LOHAN ASSOCIATES, INC. v. HSIA & ASSOCIATES LTD.

1995, No.A8817

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This action is a dispute between two firms of architects. In my view it is also a dispute which ought never to have been driven to court, far less occupy eight hearing days. Be that as it may. The Plaintiff's case is straightforward. It claims for non-payment of invoices rendered in the sum of US$85,069.46. In turn, the Defendant counterclaims for breach of agreements. It claims a sum in damages in excess of RMB2 million.

Factual Background

2. The case is larded with a significant amount of detail. In essence, however, it arises in the following way. The Defendant is a firm of architects in Hong Kong. Its principal is Mr David Hsia. It is a relatively small firm; indeed, at the material time I understand that it employed no more than five or six professional staff. The Plaintiff is a large firm of architects based in Chicago. It enjoys, I gather, some reputation within the architectural world, and employs in the region of 80 to 90 architects. Two of its principals figure largely in this case. They are Mr James Goettsch and Mr Joseph Caprile. All three gentlemen gave extensive evidence before me.

3. The two firms began their association in early 1994. What happened was this. Mr David Hsia, the eponymous founder of the Defendant, enjoyed good contacts in China. In particular, Mr Hsia was interested in obtaining the design contract for a large commercial building to be erected in Shanghai, which throughout the case was referred to as the Shen City Plaza Project; the developer of this Project was the Shanghai Shenhua Huangpu Real Estate Development Co., whose Managing Director was a Mr Dong Yun Xiong. Although I am told that Mr Hsia very much had the "inside track" in securing this project for his firm, there was, to all outward appearances, to be a genuine design competition. Accordingly, Mr Hsia chose the Plaintiff to assist him in the preparation, and the evidence is that Mr Goettsch of the Plaintiff first met Mr Hsia in February 1994, when Mr Hsia came to Chicago to work with Lohan on the preliminary design for the project competition. Mr Goettsch travelled to Shanghai in March 1994 with the presentation materials for the competition design submission, including drawings, brochure and a presentation model, and on 6th May 1994 the Plaintiff was informed by Mr Hsia that their entry had been successful : the Shen City Plaza Project was theirs', with Mr Hsia to be Project Architect, and Lohan to be the Defendant's sub-consultant.

4. This structure was reflected in the primary documentation which thereafter came into being :

(i) The Defendant, referred to as the "General Design Company", entered into a written agreement with the Developer dated 5th May 1994, intituled the "Shen City Plaza Design Contract";

(ii) The Defendant, also on 31st May 1994, entered into a Construction Design Agreement with an entity known as the East China Architectural Design Institute, a local Shanghai entity required for such project and referred to in the head agreement as the "Assisting Design Company".

5. Under the head agreement with the Developer Hsia & Associates was to be responsible for the overall design of the project; paragraph 3 of the head agreement in fact makes specific reference to the American architectural firm of Lohan Associates as part of the design team, together with the East China Institute.

6. The position of the Plaintiff as part of the Defendant's design team was in turn reflected in the written agreement which was entered into between the Plaintiff and the Defendant, which agreement has been the subject of some considerable attention in this case. It is headed "Agreement For Shen City Commercial Building" and was made "as of 5th May 1994" between the Defendant as "General Design Company" and the Plaintiff as "Design Architect"; in fact it was signed on 20th September 1994. The Agreement (as I shall hereafter refer to this document) speaks for itself; Lohan was "retained to provide such design services through the design development phase of the project" (Clause 1.1.3) and was to "perform services as is consistent with the requirements of the project and as agreed to by both parties. [Lohan's] services shall be performed as expeditiously as is consistent with professional skill and care exercised by architects and the orderly progress of the work." (Clause 1.1.2).

7. In particular, three specific matters are worth highlighting :

(i) Article 3 of the Agreement made provision for the compensation and payments which were to be made to Lohan. The total design fee for the project was to be 5.5% of the estimated construction cost, then temporarily stated at 1.70 million RMB (but subject to adjustment), and the Plaintiff and the Defendant had agreed to split such design fee (based on 2.5% of the construction cost of the project) upon a 60 : 40 basis;

(ii) Lohan's fee would be paid in U.S. dollars (Clause 3.6) and there was to be payment by phases : viz.

