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HCA2587/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2587 OF 2008
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BETWEEN
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ABLE CONTRACTORS LIMITED |
Plaintiff |
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and
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WUI LOONG SCAFFOLDING WORKS COMPANY LIMITED |
Defendant |
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Before : Hon Chu J in Court
Date of Hearing : 11-14, 17 & 19 January 2011
Date of Judgment : 13 June 2012
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J U D G M E N T
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1. This action concerns a contractual dispute over scaffolding works subcontracted by the plaintiff to the defendant.
The background
2. By a contract dated 26 April 2007 (“the Main Contract”), MTR Corporation Limited (“MTRC”) engaged Able Engineering Co Ltd (“AE”) to carry out the external wall repair works (“the Repair Works”) to 12 residential towers (T1 to T12) of Tierra Verde at Tsing Yi.
3. By a contract of the same day, AE subcontracted the entirety of the Repair Works to the plaintiff. The contract is a one-page document which adopted all the terms and conditions of the Main Contract. AE and the plaintiff are related companies.
4. Under the Main Contract, the Repair Works were to be carried out in five phases as follows:
| Phase I |
T6 |
| Phase II |
T5, T3A |
| Phase III |
T1, T2, T3 |
| Phase IV |
T10, T11, T12 |
| Phase V |
T7, T8, T9 |
5. It is also a term of the Main Contract that no more than six towers shall have any scaffolding installed at any one time and that no scaffolding shall be installed on the external wall during the Chinese New Year period of 6 to 16 February 2008.
6. On 10 May 2007, the defendant submitted a tender for the scaffolding works that was part of the Repairs Works (“the Scaffolding Works”).
7. On 14 May 2007, Mr Edward So (“So”) and Mr Fu Chi Cheung (“Fu”), who are respectively the director and general manager of the defendant, attended a meeting with the representatives of the plaintiff. It is the defendant’s case that during this meeting, representatives of the plaintiff explained that the Scaffolding Works were to be carried out in four phases so that scaffolding would be installed on no more than three towers at any one time. The defendant was further assured that it could re-use the scaffoldings and materials and on this basis it was asked to give a 5% discount. The plaintiff, while agrees that a request for 5% discount was made, denies that the defendant had been told no more than three towers would be installed with scaffolding at any one time.
8. Subsequent to the meeting, the defendant informed the plaintiff by letter dated 16 May 2007 that it would reduce its tender price by 5%. It is the defendant’s case that it agreed to the 5% discount having regard to the fact that the materials and the scaffoldings could be re-used.
9. It is not in dispute that, at the request of the plaintiff, the defendant later agreed to give a further 1% discount, bringing the discount factor to 6%.
10. On 25 May 2007, there was a meeting between Mr Yau Kwok Fai (“Yau”), the director of the plaintiff and So and Fu. At the request of Yau, the defendant agreed to give a further 1% discount, bringing the total discount factor to 7%.
11. By a contract dated 25 June 2007 (“the Subcontract”), the plaintiff subcontracted the Scaffolding Works to the defendant.
The Subcontract
12. The following provisions in the Subcontract are relevant for the present purpose:
(1) The contract sum (分判工程總額) is HK$11,797,050.
(2) Under the Conditions for Subcontracting,
(i) Clause 4(c) provides that in the event of non-compliance with the work specifications on materials, workmanship, work procedures or designs, the defendant shall forthwith carry out the remedial work or re-do the work and shall be responsible for all loss and consequences arising therefrom.
(ii) Clause 5 provides that the defendant shall complete the works, including variation and additional works, in accordance with the plaintiff’s instructions, that the plaintiff may, where necessary amend the scope and quantity of the works and that any consequential changes to the contract sum shall be based on and in accordance with the terms of the Subcontract.
(iii) Clause 9(c) provides, inter alia, that the overall work programme shall be determined by the plaintiff and the defendant shall cooperate and comply with the plaintiff’s actions and decisions.
(iv) Clause 9(d) provides that the plaintiff may, after written warning, terminate the contract where the defendant fails to obey instructions or delays the progress of the works and may claim against the defendant for all its loss. In the event the defendant terminates the contract unilaterally and without reasonable cause, the plaintiff may claim against it for all loss, including the difference between the contract sum and the costs of engaging another subcontractor to take over the works.
(v) Clause 10(a) provides that the plaintiff may reasonably require the defendant to provide additional manpower, machinery or extend the working hours so as to comply with the work programme. Such costs shall form part of the contract sum or the item cost and will not be compensated for by the plaintiff.
(vi) Clause 17(b) provides that where any of the defendant’s staff is found not to be wearing safety helmet while on the site, the plaintiff shall deduct from payments due to the defendant an administration charge, the rate for which is set out in Schedule 6 item 3.1.
(vii) Clause 21(b)(i) provides that calculations for variation or additional works shall be in accordance with the unit price set out in Schedule 4 and subject to discount, if any.
(viii) Clause 24 provides that Schedule 1 sets out the method for payments under the contract and the retention money and the plaintiff is entitled to deduct from the approved payments compensations and related expenses that are specified under the contract.
