CHOW KEE JAMES t/a TAPBO CIVIL ENGINEERING CO v. TRANSWAY CONSTRUCTION & ENGIEERING LTD t/a WO KEE CONSTRUCTION & ENGINEERING CO

CACV 36/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 36 OF 2007

(ON APPEAL FROM HCCT NO. 11 OF 2006)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from an order of Deputy High Court Judge Gill made on 19 December 2006 and a subsequent costs order of 23 May 2007.  At the conclusion of the appeal, judgment was reserved which we now give.

Background

3.  The plaintiff was the main contractor under a contract dated 5 December 2001 with the Water Supplies Department (“the employer”) for the laying of steel water mains in Castle Peak (“the main contract”).  After undertaking some preliminary work, on 1 March 2002, the plaintiff subcontracted the balance of the project to the defendant.  The sub-contract was recorded in a letter of 1 March 2002 (incorporating nine schedules) from the plaintiff to the defendant countersigned by the defendant.  Schedule 2 provided that “all documents in this schedule to be back-to-back by the whole contract documents of the main contract between [the employer and the plaintiff].”

4.  The proceedings were brought by the plaintiff to recover from the defendant payment of wages amounting to some $282,000 it had made on behalf of the defendant.  While the defendant did not dispute the amount claimed, it filed a counterclaim or set off for over $3.7 million as the balance due under the sub-contract as adjusted.

5.  The judge gave judgment in favour of the plaintiff on its claim of $282,250.74 which was to be set off against judgment in favour of the defendant in the sum of $629,104.58, leaving a net balance due to the defendant of $346,853.84.  As to costs, after hearing an application to vary the costs order nisi, the judge varied that order to the extent that the plaintiff was ordered to pay 1/4 of the defendant’s costs and the defendant 3/4 of the plaintiff’s costs.

This appeal

6.  The trial below was essentially that of the counterclaim which comprised 17 issues.  The defendant seeks to challenge only 5 of those issues on this appeal in addition to the costs order made below.  I will deal with the 5 issues first.

Industrial diesel oil

7.  The judge held that the plaintiff was entitled to contra charge the defendant for $131,912.15 being the cost of industrial diesel oil used in generators provided by the plaintiff “to supply electricity to the site”.

8.  Clause 1.4 of schedule 3 to the sub-contract provided as follows:

“Services provided by [ the plaintiff] to [the defendant] free of charge:

    a. Supply of site temporary electricity and water supplies (except connection, fixing, maintenance, fueling and transportation).”

In his skeleton submission, Mr Coleman SC who appeared for the defendant took the point that on a proper construction of clause 1.4(a), electricity should be provided free and that the word “fueling” meant no more than the act of putting fuel in the generators instead of the value of the fuel itself and that therefore the cost of the fuel consumed should not be borne by the defendant.  However, at the hearing, Mr Coleman SC took an entirely different point.

9.  As I understand it, he sought to challenge the judge’s conclusion on the basis that the amount in issue represented the cost of fuel used by generator(s) to supply electricity to the site office only and that the office was used by representatives of the employer, the engineer, the plaintiff and, to a small extent, by the defendant.  In other words, the defendant’s position was that no part of the cost of the fuel in dispute was attributable to fuel consumed by generators (which it was accepted was provided by the plaintiff) to provide electricity for ‘front line work’.

10.  The plaintiff’s witness, Lam Shiu Ming, gave evidence to the effect that three generators had been provided, one for the workshop (i.e. the site office) and two others for the use of construction work but that the contra charge was confined to oil used by the defendant for the two generators “at the work front” only.  That aspect of his evidence was not challenged.  So far as the defendant’s evidence was concerned, although the passage in the transcript referred to by Mr Coleman from the evidence of one of the defendant’s witnesses, Lam Man Cheung, could conceivably be read as suggesting that the defendant supplied its own fuel for generators supplying electricity for its work, that would appear to be inconsistent with its case on the construction of clause 1.4(a), quite apart from the apparent absence of relevant invoices to substantiate that claim.  Further, that evidence would also appear to be inconsistent with the witness statement of another of the defendant’s witnesses, Alfred Lau Kui Tim, which was to the effect that the defendant had not ordered oil for their ‘plants’.  In the context, that could only mean the generators used by them.

11.  I am of the view that the evidence this court has been shown to support the new point taken on behalf of the defendant that the amount in issue was not in respect of oil consumed by generators used for front line work but for the generator supplying electricity to the site office shared with others is, at best, tenuous and wholly unsatisfactory as opposed to clear unchallenged evidence to the contrary.  While the first sentence in § 29 of the judgment may not have been entirely accurate, the judge must have meant that the charge only related to oil consumed for generators providing electricity to the defendant for its “front line work”.

12.  I did not gain the impression that Mr Coleman was seriously pursuing the construction point but if it were still a live issue, I would say that I am in agreement with the judge that the ‘fueling’ exception relates to the cost of fuel.

