ONWAY ENGINEERING LTD v. SHUN WING CONSTRUCTION & ENGINEERING CO LTD

CACV 357/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 357 OF 2008

(ON APPEAL FROM HCA NO. 88 OF 2008)

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REASONS  FOR  JUDGMENT

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Hon Tang VP:

Introduction

1.  Chinney Construction Co. Ltd (“Chinney”), entered into a 3-year term government maintenance contract, No. TC K011, (“the Term Contract”) with the Architectural Services Department (“ASD”) of the government on 29 March 2001.

2.  The estimated annual expenditure of government under the Term Contract was HK$127 million, and the estimated total contract value attributable to the Term Contract was HK$381 million.

3.  Chinney sub-contracted the entire Term Contract to Shun Wing Construction & Engineering Company Limited (“Shun Wing”) for a fee of 2% of the agreed rate.

4.  In this action, Onway Engineering Limited (“Onway”) claimed that by a sub-contract which was contained in or evidenced by the quotation in the form of a tender signed on 31 March 2001, it had become Shun Wing's sub-contractor in respect of most of the maintenance, repairing a construction work under the Term Contract at a rate set out in the Term Contract to be paid by the government to Chinney, less 29%.  Further, by an oral agreement in or about mid-August 2001, it was agreed that the amount to be deducted would be reduced to 25%.

5.  It was also Onway's case that the sub-contract had been wrongfully repudiated by Shun Wing's letter of 31 December 2001, which repudiation was accepted by Onway in its letter dated 4 January 2002.

6.  It is common ground that no work had been done by Onway on the site since 31 December 2001.

7.  In Onway's letter of 4 January 2002 to Shun Wing, Onway alleged that the letter of 31 December 2001 was written by Shun Wing as agent on behalf of Chinney and that Onway was Chinney's sub-contractor.

8.  In Shun Wing's reply on 8 January 2002, they said:

“…we wrote to you per our letter dated the 31^st December 2001 in our personal capacity and not as agent as alleged. We write to put on record you were, prior to 31 December 2001 our sub-contractor under the Sub-Contract to the captioned contract.”

9.  Shun Wing's letter went on to say:

“Please also note that you are now liable to return to us all the payments forthwith in the total sum of $4,432,023.15 previously advanced to you. Further you are also liable for any antecedent breaches of the Sub-Contract (if any) and for all our loss and damages arising out of and as a result of the said breach.”

10.  On 26 January 2002, Onway commenced proceedings, namely, HCCT 10/2002, against Chinney as the sole defendant.  Onway claimed in HCCT 10/2002 that it was the sub-contractor of Chinney.

11.  After a 12-day trial, Deputy High Court Judge Muttrie held on 9 November 2005 that Chinney had never contracted with Onway, and dismissed Onway's claim.  He said:

“149. I am satisfied that there was a licence-borrowing agreement between Chinney and Shun Wing and that Ken Ng (Onway's Managing Director) knew of this when he made the tender.  I am satisfied that Shun Wing was the direct sub-contractor, and Onway the sub-sub-contractor.  So Chinney can have no liability to Onway.”

12.  It is true that had Deputy Judge Muttrie found that there was a direct sub-contract between Onway and Chinney, he would have given judgment in favour of Onway.  The quantum had not been clearly spelt out. But Shun Wing was not a party to that action and is not bound by the judgment.

13.  On 30 March 2007, the Court of Appeal dismissed Onway's appeal from Deputy Judge Muttrie.  On 1 June 2007, the Court of Appeal refused leave to appeal out of time to the Court of Final Appeal, and on 6 December 2007, the Court of Final Appeal refused Onway's application for leave to appeal to the Court of Final Appeal.

14.  On 15 January 2008, the present action HCA 88/2008 was commenced by a generally endorsed writ, claiming in excess of $38 million.  By 15 January 2008, the 6-year limitation period had expired.

15.  On 13 February 2008, the writ was amended so that the claim became a claim for $11,880,735.94.  In the statement of claim dated the same date, it transpired that Onway's claim was based on two written confirmations for audit purposes sent to Onway by Shun Wing's auditors Ernst & Young, which were signed by Shun Wing and dated 3 June 2005 and 19 June 2006 respectively.  Both were in standard form.  The essential term and layout of the confirmation are as follows:

“Shun Wing Construction & Engineering Co Ltd

CONFIRMATION OF AUDIT PURPOSES

Ernst & Young are in the process of conducting their regular audit of the financial statements of our Company and wish to confirm the balance of your account with us as follows:

Balance at 31 March 2006 (  )	Due from you
THIS IS NOT A REQUEST FOR PAYMENT	Due to you

If the above balance agrees with your records please confirm by signing at the foot of this page and returning a copy of this letter by fax at (852) 2118 4166 and the original letter to Ernst & Young of 18/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong in the enclosed envelope.