(3) Under Schedule 1,
(i) Clause 1a provides that the contract is a Re-measurement Contract.
(ii) Clause 4 provides, inter alia, that the plaintiff shall assess and approve interim payment application (“IPA”) within 30 days and shall pay 90% of the approved sum with the remaining 10% being retained as the retention money.
(iii) Clause 5 provides, inter alia, that the maximum amount for the retention money is 5% of the contract sum (分判工程總額).
(4) Under Schedule 2, Clause (32) provides that the proportions for the purpose for making payments on, inter alia, scaffoldings and safety nets works are 60% for setting up; 20% for maintenance and 40% for dismantling.
(5) Under Schedule 3,
(i) Clause B3e) provides that scaffolding shall be removed from the external wall of the buildings for the Lunar New Year period, i.e. 6 to 16 February 2008.
(ii) Clause B7.3e) provides that “If, in the opinion of the Engineer, any material test results are not conclusive or fail to meet the Engineer’s requirement, additional testing may be ordered by the Engineer to be performed by others in which event the cost therefore will be deducted from payments due to [the defendant]”.
13. Annexed to the Subcontract is a flowchart on assessment of interim payment applications (“IPA”) consisting of eight steps, of which the first and last step are of particular relevance. Under step 1, the IPA is to be submitted to the plaintiff before the 1st day of each month. Under step 2, the plaintiff is to effect payment between the 1st to 7th day of the month following the submission of the IPA. The flowchart also states that late IPA will not be dealt with by the plaintiff; it shall either be retrieved or assessed in the next term.
The Scaffolding Works for T1 to T6
14. According to the work programme dated 19 July 2007, the schedule for erecting the scaffoldings for T3A to T6 was to be:
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T5 |
T6 |
T3A |
Date of commencement of work |
29-06-2007 |
17-07-2007 |
23-07-2007 |
Date of commencement of scaffolding erection |
10-07-2007 |
20-07-2007 |
26-07-2007 |
Date of completion of scaffolding erection |
06-08-2007 |
16-08-2007 |
22-08-2007 |
15. The completion date for erecting the scaffolding was later revised to 23-08-2007 (T5), 01-09-2007 (T6) and 08-09-2007 (T3A).The plaintiff says this was due to delay and unsatisfactory progress on the defendant’s part. The defendant on the other hand says that there had been delay in gaining access to the roof top. As the plaintiff no longer pursue the claim for indemnity for delay, it is not necessary to resolve this dispute.
16. What is not in dispute is that the defendant commenced work in June 2007. On Fu’s evidence, the erection of the scaffoldings on T5, T6 and T3A began in about the middle or end of June, early July and mid July 2007 respectively. As for T2 and T3, it began in early September with that of T1 started in mid September 2007. It took 40 working days to complete the work of one tower.
17. The dismantling of the scaffoldings on T3A to T6 began in December 2007 while that of T1 to T3 started on about 22 January 2008. By 31 January 2008, the dismantling work for T2 to T6 had completed. The dismantling work of T1 was completed by midday of 1 February 2008. Cleaning and clearance work were carried out in the next few days. By 5 February 2008, two days before Chinese New Year, all the Scaffolding Works for T1 to T6 had been completed.
18. It is common ground that the defendant did not carry out the Scaffolding Works for the remaining six towers. I shall return to deal with the relevant circumstances.
Rebate of 1% discount
19. From the documents before the court, it can be seen that the work under the Main Contract (as well as the commencement date) had been pushed back. In August and September 2007, several changes were made to the work programme with a view to ensuring that the work under Phases I to III could be completed by Chinese New Year. On 17 August 2007, AE informed the defendant that the scaffoldings for T1 to T3 had to be erected before the scaffoldings on T3A to T6 were dismantled. This means that scaffoldings had to be installed on six towers at the same time.
20. On 27 August 2007, a meeting was held between Yau and So and Fu, during which Fu raised with Yau that the defendant had to incur additional costs (about $400,000 for each tower) to meet the revised work programme and requested the plaintiff to make compensation. According to Yau, he volunteered the idea of returning to the defendant 1% of the discount and told Fu that if the defendant completed the Subcontract satisfactorily and timeously, he would recommend to the plaintiff’s board to consider reducing the discount by 1% as a bonus to the defendant. The evidence of Fu and So, on the other hand, is that Yau had positively agreed to reduce the discount factor from 7% to 6% so as to compensate the defendant for the additional costs. Under cross-examination, Yau said he could not be sure whether he said the 1% discount rebate was a bonus or compensation. Both Fu and So, however, accepted that Yau had not specified when the 1% discount rebate would be paid to the defendant.
21. Shortly after this meeting, there were further revisions to the work programme. On 29 August 2007, MTRC instructed that scaffolding works should only be done to five towers whereupon Fu enquired with the plaintiff’s site representative, Mr Henry Hui, whether the 1% discount rebate agreement continued to hold good. After consulting with Yau, Hui replied on 30 August 2008 that the arrangement with regard to the 1% discount rebate continued to hold good. Hui did not give evidence at the trial. Yau confirmed in cross-examination that Hui did consult him and he had replied that the decision on the 1% discount rebate remained effective. He however maintained that he had not made a committed promise and, when replying to Hui, he was only referring to his agreement to make a recommendation to the plaintiff’s board.
