DIXIE ENGINEERING CO. LTD. v. VERNALTEX CO. LTD. t/a WING WO ENGINEERING CO.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NOS.71 OF 1999, 102 OF 1999, 11 OF 2000, 35 OF 2000 & 73 OF 1999

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HCCT71/1999

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J U D G M E N T

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1. In this case "Dixie" is the plaintiff in four consolidated actions. "Wing Wo" is the defendant. Dixie's sub-sub-contract with Wing Wo was a maintenance contract to maintain certain stretches of the highway in the New Territories, mainly between West Kowloon and Tuen Mun. Dixie's total claim is for invoices not paid by Wing Wo after a particular date. The four writs simply relate to four successive periods of time when invoices were submitted but remain unpaid. There is no issue about the work itself. The invoices accurately relate to work actually done. The issue relates to whether or not the calculation of payments made prior to their ceasing was properly done in accordance with the terms of the contract. Wing Wo was itself a sub-contractor to the main contractor, "Wing Fai". Wing Wo had sub-sub-contracted part of the works to Dixie for a management fee. Wing Wo's defence is that the management fee was wrongly calculated in two respects which resulted in their paying Dixie too much. When the overpayments were realized they halted further payment of Dixie's invoices.

2. The two respects in which they say the payments were wrongly calculated (and the two main issues in the consolidated action) are :

(i) Whether the contract provided for the payment of "fluctuations" to Dixie or not. Fluctuations were in fact paid, Wing Wo contend that they should not have been.

(ii) Whether the price for "variations" was correctly calculated or not. Dixie say that 20% or 29% (depending on the nature of the variation) should have been deducted. These were the figures that were in fact deducted. Wing Wo contend that the 20% or 29% deduction should have been made after the initial management fee of 36% had been deducted (making a total of 48.8% and 54.56%) and not instead of the 36% management fee.

3. This contract was carried out between 1996-1999. Following the services of the four writs, Wing Wo served another writ on Dixie relating to an earlier road works contract (the "Tolo Highway" contract) in which Wing Wo was a sub-contractor of Dixie (i.e. the other way around). In this action Wing Wo as plaintiff claim that Dixie, as defendant, were overpaid by Wing Wo between 1992 and 1995 because the management fee on that contract was actually paid at a rate of 42% whereas the contract states that it should have been 38%. The result of the overpayment is that Dixie received over $2 million too much. Wing Wo seek to reclaim this amount and set it off against any sums due to Dixie in the later consolidated action. The court has heard all the disputes together in one trial.

4. I will deal with the 1996-1999 "consolidated" action first, in which Dixie was the plaintiff and Wing Wo's sub-contractor.

WITNESSES

5. Each side called four witnesses. Dixie's four witnesses were :

(a) Mr Cheng Shiu Ching ("Mr Cheng"), Dixie's chairman and co-owner with.

(b) Mr Lee Tin Sung ("Mr Lee"), Dixie's general manager.

(c) Mr Oliver Lum Yuk Wan ("Mr Lum"), an assistant contracts manager employed by Dixie since 1991 at which time he was a site agent.

(d) Ms Tang Choi King, a clerk who had been with Dixie since 1992.

6. Wing Wo's four witnesses were :

(a) Mr Cheuk King ("Mr Cheuk"), a director of Wing Wo.

(b) Mr Ho Kwok Poon ("Mr Ho"), Mr Cheuk's partner and director of Wing Wo.

(c) Mr Eric Leung Kwan Wan, a surveyor employed by Wing Fai at the material time but who was responsible for calculating the amounts from Wing Wo, on their behalf, to Dixie.

(d) Ms Irene Chow Ka Po, a clerk employed by Wing Wo between 1992 and 1999.

7. Happily it was not necessary to call either of the parties' experts. Solicitors and counsel (Mr Adrian Bell for Dixie and Mr John Scott SC and Mr David Tsang for Wing Wo) were able to achieve substantial agreement on all matters relating to quantum.