20% Upon Contract Signing

20% Upon Approval of Preliminary Design By Government

20% Upon Approval of Design Development

Lohan was to render invoices for the work done at the completion of each stage of the project (and indeed did so);

(iii) Clause 5.3 was an Entire Agreement Clause. It read thus :

"This Agreement represents the entire and integrated Agreement between Party A [Hsia & Associates Ltd.] and Party B [Lohan Associates, Inc.] and supersedes all prior negotiations, representations, or agreements either written or oral. This Agreement may be amended only by written instrument signed by both Party A and Party B."

8. This, then, is the contractual background to the parties' relationship, which in broad terms began amicably in 1994 and continued relatively smoothly until the early part of 1995, at which point relations began to deteriorate. From the Plaintiff's standpoint, the problem was money. The short point was that the Plaintiff was not being paid for its work notwithstanding the rendering of relevant invoices, and such non-payment was beginning to rankle. Mr Hsia, for his part, was also beginning to be unhappy. He complained of unauthorised meetings between representatives of Lohan and the Developer and/or the East China Design Institute, which he maintained were discrediting him and were affecting the delicate balance of his relationship with the Developer client. Quite why such relationship was so sensitive is not entirely clear, but in any event I mention these meetings at this stage merely to place them in context; allegedly, such meetings took place in January, April, June and latterly August 1995, and, at least until the latter part of this case, they had assumed very considerable importance in the scheme of things.

9. The worsening state of affairs between the parties led to a further historical benchmark, which has attracted various descriptions, but which during the course of this case has been referred to in neutral terms as "the July 1995 arrangement". Delays in making payment to the Plaintiff had prompted a series of excuses and apologies from Mr Hsia; he was having his difficulties in China, in particular in obtaining necessary government approval to convert RMB to U.S. dollars for outward remittance to the Plaintiff, whose contractual entitlement was, of course, for payment in U.S. dollars. After a certain amount of correspondence, matters came to a head in July 1995, and resulted in a fax of 10th July 1995, whereby the Plaintiff made that which I accept was a final attempt to settle the issue of outstanding payments with the Defendant. So far as the July 1995 arrangement is concerned, it will be necessary to revert to its precise terms when I come to consider the merits of the Defendant's case, because this document came to assume a degree of prominence in these proceedings in a manner that was unanticipated at the outset. In any event, consequent upon this event, a small sum only (US$12,000) was additionally paid to Lohan for the work thus invoiced, and after a further short period the Plaintiff formally severed relations with the Defendant, and issued its Writ on 1st September 1995.

The Plaintiff's Case

10. I turn first to the Plaintiff's case. By any standard this is straightforward; in truth, it is the stuff of which Order 14 applications are made, although any such ideas the Plaintiff may have entertained would have been well and truly stifled by the Defence and Counterclaim which was filed.

11. By its Writ the Plaintiff claimed payment of the precise sum of US$85,069.46, together with interest and costs. This figure was arrived at in this way. On 1st December 1994 the Plaintiff had rendered to the Defendant Invoice No.94855 for the amount of US$97,069.46. It is not disputed that the Plaintiff had done the first three tranches of the contract work set out in Clause 3.8.2 of the Agreement dated 5th May 1984 (i.e. work up to the stages of the contract signing, approval of the preliminary design, and approval of design development), amounting to a total of US$117,000 ($39,000 x 3), credit being given for the prior remittance of US$19,930.54 (representing US$20,000.00 less bank charges). This then left the invoice figure, which was further reduced by the payment, on 23rd July 1995 pursuant to the July arrangement, of the sum of US$12,000.00. Ergo, the resultant claimed sum of US$85,069.46.

12. That the Plaintiff had done the work the subject of the invoice attracted no dispute and indeed was common ground, nor was there any suggestion that the work so performed was not of the requisite quality. Ultimately, the only defence to the Plaintiff's claim was by way of equitable set-off against the sum counterclaimed, although at the outset of the case Mr Chua for the Defendant had submitted that breach of an implied term in either the May 1994 and/or the July 1995 Agreements was sufficient to defeat the Plaintiff's claim, the issue of set-off apart. However, together with a number of other issues, this argument was abandoned at the end of the case, and subject to the sole issue of set-off against the Defendant's larger claim, there was no dispute as to the Plaintiff's entitlement to the sum it was claiming.