22. There were subsequently further revisions to the work programme. In the end, scaffolding works were carried out to three towers (T1 to T3) in Phase III.
IPAs and payments
23. In late August 2007, the defendant submitted the 1st IPA. A total of eight IPAs were submitted for the Scaffolding Works of T1 to T6. A total of nine payments were made by the plaintiff to the defendant, the first of which was in late September. A summary of the IPAs and payments appear below:
Date of
IPA |
IPA |
Amount claimed (HK$) |
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Date of cheque |
Payment |
Amount paid (HK$) |
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23.08.2007 |
1st |
1,903,378.18 |
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24.09.2007 |
1st |
1,461,408.58 |
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20.09.2007 |
2nd |
4,771,706.09 |
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02.11.2007 |
2nd |
1,584,581.87 |
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23.10.2007 |
3rd |
4,741,808.43 |
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01.12.2007 |
3rd |
1,054,953.41 |
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26.11.2007 |
4th |
4,589,658.86 |
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14.12.2007 |
4th |
580,000.00 |
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29.12.2007 |
5th |
2,930,614.79 |
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22.12.2007 |
5th |
600,000.00 |
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31.01.2008 |
6th |
3,402,196.90 |
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16.01.2008 |
6th |
809,046.14 |
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3.03.2008 |
7th |
2,458,844.41 |
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06.02.2008 |
7th |
943,352.19 |
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31.03.2008 |
8th |
2,323,316.25 |
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10.03.2008 |
8th |
135,978.16 |
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|
|
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18.04.2008 |
9th |
968,611.59 |
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Total amount claimed |
27,121,523.91 |
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Total amount paid |
8,137,932.24 |
24. The 7th and 8th IPAs are identical to the 6th IPA. They were issued as the defendant was dissatisfied with the amounts assessed and paid by the plaintiff under the 7th and 8th payments. As for the payments, the 1st to 8th payments are interim payments whereas the 9th payment was intended by the plaintiff as a final account for the work of T1 to T6.
The events leading to the disputes
25. As is evident from paragraph 23 above, there was right from the beginning substantial discrepancy between the amount claimed in the IPAs and the amount certified and paid by the plaintiff. Indeed, starting from the 2nd payment, the defendant had repeatedly raised issues about the amounts paid by the plaintiff. It is also Fu’s evidence that the defendant had to ask for the breakdown of the plaintiff’s calculations to find out why there was such huge discrepancy. It is also Fu’s evidence that the defendant had made a number of requests to resolve the differences and to settle the accounts. Notably, the defendant was dissatisfied with the assessments of the quantity and value of the works and also the deductions applied by the plaintiff.
26. On 5 December 2007, there was a meeting attended by, among others, Fu, So and Mr Sunny Yam (“Yam”), the project manager of the plaintiff. The parties differ as to what was said and agreed in the meeting. According to Yam, So requested for cash advancements to alleviate the defendant’s financial problem; as a result, the plaintiff made the 4th and 5th payments in the hope that the defendant would speed up the work and improve the work performance. The defendant denies it had requested for cash advancements or that it was in financial difficulties. According to Fu and So, they demanded the plaintiff to pay up the outstanding balance of the 3rd IPA and also the 4th IPA and the plaintiff eventually agreed to pay by 12 December 2007 the outstanding balance under the 3rd IPA and to effect payment for the 4th IPA by 22 December 2007. There is in evidence a letter dated 10 December 2007 written by the defendant to the plaintiff in which the above agreement on payment of the balance of the 3rd IPA and the 4th payment was alluded to.
27. It is also the defendant’s case that despite the promise, the plaintiff only made further payments for the 3rd IPA by way of the 4th and 5th payments but did not pay the 4th IPA. In this regard, Yam and Mr Ken Hung, the plaintiff’s quantity surveyor, both state that there was no payment under the 4th IPA.
28. It is common ground that on 15 January 2008, the defendant suspended the dismantling of the scaffoldings. By then, the dismantling work for the scaffoldings on T3A to T6 had been completed. In a letter written to the plaintiff and copied to MTRC on the same day, the defendant pointed out that despite the agreement made at the 5 December 2007 meeting, the plaintiff had yet to make payment for the 4th IPA. It also mentioned that because the plaintiff had replaced its quantity surveyor, the accounts that had been settled had to be re-opened and the new quantity surveyor kept delaying the calculations. The defendant said that dismantling of the scaffoldings on T1 to T3 was suspended so that inspection and verifications could be conducted. Under cross-examination, however, Fu frankly admitted that the suspension was partly to put pressure on the plaintiff since it did not fulfil the promise made in the 5 December 2007 meeting and did not make payment under the 4th IPA.
29. On 17 January 2008, the plaintiff made the 6th payment, which according to Hung, was based on a rough assessment on the work done in December 2007. The defendant however said this was a payment of the 4th IPA.
