figures appear :

Preliminaries	$1,565,400
Roadworks	$3,108,750
Landscape works	$   126,120
Daywork and Provisional items	$     99,800
Total	$4,900,070
Less 5% discount

Mr Kam explained the differences between the two bills of quantities.  The plaintiff agreed with the defendant that the plaintiff would be responsible for taking up insurance such as contractors’ all risks, employees’ compensation and third parties insurance and this explains the reduction in the amount for “preliminaries” in the sub-contract.  Due to the fact that the defendant was not an approved sub-contractor for the laying of asphalt, this part of the work was taken out of the sub-contract, resulting in a reduction of the figure for “roadworks”.  The contingency sum was a mandatory figure required by the Highways Department to cater for the contingency that the value of the work exceeded the budget.

10. Mr Kam denied that the defendant was ever engaged by the plaintiff as a foreman.  He explained that the project organization chart showing the defendant in the position of general foreman was only a document used to show the Highways Department the various personnels and their contact numbers. 

11. Mr Kam confirmed that prior to the termination of the sub-contract, the plaintiff had paid the defendant pursuant to its terms.  The Engineer under the main contract certified on 8 November 2000 a sum of $573,495 payable to the plaintiff out of which the plaintiff paid to the defendant a sum of $458,986.05.  The plaintiff produced its bank record showing a payment of $100,000 made on 16 November and another payment of $358,986.05 on 24 November 2000.  There is no evidence that the plaintiff paid the defendant $10,000 per month.

12. Mr Kam’s evidence is that the defendant’s performance of the sub-contract works between September and December was slow and unsatisfactory, which led to complaints from the Highways Department.  He himself wrote two letters one dated 9 December 2000 and another dated 14 December 2000 to complain of the delay.  As for the letter of 16 December 2000, Mr Kam pointed out that the person identified in the defendant’s further and better particulars as the person who allegedly gave direction and suggestion to the defendant in preparing that letter (one Mr Lui Hoi Kin) was in fact an employee of the defendant.

13. When the defendant signified his abandonment of the sub-contract by the letter of 16 December 2000, Mr Kam immediately arranged for the works to be carried out under the supervision of the plaintiff’s project management team.  The plaintiff was successful in completing the works in time to avoid the payment of liquidated damages to the Highways Department.

14. Mr Kam’s evidence is supported by contemporaneous documents and I have no hesitation in accepting his evidence in toto.  Not only is there no evidence from the defendant to support his defence, I agree with Mr Leung that the defence as pleaded is in part contradictory and also contrary to business sense.

15. I find on the evidence that the defendant was a sub-contractor as claimed by the plaintiff, and that the defendant repudiated the sub-contract resulting in loss and damage to the Plaintiff.  There is no evidence that the termination was consensual as pleaded in the Defence.  I find liability established.

Quantum

16. In prayer 1 of the Statement of Claim, the plaintiff seeks “a sum of HK$2,306,808.52 under paragraph 12, alternatively damages”.  Paragraph 12 pleads that the plaintiff suffered loss, expenses and damage in the amount of $2,306,808.52 as particularised in Appendix 1 to the Statement of Claim.  The plaintiff is, of course, not entitled to claim a liquidated sum, and its cause of action against the defendant can only be for damages.  In my view, a proper reading of the Statement of Claim is that the plaintiff is claiming damages which are particularised in Appendix 1, totalling $2,306,808.52.

17. Before the trial, the plaintiff filed a witness statement of Mr Kwok Cheuk Keung which quantified the plaintiff’s loss in the sum of $2,537,617.29.  (This is the figure stated in paragraph 151 of the witness statement although the figure in the Annexure referred to in that paragraph was a slightly different figure.)  The expert report of Mr Ngo filed on behalf of the plaintiff gave yet a different figure, namely, $2,451,280.54.

