HAY DESIGN LTD v. HENG TAI CONTRACTING (INT’L) CO LTD

HCCT 58/2016

[2020] HKCFI 358

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 58 OF 2016

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BETWEEN

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J U D G M E N T

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Background

1.  Pursuant to my Decision of 28 February 2018, an order was made for trial of preliminary issues as to:

(1) whether there was an oral agreement concluded in the terms alleged by the Plaintiff as pleaded in paragraphs 3 to 5 of the Statement of Claim;

(2) whether the projects pleaded by the Plaintiff in paragraphs 6 and 7 of the Statement of Claim fell within the alleged oral agreement; and

(3) whether the Plaintiff has proved liability on the part of the Defendant to share profits with the Plaintiff in any of the projects pleaded in paragraphs 7, 16, 25 and 29 of the Statement of Claim.

2.  It is the claim of the Plaintiff (“HD”) that in early 2009, it made an oral agreement (“Agreement”) with the Defendant (“HT”). The Agreement was pleaded as “a profit sharing arrangement for the construction of fitting out and decoration projects jointly completed by the parties”. According to the Statement of Claim, the express terms of the Agreement were that the parties would jointly prepare a tender for a project, and if the project is awarded to the party submitting the tender (“Leading Party”), the other party shall cooperate with the Leading Party to jointly complete the project. The Leading Party would be responsible for communication with the employer and other relevant parties of the project and preparing the summary of expenses incurred by the parties in completing the project, and after deducting all expenses, the profit of the project would be equally divided between them.

3.  The Plaintiff alleges that 6 projects were subject to the Agreement and claims from the Defendant half share of the net profit of the projects led by the Defendant, which are the One Central Project (“OC”) and the Lane Crawford Project (“LC”). According to the Plaintiff, a sum of $10,867,015.90 is payable to the Plaintiff as its share of profits under the OC and LC projects, and the Plaintiff agrees to give credit to the Defendant of $1,178,158.50, as the profits under the 4 projects led by the Plaintiff.

4.  The Defendant denies the existence of the Agreement. According to the Defendant, there were only ad hoc agreements made between the parties for the sharing of profits in different form for different projects. In respect of the OC and LC projects, the Defendant claims that they were short term management agreements, whereby the Plaintiff agreed to provide part-time staff to the Defendant, and the Defendant agreed only to pay specified fees to the Plaintiff for its provision of staff.

5.  There could be no doubt that the burden is on the Plaintiff to prove the existence of the Agreement on a balance of probabilities. This is accepted by the Plaintiff. It is not for the Defendant to prove its alternative account of its relationship with the Plaintiff, as it claims. The Plaintiff does not dispute this.

Whether there was an Agreement

6.  The trial of the first preliminary issue on the existence of the oral Agreement depends on the credibility of the witnesses in their different and rival accounts of the events, determined by the Court’s assessment of the inherent probability or otherwise of the parties’ assertions, and whether these assertions are consistent with the parties’ conduct and the contemporaneous documents. The Court bears in mind the fact that the witnesses are giving evidence on events which had occurred over 10 years ago. Their recollection can be less than perfect. Contemporaneous documents created in the course of the projects are likely to be more reliable as reports of the events, unless there is evidence that such documents have been tampered with or are falsified. There is no such suggestion in this case.

7.  On behalf of the Defendant, Counsel has emphasized that the Agreement was not recorded in writing of any form, and that there was no mention made of the Agreement in any of the contemporaneous documents or communication between the parties. I accept the submissions made on behalf of the Plaintiff, that by virtue of the prior dealings between Mr Kwong of the Plaintiff (“Kwong”) and Mr Chan of the Defendant (“Chan”), the parties had trusted each other and may have been content to rely on any verbal arrangement as may have been made between them. However, I agree with Counsel for the Defendant, that what is more important in this case is that the contemporaneous documents in this case in fact contradict the Plaintiff’s assertions as to the existence and terms of the Agreement as relied upon by the Plaintiff. This will be elaborated upon below.

8.  What is more important is that for the Court to find a valid, binding and enforceable Agreement, the Plaintiff must prove that the parties had concluded an effective agreement on the fundamental and essential terms. The Defendant contends that there is no such agreement as the terms alleged by the Plaintiff are lacking in essential matters such as the duration of the Agreement, the share of capital required from each party, and the cost of management and administrative work of the projects to be borne by each party. The Agreement claimed to have been concluded between Kwong and Chan was lacking in essential terms and was void for uncertainty. According to the Defendant, what was agreed allegedly between Kwong and Chan in 2009 only constituted a conditional agreement, which was subject to further negotiation and agreement on the essential terms by the parties in the future as and when a particular project should emerge.

9.  As pleaded in paragraph 4 of the Statement of Claim, the Agreement contains the following express terms:

(1) When the parties jointly prepare a tender for a project, the parties intend the project, if so awarded, to be subject to the Agreement.

(2) Once the project is successfully awarded to the party submitting the tender as the Leading Party, the other party shall cooperate with the Leading Party to jointly complete the project.

(3) The Leading Party shall be responsible for the communication with the employer and other relevant parties of the project and prepare the summary of expenses incurred by the parties in completing the project.

(4) After deducting all expenses, the profit of the project shall be equally divided between the parties.

