YAU LEE CONSTRUCTION CO LTD v. CHINA STEEL ENGINEERING CO LTD AND ANOTHER

HCCT 49/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 49 OF 2010

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J U D G M E N T

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Background

1.  The dispute between the parties in this action relates to the final account for works done under a Sub-Contract made between Yau Lee Construction Company Limited (“Plaintiff”) and China Steel Engineering Co, Ltd (“Defendant”).  The Plaintiff was the main contractor of the main works for a project known as Hong Kong Science Park Phase 2 (“Project”). Under a Sub-Contract dated 10 June 2005 (“Contract”), the Plaintiff engaged the Defendant to carry out the steel reinforcement bars fixing works of the Project (“Works”).  The 2^nd defendant in these proceedings, Mr Siu Shu Tong (“Mr Siu”), was a director of the Defendant, and executed a guarantee to indemnify the Plaintiff in respect of any losses and damages arising out of the Defendant’s breach or non-observance of the terms of the Contract (“Guarantee”). 

2.  The Contract is a “labour only” contract, whereby reinforcement steel bars (“Bars”) were supplied by the Plaintiff to the Defendant, and the Defendant was responsible for cutting, bending and fixing the Bars in various reinforced concrete building elements of the Project, before concreting work was executed.  The unit rate agreed for cutting, bending and fixing the Bars for permanent works was $0.70/kg, whereas the unit rate agreed for cutting and bending the Bars for preliminaries or temporary works under the Project was $0.40/kg.  Under clause 38 of the Contract, deduction would be made for wastage of material exceeding 6%, whereas a bonus would be paid to the Defendant if the actual wastage of material was less than 6%. 

3.  According to the Re-amended Statement of Claim, the Plaintiff claims that it had made an overpayment of $11,988,492.68 to the Defendant under the Contract.  According to the Plaintiff’s valuation of the Works carried out by the Defendant, a sum of $14,954,987.18 was payable to the Defendant under the Contract.  After deductions for excessive wastage and administrative costs which the Plaintiff claims it was entitled to make under the Contract, and interim payments already made in the course of the Contract, the Plaintiff seeks a sum of $11,988,492.68 from the Defendant as overpayment.

4.  On the Defendant’s part, it claims that it was entitled under the Contract to payment of a sum of $18,215,470.44 in respect of the Works executed, a further sum of $1,841,018.68 for variation works (dayworks and internal and external transportation), and a bonus of $1,249,748.45 for wastage less than 6%.  The Defendant further claimed that completion of the Works was delayed as a result of the late handover of the work sites, such that it was entitled to damages (being additional costs and overheads incurred and loss of profits) of $2,893,630.50 (“Prolongation Claim”).  Accordingly, the Defendant seeks by way of counterclaim a sum of $4,897,778.18, as the balance due to it under the Contract.

5.  It is not in dispute that pursuant to clause 18 of the Contract, the final quantities of the Bars supplied and in respect of which the Works were carried out were to be re-measured according to the drawings and upon completion of the Works.  In respect of the quantity of the Bars and the value of the Works (including permanent works and preliminaries or temporary works), the parties have adduced expert evidence on the re-measurement.  Due to the relentless efforts of the Plaintiff’s expert, and finally with the co-operation of the Defendant’s expert, the experts have been able, by the time of the commencement of trial, to agree on the value and amounts identified in most of the issues in dispute.  The efforts made by the parties in this regard are commendable, as a substantial amount of time and costs have been saved as a result of the agreement reached on the quantities.

6.  By the time of Closing submissions, counsel for the Defendant confirmed that the Defendant will not be pursuing its Prolongation Claim.

7.  The issues which accordingly remain for the Court’s determination are:

(1)   the re-measured quantity of the Bars for the floor slabs in Buildings 14 - 16;

(2)   the re-measured quantity of Bars for the RC Wall, which focuses on the Bars placed in the floor slab where there is a partition wall running directly on top of the slab;

(3)   whether the Works relating to the Bars in the columns of the Auditorium were carried out by the Defendant;

(4)   the re-measured quantity of the Bars for concrete testing;

(5)   whether spacer bars are measurable under the Contract;

(6)   whether there was excessive wastage;

(7)   whether the Defendant is entitled to payment for transportation of the Bars;

(8)   whether the Defendant is liable to pay administrative costs to the Plaintiff for the arrangements made by the Plaintiff to pay wages to the Defendant’s workers; and

(9)   whether the Defendant is entitled to a 20% additional “ex gratia” payment, as agreed under a letter dated 27 June 2006.