8. As to the non-expert witnesses I make the following preliminary observation. The principal witnesses for each side were Mr Cheng (Dixie) and Mr Cheuk (Wing Wo). They were each followed by Mr Lee and Mr Ho respectively. There were important factual issues in dispute between them. Factual issues upon which this case largely turns. The remaining four witnesses were less controversial. In respect of the earlier contract (Tolo Highway) they were recalling events of 10 years ago which were not made the subject matter of dispute until 1999, seven years after the event. Contemporaneous documentation which might have been available to assist the court in resolving the factual issues was sparse. Both Mr Cheng and Mr Cheuk were subjected to careful and lengthy cross-examination. It would be pointless to deal with all the many issues and topics about which they were questioned. In a case such as this however, the overall impression made on the court is important. I formed the clear view that Mr Cheng's evidence was the more reliable. Where there were stark conflicts in the evidence I preferred, adopted and relied on Mr Cheng's evidence (unless I specifically state otherwise hereafter). It can be difficult to select particular reasons for coming to such a conclusion. The following however are examples, highlighted by Mr Bell for Dixie, with which the court concurs.

9. In both actions what Mr Cheng said was the agreement was reflected in what actually happened. In the consolidated action he said the agreement was that fluctuations were included and variations were deducted at a straight 20% or 29%. In both cases that is what was actually paid. Wing Wo's claim that fluctuations were excluded and that the variation deductions were approximately 48% or 54% came considerably later. The earlier reasons for non-payment by Wing Wo were firstly, that they had not been paid by the main contractor Wing Fai (which was not true), secondly that Dixie had been overpaid on the Tolo Highway project seven years earlier and only thirdly, that there had been mistaken calculations in the 1996-1999 contract. Moreover the mere fact that the claim of overpayment on the Tolo Highway was never the subject of any written complaint until July 1999 is itself a reason to question the bona fides of Wing Wo's case.

10. Mr Cheuk's explanation for making no written complaints about the overpayment on the Tolo Highway contract did not stand up to scrutiny. He claimed he had complained orally but never put it in writing. His reason was that he regarded Mr Cheng as a friend. It is hard to accept that he would allow a $2 million overpayment (which if Mr Cheuk's evidence were to be accepted was the result of a unilateral decision by Mr Cheng simply to deduct a higher percentage) to go unchallenged in any formal way for up to seven years and remain friends. In 1996 Mr Cheuk awarded Mr Cheng the "consolidated" action contract. It is difficult to understand why he would do so at a time when he felt he had been "cheated" out of $2 million from their previous business dealing.

11. Mr Cheng also had the advantage of being supported on a number of material issues by Mr Lee, who impressed as a reliable and straightforward witness.

12. In February 1999 a sum of $1 million was paid to Dixie by Wing Wo. Dixie had been asking for payments. Dixie say the payment was a part payment for outstanding invoices. Wing Wo says it was a loan which attracted interest at 15%. Wing Wo says it agreed to loan this sum to Dixie. The reason given for it being a loan was that Dixie was in need of cash but they (Wing Wo) had not been paid by Wing Fai. I accept Mr Cheng's evidence that this was the explanation given to him by Mr Cheuk for their failure to pay earlier invoices. In fact, Wing Wo had been paid by Wing Fai. They had been paid varying amounts, some substantial, every month up to July 1999. It is true that Wing Fai were in arrears to Wing Wo but firstly that was not the reason given to Dixie for non-payment and secondly it would not be an adequate reason for paying nothing to Dixie. When Wing Wo was later paid by Wing Fai the $1 million was duly accounted for and thus it is not an issue in this trial. However, there is no documentary evidence of interest being payable in connection with this particular transaction. I thus conclude that it was in fact an advance part payment as described by Dixie and mention it only because it is another example of an issue which weighs in Dixie's favour on the question of credibility.

CONSOLIDATED ACTION

13. Both the "fluctuations" issue and the "variations" issue depend on the proper construction to be given to the written contract. The contract was signed in January 1997 but there had been an earlier oral agreement in about April 1996. Dixie's case is that the terms of the written agreement are clear and unambiguous and accurately reflect the terms of the earlier oral agreement. The written contract was in Chinese. Unfortunately there is a dispute about the English translation. The crucial paragraph is Clause (3). Dixie's translation is :

"(3) Price

A. Basic contract price- Party B deduct 36% as the management fee of Party A in accordance with the contract price in the Government Contract (Contract No.: 19/HY/95) (i.e. the tender price of the Main Contractor).