18. At one stage during the trial, Mr Leung for the plaintiff sought to persuade me that I should treat prayer 1 of the Statement of Claim as a claim for damages to be assessed and allow the plaintiff to claim an amount higher than that particularised.  I indicated to Mr Leung that if the plaintiff wished to seek a higher amount than that pleaded in the Statement of Claim, I would require the plaintiff to seek leave to amend its claim and the application for leave to amend must be served on the defendant.  In the event, Mr Leung indicated to the court that he was content with seeking damages as pleaded.

19. Mr Kwok Cheuk Keung gave evidence of the various items of costs and expenditure incurred by the plaintiff in carrying out and completing the outstanding work left behind by the defendant.

20. The plaintiff’s quantification of its loss proceeds upon the following steps :

(1)     The plaintiff first took the amount agreed between the plaintiff and the Highways Department in the Final Account to be the value of all the work completed under its main contract.  This was a sum of $5,886,307.17, a figure which can be verified from the Final Payment Certificate dated 13 November 2002.

(2)     Next, the plaintiff deducted from that sum the following Bills of Quantity items which were excluded from the sub-contract with the defendant.  These are items 2.1 to 2.11 in Appendix 1 to the Statement of Claim, as verified by Mr Kwok Cheuk Keung, totalling $1,185,749.05.

(3)     Following steps (1) and (2) above leads one to a figure of $4,700,558.12 (i.e. $5,886,307.17 - $1,185,749.05).  This figure represents the value of the work completed within the parameters of the sub-contract.

(4)     The plaintiff then deducted 5% from this figure of $4,700,558.12 being the amount which the plaintiff would have been entitled to under the sub-contract.  This works out to be $235,027.91.  The net figure of $4,465,530.21 (i.e. $4,700,558.12 - $235,027.91) would represent the final sub-contract sum payable to the defendant had the defendant completed the sub-contract based on Highway Department’s final account.

(5)     Next, the plaintiff seeks to establish the total costs and expenses the plaintiff incurred in the sub-contract works.  The following comes under this head :

(a)      Costs of services and materials which the plaintiff certified.  The figure originally pleaded under this head was $7,823,516.18.  The breakdown of this figure is at Exhibit P3.  The amount under this head was reduced during the trial to $7,684,055.98.  The adjustments are in item A8 (-$13,844.72 for Construction Industry Training Authority levy), A18 (-$12,000 deposit for water charges), A20 (+1,453 for PCCW), A23 (-$14,117.38 for Hong Shun), A34 (-$6,330.90 petty cash), A40 (-$8,286 for Pneumoconiosis Compensation Fund Board levy), A26 (-$85,834.20 for K Wah Concrete) and A10 (-$500 Ding Cheong Ltd).

(b)     From this sum of $7,6840,055.98 must be deducted expenses incurred by the plaintiff in respect of items which fell outside the sub-contract.  These totalled $1,602,475.48.  The breakdown can also be found in P3.  They comprised items A6 ($6,000 Chi Wo Insurance Consultants), A11 ($425,030.67 Employees’ Compensation), A39 ($1,040,405.81 Pioneer Asphalts (Hong Kong) Ltd), A48 ($98,039 Tarmac Asphalt Hong Kong Ltd) and A50 ($33,000 The Wing On Fire & Marine Insurance Co. Ltd).

          After adjustments, all the items save one were supported by payment certificates issued by the plaintiff.  I am satisfied that the figure, after the afore-mentioned adjustments, represents part of the costs and expenditure incurred by the plaintiff in completing the works.  I should mention that this sum includes the amount which the plaintiff paid to the defendant in November 2000.

 (c)    In addition, the plaintiff claims to have incurred expenses which are not the subject of payment certificates, but were directly paid by the plaintiff’s accounts department.  The amount originally claimed in Appendix 1 in the Statement of Claim was $220,734.46.  This again required adjustments, principally to take out those items which the plaintiff accepts it does not have supporting documents or are levies which would not be part of the sub-contract.  A breakdown of the figure is in Section D of Exhibit P3.  The items taken out are D1-D3, D16, 17, 20, 22 and D26-30.  After taking out these figures, the amount under this head is $202,046.63.