The floor slab dispute

8.  On this issue, the experts differ in their interpretation of the Contract drawings, and in particular their interpretation of a “Type 3” section of the floor slab shown in drawing No ST15-L28401.  The difference lies as to whether the top bars in adjacent floor slabs should be cut and “lapped” with each other when both adjacent slabs have the same span direction, or whether they should be continuous bars.

9.  After reviewing the reports of Mr Chang (the Plaintiff’s expert) and Mr Lee (the Defendant’s expert), and hearing their evidence in Court, I prefer the evidence of Mr Chang and the explanations he gave to support his interpretation of the drawings.  According to Mr Chang, the drawing of the Type 3 section shows a middle slab along its short span.  On the left is the adjacent slab illustrated under 2 different scenarios in the drawing: firstly, along its long span, ie a “long short” scenario; and secondly, along its short span, ie a “short short” scenario.  Under the 1^st scenario, the ‘a’ bars (which are the main bars) of the middle slab would extend to a distance of Tension Lap Length (“TLL”) into the slab on the left, and would overlap with the bars of the slab on the left.  This is depicted by the lower ‘a’ bars in the left slap.  However, in the 2^nd scenario, continuous ‘a’ bars would be used for the middle slab and the adjoining slab on the left.  This is demonstrated by the upper ‘a’ bars of the slab on the left which continue beyond the left hand edge of the length of the TLL.

10.  Mr Lee disagrees with Mr Chang’s interpretation of the 2^nd scenario.  His opinion is that even in the 2^nd scenario, there would be an overlapping of bars in the adjoining slabs by a length of TLL, and not continuous bars.

11.  On an objective, reasonable reading of the relevant drawing, the upper ‘a’ bar is clearly shown to extend beyond the length of the TLL, but the lower ‘a’ bar stops at the edge of the TLL length.  There are 2 different arrangements depicted in the drawing, and they support Mr Chang’s interpretation.  Mr Lee did not offer any reasonable explanation for the difference in the depiction, and can only claim that the drawing is incorrect in this aspect.  This is not convincing, and I must reject Mr Lee’s interpretation.

The RC wall dispute

12.  The issue in dispute between the experts is whether there should be “additional” Bars placed in the slab section where there is a partition wall running directly on top of the slab, as Mr Lee opined, or whether there should be a “replacement” Bar in that slab section, or alternatively a combination of “replacement” and “additional” Bars, as Mr Chang opined.

13.  The dispute turns on the interpretation of the detail drawing (“Detail Drawing”) in drawing No STBB-L10401.  The Detail Drawing refers to “additional slab reinforcement under partition wall”, and notes that the top and bottom reinforcement is to be “one size bigger than as shown in slab schedule”.  Mr Lee interprets this to mean that where there is a partition wall running on top of the slab, additional Bars have to be added to the top and bottom bars of the slab for a specified area, and the size of the Bars should also be bigger than as shown in the slab schedule (“Schedule”). According to Mr Chang, the Bars in the slabs which have partition walls directly above them should be replaced by Bars which are one size bigger than as shown in the Schedule, but this does not mean that these Bars of one size larger should be placed in addition to the original Bars.

14.  Again, I can only adopt what can be explained to be a reasonable interpretation of the drawings, objectively considered.  Mr Chang is able to justify his interpretation by the title to the Detail Drawing, which describes the “additional slab reinforcement” required for the slab under the partition wall.  On a plain and ordinary meaning of the words used, they do not necessarily require additional Bars under the partition wall, so long as there is additional reinforcement as particularized in the Detail Drawing.  The additional reinforcement is provided by the increase in the Bar size which provides increase in weight and strength of the reinforcement.  Mr Chang can further draw support from the annotations used in the detail drawing in drawing No STBB- L28005, which refers to “extra” Bars when they are required.

15.  Overall, I prefer the reasoned opinion of Mr Chang.

Auditorium columns dispute

16.  There is dispute as to whether the Defendant had carried out Works in respect of the Bars in the columns of the Auditorium.

17.  The Plaintiff claims that the Defendant had wrongfully included in its re-measurements the Bars used for the columns in the Auditorium, whereas in actual fact, another subcontractor (“BF”) had been appointed for the design, supply, installation and erection of the structural steel and glass balustrade for the Project.  The Plaintiff claims that the circular columns in the Auditorium have permanent steel casing which were fixed with Bars inside and were fabricated and erected by BF, and that the Defendant did not carry out any Works in respect of the columns or any Bars in the columns.