B. Variation Order (V.O.) deduct 20% as management fee of Party A.

C. For closure of road to Wing Wo for carrying out road surfacing work, the contract price deduct 10%."

14. Wing Wo's translation is :

"(3) List of Price :

A. Basic contract unit rate - Party B based on the contract unit rate of the Government Contract (Contract No.: 19/HY/95) (i.e. the tender price of the Main Contractor) deduct 36% as management fee for Party A.

B. Variation Order unit rate (V.O.) - deduct 20% as management fee for Party A.

C. Closure of road to allow Wing Wo to lay tarmac being contract price less 10%."

(Party A is Dixie, Party B is Wing Wo)

15. Clause 4, in Dixie's translation goes on to provide for the method of payment :

"(4) Method of Payment :

Party B can apply to Party A for payment twice a month. The project amount is the balance of the amount which the Government certified and paid to the Main Contractor (Paylist) after deducting the management fee of Party A. Period of payment is two days after Wing Wo Engineering Co. received payment from Wing Fai Construction Co. Ltd. (i.e. on the 7th and 22nd day of each month)."

16. Wing Wo's Clause 4 states :

"Party B can apply for payment twice every month to Party A. The contract sum is the amount the Government certify and pay the Main Contract (Paylist) deducting the management fee of Party A. Time of payment is two days after Wing Wo Engineering Co. has received payment from Wing Fai Construction Co. Ltd. (i.e. on the 7th and 22nd day of each month)."

17. The key difference in the translations of Clause 3 is that Wing Wo contend for "basic contract unit rate" whereas Dixie submit it is "basic contract price". With the consent of the parties I sought assistance from the court interpreter who said the relevant characters could mean either "basic contract unit price" or "basic contract unit rate". In other words alternative translations include both of the words "rate" and "price". In my judgment the defence have sought to read too much into the difference. In both versions there is no express reference to "fluctuations" and in both versions Clause 3(B) does not state that the deduction for variations should be an "additional" or "further" 20%.

18. Turning now to each of the two issues separately.

A. Fluctuations

19. The Chinese characters which were in dispute were referred to as "Dan Gar". Mr Cheng's evidence was that the expression Dan Gar included more than just the "contract rate". He said it included fluctuations. He said it was agreed at the time that fluctuations would be included in the payments to Dixie. He said that the absence of any express reference to fluctuations in the contract meant that Dixie was to be paid everything after the 36% management fee deduction, because that was what was agreed and that is what is normal. I was referred, by the defence, to other contracts with other sub-contractors arising out of this or similar road maintenance projects in which fluctuations were expressly mentioned. It was submitted by the defence that the correct construction therefore should be that for fluctuations to be paid to the sub-contractor they should be specifically mentioned in the written agreement. I do not accept this for a number of reasons.

(a) Generally speaking references to fluctuations in other contracts were made and were necessary because the agreement between those contracting parties was not the norm. For example, only a percentage of the fluctuations was to be paid, or an amendment to the agreement on fluctuations was being recorded or no fluctuations were to be paid. In any event the other contracts stand alone and provide peripheral guidance only in the construction of this contract.

(b) The undisputed terms of Clause 4 weigh heavily in the plaintiff's favour. Whether the correct translation in Clause 4 is "contract sum" or "project amount" makes no difference. Both versions provides for Dixie to be paid that sum which the Government paid the main contractor minus the management fee. No more no less. There is no argument that the sum paid by the Government included fluctuations. Both versions also refer to "paylists". Two types of paylists were produced and considered in the course of the trial, firstly, a "Government" paylist which is self-explanatory and secondly a "detailed" paylist which was prepared by Eric Leung on Wing Wo's behalf. Both contained fluctuations.

