AMERY CONSTRUCTION WATER PROOFING CO LTD v. YUE HING LAND INVESTMENT CO LTD

DCCJ16179/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16179 OF 2001

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JUDGMENT

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1. The plaintiff is a civil engineering company. The defendant was the developer of a building site at 62B Robinson Road and 5 Seymour Terrace, Hong Kong, and employed the plaintiff to do certain works on the site, at a fixed price of $635,550.00. The plaintiff claims that it was agreed between the parties that it would carry out certain extra works as additions or variations to the original works contracted for, at a price of $265,870.00. Interim payments of $571,950.00 having been made by the defendant to the plaintiff, and giving credit for electricity and water charges of $35,149.11 payable by the plaintiff, the latter now claims for the outstanding balance of $294,320.89.

2. The defendant's case is that its architect issued three interim payment certificates, for the contract price plus variation works, for a total of $722,922.95, but always subject to its right to claim against the plaintiff for liquidated and ascertained damages for non-completion of the works by the agreed completion date. Interim payments of $571,950.00 were made under the first two such certificates. The alleged variations valued at $265,870.00 were never agreed. No final certificate was issued by the architect in respect of them, and therefore the action is premature.

3. If it be held that the interim certificates entitle the plaintiff to payment, the defendant says that payment under third certificate for $151,022.25 was never made, because the defendant anticipated that it would have a substantial claim against the plaintiff for defective and unfinished works as well as liquidated damages. The defendant now counterclaims for $139,000.00 in respect of such defective works, $35,149.11 for electricity and water charges, plus $3,849.36 for further electricity charges, and $45,000 in respect of liquidated damages for delay, making a total of $222,998.47.

4. The plaintiff tendered for the work. In the tender documents the defendant is identified as the Employer and the plaintiff as the Contractor. The architect is Dennis Lau and Ng Chun Man Architects and Engineers (H.K.) Ltd. ("the Architect"), the quantity surveyor is Davis Langdon and Seah (H.K.) Ltd. ("the QS") and the project manager was Macro (Asia) Ltd. ("Macro").

5. Clauses 12 and 13 of the Terms and Conditions of the tender provides:

12. Variations

12.1. The Architect may issue instructions requiring a Variation which may include alterations of the design, quality and quantities of the Works and/or a change in the order or period in which the Works are to be carried out.

The valuation of variations will be assessed by the Quantity Surveyor based on the contract rates or no such rates is appropriate then a fair valuation or daywork basis will be assessed accordingly.

13. Certificates and Payments

13.1 The Architect will at intervals of one month, issue Interim Certificates stating the amount due to the Contractor for the Employer.

13.2 The Employer shall pay to the Contractor the amount stated as due in Interim Certificates fourteen days from presentation of such certificate by the Contractor.

6. On 20 April 2000 the Architect wrote to the plaintiff accepting the tender subject to various terms and conditions, which the plaintiff later accepted. In fact the defendant identifies this letter as the contract between the parties. Item 3 of the terms and conditions provides that the contract is to be a lump sum fixed price contract, and that no adjustment is to be made unless in the case of adjustment for variation instruction, which has cost effect, to be issued by the Architect. Item 4 provides for a contract period of 21 days including Saturdays, Sundays and public holidays. Item 7 provides for payment of 50% of the price on completion of 50% of the works to the Architect's satisfaction, the remaining 50% on completion, and 10% retention for defects liability, the period for which by Item 9 is 12 months from the date of completion as certified by the Architect. Item 11 provides for the plaintiff to be liable for water, electricity and all other charges for the works. The letter does not specifically bear to supersede any previous documents.

7. Item 5 should be particularly noted. It reads:

5. Completion of the Works

The rectification works shall be completed to the satisfaction of our office.

You agree to carry out all rectification works in one floor as the sample floor prior to the commencement of the Works for our approval. After the acceptance of the rectifications works in the sample floor by our office, this sample floor will act as the standard.

