LO KWOK HUNG t/a GAR WING HUNG KEE CONSTRUCTION COMPANY v. LEE SHU SUM AND ANOTHER

1985, No. A3183

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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RULING

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1. The plaintiff and the defendants carry on business under their respective trade names as building contractors. On 14th September 1984 they entered into a rock crushing contract. The plaintiff was then the sub-contractor designate for a reclamation contract on Tsing Yi Island. I use that word because the actual sub-contract between the plaintiff and Harbour Engineering Co. Ltd. (Harbour) was not entered into until 22nd November. Despite this its stringent time table started on 17th September. This contract provided for the excavation of rock on Tsing Yi Island and for the deposit of approved fill material into certain reclamation areas. To make rock suitable for use as fill material it has to be crushed. This was the purpose of the parties' contract.

2. The main function of the defendants under the contract of the 14th September, was to provide crushing machinery and to carry out the crushing work: of the plaintiff to deliver rock to the hopper and to remove the crushed material. The contract provided for a guaranteed minimum of 200,000 cubic metres of rock. The processing fee was fixed, (and I quote from the translation before me) at "$10.70 a cubic metre". The dispute turns upon the meaning of that phrase. Crushing started on 6th November. It was suspended on 3rd April 1985 and never resumed. Each party alleges the other repudiated. Under pressure from the main contractor and the time constraints in the sub-contract, the plaintiff entered into a new crushing contract an 10th April. Since the time fixed by the parties was plainly insufficient to determine all the issues arising on the pleadings, it was agreed early in the hearing that I should, as a preliminary issue first rule upon the question: which of the two parties repudiated the contract?

3. In the words above quoted the contract provided for payment by volume. It does not in terms stipulate whether it is the volume of rock or of crushed rock which is to be measured. Both pleaders adopted the same phrase: "cubic metre of rock crushed". Notwithstanding this neither party made any attempt on site to measure volume directly. The only measurements taken were of the weights of rock being delivered to the hopper. It was therefore necessary to convert measurements of weight (over which there is no dispute) into measurements of volume. This requires the ascertainment of the specific gravity or density of the load. This produces a conversion factor: a figure by which a weight in tonnes can be multiplied to produce volume in cubic metres. The whole dispute centres on this figure.

4. Neither party in its pleading asserted that any figure was in fact correct, or invited me to arrive at any figure on the construction of the contract in the light of all the evidence. Both relied upon a figure said to have been subsequently "agreed": the plaintiff on 2.69 : and the defendants on 1.543. The financial differences between the application of these figures to 200,000 cub. of material is, of course, very considerable. Further both parties sought to establish their different figures by substantially the same route: by the others consensual participation in a particular test. Neither was able to assert or to lead evidence to suggest that the other had either expressly accepted the result of the proposed test in advance; or the resultant figure after the test had been concluded. Each had to argue that by participating in a test intended to produce a definite figure the other had impliedly accepted the result in advance, or as both put it "had" to accept it because the result was right. Both parties thus assumed a considerable burden.

5. Compaction, and its effect upon apparent specific gravity, volume and price, was really what divided the parties. In simple terms specific gravity is weight/volume. The specific gravity of a piece of rock is not affected volume by crushing. Its weight remains the same: its volume is re-distributed not enlarged. Tested in the laboratory by the Archimedes principle, a given piece of rock, first in solid and then in crushed form, will displace the same quantity of water. So laboratory tests giving the specific gravity of solid rock, such as produced the plaintiffs 2.69, apply equally to the same rock when crushed.

6. It is different in the field or on site. The variable is volume. A lorry of given capacity can be precisely filled with crushed rock. If you then divide the weight of the rock by that lorry container volume you get a much lower reading for specific gravity of the load. This is how the defendants' figure of 1.543 was obtained. This is simply because the measured volume is not that of rock alone, but that of rock plus voids, the air spaces between the rock particles. The size of a specific gravity reading so obtained will therefore depend entirely upon the degree of compaction. The greater the degree of compaction, the higher the figure, and the narrower the gap between crushed rock and virgin rock. Underlying the dispute here is whether this factor is fixed by reference to the solid, or by some, and if so what, degree of compaction.