(c) Regardless of whether there is any ambiguity in the terms of the contract or not the court is entitled to look at the factual matrix at the material time. Lord Hoffman in I.C.S. Ltd v. West Broruch B.S [1998] 1 WLR set out five principles at p.912. The first three are :

"The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them."

In our case a consideration of the matrix of fact at the material time would include the evidence (not denied by Mr Cheuk) that normally fluctuations are included in contracts such as this. After all, fluctuations represent an ongoing uplift or decrease (depending on inflation or deflation) in the costs of materials and services which in the normal course of events would have been paid for by the sub-contractor. They protect the party who would otherwise have suffered as a result of inflation or deflation.

It would also include Mr Eric Leung's evidence that he "assumed" that fluctuations were included in the payments to Dixie. This is an entirely reasonable assumption given the surrounding matrix of fact.

(d) The contract was prepared by Mr Ho of Wing Wo. They produced it in the terms that they required Dixie to sign, which they did in January 1997. They cannot now argue for a construction which is not apparent from the face of the document.

B. Variation

20. Again Dixie relies on the actual words of the agreement. Clause 3(B) simply says "deduct 20%" no more, no less. There was a later written agreement that certain variations would attract 29%. There is no issue as to which variation orders fall into which category. The later agreement merely states "for the above orders Wing Wo deducts 29%". Thus the issue in respect of both categories is the same - did they agree a straight 20% or 29% or did they agree that the 20% or 29% would be on top of (or put another way, after deducting) the initial management fee of 36%.

21. As with the fluctuation issue, Wing Wo submits first that the terms of the contract should be construed in their favour. Failing that, as an alternative, they seek a rectification of the contract to reflect their understanding of what was agreed. I shall deal with the issue of rectification in respect of both issues later.

22. Dixie starts this argument in a strong position. The contract does not say "a further 20%", it does not say "48.8%" (which is what 36% then another 20% would be). Given the court's preference for Mr Cheng's recollection of the oral agreement at the meetings in March and April 1996, their position is further strengthened. On the question of pure construction, Mr Scott placed reliance on the fact that Clause 3(A) used the word "basic" to describe the contract rate of 36%. This suggested, he submitted that this stood alone as a starting point and following clauses must be on top of the "basic" deduction, unless expressly stated otherwise. He pointed out that Clause 3(C) did expressly state a different position because Clause 3(C) (dealing with a 10% deduction for road closures) states "contract price" less 10%. In my judgment, these arguments are over subtle and should not change the meaning of the document as a reasonable man would interpret it. The use of the word "basic" adds nothing save to distinguish the initial management fee from a different fee for variations. Equally the use of the words "contract price" in Clause 3(C) cannot import into Clause 3(B) extra words such as "additional", "further" or "extra".

23. However, the court should not turn a blind eye to the factual matrix even where, on the face of it, there seems little room for argument. In deciding what matters of fact come within the definition of "factual matrix" (as opposed to extrinsic evidence of, for example, negotiations which might throw light on the parties subjective intentions at the material time which would be inadmissible), I am prepared to be reasonably flexible in Wing Wo's favour.

24. Wing Wo argue that there is much to be gleaned from the fact that whereas there were meetings in March and April 1996 after which the works commenced, the contract itself was not signed until January 1997. They submitted that in the intervening period, there were many discussions between the parties as to Dixie's scope of works under the contract (which had been orally agreed). Mr Cheuk and Mr Ho said that there were three draft contracts sent to Dixie, but only the final one was signed. The two earlier ones reflected changes as the works progressed. In a nutshell, it was Wing Wo's case that as the works progressed Dixie wanted certain items of work excluded. Dixie did not want to perform the less profitable items under the maintenance contract, such as, cleaning oil spillages, cutting trees and road markings. By agreeing to allow Dixie to exclude these less profitable works, a quid pro quo agreement was reached that variation works would be separately charged and would result in a higher deduction to Wing Wo to compensate it for the loss of its management fee for the works which became exempted.

25. Dixie's case was that it was never part of the agreement that they would do such works in the first place. At trial, much time was spent on an investigation into the fact that Dixie did in fact do some works under these headings in an effort to support Wing Wo's claim that they were originally included but later excluded and therefore the variation deduction would be made on top of the 36%.