13. Nor did any issue arise in context of the effect of the July 1995 arrangement on the primary Agreement of May 1994 (in terms, for example, of merger of causes of action). Mr Fok, who appeared for the Plaintiff, took the view, and indeed so submitted, that given the non-implementation by the Defendant of the July 1995 revised payment arrangements, the Plaintiff was thus entitled to revert to its original cause of action, and that there had been no extinction of underlying rights. He further pointed out that the Defendant had never sought to argue to the contrary, and indeed on the pleadings had taken no position that the July 1995 arrangement was other than a variation of the original contractual position.

14. In so far as it be relevant, I have no doubt that Mr Fok's submission is correct, and that the Plaintiff was and is entitled, in light of the failure of the revised July 1995 payment arrangements, to revert to its case based upon its original cause of action for non-payment for contractual services performed. In any event, perhaps it does not much matter : as a purely practical consideration, the difference in total between the original amount due and the amount agreed due under the July 1995 arrangement was in the order of US$69 and odd cents. Moreover, Mr Chua, for the Defendant, abjured any such technical point, and in the circumstances there is therefore no need to dwell further upon the Plaintiff's case. The short point is that the claim is good and was always good, and in my judgment it is regrettable that the Plaintiff has been required to take part in a lengthy and doubtless expensive trial in order to establish that to which it was undoubtedly entitled in terms of the design services rendered.

The Defendant's Case

15. In broad terms the factual premise of the Defendant's case, as pleaded and as outlined in Mr Chua's helpful and detailed opening skeleton argument, essentially came down to this : that by reason of the Plaintiff's direct and unauthorised contacts with the Developer client, the Defendant had been discredited, and as a consequence he had effectively been cut adrift from the Shen City Plaza Project; and that by reason thereof he had suffered loss and damage in terms, in particular, of the loss of professional fees, both billed and unbilled, which the Defendant would have expected to recover if his relationship with the Developer had not been damaged by the Plaintiff.

16. That, shorn of detail, was the thrust of the case. Significantly however, whilst the Plaintiff's unauthorised direct contact with the client appeared to form the factual core, at no stage was this expressed in tort (for example, wrongful interference with contractual relations), but was confined solely to a cause of action in contract. And the contractual causes of action were pleaded in two ways : first, notwithstanding the Entire Agreement Clause, the Defendant alleged a separate oral agreement entered into between Mr Hsia and Messrs Caprile and Goettsch both over the telephone and in various meetings; alternatively, that it was an implied term of the Agreement, such term being implied by law in order to provide business efficacy, alternatively implied by trade custom and/or practice, which precluded direct contact by the Plaintiff with the Developer client absent the Defendant's prior approval.

17. So far as this implied term was concerned, its terms themselves changed during the progress of the case. As originally pleaded such implied term was put thus :

"... that the Plaintiff would not have any direct dealings with the client, to the exclusion of the Defendant, without the Defendant's prior approval."

Re-amendments permitted to the Statement of Claim shortly before the closure of the Plaintiff's case produced, inter alia, the following amendment to this formulation :

"... that the Plaintiff would not seek to have any direct access to the client, to the exclusion of the Defendant, without the Defendant's prior approval."

18. It was this latter version, therefore, that was the final formulation of either of the oral agreement or of the implied term. Further, and in so far as I understood the position, this negative stricture was unaffected by the existence of the July 1995 arrangement, and continued to bind the Plaintiff, so that the breach of this term and/or agreement, by reason of the unauthorised meetings which had taken place between the Plaintiff and the Developer client, was causative of the damage claimed to have been suffered by the Defendant. That, at least, was the way it was put on the pleaded case.

19. This approach, with respect, occasioned both analytical and evidential difficulties, and served, I suspect, effectively to obscure the real bone of contention, which was the Defendant's conviction that the Plaintiff had in some way adversely affected its relations with the Developer client. But no cause of action going specifically to this point was put forward. Instead the cause of action relied upon was purely contractual, and in the broad terms recited, the emphasis therein being upon the absence of unauthorised access. In this regard the alleged breach of the alleged oral agreement was always going to be difficult to establish by reason of the written Agreement of May 1994, and in particular the existence of the Entire Agreement Clause. And so far as the implied term was concerned, not only was there the problem of the clear terms of the Agreement itself, but the term as (finally) settled upon not only in my view failed to surmount the business efficacy test, but was drawn far more widely than was necessary to redress the real ill of which complaint was made, namely, that the Plaintiff was discrediting the Defendant in the eyes of the Developer client, and indeed had been going so far as to suggest the substitution of the existing Plaintiff/Defendant relationship with a direct Plaintiff/Developer relationship to the exclusion of the Defendant.