*If you do not agree the above balance we should be grateful if you would give the position according to your records and the reasons for your disagreement on the back of the this letter.

We appreciate that you may have settled the above account after the date mentioned above, but would still appreciate your confirmation that the balance is correct.

16.  Neither confirmation had been returned to Ernst & Young.

17.  On 18 November 2008, Deputy High Court Judge Carlson struck off the pleadings as well as the action:

“… on the ground that they are (i) scandalous, frivolous or vexatious and/or (ii) otherwise an abuse of the process of the court and the action be dismissed on the basis that they set up a cause of action which was barred by Section 4  of the Limitation Ordinance, Cap. 347 at the time of the issue of the writ herein;”

and that

“… This Action be dismissed.”

The appeal

18.  This is Onway's appeal.

19.  Shun Wing's application to strike-out was supported by two affirmations by Mr Patrick Au, a director of Shun Wing.  He said that the amounts stated in the two confirmations:

“… should have been inserted in the box PAYMENTS DUE FROM ONWAY instead of PAYMENTS DUE TO ONWAY”.

20.  He explained:

“34.   I recollect that when an audit team of EY attended Shun Wing's office for the purpose of conducting a regular audit of Shun Wing's account for the year ended 31^st March 2005, Shun Wing had given EY copies of the relevant documents of Shun Wing, including the relevant payment certificates to Onway, a breakdown for temporary payment to Shun Wing's sub-contractors, Shun Wing's management account, etc. for EY's preparation of Shun Wing's audit account. All the supporting documents show that as of 31^st March 2005, the amount of HK$10,981,668.83 was due from Onway not of due to Onway, particulars of which are set out in Appendix A annexed hereto. However, for unknown reason, the figure of HK$10,981,699.00 was wrongfully put in the box of ‘DUE TO YOU’ instead of ‘DUE FROM YOU’ in Confirmation 05.

35.    I note from Confirmation 05 that Mr. Lo Yun Sang also known as Sam Lo (‘Sam Lo’), the company secretary of Shun Wing at that time had signed thereon. I had made enquiry with Sam Lo at that time to ascertain from him under what circumstances had he signed Confirmation 05. Sam Lo told me that he had signed on Confirmation 05 upon the request of EY. He had relied on the expertise of EY and had signed on Confirmation 05 without checking the details therein. After signing Confirmation 05, Sam Lo returned the same to EY without making any copy thereof. Due to inadvertence, the figure of ‘10,981,699.00’ was entered in the box of Confirmation 05 against ‘Due to you’ which should have been entered in the box against ‘Due from you’ by EY.

36.    This notwithstanding, EY had properly prepared the audit account of Shun Wing and further advised Shun Wing that as the amount of HK$10,98l,668.83 had been outstanding from Onway for a long time and according to good accounting principles should be treated as doubtful debt and provision for such doubtful debt should be provided. Shun Wing had taken EY's advice and made provision for the sum of HK$10,981,668.83 as reflected in the relevant accounting documents of Shun Wing at the material times.

37.    A similar auditing exercise was conducted in 2006. Shun Wing again provided the audit team of EY relevant documents for preparing Shun Wing's audit account for the year ended 31^st March 2006. All the supporting documents show that as of 31^st March 2006, the amount of HK$11,880,735.94 was due from Onway instead of due to Onway, particulars of which are set out in Appendix B annexed hereto. However, for unknown reason, the figure of HK$11,880,735.94 was wrongfully entered in the box of ‘DUE TO YOU’ instead of ‘DUE FROM YOU' in Confirmation 06.

38.    The figure ‘HK$11,880,735.94’ was again entered in the box against ‘Due to you’ which should have been entered in the box against ‘Due from you’ due to inadvertence on the part of EY in preparing Confirmation 06. Sam Lo had also confirmed with me that he had signed and chopped the company chop of Shun Wing on Confirmation 06 upon reliance of the expertise of EY, which had prepared the same. He had not checked the details in Confirmation 06 upon signing on the same. Sam Lo then returned Confirmation 06 to EY after signing thereon without making a copy thereof.

39.    Shun Wing has written a letter to EY to invite EY to look into its archive and so as to confirm the correct position. EY has written a reply letter to Shun Wing dated 29^th April 2008, which shows that the sums were recorded as owed to Shun Wing by Onway, and that Onway never responded to the Confirmation requests. There are now produced and shown to me marked ‘AYFP-7’ true copies of the letter from Shun Wing to EY and EY's reply.”