30. The representatives of the plaintiff and the defendant had a site meeting on 21 January 2008 to discuss the work progress with a view to expediting the dismantling of the scaffolding on T1 to T3 and to complete all the work before the Chinese New Year. There had been a delay in delivering these three towers to the defendant to carry out the dismantling work. By its letter dated 22 January 2008, the defendant assured the plaintiff the dismantling work for T1 would be completed by 4 February 2008. The defendant further requested a compensation for the costs incurred as a result of having to expedite the work.
31. It is also the defendant’s case that in the 21 January 2008 meeting, the plaintiff had promised to pay the 5th IPA by the end of January 2008 in view of the approach of Chinese New Year. However, the plaintiff again did not keep its promise and the defendant’s staff had to wait at the plaintiff’s office for two days before receiving the cheque for the 7th payment. But as it was the Chinese New Year’s eve, the cheque could only be presented after the Chinese New Year holiday.
32. After the Chinese New Year, the defendant continued to press for the payment of the IPAs. On 12 March 2008, the plaintiff made the 8th payment. Afterwards, the parties’ representatives had several meetings for the purpose of settling the account. By end of March and early April 2008, the parties had reached consensus over some of the disputes, including the maximum amount of retention money to be held by the plaintiff and the contra charges. It was agreed that the plaintiff would make a further payment to the defendant and the defendant would proceed with the work of the remaining six towers as the parties continued with the discussions on the outstanding differences.
33. On 5 April 2008, Hung faxed to the defendant a breakdown for the 9th payment. The amount stated was $1,064,342.74, which had included the 1% discount rebate. However, the 9th payment that was paid to the defendant on 18 April 2008 was in the sum of $968,611.59, which had excluded the 1% discount rebate. Hung’s explanation is that the faxed breakdown was only a draft and he included the 1% discount rebate at the request of the defendant when in fact the rebate should only be dealt with upon the completion of the work for all the 12 towers. Fu’s evidence is that it had already been agreed that the 1% discount rebate, which was compensation for the additional costs of the six completed towers, would be included in the 9th payment, but the plaintiff reneged from the agreement. On the defendant’s case, this was the last straw.
34. In the meantime, the parties were also engaged in correspondence over the work under Phases IV and V. Two site meetings were scheduled for 25 February and 1 March 2008, but the defendant did not attend. On 28 February 2008, AE gave notice to the defendant to commence work on 3 March 2008, to which the defendant replied by saying that one-month written notice was required so that the commencement date should be end of March. On 3 March 2008, AE issued a warning letter to the defendant for the failure to attend site meetings. On 7 March 2008, the plaintiff wrote to the defendant disputing the requirement to give one-month notice to commence work. By letter dated 15 March 2008, the defendant reserved its position on the plaintiff’s breach in failing to making payments within the 30 days’ period stipulated by the Subcontract.
35. On 25 March 2008, however, the defendant rendered a quotation for washing the old safety nets. The parties’ representatives also met to discuss on the work programme. On 16 April 2008, AE passed to the defendant the drawings and instruction received from the project consultant. AE further wrote on 19 and 22 April 2008 to give work instructions.
36. By a letter dated 23 April 2008 to the plaintiff, the defendant gave notice to terminate the Subcontract with immediate effect on account of the plaintiff’s breach of the Subcontract. The letter referred to three breaches committed by the plaintiff, namely, (1) continued failure to make payments on time; (2) failure to make payments for the works done in full and unreasonable deductions from the amounts claimed under the IPAs; and (3) breach of the oral agreement made on 27 August 2007 with regard to the 1% discount rebate.
37. By letter dated 24 April 2008, the plaintiff refused to accept the defendant’s termination and gave notice to the defendant to proceed with the uncompleted works within seven days. The plaintiff further offered on a without prejudice basis to meet with the defendant to discuss “how the problem and misunderstanding might best be overcome”.
38. On the same day, AE also wrote to the defendant demanding that it commenced work within three days, failing which another subcontractor would be appointed to take over the remaining works and the defendant would be held liable for the costs thus incurred.
39. The defendant replied by letter dated 28 April 2008 addressed to AE, refuting the allegation that it failed to attend to work and pointed out that it had yet to be provided with an approved Method statement. In relation to the plaintiff’s letter, the defendant invited the plaintiff to a meeting on 2 May 2008 “so as to come up with an amicable result/ settlement” before it resorted to legal action.
40. By letter dated 2 May 2008, the plaintiff informed the defendant that since it continued to be in breach, the Subcontract was terminated forthwith. The plaintiff further gave notice that it would engage another subcontractor to complete the remaining works and would recover all loss and expenses from the defendant.
41. By a contract dated 3 June 2008, the plaintiff appointed Chit Tat Bamboo Awning Limited (“Chit Tat”) to carry out the works of the remaining six towers.
The claim
42. On 16 July 2008, the plaintiff issued a writ in the District Court, claiming against the defendant for damages for breach of contract. The defendant disputes the claim and further counterclaims for return of the retention money and damages for breach of contract. By the order dated 19 November 2009, the action was transferred to the Court of First Instance and became the present action.