18.  The evidence adduced by the Defendant includes records of the use of Bars (prepared and dated 5 June 2007).  These show uncut Bars of 12m length which were provided to BF.  There is no other documentary evidence which shows that the Defendant had carried out any Works in respect of the columns in question.  The Defendant also referred to drawings, but these only show the location of and specifications for the columns, not the contractor which did the work involved.  In the light of the Plaintiff’s denial that the Works were carried out by the Defendant, and its claim that it was BF which had provided the steel casing for the columns, the drawings do not constitute sufficient evidence that the Defendant had cut, bent or fixed the Bars in the columns.

19.  I am not satisfied that the Defendant has established its claim to payment on the basis of Works carried out in respect of the columns in the Auditorium.

Concrete testing dispute

20.  The dispute is whether the Defendant carried out any Work for concrete testing.  According to Mr Lee’s report, 13,202 kg of Bars were included in the measurement and the claim for payment made by the Defendant.  This is on the basis that Bars were cut to the required size for concrete testing to be carried out. 

21.  According to Mr Chang, there are no Contract drawings available to verify the quantities claimed by the Defendant.  From his experience, Mr Chang explained that in the testing of concrete, a sample of concrete is taken from the concrete truck before the concrete is placed in a steel mould to make a concrete cube, and the concrete cube is then taken to the laboratory for testing.  Mr Chang therefore explained that no Bar is required or allowed to be placed in the concrete cube for testing, so there can be no Bar involved in the whole process, as the Defendant claimed.  This was confirmed by Mr Ngan of the Plaintiff in his evidence.

22.  Notwithstanding the Plaintiff’s dispute, neither Mr Lee nor the Defendant can explain or produce any evidence to show that Bars had been cut by the Defendant for the concrete testing process. 

23.  On such basis, I do not allow the Defendant’s claim for the quantity included in its claim for concrete testing.

The steel chairs and steel frames/spacer bars dispute

24.  A spacer is a device that secures the reinforcing steel or “rebar” in reinforced concrete structures.  Spacer bars are used in beams of multilayer reinforcements to hold the main bars in proper position, particularly when concrete is being poured.  The dispute in this case is whether spacer bars are measurable under the Contract, or whether they are included in the value of the Works under the Contract by virtue of clause 35(a).

25.  Mr Lee pointed out that although spacer bars are not shown in the drawings, paragraph 18 of the General Notes to the drawings provides that “adequate bar spacers should be provided to ascertain the position and alignment of steel reinforcement”, and paragraph 19 specifies the size of the spacer bars.  Mr Lee maintains therefore that the re-measurement of the Works according to the drawings (as specified under clause 18 of the Contract) should include measurement of the spacer bars. 

26.  Notwithstanding the General Notes which require the provision of adequate bar spacers, clause 7(d) of the Contract provides that the Defendant’s unit rates（“承判人所取之單價”）or price for the Works are to include the items specified in the Contract provisions.  Clause 35(a) of the Contract further states that the value of the Defendant’s Works（“承判人所取之工程價值”）under the Contract are inclusive of steel chairs (鐡凳), and expressly states that steel chairs would not be separately measured.  There is no dispute that the steel chairs (and steel frames which form part of the steel chairs) are the spacer bars.

27.  On my reading of clauses 7(d) and 35(a) of the Contract as a whole, the provision of the spacer bars required under the General Notes to the drawings are to be included in the Defendant’s rates for the Works under the Contract, and are not to be separately measured.  Clause 18 of the Contract, which provides that the quantities stated in the Contract are only provisional and deals with the method of final measurement upon completion of the Works, must be read subject to clauses 7(d) and 35(a) which clearly state that the specified items (which include the steel chairs) must be included in the rates for the Contract to be received by the Defendant, and that there should be no separate measurement of the steel chairs. 

28.  For these reasons, I disallow the measurements for spacer bars.

Bonus or excessive wastage dispute

29.  This turns on the quantities of the Bars delivered and measured, which will be used to calculate whether there is excessive wastage, or whether the Defendant is entitled to a bonus.  The calculations depend on my findings on the other issues relating to the disputed measurements.

Transportation costs dispute

30.  The dispute is whether the Defendant is entitled to the costs of internal transportation of the Bars within the construction site (“Site”).

31.  Under the Contract, the Bars were supplied by the Plaintiff.  Clause 10 of the Contract requires the Defendant to transport the Bars within the Site to the areas where Work was required to be carried out, and the Plaintiff is to supply the lifting cranes and the vehicles for such purpose.  The cost of the Works to be carried out by the Defendant under the Contract is expressly provided under clause 35(a) to include the cost of transporting the materials “within the Site”.