20. Be that as it may. As matters ultimately transpired, these analytical difficulties did not require to be addressed, since at the outset of his closing submission Mr Chua submitted that, having heard the evidence, he no longer wished to rely upon the oral agreement, nor was he going to press the alleged implied term; in the circumstances, he said, his case now stood solely upon the basis of the breach of a positive term in the July 1995 Agreement. And further that (subject to an argument as to set-off) he was otherwise intending to advance no independent defence to the Plaintiff's claim.

21. It followed therefore, as Mr Chua made clear, that the case now finally came down to a question of construction of the July 1995 arrangement, embodied by the Plaintiff's fax of 10th July 1995, and in particular the alleged breach of the positive term canvassed therein as to a tripartite meeting. To say the least, this was an unanticipated development, particularly in light of the history and course of the case, and the manner in which it had been articulated throughout on the pleadings; indeed, Mr Fok was moved to remark that the result of this development was that Mr Chua had not pleaded the only cause of action he was now left with. Possibly Mr Chua had come to terms with the difficulties which had dogged the case as originally presented, and certainly he had taken into account the evidence as it had come out; but in any event, I was left in no doubt that the case now revolved around the fax letter of 10th July 1995 from Mr Caprile of Lohan to Mr Hsia. Although this fax remained pleaded (at paragraph 11 of the Re-Amended Defence and Counterclaim) as a variation of the original Agreement, at least with regard to payment terms, the sole remaining cause of action now urged upon the Court was the breach of the term said to be contained in paragraph 2 of that letter, which reads as follows :

" A second payment of $35,000 USD will be wired to our bank within 45 days of the date of this letter. Our acceptance is based on that the full second payment will be in our bank by close of business Thursday, 24th August 1995. We agree to meet with you and the client to provide information and assist in resolution of disputes, but our second payment is not dependent of any future payments or contractual obligations between Hsia & Associates and the client. We have no control over these matters." (emphasis added)

22. In a nutshell, Mr Chua was now suggesting that there was a contractual obligation upon Lohan to attend the tripartite meeting referred to in the second paragraph of this letter, that in failing so to do the Plaintiff was in breach of this obligation and (presumably) that such breach was causative of his client's damage, which crystallized during the trial into the following individual (and re-amended) categories :-

(i) non-payment of the Defendant's invoice to his Client dated 24th March 1995, in the sum of RMB596,754.90;

(ii) compensation paid to East Asia in the sum of RMB95,000.00;

(iii) the balance of the Defendant's fees not yet billed to the client in the sum of RMB1,573,052.94.

23. I can, I think, deal with this revised case in relatively short order. Assuming, for purposes of argument only, that this paragraph of the fax of 15th July 1995 constituted an independent and enforceable contractual obligation unrelated to the revised payment obligations (the non-honouring of which had spawned the Plaintiff's action), it seems clear that there remain fundamental problems in terms of breach, causation and damage.

24. On the evidence, it seems clear that the July 1995 arrangement, as represented by the 10th July 1995 fax was, and was intended to be, an agreement focusing on the revision of the payment schedule, which agreement was in fact terminated by Lohan by reason of Mr Hsia's non-performance thereof. Moreover, the factual position consequent upon this fax is again tolerably clear. Lohan sent the requested documents to the Developer client, payment was not made by Mr Hsia in accordance with the timetable laid down (US$12,000.00 only was received) and a meeting did take place with the client, but in the absence of Mr Hsia. This meeting was preceded by a fax of 20th July 1995 from Mr Caprile to Mr Hsia which read, in part :

"Jim Goettsch, with Charles Smith and Ping Xu, will be in Shanghai next week, from Tuesday, 1 August through Friday, 4 August. This would be an excellent opportunity to meet with you, the client, and East China to present a unified team. Tuesday and/or Friday are available for the meeting. Thursday, 3 August is completely committed on another project. Please contact the client and arrange a meeting date and time. There should be a separate meeting with East China to coordinate some technical issues that we are aware of. We await your response."