43. The plaintiff’s case is that the defendant had wrongfully repudiated the Subcontract by refusing to carry out the Scaffolding Works for the remaining six towers. The plaintiff accepted the repudiation and terminated the Subcontract. It claims against the defendant for loss and damage represented by: (i) the additional costs incurred in employing Chit Tat to carry out the unfinished Scaffolding Works, in the sum of $1,703,105.61; and (ii) the costs of remedial works to deal with damages caused by the defendant in the course of carrying out the works to the first six towers, in the total sum of $139,039. The plaintiff will give credit for the $590,000 retention money held by it, reducing its claim to $1,252,144.61.
44. There are in the Statement of Claim a claim for indemnity for delay and a claim for the costs of remedying the defective works carried out by the defendant. They were not pursued at the trial.
The counterclaim
45. The defendant’s case is that the plaintiff was in breach of its payment obligation under the Subcontract in that the interim payments were late and there were also underpayment. The defendant also says that the plaintiff was in breach the oral agreement made on 27 August 2007 for the 1% discount rebate. By reason of the breaches, the defendant was entitled not to commence the Scaffolding Works for the remaining six towers and to terminate the Subcontract. The defendant puts the plaintiff to strict proof of the loss and damage claimed.
46. The defendant further counterclaims for the difference between the total amount of the payment applications submitted by the defendant (applying a 6% discount factor) and the total amount of payments made by the plaintiff to the defendant, in the sum of $1,944,557.16.
The issues
47. The principal issues to be resolved in this trial are:
(1) Whether the defendant had repudiated the Subcontract by failing to continue with the remaining Scaffolding Works. This in turn involves the determination of whether at the 27 August 2007 meeting, Yau had agreed with the defendant to reduce the discount factor from 7% to 6 % and whether the plaintiff was in breach of the agreement.
(2) Whether the plaintiff was in breach of the Subcontract with regard to its payment obligation. This entails determination on whether the plaintiff was late in making payments and had underpaid the defendant.
(3) If the defendant had wrongfully repudiated the Subcontract and is liable to pay the extra costs caused by the engagement of Chi Tat, what is the amount involved.
(4) Whether the defendant is liable for the costs of the remedial or replacement works.
(5) Whether, apart from the retention money, the plaintiff is obliged to make further payments to the defendant for the Scaffolding Works of T1 to T6.
The witnesses
48. The plaintiff had called three witnesses. They are Yau, Yam and Hung. Yau was involved in the project until September 2007 when he was transferred to another project. Yam took over from Yau in September 2007. In the case of Hung, he took over from another quantitative surveyor and since January 2008 was in charge of assessing the IPAs and calculating the payments to the defendant.
49. For the defendant, there were two witnesses, Fu and So. They were involved in the Subcontract throughout and had taken part in the discussions over the 1% interest rebate as well as the disputes regarding the IPAs and the payments.
50. For reasons that I will elaborate when I deal with the issues in dispute, I consider the evidence of Fu and So in general to be inherently credible and reliable. In particular, I find Fu a straightforward and fair witness. When his attention was drawn to the IPAs and the plaintiff’s assessments and calculations, he readily accepts that they both contain errors. He frankly admits that the suspension of work on 15 January 2008 was in part to put pressure on the plaintiff and that after the Chinese New Year, the defendant was not enthusiastic about commencing work because they were unhappy about the manner in which the 7th payment was effected. There is also a ring of truth in his account of how, in the period leading to the completion of the dismantling of the scaffoldings on T1, he brought cash to the site every day to pay to the workers so as to encourage them to expedite the work and to finish it before the Chinese New Year.
51. Yau and Yam are, by contrast, less forthcoming. Yau, in particular, was being evasive when being cross-examined as to whether the costs would be higher if scaffoldings were to be erected to six towers at the same time, as compared to the erection of scaffoldings on no more than three towers. Clearly, he is aware that the answer will impact upon the disputes over the 14 May 2007 and 27 August 2007 meetings as well as the issue of 1% discount rebate. Hence, he was reluctant to give a direct answer so as not to commit himself.
52. As for Hung, I have reservations about the reliability of his evidence. He is of the view that the maximum amount of retention money to be held by the plaintiff was 5% of the projected final contract costs (i.e. $850,000) and not 5% of the contract sum (i.e. $590,000). Thus, after he took over from the previous quantitative surveyor, he made a deduction of $256,300 in the 8th payment so as to bring the retention money up to 5% of the total amount of the work done. He did so knowing that there was a previous dispute between the parties over the maximum amount of the retention money and that his predecessor eventually made a decision to refund to the defendant the amount in excess of $590,000. This illustrates the assertive aspect of his character. It also, at the same time, reflects adversely on his evidence on the exclusion of the 1% discount rebate in the 9th payment. If indeed he did not believe there had been an agreement and that the plaintiff was entitled to the rebate, it is improbable that he would have, out of sheer kindness and desire to help the defendant, included the 1% discount rebate in the calculations that he faxed to the defendant on 5 April 2008. Indeed he is not a person who will easily concede. When he was cross-examined on the schedule of calculations of the extra costs incurred as a result of the engagement of Chi Tat, he refused steadfastly to accept that the price quoted by the defendant for new white-colour safety nets was higher than that quoted by Chit Tat and that his calculations had failed to take this into account. He maintained his position notwithstanding he had been taken to the relevant documents. When being shown the plaintiff’s letter dated 15 April 2008 instructing the defendant to proceed to purchase new white-colour safety nets, he would not accept that this demonstrates that the plaintiff had accepted the defendant’s quotation. He went so far as saying that if the plaintiff did not accept the defendant’s quotation, it did not have to inform the defendant even when instructing the defendant to proceed with the purchase of the safety nets. These unreasonable answers reflect adversely on the objectivity and reliability of his evidence.