32.  On the evidence, there was insufficient space within the Site to accommodate a Bars bending yard.  Accordingly, such a bending yard was provided at a distance of 10m from the boundary of the Site, for the Works to be carried out outside the Site (“Yard”).  The Plaintiff is prepared to pay for the external transportation costs, namely the costs of transporting the Bars, materials, equipment and machinery from the Yard outside the Site to the Site, but is not prepared to bear the costs required for the internal transportation of the materials and the Bars within the Site to the areas where Work was required within the Site - since these are required to be borne by the Defendant in any event under clause 35(a) of the Contract. 

33.  Of the total sum of $935,800 claimed by the Defendant for transportation, the Plaintiff is prepared to pay in full the rental charges for the trucks and vehicles, and half of the wages for the additional workers required for the transportation.  According to the Plaintiff’s witness, workers would be required even if the Yard was within the Site, and the Plaintiff made provision for half of the cost of workers claimed, to reflect the work required in loading the Bars on to the truck at the Yard, for transporting to the Site. 

34.  Since there is no evidence as to which part of the Defendant’s transportation costs relates to internal transportation within the Site, and which part relates to the cost of having to transport the Bars from the Yard to the Site, I will accept Mr Chang’s proportion, and allow 50% of the Defendant’s transportation claim in the manner suggested by the Plaintiff.

Administrative cost dispute

35.  There is no dispute that as a result of the Defendant’s inability to pay wages to its workers on the Site, the Plaintiff agreed to pay the wages of the Defendant’s workers, as from May 2006.  A total sum of $7,646,748.30 (“Wages Payment”) was paid by the Plaintiff, and there is no dispute as to this.  The Plaintiff claims that it is entitled to charge an administrative fee of 15% of the Wages Payment, pursuant to clause 7(b) of the Contract.  This provides as follows:

“如承判人未能支付其直接或間接僱用之工人之薪金而要由出判人代行支付。其所代支付之金額再加上15%之行政費用將在承判人之完成工程費用內扣除，不足夠數則由承判人補足。但如承判人未能補回，則出判人有權根據本合約條文及香港法律向承判人追討所有款項，及出判人有權立即停止本合約並根據第7(a)條款追討所有損失。”

36.  In essence, clause 7(b) provides that if the Defendant is unable to pay wages to its directly or indirectly employed workers, and such wages have to be paid “on its behalf” by the Plaintiff, then the wages so paid plus 15% as administrative fee will be deducted from the Contract sum upon completion of the Works, and any balance will have to be paid by the Defendant.  In the event that the Defendant cannot reimburse the wages paid, the Plaintiff has the right to seek recovery of the payment made and all damages incurred.

37.  The Plaintiff claims $1,147,012.25, as administrative costs of 15% of the Wages Payment.  This is disputed by the Defendant on the basis that the Wages Payment had already been deducted as interim payments under the Contract, and that the administrative fee is a penalty.

38.  On the evidence and from the contemporaneous correspondence exchanged between the parties, it cannot be disputed that the Defendant had failed to pay wages to its workers from March 2006 up to 16 May 2006.  If the Defendant maintained that this was somehow due to any breach by the Plaintiff of its obligations under the Contract, whether in delaying interim payments or otherwise, the Defendant is entitled to make a claim against the Plaintiff for damages, which it has not done on the pleadings filed. What cannot be denied is that the Plaintiff had to make the Wages Payment to settle the wages due to the Defendant’s workers.  Clause 7(b) does not require the Plaintiff to make direct payment of wages to the workers.  It is sufficient to show that the Wages Payment had been made by the Plaintiff for or on behalf of the Defendant.  On the evidence, the Plaintiff did make the Wages Payment to the Defendant, by monthly payment to the Defendant of the amount representing the monthly wages due to the Defendant’s workers, and the Defendant was able to issue its own cheques to the workers, after receiving from the Plaintiff a cheque of a single sum equivalent to the total wages paid to the workers. 

39.  There is no merit to the argument that the Wages Payment had been taken into account and treated as the value of the Work done when interim payments were made, such that it is no longer recoverable by the Plaintiff.  The Wages Payment was made by the Plaintiff under clause 7(b).  The Wages Payment cannot in law be an interim payment under clause 18, which provides for interim and provisional payment based on “the quantity of the Work actually carried out” at the time when the interim payment is made.

40.  As to whether the 15% administrative fee is penal so as to be unenforceable, Mr Lee considered that the “reasonable administration cost” chargeable by the Plaintiff would only be for the time taken to check wages records against payment, such that on time basis, Mr Lee estimated that the Plaintiff’s reasonable administration cost should be $162,486, which was far below the sum of $1,147,012.25 claimed.