25. In fact, Mr Hsia telephoned Mr Caprile and asked that such a meeting not take place. The substance of this telephone call was related by Mr Caprile to Mr Goettsch by a fax dated 31st July 1995 :

"On Sunday night I received a call at home from David Hsia. I said it would be beneficial if he contacted you directly, so this may be old news. He was responding to our fax which he was just reading..... In summary this is what we discussed :

He apologized for the late payment and said the second payment should be wired by Friday, 4 August. This is due to death in family. (More excuses!)

He could not set up a joint meeting with the client and requested that we do not meet with them directly. I sense they owe David money. He feels all of his obligations are met and wants to get paid before providing more service. I said I will share this with you via this fax. This is where I thought a call from David to you would be in order. I did say you will meet with East China because we were pursuing a separate relationship."

26. In the event, however, there was no agreement not to meet, and the meeting went ahead with the client and Mr Goettsch of Lohan in Mr Hsia's absence; in this regard I accept without hesitation Mr Goettsch's account of what transpired. He was in Shanghai, there were important matters of detail regarding the project which required to be discussed with the client, and nothing was done or said which was inconsistent with or damaging to the Defendant or the Defendant's contract with the Developer; indeed, as I understand the position, Mr Hsia had never objected in any event to direct exchanges with the client with regard solely to technical matters.

27. Moreover, so far as this sole remaining cause of action is concerned, I find it difficult even to accept the assumption that the content of this fax, written in the context of an ongoing payment dispute, can be elevated to the level of the contractual obligation pressed by Mr Chua. Mr Caprile's evidence, which I accept, was that this fax represented a final effort on Lohan's part to sort out the payment problems which were being encountered, and that the use of the word 'conditions' appearing in the carriage to the three substantive paragraphs was but normal grammatical usage. And he emphatically disavowed the idea that non-compliance with the content of paragraph 2, in the sense of the failure on the part of Lohan to hold a tripartite meeting would suffice to disentitle Lohan to the balance of the fees due to it, a line of argument which at one time was being run as a defence to the Plaintiff's claim, but subsequently was abandoned. Nor could Mr Caprile, I imagine, have had any inkling that the very same paragraph in that same fax would assume the profile in the case which it ultimately did. I note also that the obligation prayed in aid in paragraph 2 of the fax is expressed in positive terms, that is in terms of a positive agreement to meet with Mr Hsia and the client; to the contrary, it is not expressed in terms of an agreement not to meet in the absence of Mr Hsia, and in the circumstances it is not easy to see how the August 1995 meeting could in any event constitute a relevant breach given that Lohan made itself available for the meeting with both the client and Mr Hsia, but that the opportunity was turned down by reason, apparently, of Mr Hsia's own agenda.

28. It follows, therefore, that I do not consider that the August 1995 meeting was a contractual breach and I so find. Further, I also do not consider that there has been established any causative relationship between the August 95 meeting (or, for that matter, any action on the part of Lohan) which could reasonably be said to have resulted in the loss claimed. In terms of causation pure and simple, there was no direct oral evidence called from Mr Dong, the Developer or from Mr Zhang of the East China Institute, or from Mr Luk, Mr Hsia's employee; and for the avoidance of doubt, in the particular circumstances of this case, I would add that accord no weight to statements allegedly attributed to Mr Dong in witness statements about what Lohan did or did not say or do; such hearsay statements seem to me to be wholly self-serving, inherently unreliable in the circumstances and, in addition, commercially implausible. Moreover given Mr Hsia's own evidence that in any event statements by the Developer could not be taken at face value, reliance on such hearsay material is clearly even more dangerous. I further find it difficult to understand as a matter of commercial probability why anything Lohan allegedly did or said at the August 1995 meeting (or indeed at any of the other meetings which hitherto had provided material for complaint in this case) could have resulted or be said to have resulted in the particular categories of loss claimed.