26. I found Dixie's explanations on this part of the evidence to be entirely reasonable and credible. They agreed they did do some oil spillage clearance and some tree cutting and so on but only when specifically called on to do so, perhaps in an emergency, and they agreed to do so in spite of their lack of expertise and their lack of equipment, to help in an urgent situation or to help other sub-contractors generally which often happens in maintenance contract of this type in the construction industry. In some ways, Wing Wo's argument on this issue works against them. If the agreement was that a further 20% would be deducted for variations as a quid pro quo for excluding contract items all the more reason to spell it out in the final draft of the contract. If the original contract items had been reduced between April 1996 and January 1997, one would have expected the written contract to say, quite simply, that basic contract items are at 36% but variations will attract a higher percentage (at whatever rate had been agreed).

27. The above resume only scratches the surface of the volume of evidence which was heard on this matter. My above conclusion is after careful consideration of all that evidence.

RECTIFICATION

28. Dixie has persuaded the court that the proper construction of the contract is that fluctuations were included for Dixie's benefit and their liability to deduct a percentage for variations was limited to a straight 20% or 29%. Wing Wo, in these circumstances, seek a rectification of the contract.

29. On the law of rectification in Joscelyne v. Nissen [1970] 2 QB 86, Lord Justice Russel cited an earlier judgment of Simmonds J of Crane v. Hegeman-Harris [1939] 1 All ER in which the judge said it was necessary to :

" ... find a common continuing intention in regard to a particular provision or aspect of the agreement. If one finds that, in regard to a particular point, the parties were in agreement up to the moment when they executed their formal instrument, and the formal instrument does not conform with that common agreement, then this court has jurisdiction to rectify, although it may be that there was, until the formal instrument was executed, no concluded and binding contract between the parties. ...

Secondly, I want to say this upon the principle of the jurisdiction. It is a jurisdiction which is to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where one finds prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled legal advisers. The assumption is very strong in such a case that the instrument does represent their real intention. ... the court can only act if it is satisfied beyond all reasonable doubt that the instrument does not represent their common intention, and is further satisfied as to what their common intention was. For let it be clear that it is not sufficient to show that the written instrument does not represent their common intention unless positively also one can show what their common intention was. ..."

30. In deciding whether to allow a plea of rectification, the onus of which is on the defendant, the court can consider a wider ambit of evidence than on the construction issue. Ultimately, the court must find that there is convincing proof in support of the proposed rectification. I take into account, therefore, all matters already canvassed. Wing Wo's plea depends on Mr Cheuk's recollection of events and negotiations. I have determined that his account is less dependable than Mr Cheng and Mr Lee. Perhaps the most telling additional factor which weighs against rectification is that by the time Wing Wo first sought this relief, on the basis that the earlier oral agreement was not truly reflected in the later written agreement, payments had always been made to Dixie for over three years on the basis contended for by Dixie. This basis is the one which is consistent with the plaintiff's evidence of the negotiations at the time which I have been able to accept with confidence. During that three years, Mr Eric Leung had been faithfully making his calculations on instructions. There was some dispute as to whether Eric Leung was employed by Wing Wo or the main contractor Wing Fai. Whichever it was (and I find that on a day-to-day basis he had been assigned, in a layman's sense, to Wing Wo for the purpose of this contract) he was not employed by Dixie. It is surprising that Wing Wo never checked the figures and never noticed the way in which Dixie's payments were being erroneously (allegedly) calculated until so much later.

QUANTUM

1. Fluctuations and variation issues

31. As earlier mentioned, the parties produced a very helpful schedule setting out the agreed figures on quantum depending on how the court determined the various issues.

32. Dixie had been paid $37,745,944.23 by Wing Wo under this contract. If fluctuations had been included and if the variations had been calculated at a straight 20% and 29%, they should have been paid $43,364,243.57. A further sum of $5,618,299.35 is therefore due to them in this action.