          The resultant figure from these calculations is $6,283,627.13 ($7,684,055.98 - $1,602,475.48 + $202,046.63).  On the evidence, which I accept, this is the actual cost and expenses incurred by the plaintiff in completing that part of the works which is covered by the sub-contract.

21. There is a further item which the plaintiff seeks to claim.  This is labelled as “extra site management/QS/account/admin” provided by the plaintiff.  The figure pleaded in the Statement of Claim is $329,988.22.  Mr Kwok was the person who prepared Appendix 1, but was unable to tell me how he arrived at that very odd figure.  He said that at the time he prepared the appendix, he estimated an item for extra overheads being approximately 5% of the actual costs to reflect the additional overheads caused to the plaintiff because of the defendant’s abandonment of the contract.  Mr Ngo had a different opinion as to how this item should be assessed.  He first grouped the costs and expenditure incurred by the plaintiff into two categories : (1) prime costs (defined to mean costs which relates directly to the work), e.g. concrete; and (2) overheads (such as payment for water charges and electricity and payment to drivers, amahs, site agents, site surveyors etc.).  Having separated the cost items in this manner, Mr Ngo arrived at a figure of $5,209,217.04 as prime cost for this project and $413,377.41 for site overheads (reduced from a figure of $451,637.08 in his report).  It is his opinion that for a project of this nature, the overhead and profits would be about 30% of the prime costs of which 5% was attributed to profits.  He produced a letter from the Civil Engineering Department in respect of a road and drainage contract that an overhead and profit factor of 29.03% would be adopted for valuation of variation orders under that contract.  Mr Ngo pointed out that the sum of $413,377.41 for site overheads did not include the costs of the project manager, the quantity surveyor, safety officer and other site personnel which he would consider as overheads of the plaintiff for the execution of the works.  He explained that the total overhead costs claimed by the plaintiff was $413,377.41 + $202,046.63 (claimed to be paid directly by accounts department) + $329,988.22.  Since the total of these sums ($945,412.26) does not exceed 25% of the prime costs, he came to the conclusion that the overhead costs as claimed by the plaintiff was reasonable.

22. The problem with the claim of $329,988.22 is that this is not based on any evidence that the plaintiff actually incurred such costs.  It may be reasonable for a contractor to include an element of overhead for the cost of its permanent staff and office expense when bidding for a contract, it does not follow that when a sub-contractor abandons the works and the main contractor has to take over the work, the main contractor would necessarily suffer a loss of a commensurate amount.  I have no evidence before me that as a result of the defendant’s breach of the sub-contract, the plaintiff had to pay more either in terms of office expense or in the remuneration of its staff.  Nor is there any evidence that because the plaintiff’s staff had to be engaged in extra work in the supervision of this contract, the plaintiff lost an opportunity to make profits from other contracts.  In any event, this is not the basis on which the claim is pleaded.  When these problems were put to Mr Leung, he accepted the difficulty in the way of claiming this item, but asked the Court to consider making a nominal award on this head.  I do not see any basis for doing so.

23. Apart from this last aspect, I am satisfied that the plaintiff’s methodology in the assessment is sound.  The normal measure of damages in the case of a failure on the part of a builder to honour a building contract is the cost to the owner of completing the works in a reasonable manner less the contract price, see McGregor on Damages, 17^th ed. (2003) paragraph 26-003.  In the present case, I am satisfied that the amount of cost which the plaintiff incurred in completing the contract (including the amount already paid to the defendant) was $6,283,627.13.  I am also satisfied that the amount payable under the sub-contract to the defendant for the works would have been $4,465,530.21.  The difference, namely $1,818,096.92 is the amount of damages suffered by the plaintiff as a result of the defendant’s breach of contract.

Order

24. Accordingly, I enter judgment in favour of the plaintiff for damages in the sum of $1,818,096.92.  I order that the defendant do pay interest on the amount awarded at the rate of prime +1% from the date of the writ until judgment.  I make an order nisi that the plaintiff shall have the costs of this action against the defendant, such order shall become absolute unless the defendant applies within 14 days from the date of this judgment to vary or discharge the order.