7. The parties' contract has to be put in context. It is true, as the defendants emphasize, that the court is directly concerned with that contract and no other. But the defendants in my judgment exaggerated their ability to distance themselves from the context which is the Government contract with Harbour, and Harbour's sub-contract with the plaintiff. This is because all reclamation contracts start with Government in the role of developer. Government's practice is notorious and is spelt out in the Harbour/plaintiff sub-contract. Its unit of measurement is the cubic metre. For excavation this is measured by survey of ground formations before and after, so that the intent is to pay virgin/solid rock fully-compacted volumes: section 6.04 of Addendum 1. Deposition and compaction of fill volumes are again measured by a surveyed difference between the old and new profiles, with the intent of arriving, in the words of section 6.08, at the "net volume of compacted fill". All this can only be done at final measurement. All interim figures are provisional. At interim payment stage, all the parties can do is seek a figure which will approximate as closely as possible to the relevant final surveyed measurements, to reduce the size and risk of post-final measurement adjustments.

8. In practical terms this means that all parties down the contractual chain, contracting directly on Government terms:-

9. Of the two parties before me only the plaintiff was directly affected by these contractual constraints. This contract provides for a fixed rate per cube not for a provisional rate subject to final measurement. But the nature of these constraints was well-known to the defendants, who immediately before entering into this agreement had concluded crushing work on the adjacent site under another Government reclamation. This background explains the parties exclusive use of weight as a basic measurement. It has great bearing upon the probabilities in relation to the two express contracts alleged. It equally has great bearing upon the construction of the material contract and whether the fee is to be calculated by reference to a cubic metre of virgin rock, compacted fill, or uncompacted crushed rock.

The agreement alleged by the plaintiff

10. The plaintiffs case is that at about mid-November the 1st defendant Lee Shu Sum (S. S. Lee) selected three rock samples for testing purposes and handed them to the plaintiffs site agent Lee Chi Hung (C. H. Lee). These rock samples were tested by Hong Kong Testing Co. Ltd. whose report dated 17th November showed an average specific gravity of this rock of 2.69. A copy of this report was given to S. S. Lee, but he could not personally have read it and nothing further was said about it. During the execution of the work no attempt by the plaintiff was made to use this figure of 2.69 or to calculate payments due to the defendants by reference to it. It was first expressly referred to inn letter dated 24th April 1985 written after all work had ceased. Enclosed with this letter was a payment certificate which re-calculated the defendants' entitlement for all work done on the basis of this factor. This letter says that the factor "had not been agreed", but had been "adopted”on the basis of the Hong Kong Test Report.

11. I accept the plaintiff's account as substantially correct in fact. I also accept the accuracy of this certified figure. The defendants' tests on similar rock produced a figure of 2.63. The specific gravity for this rock can thus firmly be put at 2.6. But I cannot accept that by this collection of rocks either party bound itself to the other to accept in advance the laboratory results. They were in the process of investigating not agreeing. I think that the letter of 24th April was accurate. What the plaintiff was seeking to say there was that 2.69 was not agreed but was correct. It represented the specific gravity of virgin rock which was the factor required by this contract. This contention can only be justified by construction. There was no agreement.

The agreement alleged by the defendants

12. On 24th November experiments were conducted on site in the presence of Harbour's site agent, Sam Fung: the plaintiff's site agent, C. H. Lee: and the defendants' foreman Lee Hung. Three loads of category 0 (the smallest) crushed rock were placed in the container of a lorry and the weights of the lorry and the loads were taken. The container was measured and its volume calculated. The load weights were divided by the container volume and an average density figure of 1.543 was produced. No attempt was made to compact the crushed rock on the lorries. This was clearly an uncompacted reading where the volume taken was of both rock and voids. C.H. Lee certified this result to the defendants by letter dated 25th November; and put it on record to Harbour by letter dated 30th November.