2. Minor claims in Action No.35/2000

33. Unfortunately that is not quite the end of the matter.

34. In action no.35/2000, Dixie complain that further minor items have been deducted from their payments which should not have been. I accept the following claims :

(a) Water charges. A total of $30,523.00 was wrongly deducted for water charges which was paid by the employer to the main contractor.

(b) $5,000.00 in relation to a damaged vehicle for which no documentary evidence was produced.

(c) Lunch and gifts. Mr Cheuk organized a post contract lunch and invited some staff from Dixie. At the lunch he presented members of the Highways Department with gold coloured plaques. The gifts were later returned. Mr Cheuk, after the event, charged Dixie for 1/3 of the cost. I find there was no agreement by which he was entitled to do so. $16,633.00 was wrongly deducted.

(d) Stabilization works. Wing Wo now admit that $60,000.00 for this item should not have been deducted.

(e) CITA and PCFB levies. I find that Dixie, as sub-sub-contractor, was not liable for these Government levies which were, in truth, the responsibility of the main contractor These total $30,857.00.

(f) Letter of credit handling charges. A minor sum of $925.73 has been wrongfully deducted for charges which Mr Cheng never agreed to pay and could not have been liable for.

(g) Interest. $642.86 interest in relation to (e) and (f) above was also deducted.

The total extra due to Dixie under these minor claims is $144,582.44.

3. Minor counterclaims in Action No.71/1999

35. Wing Wo has raised counterclaims in respect of similar items in this action. They relate to CITA levies, letter of credit handling charges, repairs to vehicles and a fine in relation to a vehicle. For the same reasons as above and because the court has relied on Mr Cheng's evidence in areas of conflict, these counterclaims are dismissed.

THE "TOLO HIGHWAY" ACTION

36. As previously stated this claim, relating to a 1992 contract, rose from the ashes at about the same time that Dixie decided to sue Wing Wo for its unpaid invoices in the previous actions.

37. The parties' positions were reversed. Wing Wo (the plaintiff) was Dixie's (the defendant) sub-contractor in a tarmac contract on the Tolo Highway. The written contract provided for a management fee of 38% to be retained by Dixie before paying on the balance of payments to Wing Wo. It is not in dispute that from about the second payment onwards until the end of the contract, Dixie in fact retained 42%. By retaining an extra 4%, Wing Wo received about $2 million less than it would have done had 38% been retained (again, helpfully, issues of quantum have been agreed). Thus, unlike in the consolidated action, the defendant (Dixie) relies on an oral agreement after the written agreement which it says reflects a true amendment to the agreement between the parties. Dixie says the prime reason for increasing the management fee from 38% to 42% was to bring it in line with the management fee being retained by another contractor, Wing Hing, who had also engaged Wing Wo on tarmac works under the same main contract but in a different area.

38. There are three issues to be resolved :

(i) Was there a subsequent oral agreement which varied the management fee upwards by 4%?

(ii) If there was, was it supported by consideration to make it legally binding?

(iii) If there was no consideration, are Dixie still entitled to retain the $2 million odd due to Wing Wo's claim being defeated by the doctrines of waiver and/or promissory estoppel.

Taking each issue in turn.

1. Was there an oral agreement?

39. In this case, I am not asked to construe the written contract. The contract plainly states a 38% management fee. I am asked to decide, as a matter of fact, whether the parties agreed a variation which is not the subject of a signed written alteration. Dixie relies on a written alteration but acknowledges that it is not signed.

40. At the outset, it is important not to lose sight of the fact that these events occurred 10 years ago. Nobody knew they were going to become controversial until 1999. In order to decide the issue, therefore, the court must concentrate on such contemporary documents that exist and unchallenged evidence about what actually happened, rather than attaching weight to inconsistencies in recollections of factual matters that occurred in the early 1990's.

41. Dixie relies primarily on the evidence of Mr Cheng. Apart from testifying that the oral agreement did take place, he also points to his written endorsement to that effect on the contract document. He wrote on the contract document which is dated 23 March 1992 the following note :

"thickness less than 55 mm deduct 38% include fluctuation, thickness more than 55 mm deduct 42% include fluctuation."