The meeting on 27 August 2007 and the 1% discount rebate
53. The primary dispute between the parties over the meeting on 27 August 2007 is whether Yau had agreed to return 1% of the discount to the defendant as compensation for the changes to the work programme of T1 to T6. Underlying this dispute is the dispute as to whether the plaintiff’s representatives had at the 14 May 2007 informed the defendant that scaffoldings would be erected on no more than three towers at any one time. In my view, the account given by Fu and So is to be preferred. Apart from the fact that none of the plaintiff’s representatives who were present at the 14 May 2007 meeting was called, there is no conceivable reason why the defendant would agree to a 5% discount. On the plaintiff’s own case, the defendant is not a small company; it is one of the major subcontractors for scaffolding work. There is also no suggestion that he defendant needed work badly. I do not consider the fact that the plaintiff did not in the letter dated 16 May 2007 refer to the reason for agreeing to a 5% discount as casting doubt on the evidence of Fu and So, bearing especially in mind that it was a short letter to convey the defendant’s decision. Further, the fact that the defendant had to deliberate on the request and to revert after the meeting shows that the 5% discount was not something that the defendant readily accepted. It reinforces the point that there had to be an incentive for it.
54. As to the 27 August 2007 meeting, it is not in dispute that there was a discussion between Fu and So, on the one hand, and Yau, on the other, on the effect of the changes to the work programme on the costs to be incurred by the defendant. There is also no dispute that the 1% discount rebate was raised. According to Yau, he was the one who proposed this. He however says that he only agreed to recommend to the plaintiff’s board to consider giving the rebate as a bonus or compensation if the defendant completed the work timeously and satisfactorily. I find Yau’s account inherently improbable. Firstly, there is no assurance or comfort to the plaintiff id all that he said was he would recommend to the plaintiff’s board to consider a rebate because it is as good as nothing. Given the serious concerns the plaintiff had over the impact of the changes to the work programme (as demonstrated by the repeated reference to this issue in the several revisions to the work programme), it is improbable that Fu and So would be contented with an empty promise like this. Secondly, there is no need to make satisfactory and timely completion a condition since this is what the defendant was contractually bound to do. Thirdly, while Yau was adamant in his witness statement that the rebate was to be a special bonus, he prevaricated under cross-examination, saying he did not remember whether he said the rebate was to be a bonus or as compensation. But on the plaintiff’s case, no one had ever told the defendant that scaffoldings would be erected on no more than three towers at any one time and it would be the defendant’s own fault mistake in thinking that it could re-use the materials, there was no room for considering a compensation. There is simply no reason for Yau to volunteer some possible form of compensation for the defendant. On the other hand, if Yau was agreeable to the idea of a compensation, it is difficult to see why he would only make a recommendation upon satisfactory and timely completion of the work.
55. I am of the view that the account of Fu and So on the 27 August 2007 meeting and the 1% discount rebate to be more convincing and is to be preferred. I find as a fact that at this meeting, Yau did agree to return 1% of the discount to the defendant as compensation for the additional costs incurred as a result of changes to the work programme.
56. I also find as a fact, which is not controversial, that Yau had not indicated when the rebate would be paid to the plaintiff. The absence of express agreement on this point probably explains why the defendant continued to apply a 7% discount in the 2nd to 4th IPA whereas the plaintiff’s quantitative surveyor adopted a 6% discount in the draft assessment that was faxed to the defendant on 11 December 2007.
57. I shall return to deal with the impact of the findings on the 1% discount rebate on whether the issues of which of the parties had repudiated the Subcontract.
Late payment and under payment
58. On the issue of whether the plaintiff had been in breach of its payment obligation under the Subcontractor, the primary disputes are whether there had late and/or under payments. In coming to a conclusion on these disputes, it is necessary to consider several matters as follows.
(1) The 4th and 5th payments.
(1.1) According to Yam, the 4th and 5th payments were cash advancements requested by the defendant. Both Fu and So denied the defendant had requested financial assistance from the plaintiff or that the defendant was in financial difficulties (see paragraph 26 above). In my view, the evidence of Fu and So in this respect and of the 5 December 2007 meeting is to be preferred. Firstly, it is common ground that the defendant is a sizable company and there is no evidence before the court to suggest that it ran into financial difficulties at the material time. Secondly, in the letter dated 10 December 2007, the defendant expressly referred to the agreed timetable for payments of the unpaid balance of the 3rd IPA and of the 4th IPA. There was no reply from the plaintiff to refute this.