13. This figure was thereafter used by the defendants in all their billings to the plaintiff. It was likewise adopted by the plaintiff to Harbour in its interim payment requests. Harbour declined to act on it. With knowledge of it Harbour adopted initially a factor of 2.2, which they were then persuaded to reduce to 2.0. Harbour in turn used the figure of 1.543 in calculations submitted to Government. I have seen a minute of a meeting of 7th February 1985 between Government and Harbour, in which the SRE is said to have criticized this figure as too low and outside his normal range of 1.8 - 2.3 "for crushed rock". The lower the figure the greater the interim payments all would receive. The inference is that Harbour were restrained by Government objection and perhaps by their own doubts from going below 2.0 which lay very close to the SRE's middle figure.

14. The defendants' attitude to this figure seemed to me strikingly similar to that of the plaintiff to 2.69. Again there was no evidence of express acceptance of this figure as binding before or after the experiment was conducted. S.S. Lee thought the plaintiff had to accept it because it was accurate - indeed the only correct figure. His partner, the 2nd defendant, when he met with Chan Jor Wah to insist upon its use by the plaintiff, maintained that Chan had "to admit the figure is correct to be used ...... because the test was conducted together". In other words he too was asserting the appropriateness of this figure; that the contract required an uncompacted volume figure which is what this is.

15. The defendants argue that the plaintiff is bound by this test result because they say that Chan agreed to conduct this test with a view to producing a binding figure. I de not agree. An agreement to conduct an experiment is no more conclusive against him than it was in his favour in respect of the rocks. Further I accept his explanation of his motives. He then had the 2.69 test result. This was adverse to his own interest in relation to Harbour. I accept that he was prepared to conduct the lorry test at Lee Hung's express request in the hope, first of obtaining a lower figure which would be more profitable for both him and the defendant; and secondly of obtaining Harbour's express acceptance of such figure. This was the reason for Harbour's presence. I can see no substance at all in the suggestion that Chan bound the plaintiff to the defendants in advance at all, and still less separately and independently of Harbour.

Repudiation

16. In my judgment neither party has proved the agreement it alleges. The plaintiff's alleged agreement had no impact on the work as it was not asserted until after this had ceased. The defendants, on the other hand, stopped work in an attempt to enforce their alleged agreement. Orally on 7th February and in their letter of 11th March they demanded adjustment of the price on this basis. The letter of 2nd April threatened suspension of work to bring this about. The late payment also complained of had already been received and late payments could in no way justify suspension. In my judgment there was no justification for the defendants' attitude and for this suspension, and accordingly upon the pleadings as they stand there is no escape from the conclusion that it was the defendants who repudiated this contract.

17. This conclusion is unsatisfactory because it does not resolve all the issues on liability which emerged in evidence. My rejection of the agreement alleged by the plaintiff means that the adjustment in Payment Certificate No. 5 is not supportable. But it supplies no substituted figure. My rejection of the agreement alleged by the defendants leads to the above conclusion, but leaves open the question whether the defendants can justify this behaviour by reference to the contract itself. The answer to both depends upon the true construction and effect of the parties' written contract. Having heard all the evidence I think it right to express at least a preliminary view upon this, subject to such further argument as either party may wish to advance generally or in support of any amendment to the pleadings. I take this unusual course in the hope of saving costs, and despite the fact that at the hearing neither party sought leave to amend in the face of my warnings that their pleaded cases could fail.

18. The contractual issue is whether a cubic metre in this contract falls to be measured by virgin rock or crushed rock; and if it is the latter by uncompacted or substantially compacted crushed rock. This question is dominated by the Government contractual context and practical realities. The argument that a virgin rock approach should prevail derives some apparent support from the pleadings and from the point at which weights were taken. But this seems to me harsh, narrow and unreal, and not supported by the general practice and apparent understanding of any of the parties concerned on this site. But if these factors suggest a less restrictive mode of measurement by reference to crushed rock, as I am minded to think they do, I do not see how this can possibly be extended beyond "substantially compacted" crushed rock or "compacted fill". I would so construe this contract.

19. It then becomes necessary to estimate or assess a specific gravity factor appropriate to substantially compacted crushed rock. I have a firm reading of 2.6 for virgin rock; and one of 1.5 for uncompacted crushed rock. I have the SRE's apparent range of 1.8 - 2.3. I therefore conclude that the figure of 2.0 selected and acted upon by Harbour is very much on target. I can see no good reason for not adopting it.

Upon these preliminary conclusions it follows:-