41.  In cross-examination, Mr Lee’s own evidence is that administration costs normally charged in the industry for work carried out by a main contractor for the employer can amount to 15%, represented by 5% for profit, 5% for office overhead expenses, and 5% for site overhead expenses.  The sum of $162,486 estimated by Mr Lee for the Plaintiff’s reasonable administrative costs only included the limited time he considered was required for checking the work records.  In the circumstances of the present dispute, the method of payment adopted, the number of workers involved and the amount of the Wages Payment, the time estimate given by Mr Lee appears to be inadequate. At most, it would cover only office time spent, and does not take into consideration the work which would inevitably be involved at site, or office overhead expenses.

42.  In all the circumstances and on the available evidence, I am not persuaded that the 15% specified in clause 7(b) was not a genuine and reasonable pre-estimate (at the time when the Contract was made) of the loss or damage which may be incurred by the Plaintiff in the event of the Defendant’s breach of its contractual obligation to make timely payment of wages to its own workers.  At the time when the Contract was made, the parties had equal bargaining power in a commercial transaction.  I do not consider that the 15% administrative costs specified and agreed under clause 7(b) is “out of all proportion” to the Plaintiff’s likely loss or damage, to be unconscionable and hence to be struck down (Pfeiffer Gmbh v Cheung Hay Kit t/a Sun Wai Construction, HCA 1369/2011, 24 October 2013).

The ex gratia payment dispute

43.  By a letter dated 27 June 2006 (“June Letter”), issued by the Plaintiff and countersigned by the Defendant, the Plaintiff agreed that the Defendant would be entitled to an additional payment represented by 20% of the Contract rates for the Works (“Ex gratia Payment”). This followed complaints made by the Defendant that as a result of losses on the Project and cash flow problems, the Defendant had been unable to pay wages to its workers (eg the Defendant’s letter dated 17 May 2006), and complaints made by the Plaintiff as to delay in progress of the Works (eg the Plaintiff’s letter of 25 May 2006), and meetings held between the parties at the Site. 

44.  The Plaintiff’s case is that the Ex gratia Payment is conditional on the Defendant’s provision of increased manpower, which the Defendant had failed to provide, as promised and agreed.  This is supported by the June Letter, which refers to discussions held on 29 May 2006, and sets out the conditions of the agreement, including (item D) the Defendant’s promise to increase its manpower to coordinate with work progress. Item D states that if manpower was unsatisfactory, the Plaintiff had the right to terminate the Ex gratia Payment.

45.  The Plaintiff’s evidence is that the Defendant had agreed to provide more than 120 workers by way of the additional manpower referred to in the June Letter.  The evidence of the Plaintiff’s Mr Ngan and Mr Yam is not contradicted by the Defendant’s evidence.  The Plaintiff’s evidence is supported by the contemporaneous correspondence exchanged between the parties.  In its letter of 25 May 2006 (“May Letter”), the Plaintiff already referred to the Defendant’s agreement made at a meeting on 15 May 2006 to increase its manpower in order to make up for the delay, and the Defendant’s failure to adhere to its agreement.  The May Letter sets out the Defendant’s agreement to provide for a total of 118 workers, in order to complete the Works on schedule.  The May Letter also records the Plaintiff’s “conservative estimate” that 30 more workers were required to complete all the outstanding items of the Works, but that the Defendant was only able then to maintain its work force to 70 to 80 workers per day.  The Plaintiff reserved its position with regard to its right to terminate the Contract and to seek damages.

46.  The Defendant’s evidence does not dispute the above.  In his witness statement, Mr Siu acknowledged that the Defendant had been instructed to increase its resources to over 150 workers.  Mr Siu also admitted in his testimony that only 60 to 90 workers had been provided, although Mr Ngan had asked for more than 120 workers.

47.  On the evidence available, I accept the Plaintiff’s evidence that the Ex gratia Payment was conditional upon the provision of additional manpower by the Defendant, which was not so provided as promised.  The Plaintiff is entitled to withhold the Ex gratia Payment, on the terms of the June Letter. 

The Guarantee

48.  No dispute has been raised with regard to Mr Siu’s liability under the Guarantee, in respect of the Plaintiff’s claims against the Defendant.

Conclusion

49.  I have made findings on the different issues in dispute which affect the quantification of the claims made by the Plaintiff and the Defendant respectively.  Based on these findings, the experts’ agreement on the quantities and the method of calculation of the amounts payable, and the other agreed figures, an order can be agreed and drawn up.  The parties should agree and submit by 5 September 2016 a draft order to be made by the Court, including the orders on interest and costs.  In default of agreement on the costs order to be made, the parties are to file written submissions on costs, to be limited to no more than 3 pages each.