Any rectification works which are not carried out up to the approved standard as demonstrated in the sample floor should be made good again at your own expense until the rectification works are up to the standard.

8. The following dates which appear on the Architect's letter are not in dispute:

Contract commencement date:	20/4/2000
Contract completion date:	10/5/2000
Practical completion date:	19/6/2000
Extension of time granted:	25 days
Extended contract completion date:	4/6/2000
Delay	15 days

9. The plaintiff's claim for the variations arises from a letter dated 13 August 2001 from the QS to the plaintiff, referring to a meeting between its representative and their representatives on 2 August 2001, and agreeing the valuation of variations as set out in an attached schedule. The details are set out in the Statement of Claim. The QS asked for confirmation of agreement by the plaintiff, and the plaintiff chopped and signed the letter to signify confirmation on 16 August 2001.

10. It does not appear that the amount is in dispute. The defendant at the last minute disclosed a bundle of correspondence including a letter from the QS to the Architect dated 7 March 2003, enclosing a draft statement of final account for the works, a letter from the Architect dated 13 March 2003 to the effect that he had no adverse comment and instructing that it be sent to the plaintiff, and a letter of 19 March 2003 sending the final account to the plaintiff.

11. This final account is as follows:

1.	Original Contract Sum	$633,550.00
2.	Valuation of Variations	$265,870.00
3.	Final Contract Sum	$901,420.00
4.	Less: Electricity and Water bills	-$35,149.11
5.	Less: Electricity bills	-$3,849.00
6.	Less: Cost deduction for defects	-$117,000.00
7.	Less: Liquidated & Ascertained Damages	-$45,000.00
8.	Add: Cost reimbursement for loss and expense claims	$57,895.96
9.	Final Cost	$758,317.49

12. These documents were admitted de bene esse subject to the plaintiff's objections to their admissibility, but it seems to me that they are relevant and indeed to some extent support the plaintiff's case on the counterclaim. How the defendant can maintain its counterclaim for $222,998.47 in the light of these figures is not clear to me. The total deductions it claims amount to $200,998.11 but there is now an added figure of $57,895.96 which has not been taken into account.

13. The issues are firstly whether the plaintiff was entitled to sue for its claim of $265,870.00, and secondly what if anything is to be deducted in respect of defective works by the plaintiff. In fact the plaintiff has accepted all along that it must pay the water and electricity charges of $35,149.11. It now appears from the plaintiff's witness Mr. Chan Yat Sun under cross-examination that the electricity charges of $3,849.00 and liquidated damages for delay of $45,000.00 are payable by the plaintiff. What is in issue is the figure of $139,000.00 for cost deduction for defects.

14. The plaintiff's witness, Mr. Chan Yat Sun, said in his statement there was a lot of correspondence between the plaintiff, the defendant, the QS and the Architect; the negotiation was within the knowledge of the defendant; and that the letter of 16 August 2001 (by which the plaintiff accepted the letter from the QS) was evidence of a final agreement that the cost of the variation works was $265,870.00. Nevertheless the defendant had cut down the price of the variations when the plaintiff sent it a breakdown in December 2000. The architect's certificate dated 20 December showed that the contract price of $635,550.00 was accepted.

15. In oral evidence Mr. Chan said that the contract and variation work was finished in about October 2000. The defendant had issued a defects list on 27 November 2000 following a site inspection. Some of the work had to be done by another contractor, Wo Hing and other work by the plaintiff. The work which was the responsibility of the plaintiff was all subsequently completed.

16. Under cross-examination Mr. Chan insisted that the letter of 13 August 2000 from the QS showed that the final figures had been agreed between the parties. However, he was not at the meeting to which that letter referred, and could only speak to what he had been told by his foreman, who was. He tried to say that the letter itself was an architect's certificate, but then had to agree that it was not. He agreed that the defects liability period would continue until 18 June 2001. As to specific items on the list of defects, he insisted that the plaintiff had carried out all of them. He insisted that the plaintiff was not liable for defects totalling $139,000.00.However, he ultimately accepted the defendant's claims for $45,000 for liquidated damages for delay and electricity charges of $3,849.00. The claim for electricity and water charges of $35,149.11 was never in dispute.