Penalty charges for damaging existing water mains -- $177,974.90

13.  In the course of carrying out the sub-contract, the mains were damaged on three occasions resulting in the employer imposing financial charges totalling $177,974.90 on the plaintiff.  The plaintiff sought to make a contra charge of that amount.

14.  Under the main contract, the plaintiff was required, under the special conditions, to procure an insurance policy in the joint names of the plaintiff and the employer.  It is common ground that, first, the insurance taken out provided coverage not only for the plaintiff but also “all its subcontractors” and therefore extended to the defendant; second, the defendant did not pay and was never asked to pay any part of the insurance premium.  At the appeal hearing, it was suggested for the first time that the defendant had an obligation, under the back-to-back arrangement, to take out or pay for that insurance.

15.  Notwithstanding requests by the defendant, the plaintiff never claimed on the insurance.  The judge held that as the plaintiff was not under any contractual obligation to report the incidents to the insurers, the penalty charges had to be borne by the defendant.

16.  The defendant’s case, in essence, is that the plaintiff ought to have mitigated its loss by claiming under the policy.  Had it done so, the defendant would not have been responsible for more than what would have been chargeable under the excess clause, namely $30,000 for each incident.  Therefore the contra charge should have been $90,000 only, a difference of $87,974.90.

17.  Mr Yee who appeared for the plaintiff submitted that the judge was correct in finding that the plaintiff was not under any contractual obligation to claim on the insurance.  That may be so but it is no answer to the mitigation point.  Then it was said that the policy contained some exception that effectively excluded negligent acts.  However, Mr Yee was unable to show this court the relevant provision in the policy.

18.  I consider the defendant’s contention to be correct since the plaintiff was liable under the main contract for the penalty charges imposed.  The plaintiff was in a position to mitigate its loss by making the insurance claims but it failed to do so.  Accordingly, the contra charge should be limited to the sum of $90,000.

ICE services -- $61,650

19.  Clause 1.4 of schedule 3 to the sub-contract reads:

“e.    Supply of once-off ICE services (second certification due to 1st failure to be back-charged at [the defendant’s] account)”

The judge appeared to attribute to the word “once-off” charges for making the first visit only.

20.  Mr Yee was unable to point to any second certification.  All he was able to show the court were a number of invoices itemising ICE services provided for each month commencing June through November 2002.  There was no evidence that any of the services rendered in those months was a second or subsequent visit in respect of the same item of work rendered necessary because of any inability on the part of ICE services to make the requisite certification on the first visit.  Absent such evidence, I can see no basis for this contra charge.

Site agent -- $398,606.52

21.  Clause 17(2) of the general conditions of the main contract provided that

“[The plaintiff] shall ensure that he is at all times represented on the Site by a competent an authorised English-speaking agent … Such agent shall be constantly on the Site and shall give his whole time to the superintendence of the Works.”

The short point that arises is whether the judge was correct in holding that, as a result of the back-to-back arrangement, the plaintiff’s obligation under the main contract shifted to the defendant so that the latter was to be responsible for the cost of providing a site agent.

22.  Mr Coleman drew the court’s attention to the judge’s finding at § 9 of his judgment to the effect that the plaintiff’s role, apart from protecting its profit in the “sale on” of the lion’s share of the main contract, was a supervisory one.  In essence the point made was that it was not open to the plaintiff to shift its contractual obligation by a back-to-back arrangement to provide a site agent to superintend the work.

23.  The amount in question related to the salary of Mr Peter Yeung who prior to 15 August 2002 was employed by the plaintiff as its Assistant Project Manager (“APM”).  He was appointed site agent by the plaintiff with effect from 15 August 2002, following the ‘uninformed’ absence on that day of the previous site agent, Mr Ben Li who had been an employee of the defendant.

24.  There is no challenge to the judge’s finding that the plaintiff retained a supervisory role notwithstanding the sub-contract.  In order to perform that role and to discharge its contractual obligations under the main contract, the plaintiff had to have a site agent.  In this regard, clause 4 of the general conditions of the main contract relating to ‘assignments and subcontracting’ is of relevance and, in particular, subclause (4) of that clause which specifically provided that the subcontracting of any part of the works “shall not relieve the [plaintiff] from any liability or obligation under the contract particularly in respect of the provision of superintendence in accordance with clause 17”.

25.  In view of that provision, the contractual intention is quite clear: the obligation to superintend by having a site agent would remain with the plaintiff irrespective of any subcontracting.  Moreover, the defendant wrote to the plaintiff on 6 September 2002 indicating that it could fulfill its contractual obligations with the various staff that it had.  As far as is known, there was never any reply from the plaintiff disputing that.  Hence, as far as concerns the defendant’s own work, it would appear that it had fulfilled its obligations.  In those circumstances, I do not consider that the plaintiff is entitled to contra charge the defendant for the cost of its site agent.