29. In this context the compensation paid to East Asia employees for overtime to complete interior perspectives which had been gratuitously provided by Lohan is, it seems to me, misconceived as a head of claim. I similarly reject the two other claims. I cannot understand how it could be said that the Developer's refusal at Mr Hsia's request to adjust the construction cost, which was the basis of the reamended claim for RMB596,754.90 (representing 60% of the adjustment sought), has or can have anything to do with Lohan's activities; in my view it is perfectly plausible that the Developer wanted to maintain the construction cost at the initially agreed figure, and although I appreciate that, as a commercial tactic, Mr Hsia may have wanted to exert pressure on the Developer client by withdrawing his services until such sum as he was demanding was paid, it seems to me, with respect, highly implausible to suggest that the meeting which took place in August 1995 between Lohan and the Developer was causative of the non-payment of a disputed invoice rendered some six months previously.

30. Turning now to the counterclaim based upon the unbilled portion of the Defendant's design fee, RMB1,573,052.94 (again, 60% of the originally claimed figure), which sum allegedly represented the profit element of the work Mr Hsia claims to have lost the opportunity of invoicing, on the evidence before me I do not accept that this bears any relationship to anything that Lohan did, far less Mr Goettsch's attendance at the meeting in August 1995. This element of the claim must be a matter essentially between Mr Hsia and the Developer, who were in direct contractual relationship. Moreover, as Mr Fok pointed out, apart from causation problems in this regard, the assertion that the costs of earning such a profit would be but 10% of the unbilled portion appears to be wishful thinking on the part of Mr Hsia and is unsupported by any cogent evidence.

31. It follows from the foregoing rehearsal of the issues that the Defendant's counterclaim must be dismissed. Indeed, in light of the history of this action and the way in which this trial developed, I have had cause to wonder whether in fact there ever was an analytical case; if I may say so, the Defendant's case has the "feel" of a counterclaim which was never envisaged would be subject to the scrutiny of the Court, with, perhaps, predictable results when the Plaintiff declined to write off what was a relatively small sum and elected to press on to trial.

32. Nor did the evidence given on behalf of the Defendant serve to assist its case. Putting to one side the expert evidence called on the Defendant's behalf, which I regret to say was risible (and in any event is no longer relevant given the abrupt change of stance in the case), and the hearsay material, with which aspect I have already dealt, Mr Hsia was unable in my view to substantiate his allegations, albeit I did not think at any stage that he was trying to do other than to describe to the Court the situation as he perceived it; and certainly the fact that he did not seek to strain his evidence to support the alleged oral agreement was significant, and, I think, ultimately to his credit. However, taken overall, his evidence did not impress, nor did it serve to make out his case. This was in stark contrast to the position of Messrs Goettsch and Caprile. These two gentlemen struck me as professional men of integrity. They were each pressed extensively in cross-examination by Mr Chua, but were unruffled and displayed a firm but principled approach to the case. They were professional architects who were concerned to do a professional job and to build a good building. They acted accordingly. They had no desire to harm the Defendant or his relations with the Developer client; to the contrary, they simply wanted to be paid for their services. I accept their evidence, and, for the avoidance of doubt, in matters of factual conflict, I have no hesitation in preferring their evidence to that of Mr Hsia.

Judgment

33. It follows from the foregoing that my judgment in this action is as follows :-

(i) there be judgment for the Plaintiff in the sum of US$85,069.46;

(ii) the Defendant's counterclaim be dismissed;

(iii) there be interest on the said judgment sum at the rate of 8% from the date of the issuance of the writ herein to the date of judgment, and thereafter interest on the said judgment sum at the judgment rate from time to time prevailing;

(iv) that the money standing in Court which was paid into Court by the Plaintiff as security for costs be paid out to its solicitors, and that the bank guarantee furnished to the Defendant as further security for costs be redelivered to the Plaintiff's solicitors.

34. As to costs, I make an order nisi that the costs of this action be to the Plaintiff, to be taxed if not agreed, on a common fund basis. In this regard, I am minded to accede to Mr Fok's submission, made at the conclusion of argument, that the circumstances and development of this case merit a costs order upon such higher scale, notwithstanding Mr Chua's resistance thereto. However, should either of the parties wish to be heard further on costs, or indeed upon any consequential matter which may otherwise arise, I will hear such further submissions as and when required.

35. I thank Counsel for their assistance.