(1.2) Although in the payment certificates the plaintiff described the amounts as advanced payments and made no deduction for retention money, this only go to show the plaintiff’s treatment of the two payments, but does not, having regard to the objective circumstances, support the plaintiff’s case that they were cash advancements made on the defendant’s request.
(1.3) It is noteworthy that the defendant had by then submitted the 4th IPA and the plaintiff had done a draft assessment which was faxed to the defendant on 11 December 2007. For reasons that were not explained, the plaintiff claimed that it did not make an assessment of or payment under the 4th IPA. It is also to be noted that the total amount of the 4th and 5th payments was less than the assessed payable amount in the 11 December 2007 fax.
(1.4) In my view, for reasons best known to the plaintiff, it had unilaterally decided to describe and treat the two payments as advancements, when in fact they should have been further payments of the 3rd IPA and/or payment of the 4th IPA.
(2) The 4th IPA
As a result of the plaintiff’s treatment of the 4th and 5th payments, the plaintiff had admittedly not made a formal assessment of the 4th IPA. In my view, even if the 4th and 5th payments were in fact cash advancements made at the defendant’s request, they would not have exonerated the plaintiff from the contractual duty to make assessment and payment under the 4th IPA.
(3) The 7th payment
On Hung’s evidence, the 7th payment was made not as a result of an IPA from the defendant. He said in his witness statement that this payment came about as a result of his reassessing the value of the works done by the defendant in November and December 2007 in greater details. He however did not explain what caused him to do so. If his evidence were to be believed, it would show that the previous payments made by the plaintiff were in all probabilities inadequate since the amount of this payment was in excess of $940,000.
(4) The 8th payment
As to the 8th payment, the plaintiff admits it was late. But the problem is not just late payment. This was a payment for the 6th and 7th IPAs (which are identical). By the time it was paid (10 March 2008) all the work for T1 to T6 had completed. Yet, the amount paid was a modest sum of $135,978.16. In the absence of credible explanations, for which there was none, this suggests again that the amount paid was inadequate.
(5) The maximum amount of the retention money
As noted above, there had been a dispute between the parties as to whether the maximum amount of the retention money to be held by the plaintiff is 5% of the contract sum as stated in the Subcontract or of the actual amount of the work done under the Subcontract. It is common ground that by April 2008, the difference had been resolved in favour of the former and it was agreed that $590,000 was the maximum amount to be deducted by the plaintiff as retention money. The point therefore does not call for determination.
(6) The deductions made by the plaintiff
(6.1) It is the defendant’s argument that the plaintiff’s assessments of the IPAs and deductions of the amounts claimed in the IPAs were made arbitrarily. However it was not until at the trial after I requested for the preparation of a Scott Schedule that there were some clearer ideas as to what were the disputed items of work. Even then, the situation is far from satisfactory principally because none of the witnesses has personal and direct or full knowledge of the matters in dispute; none of them was involved in the day-to-day work on the site. There is also no expert evidence on the valuation of the disputed items of work. It is thus impossible for the court to make a determination on the various disputed items as identified on the Scott Schedule, other than to resort to the burden of proof.
(6.2) As observed by Deputy Judge To (as he then was) in Wong Chuk Kin t/a Kin Kee Aluminum Company v. Millennium Engineering Limited (unreported) HCA 876/2004 (17 August 2007),
“Proof rests on he who affirms not he who denies. It therefore lies upon the party who substantially asserts the affirmative to prove the issue: see Constantine Line v. Imperial Smelting Corporation [1942] 154 at 174. This burden is fixed at the beginning of the trial by the state of the pleading.”
(6.3) Adopting this approach, since the defendant alleges under payment, it bears the burden of demonstrating that the assessments and deductions in the disputed items of work (such as the quantity of the toe-board and the gangway or working platform and whether it was a single- or double- layered scaffolding) and the contra charges were incorrect or without proper basis
(6.4) From the Scott schedule adduced at the trial, it will appear that much of the disputes relates to the quantity of the work done and also to the materials used, which in turn affects the applicable unit rates. The defendant has adduced no actual evidence to show that the counting or valuation made by the plaintiff was or was in what way incorrect. In the circumstances, the defendant has failed to discharge its burden of proof with respect to the disputed items on the Scott Schedule.
(6.5) As to the contra charges, the defendant disputes the deductions for the testing of the eye-bolts for the safety ropes (Item D on Bundle C, p.770). The plaintiff relies on Clause 7B.3e) of schedule 3 of the Subcontract (see paragraph 12(5)(ii) above) as justifying charging the testing fees to the defendant. However, there is no evidence that the test results procured by the defendant were not conclusive or did not meet the requirement of the engineer as to necessitate additional testing. In the circumstances, there is no proper basis for including the expenses for testing the eye-bolts in the contra charges.
59. Having regard to the above mattes, I am of the view that in the round, there had been late payments and underpayments on the part of the plaintiff.