42. Where and when he wrote this is not entirely clear. At worst it was a few days after the contract was signed. I find that nothing turns on the conflicts as to where and when he wrote it, it was done 10 years ago. In any event Wing Wo did not initial or sign it. They say there was no such variation.

43. On the balance of probabilities, I accept Mr Cheng's evidence that there was such an agreement. The lack of acknowledgement by Wing Wo's signature is, in my judgment, more than made up by subsequent events.

44. Firstly, 42% was actually paid from very early on. Nothing turns on the fact that some of the later invoices were calculated at 38%. I accept Dixie's simple explanation for this namely that in all such cases, save one, the 38% calculation was for work done prior to the oral variation even though the invoices were rendered and paid much later.

45. Secondly, 42% was paid throughout the duration of the contract. Mr Cheuk and Mr Ho said they complained about this however, this evidence must be viewed with some scepticism because there is not one letter of complaint about it to anyone. The whole contract came and went, successive annual accounts (both for internal purposes and for revenue purpose) in which the higher fee was accounted for also came and went, without anything being put in writing by Wing Wo that they objected to it or did not agree with it.

46. Thirdly, there were good reasons for the variation. Firstly, thicker tarmac generated more profit and secondly the other company to whom Wing Wo was a sub-contractor, doing identical works, were charging 42%. It is true that Wing Wo's contract with the other company, Wing Hung, was not signed until later, namely May 1992, but nothing turns on this because the works had already begun and Mr Cheng, having spoken to them, knew that 42% was being charged. He had also learnt that the distinction between tarmac over 55mm thick and less than 55mm thick had been incorporated into that contract. Exactly the same provision was incorporated into his contract. Rather than risking further arguments and souring their relationship with Dixie, Mr Cheuk would have readily agreed to identical terms in both of his contracts to permit smooth progress in the future. Wing Wo were then a small company in its early days.

47. Fourthly, in respect of such 42% deduction Wing Wo not only signed a receipt for the payments made to them but in addition, either Mr Cheuk or Mr Ho signed an acceptance form that certified the payment was correct.

48. Fifthly, not only did Wing Wo continue to accept certified payments for the duration of the contract, they also agreed the final account. Thereafter, any lurking grievances they may have had lay dormant until Dixie sued them in the consolidated action. I am certain that had that dispute not emerged (which was caused by Wing Wo suddenly halting payments to Dixie) this dispute over the 1992 contract would never have risen from ashes.

CONSIDERATION

49. The existence of the oral agreement is the beginning of the issue rather than the end of it. For it to be a legally binding agreement it must be supported by consideration. Wing Wo submit there was no benefit to them in paying 42%. It merely meant that they received less which could only be a detriment. Dixie suggest that consideration can be found in the fact that their site agent, Mr Lum, would be retained as the site agent for this project because of the increased revenue, whereas had the fee remained at 38% they may have had to dispense with his services which would have been to Wing Wo's disadvantage. Keeping Mr Lum was therefore a benefit to Wing Wo. With his experience, more work orders could be generated.

50. At best I find this to be an ingenious argument. It is true that any consideration however small will suffice. However, even if factually sound and sustainable on the evidence, I find it difficult to access this claimed consideration as anymore than paper thin and arguably insufficient. I therefore put to one side the question of whether or not there was any consideration but proceed to the next issue on the basis that there was none. I approach the problem this way because if Dixie's defences of waiver and/or estoppel are made out, it matters not that there was no consideration.

WAIVER

51. Paragraph 12(ii) of Dixie's defence pleads that :

"The plaintiff by repeatedly accepting payment at the rates of the contract less 42% without raising any objection has waived any entitlement to being paid at the rates of the contract less 38%."

52. The defence of estoppel by representation is separately pleaded on an "and/or" basis in paragraph 12(iii).

53. Mr Scott, in his submissions to the court, seems to take the two defences together and treat them as one. I think they can be considered separately. As will be seen hereafter I have come to the conclusion that Dixie's defence succeeds on the defence of waiver. I have therefore not gone on to consider the further and more problematic arguments that are peculiar to the defence of promissory estoppel in any detail.