21.  The letter to Ernst & Young was dated 29 April 2008 and reads:

“Shun Wing Construction & Engineering Company Limited (the ‘Company’)

We would like to advise that Onway Engineering Limited (‘Onway’) commenced a legal proceedings against the Company on 15 January 2008 claiming for the sum of HK$11,880,735.94 plus interest and costs thereon. In Paragraphs 28 and 29 of Onway's Statement of Claim, Onway relies on the ‘Confirmation for Audit Purposes’ dated 3 June 2005 (‘Confirmation 05’) and ‘Confirmation for Audit Purposes’ dated 19 June 2006 (‘Confirmation 06’), which were sent to it by you at the material times, to allege that the Company has acknowledged that the amount of HK$10,981,699.00 or HK$11,880,735.94 was DUE TO ONWAY.

Since we have not retained any copy of Confirmation 05 and Confirmation 06, we have instructed our Solicitors to obtain one copy each thereof from Onway's Solicitors. On or about 25 February 2008, we received copies of Confirmation 05 and Confirmation 06 from Onway's Solicitors (copies of which are attached hereto for your easy reference).

From the copies Confirmation 05 and Confirmation 06 provided by Onway's Solicitors, we note that Onway has not signed thereon to show whether they agree or disagree to the figures as shown on the Confirmations.

As far as we know, all along, Onway owes money to the Company and the Company does not owe any money to Onway. We have checked with the Company's records and found that, as at 31 March 2005 and 31 March 2006, there were balances due from Onway to the Company of HK$10,981,668.83 and HK$11,880,735.94 respectively. In addition, we also note that there were balances due from Onway to the Company as at each of 31 March 2002, 2003 and 2004 as follows: -

Date	Balance of amounts due from Onway to the Company (HK$)
As at 31st March 2002	8,615,308.80
As at 31st March 2003	15,433,514.84
As at 31st March 2004	12,240,024.87

In view of the above circumstances, we trust that the said figures of HK$10,981,699.00 and HK$11,880,735.94 were inadvertently written in the box against ‘Due to you’ which should have been entered in the box against ‘Due from you’ in Confirmation 05 and Confirmation 06 respectively.

In this regards, we would like to have your written advice on the following matters:

1.  the balances between the Company and Onway as at each of 31 March 2002, 2003, 2004, 2005 and 2006 as per your finding during the course of audit of the Company's financial statement for the years/period then ended; and

2.  whether you sent out any audit confirmations for the balances between the Company and Onway as at 31 March 2002, 2003, 2004, 2005 and 2006 seeking Onway's confirmation as regards the figures shown thereon; and if so, whether Onway has returned and signed on any of those confirmations showing its agreement/disagreement to the figures.”

22.  Ernst & Young replied on the same day:

“Shun Wing Construction & Engineering Company Limited (‘Shun Wing’)

We refer to your letter dated 29 April 2008.

We have been appointed as auditors of Shun Wing for the years ended 31 March 2002, 2003, 2004, 2005 and 2006 (the ‘Periods’). According to our working papers based on schedules prepared by the management as extracted from the books and records of Shun Wing, Shun Wing had receivable balances due from Onway Engineering Limited (‘Onway’) as at the balance sheet dates of the Periods as below.

	HK$
As at 31 March 2002	8,615,308.80
As at 31 March 2003	15,433,514.84
As at 31 March 2004	12,240,024.87
As at 31 March 2005	10,981,668.83
As at 31 March 2006	11,880,735.94

As part of our audit procedures, we sent out confirmations to Onway for the Periods to confirm the balances as at the balance sheet dates of the Periods. However, based on our records, we did not receive any audit confirmation signed and returned by Onway.”

23.  Mr Alan Ng Man Sang (“Mr Ng”), appearing for Onway, submitted that the issue on appeal is whether it is plain and obvious that the audit confirmations could not amount to an acknowledgment of Shun Wing's indebtedness to Onway.

24.  I believe the question is whether it is plain and obvious that the entry in the “DUE TO YOU” box was a mistake.  Suppose Shun Wing was indebted to another entity, say, X Ltd, but by mistake the confirmation was addressed and sent to Onway, surely for the purpose of striking-out, the question that has to be resolved is whether it is plain and obvious that a mistake had been made.  That is so even if the content of the document is clearly an acknowledgment of indebtedness.

25.  Here, I would assume without deciding that, subject to the mistake, the confirmations would have been sufficient acknowledgment of indebtedness for the purpose of section 23(3) of the Limitation Ordinance, Cap. 347.

26.  Mr Ng submitted that this is not a plain and obvious case because there are suspicious circumstances which should to be further investigated.