Liquidated damages and additional insurance premium

26.  The main contract provided for liquidated damages at a daily rate to be ascertained in accordance with a specified formula.  It is common ground that the amount comes to $4019 per day.  The period of delay of 104 days under the main contract attracted liquidated damages of $417,976.  The judge ruled that the plaintiff was entitled to calculate its liquidated damages by applying the rate applicable under the main contract to the period of delay under the sub-contract which was 136 days resulting in a sum of $546,584 which was $128,608 more than what the plaintiff had to pay the employer.  He further held that the plaintiff was entitled to recover from the defendant the amount of additional insurance premium of $190,639.08 it had to pay in respect of the defendant’s period of delay as “provision of additional services”.

27.  Dealing with the additional premium first, Mr Coleman submitted that as the defendant was never under any obligation under the back-to-back arrangement or otherwise to pay any part of the insurance premium, the same must apply to the additional premium.  Further, if the clause entitling the plaintiff to liquidated damages was intended to be exhaustive and a genuine pre-estimate of loss from any delay, the plaintiff may not recover the additional premium by way of general damages.  There is therefore no basis upon which the plaintiff could be entitled to the additional premium if it was claiming liquidated damages and not general damages.

28.  It is accepted that the defendant was never asked to pay any part of the original premium under the policy.  Although the amount of the original premium is not in evidence, it has to be a significant amount given the value of the additional premium charged for the period of delay.  The plaintiff’s failure to demand reimbursement for part of the original premium cannot be explained away as an act of magnanimity, given the manner in which the proceedings have been fought and the amounts the individual items involved.  Logically, the only basis upon which the defendant would have to bear the additional premium would be by way of general damages.  The question therefore is whether that is precluded where, as confirmed by Mr Yee, the plaintiff was claiming liquidated damages.

29.  In my view, as a matter of construction, the provision for liquidated damages in the main contract was plainly intended to be an exhaustive remedy for any delay in the completion of the project.  Under the back-to-back arrangement, the same would apply to the sub-contract.  As the period of delay under the main contract (of 104 days) was different from that of the sub-contract (of 136 days), the question posed is whether, under the back-to-back arrangement, the plaintiff is only entitled to recover damages for the period of delay under the main contract or under the longer period under the sub-contract.  I am inclined to the view that liquidated damages should be calculated by reference the period of delay under the sub-contract since losses may conceivably arise under the sub-contract during the period of delay outside that of the main contract.

30.  Thus, while I consider that the judge was correct in holding that the plaintiff was entitled to liquidated damages in the sum of $546,584, there was no basis upon which he could have allowed any reimbursement for the additional premium of $190,639.08.

Costs

31.  As stated above, the plaintiff instituted these proceedings to recover from the defendant payment of wages it had made on the defendant’s behalf.  Notwithstanding the defence that the sum was extinguished by set off of sums due to the defendant under the same contract, the plaintiff maintained that monies remained due and owing from the defendant.  It was not until the first day of the trial that the concession was made orally to the effect that a small amount was due to the defendant.  The pleadings were amended on the third day to reflect the concession.  After trial, the defendant was awarded a sum that greatly exceeded the amount conceded although it has to be said that the award represented but a small percentage of the amount of the counterclaim.  The judge awarded the defendant 1/4 of its costs and the plaintiff 3/4 of its costs, to be netted off.  Assuming that the plaintiff’s costs and the defendant’s costs are more or less within the same range, the net effect of the judge’s order was to award the plaintiff half of its costs.

32.  As the judge recognised, the trial was essentially that of the counterclaim.  The reality is that had the defendant not made the counterclaim, it would not have recovered anything at all.  Undeniably, it was a successful party to the action and the principles set out in the judgment of Nourse LJ in In re Elgindata (No.2) [1992] 1 WLR 1207 apply:

“The principles of these.  (i) Costs are in the discretion of the court.  (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some of the order should be made.  (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or costs of the proceedings he may be deprived of the whole or any part of his costs.  (iv) Were the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprived him of his costs but may order him to pay the whole or a part of this unsuccessful party’s costs.”

33.  It was said that the counterclaim involved the determination of 17 discrete issues and that the defendant only succeeded on 7 of them.  While that may bring the third of the principles set out above into play (such that it would be appropriate to deprive the defendant of part of its costs), it would not result in the defendant having to bear part of the plaintiff’s costs (which was the net effect of the judge’s order) unless the defendant had acted “improperly or unreasonably”.  In the present case, there is no question of the defendant having acted improperly or unreasonably given the judge’s express finding in § 19 of his ruling on costs and therefore no proper basis for making an award of costs in favour of the plaintiff.

34.  I would set aside the judge’s order on costs and substitute in its place a costs order that the defendant be entitled to 75% of its costs below.

35.  Finally it would be appropriate to comment on the form of the costs order made by the judge.  In general, a costs order that would require two separate sets of taxation (one of the plaintiff’s costs and the other of the defendant’s costs) to work out the net effect duplicates costs and is undesirable.  A more efficient and cost-effective costs order would be to award the successful party the appropriate percentage of its costs.

Conclusion

36.  An agreed draft order should be submitted for approval.  As regards the costs of this appeal, I would make an order nisi that the costs be in favour of the defendant.

Hon Barma J:

37.  I agree.