54. 125 years ago Lord Cairns in Hughes v. Metropolitan Railway Co. (1877) 2 AC 439 said :

".... if parties who have entered into definite and distinct terms involving certain legal results--certain penalties or legal forfeiture--afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties. ...."

55. The somewhat different facts in this oft quoted case which has withstood the test of time make no difference. The application of the principle goes much wider than the particular facts of that case. The first two requirements which emerge from this short citation are not in issue in our case. The parties entered into a contract. I have determined that Wing Wo led Dixie to believe that Dixie could deduct 42% and Wing Wo signed certified acceptance forms to that effect. The third question which arises is -- would it be inequitable to allow Wing Wo to enforce their right to a 38% deduction on the written contract because the parties had, in fact, made a subsequent oral variation which lacked adequate consideration?

56. In coming to the conclusion that it would be inequitable to Dixie to permit Wong Wo to enforce its contractual rights, the key factor is the exceptionally long passage of time between first accepting the 42% fee and the institution of proceedings in 1999. In the intervening period I accept that Dixie conducted themselves in a way consistent with the acceptance of 42% as their contractual right.

57. Soon after the commencement of the trial, and erring on the side of caution, Mr Bell for Dixie applied for leave to plead further particulars of "reliance" in support of its defence of estoppel under paragraph 12(iii) of the defence. In addition he sought leave to file a supplemental statement from Mr Cheng in support of particulars. Mr Scott opposed the application. However, after Dixie had responded reasonably fully and very quickly to Mr Scott's request for further discovery, the objection was withdrawn. It was withdrawn however on the basis that the court had indicated that the lateness of the application would be bound to affect the weight which the court would attach to the additional evidence.

58. In very broad terms the particulars of reliance were that because of the increased fee to 42%, Dixie were able to retain the services of Mr Lum, pay him a bit more and also invest in the purchase of a workshop in Shatin. Mr Scott examined all these matters very carefully. He submitted they "had the hallmarks of points fabricated to bolster a weak legal argument".

59. I do not think that this is the correct way of looking at the matter. Wing Wo did not raise the dispute until 1999. Only then, at the earliest, would Dixie have to look back and ask themselves -- to what extent did we rely on the extra income? In this context and in such a time frame, the issue of reliance takes on a much more general hue. The relevance of reliance on the question of waiver is limited. Firstly, in deciding the question of inequality it would be permissible to ask : did Dixie rely on the extra money so as to make it unjust for Wing Wo to claim it back many years later? Secondly, and this is merely an extension of the first question, did Dixie's reliance cause them to alter their position in some way because of revised arrangement?

60. Having heard Mr Cheng and Mr Lee, I am satisfied that with the knowledge of greater income from 1992 onwards they did not simply bank the bonus but it affected their day-to-day business decisions. A direct causal link between (a) agreeing the 42% fee on the one hand, and (b) deciding to buy a workshop in Shatin or deciding to give Mr Lum a bonus on the other hand would be difficult to establish given the passage of time. I am satisfied that the extra money was applied to business expenses in some way which were made in the confident knowledge that it was regular and continuing income from Wing Wo from the date of the oral agreement. This seems to me to be obvious from the evidence. A microscopic investigation of the use to which the money was put at the time, 10 years after the event does not take the matter much further. I have indeed attached little weight to the particulars of the late evidence adduced but I have attached weight to the general picture which emerged as a result.

61. For these reason I have come to the conclusion that Wing Wo's claim in Action No.73/1999 must fail.

62. The court's judgment below is silent on the question of interest. It has been agreed between the court and the parties that if the parties are unable to agree the rate and period of interest, another hearing may be fixed for that purpose.

JUDGMENT

(1) In Action Nos.71/1999, 102/1999, 11/2000 and 35/2000, there will be judgment for the plaintiff in the sum of $5,762,881.79.

(2) In Action No.73/1999, there will be judgment for the defendant.

(3) There shall be a costs order nisi that the plaintiff in the "consolidated action" and the defendant in Action No.73/1999 shall have its costs, to be taxed if not agreed, save that the costs of the defendant's summons in Action No.73/1999 dated 16 July 2002 be to the plaintiff.