27.  Whilst Mr Ng accepted that the evidence of Mr Sam Lo, which was relied on Patrick Au in his affirmations are admissible under Order 41 Rule 5(2), he submitted it was suspicious that Sam Lo had not actually made an affirmation.  I do not agree.

28.  Mr Ng submitted that the documents included in Appendices A and B to Mr Patrick Au's 1^st affirmation were self-serving or had been re-engineered. 

29.  Mr Ng referred to the documents B1 annexed to Mr Patrick Au 1^st affirmation.  According to Mr Patrick Au, the documents in Appendix B1 were produced to Ernst & Young for the purpose of the audit.  Mr Ng referred to the following entries in document B1:

“31/05/2005	GJ05030016	ONWAY ENGINEERING LTD	Written-off Mar’05 bal.	(10,981,668.83)*
23/07/2002	RV02070005	ONWAY ENGINEERING LTD	Hing Kee refund duplicate pymt	(2,700.00)
21/02/2005	GJ06020003	ONWAY ENGINEERING LTD	IP#89 Bal	11,882,852.94
31/03/2006	GJ06030007	ONWAY ENGINEERING LTD	DN#0603/001	583.00	899,067.11
31/03/2006	GJ06030014	ONWAY ENG LTD	IP#89 INTEREST	(92,715.06)
31/03/2006	GJ06030014	ONWAY ENG LTD	IP#89 INTEREST	(145,702.25)
31/03/2006	GJ06030014	ONWAY ENG LTD	IP#89 INTEREST	(897,157.46)	(1,135,574.77)”

30.  Mr Ng submitted that:

“(c)    According to Patrick Au, the sum of HK$10,981,668.83 has been written off as doubtful / bad debt in 2005 This is so stated in B1 of Appendix B. The receivables from P as at 31/3/2006 should have been HK$899,067.11, not the figure of HK$11,880,735.94 as stated in the E&Y Letter. If the sum of HK$10,981,668.83 was not written off, the receivables from P as at 31/3/2006 should have been HK$(11,882,852.94 -2700.00 + 583.00 + 92,715.06 + 145,702.25 + 897,154.46) = HK$13,016,310.71, not HK$11,880,735.94.”

31.  With respect, the fact that HK$10,981,668.83 had been or was to be written off as doubtful/bad debt would not mean that that amount ceased to be due and owing by Onway.  Also, even if Mr Ng is right and the correct amount was HK$13,016,310.71 instead of the amount stated in the 2006 confirmation, that would not help Onway.  The critical issue is not whether the amount stated to be due and owing had been correctly stated, the critical issue is whether the confirmations were meant to show the amounts as due to or owed by Onway. 

32.  In relation to Ernst & Young's letter, Mr Ng submitted that he could not go so far to say that Ernst & Young was dishonest.  He submitted, however, that it was suspicious that Ernst & Young was able to respond to the letter of Shun Wing so promptly.  But as Mr Patrick Au's affirmation shows, Shun Wing did not have a copy of the confirmations, and received them from the solicitors for Onway on/about 25 February 2008.  It is common sense that there would have been inquiries made by Shun Wing with Ernst & Young after the statement of claim was served in February.  So I can see nothing suspicious about the correspondence. 

33.  It is noted that Ernst & Young's letter referred to confirmations for the years ended 31 March 2002, 2003 and 2004 respectively, which showed amounts receivable from Onway.  We are told by Mr Ng that the earlier audit confirmations had not been received by Onway.  But that does not matter.  What matters is that according to Ernst & Young, and there is really no reason to doubt what they said, in the 3 earlier years, the audit confirmations showed that it was Onway who was indebted to Shun Wing.  That goes also to support Shun Wing's case that the confirmations for 2005 and 2006 were mistaken insofar as they show the amount as payable to Onway as opposed to payable by Onway.

34.  Mr Patrick Au had also produced over 50 “sub-contractors’ application for payment form” each showing, as from January 2002 an amount owing by Onway to Shun Wing.  It is Onway's case that none of it had been received by them.  That does not matter.  What is important is that these documents showed that according to Shun Wing's internal records, it was Onway who was indebted to Shun Wing and not vice versa.

35.  Mr Ng also referred us to some of these “sub-contractors’ application for payment form”, the photocopies of which showed shadows in some areas and suggested these documents are suspicious.  With respect, I can see nothing suspicious about these documents.

36.  In the circumstances of this case, I believe it is plain and obvious that in the confirmations the amounts had been mistakenly stated in the confirmations to be owed by Shun Wing to Onway whereas they should be the other way round.  There is no substance in any of the suspicious circumstances relied on by Mr Ng.

37.  For these reasons, I have dismissed the appeal with costs.

Hon Hartmann JA:

38.  I agree with the reasons given and have nothing to add.