17. The defendant's witness was its director, Mr. Lo Wah Lee, Kenneth. He too adopted a statement. In it he said that the original contractor had been Wo Hing Construction Co. Ltd. It had not completed the work properly. On the recommendation of the Architect the plaintiff had been brought in to do the rectification work, pursuant to the contract dated 20 April 2000. Further work not done by Wo Hing had been found and in May 2000 the plaintiff was instructed to do the additional works or variations. Delays ensued, and the plaintiff applied for extensions of time. Ultimately on 7 November 2000 the Architect gave the plaintiff a list of defects in the original works and variations, which the plaintiff had to make good. On 13 November, a site inspection showed no progress. The Architect was instructed to tell the plaintiff that if no progress was made by 22 November, the outstanding works would be contracted out to another contractor, at the cost of the plaintiff. On 27 November, the plaintiff was instructed to rectify defects contained in a second list. Some of these the plaintiff refused to do.

18. Mr. HO said that the Architect had issued the third certificate to the plaintiff on 20 December 2000 but without prejudice to the defendant's right to claim liquidated damages for delay. As I have indicated, that certificate was for $151,022.25. The additions certified amounted to $233,510.00. The total retention to date was $146,087.75. Mr. Ho said that the plaintiff had sought payment under it, and release of the retention money. The Architect had refused the latter, pending the making good of defects or the expiry of the defect liability period, whichever was later.

19. Mr. Ho said that the defendant did not pay the sum certified in the Architect's third certificate, for which the plaintiff had invoiced it, because it was expected that the total cost of repairing the defects, and other charges, would exceed it. In fact, the defects were not rectified and ultimately in May 2001 the defendant was told that the work would be contracted out. It was contracted out to one Hung Yat Decoration Design Engineering Co.

20. The rest of the statement is concerned with correspondence between the parties and their solicitors. It is not necessary to set that out here but reference may be made to the correspondence as necessary.

21. There was no further oral evidence in chief, and nothing particularly significant in cross-examination, save that it appears from cross-examination that Mr. Ho only went once to the site. He was clearly not much concerned with the day-to-day dealings between the parties; those were all a matter for the QS and the Architect.

22. Mr. Chan was not a good witness. He was self-contradictory and imprecise. As I have indicated, the defendant's witness seemed to be a long way removed from the "action" in this matter. We have heard no evidence from the Architect or the QS who might have given a better picture of what really happened particularly with regard to the defects, deductions for which make up the major part of the counterclaim. Much reliance must therefore be placed on the documents. One thing we do not see from the documents, however, is an invoice from another contractor for the completion of the rectification of the defects.

23. The first issue is whether the plaintiff was entitled to sue for $265,870.00 in the first place. It is argued for the plaintiff, if I have understood the argument correctly, that the letter of 20 April says nothing about variation works but they have to be paid for. The figures in the schedule to the letter of 13 August 2001 were arrived at after discussion between the plaintiff, the Architect and the QS. The letter of 13 August and its acceptance by the plaintiff on 16 August constituted a final agreement. Further it seems to be argued that the figure then reached must have included the cost of rectification of defects.

24. The defendant's argument is that the plaintiff's claim is premature, because no final certificate was issued. None of the certificates was a final certificate. They were all issued without prejudice to the employer's right to claim damages for non-completion. An unqualified certificate is conclusive evidence of his satisfaction with the work done but the certificate dated 20 December 2000 was qualified in this way.

25. The terms of the contract and particularly Item 5 of the terms and conditions provide that the work must be done to the satisfaction of the Architect and anything which is not done to the required standard must be made good at the plaintiff's expense. Whether the work was done to the satisfaction of the Architect is a question of fact.