Repudiation by the plaintiff?
60. Mr Wong submits that even if the plaintiff had underpaid or was late in making payments, it does not follow that it amounts to repudiation justifying the defendant from refusing from carrying out the remaining work. In Keating on Construction Contracts (8th edition, 2006) para.6-058 & 6-081, it was stated that:
“In the context of construction cases, there are three categories of cases involving repudiatory breach: (1) those cases in which the parties have agreed that the term is so important that any breach will justify termination; (2) those contractors who simply walk away from their obligations thus clearly indicating an intention no longer to be bound; and (3) those cases in which the cumulative effect of the breaches which have taken place is sufficiently serious to justify the innocent party in bringing the contract to a premature end.”
61. Of relevance to the present case is the third category. It is a question of facts in each case as to whether the cumulative effect is so serious as to justify regarding the breach as amounting to a repudiation. In the context of the present case, the relevant time is 23 April 2008 when the defendant issued the letter of termination. The undisputed facts are that by then the parties had reached consensus on a number of the matters in dispute and had agreed to continue negotiations on the outstanding items and that the defendant would proceed with the remaining work. Further by then the defendant had received 9 payments, which came up to about 91% of the amount claimed in the IPAs. In these circumstances, even though the plaintiff had been previously been in breach of its payment obligations under the Subcontract, it would not have entitled the defendant to treat the contract as having been repudiated and to terminate it. In fact, it is clear from the evidence that what triggers the letter of 23 April 2008 is the exclusion of the 1% discount rebate from the 9th payment.
Repudiation by the defendant?
62. It follows that the defendant was in breach of the contract in issuing the letter of 23 April 2007. When it failed to accede to the plaintiff’s demand in the letter dated 24 April 2008 to commence work on the remaining six towers, the defendant was in repudiatary breach of the Subcontract that entitles the plaintiff to accept the repudiation and terminate the contract by its letter of 2 May 2008. The defendant refers to the letter dated 28 April 2008 as showing that it was willing to continue with the contract. However, a reading of the letter will show that the defendant’s request for a meeting was only to discuss the disputes over payments but not with regard to re-commencing work under the contract.
Damages – Additional costs incurred by engaging Chit Tat
63. In the circumstances, the plaintiff is entitled to engage Chit Tat to carry out the remaining work and to claim against the defendant for the additional costs arising therefrom.
64. The plaintiff claims that the additional costs come up to the amount of $2,290,719.05. The breakdown for the amount was prepared by Hung and it was attached to his witness statement (at A72).
65. I note that the plaintiff has not disclosed the complete set of the contract with Chit Tat. It has however disclosed the payment certificates. I am prepared to accept the veracity of the figures stated in the breakdown.
66. The defendant has taken issue with the unit rates for calculating items 3(a) and 3(b), which relate to new/ old safety nets. The defendant contends that the defendant’s unit rates for these items should be adjusted in the light of the discussions and agreement it had made with the plaintiff.
67. In his closing submission, Mr Wong accepts the unit rates for these two items should be adjusted. The plaintiff is prepared to proceed on the assumption that only new nets were used. On this basis, the following deductions were made to this head of the claim:
(a) Item 3(a) (Double layer)
27,197.60 sq. ft. x $8 = $217,580.80
(b) Item 3(b) (Single layer)
103,565.40 sq. ft. x $4 = $414,216.60
68. The additional costs incurred by the plaintiff in engaging Chit Tat, for which the defendant is liable, is therefore:
[$2,290,719.05 – ($217,580.80 x 94%) – ($414,216.60 x 94%)] =
$1,479,206.39.
Damages – Replacement costs
69. The plaintiff also claims against the defendant the replacement costs for: (1) the aluminum cover for movement joint ($43,200); (2) the spray granite costing at the external façade ($40,039); and (3) the tiles at the roof floor ($55,800). The plaintiff says that all three items were damaged by the defendant when it carried out the Scaffolding Works to T1 to T6.
70. The defendant puts the plaintiff to strict proof that the damages were caused by it.
71. Having regard to the documentary evidence, such as the incident reports, and the fact that the damages occurred during the period when the scaffolding work was in progress, I am satisfied that the plaintiff has proved on balance of probabilities that these damages were caused by the defendant. The defendant is liable to reimburse the plaintiff for the three items of replacement costs as claimed.
Conclusion
72. In conclusion, I enter judgment for the plaintiff on the additional costs incurred in engaging Chit Tat and also the replacement costs together with interest thereon at judgment rate from the date of judgment until full payment.
73. I also enter judgment for the defendant on the counterclaim for the 1% discount rebate; the retention money ($590,000); the contra charges relating to the testing of the eye-bolts together with interest thereon at judgment rate from the date of judgment until full payment.
74. I also make an order nisi that the plaintiff shall have the costs of the claim and the defendant shall have the costs of the counterclaim.
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(C Chu)
Judge of Court of First Instance
High Court |
Mr Damian Wong instructed by Chan, Lau & Wai for the plaintiff.
Mr James C C Cheng instructed by Johnie Yam, Jacky Lee & Co for the defendant.
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