26. If the Architect had issued an unqualified final certificate, this would in practice be proof of satisfaction. See N.C.B. v William Neill & Son [1980] Q.B. 300. But the letter of 13 August 2001 was not any sort of an architect's certificate. At best it was an proof that the QS agreed the variations. No doubt they Architect would in turn agree them; it certainly had no objection to the same figure in March 2003, subject always to the defendant's claims for defect rectification etc.

27. It appears from a letter from the defendant to the Architect dated 15 June 2001 that argument was still going on about the extent of the defects, on the basis that most of them were not within the scope of the plaintiff's works, or could not be found in the defect list of October 2000. That argument was never resolved, as may be seen from subsequent correspondence up to the end of July, referred to by Mr. Ho. There is no evidence that the Architect agreed anything at a meeting in early August, as Mr. Chan seems to say. Indeed even on his evidence it is not clear that anyone from the Architect was at that meeting. I do not see that the letter from the QS dated 13 August 2001 with the list of variations can be regarded as evidence that the variations and the rectification of defects had been completed to the Architect's satisfaction.

28. As to what in fact had been done by the plaintiff, I find it difficult to place any reliance on Mr. Chan's evidence. As I have indicated he was not a good witness. His assertion that all the defects were rectified is contradicted by the correspondence. I do not believe him.

29. I am satisfied therefore that the plaintiff had not complied with Item 5 of the terms and conditions of the contract by the time it raised its action. The action was premature.

30. Does the certificate dated 20 December 2000 entitle the plaintiff to payment? It appears from Keating on Building Contracts, 7th Edition, 5-11 that

"Subject to the effect of words showing that it is merely intended to make advances on money not legally due until completion, a progress properly given creates a debt due. Subject to rights of set-off and service of any applicable notice, the contractor can seek summary judgment for the amount certified upon the issue of a certificate for payment of an instalment."

31. As I have indicated the tender documents provided for payment of the sum certified in an interim certificate after 14 days from presentation. There is nothing in the contract specifically to indicate that all the provisions of the tender documents are superseded. In fact the defendant paid out on the first two certificates. I do not see why the plaintiff could not have sought payment on the certificate dated 20 December 2000 and I have no doubt that the defendant is now liable to the plaintiff for the sum certified therein.

32. The defendant argues with regard to the counterclaim for defects that since the evidence of Mr. Chan is unreliable, the best evidence to date is the draft final account sent by the QS to the Architect on 10 August 2001, which shows a figure in respect of defects of $139,000.00. This would mean that, on Mr. Hart's calculations, there is a balance of $71,976.22 owing by the plaintiff to the defendant. This is obtained by setting off a total counterclaim of $222,998.47, which would include the figures agreed by Mr. Chan in evidence, against the sum due on the third certificate.

33. I have indicated that I do not believe Mr. Chan. At the same time we have no actual evidence of payment for rectification of the defects. But this is no longer the whole story. The QS has produced the final account of 19 March 2003 which puts the defects figure at $117,000.00 and also provides for an addition of $57,895.96 in respect of cost reimbursement for loss and expense claims. The final figure is $758,317.49. If that is right is means that on its own figures the defendant, having paid $571,950.00, now owes the plaintiff $186,367.49 in total. So a balance in favour of the defendant of $71,976.22 cannot be right.

34. It seems to me that the only sensible course now in the light of these latest figures is to accept them, and rather than giving judgment for some balance which does not reflect the true position between the parties and leaves outstanding figures still to be litigated, to find that there is indeed a balance of $186,367.49, and to apply Order 15 Rule 2(4) of the Rules of the District Court and give judgment in favour of the plaintiff for that balance. The fact that the plaintiff sued on the basis of a figure to which it was not then entitled can be reflected in the order for costs to be made.

35. There will accordingly be judgment in favour of the plaintiff for $186,367.49. Rather than make an order nisi for costs, which will inevitably produce further argument, I will simply order that arrangements to be made for me to hear the parties on costs and interest.