10.  In his witness statement, Kwong did not add to the terms of the alleged Agreement. He only claimed that when he spoke to Chan in about April 2009, the Agreement proposed by him and agreed to by Chan was that the party which had approached the outsider for the project would take lead, the Plaintiff and the Defendant would jointly tender, and jointly complete the project when the tender was accepted. Kwong accepted that they had not discussed how the capital contribution would be shared, as they expected that the expenses of the project such as labor costs, cost of materials and cost of site management could be paid from the project income.

11.  In cross-examination, Kwong accepted that what was contemplated in 2009 was that when a project materialized, the parties would discuss and agree the logistics, and on how to complete the work. He also accepted that amongst the terms to be discussed and agreed would be the capital injection to be made by each party, and the work to be contributed by each. He claimed that this would follow the pattern adopted by the Plaintiff and the Defendant in their past dealings, when they had worked on different projects before the Agreement.

12.  Significantly, Kwong himself claimed that what had first been proposed to Chan, in early April 2009, by Kwong’s colleague (Ken Ng) on Kwong’s instructions, was a framework agreement, or letter of intent, only. However, according to Kwong’s witness statement, the terms proposed by Ken and allegedly accepted by Chan under the framework agreement were exactly the same as those Kwong claimed to have been agreed between himself and Chan later in April 2009: namely, joint preparation of tender, joint completion after a successful tender, and equal sharing of profits and losses. Nothing further had been agreed between Kwong and Chan in April, to render the Agreement alleged any more detailed or concrete than the framework agreement reached between Chan and Ken.

13.  On Kwong’s own evidence, therefore, what was agreed between Kwong and Chan was only a framework agreement, subject to further negotiation and agreement on terms such as capital contribution, or an agreement to agree to “cooperate” in the completion of the project, without actual agreement on the exact detailed terms of cooperation. The terms on how the parties would cooperate, the parties’ work and capital contribution, and when capital was to be injected were all lacking but essential as was demonstrated when dispute later arose in relation to the work to be contributed by the Plaintiff in the LC project, and in relation to when funds had to be paid for the ISL project (included in paragraph 6 of the Statement of Claim).

14.  Even if, as Counsel for the Plaintiff argued, the Agreement was enforceable as an agreement to agree on the precise terms as to pricing or cost of the parties’ work, and their respective contribution to the projects jointly tendered, such Agreement is only consistent with the parties intending to enter into ad hoc agreements for individual projects as they arise, and which they agree to jointly tender for. Bearing in mind the nature of the projects intended to be undertaken, and the different scale of the projects that may be involved, it is not probable that the parties as commercial businessmen would have agreed to be bound on indefinite terms as to payment of capital and sharing of profits, when the nature of their work contribution and capital outlay are uncertain. When the parties do agree to jointly tender for a project, that would be the time when they would be expected to discuss and then agree on the work each party would undertake, and the capital and expenses to commit to, from which they can decide whether the share of profit and loss would be commercially worthwhile. In short, the evidence leads to the conclusion that there was no concluded and final agreement reached between the parties in April 2009, as contended by the Plaintiff.

15.  The contemporaneous documents produced in evidence support the conclusion reached as to the absence of the Agreement alleged by the Plaintiff. On the LC project, the share profit summaries and the financial statements issued in 2013, 2015 and 2016 all refer to management fees as the Plaintiff’s contribution to or share in the project, and none of the documents support the Plaintiff’s claim for half share of the profits from LC. The Plaintiff’s invoices likewise referred to “management fees” for the LC project. The profit summary prepared by the Plaintiff in April 2013 referred not to its share of 50% of the profit from the LC project, but to 11% share of profits based on the parties’ respective expenses incurred. Kwong has not given any satisfactory or credible explanation for such contradiction to the Plaintiff’s claim, and I consider the excuses he made to be incredible and unsupported by the documents. According to Chan, the reference to the 11% related to discussions which had taken place between the parties, as to the possible payment to the Plaintiff of a bonus, on top of payment for the management staff provided by the Plaintiff for LC (as was the Defendant’s case).

16.  Likewise, for the OC project, the invoices issued by the Plaintiff and the share profit summaries, dated 2013, 2015 and 2016, all referred to management fees for the Plaintiff’s provision of staff and management services. None of these documents made any reference to the Plaintiff’s half share of the profits.

17.  The above adequately disposes of the first preliminary issue, which makes decision on the second and third preliminary issues unnecessary. Even if there was an enforceable and concluded Agreement made between the parties in April 2009, it is clear from the evidence that the OC project does not fall within the ambit of the Agreement as alleged by the Plaintiff. On the Plaintiff’s case, the Agreement applies to projects in which the parties jointly made the tender (paragraph 4(a) of the Statement of Claim). On Kwong’s evidence, the tender for the OC project was made solely by the Defendant. It was only after the project was awarded to the Defendant that the parties started to negotiate the terms of cooperation. The OC project does not comply with the condition for the application of the Agreement as contended by the Plaintiff. As for the LC project, the net profit summaries prepared by the Plaintiff show that whatever was the initial arrangement, the parties had altered their arrangement for the Plaintiff only to provide management services and to charge therefor.

Observations on the evidence

18.  In the consideration of the evidence, I accept the submissions made on behalf of the Defendant in the following respects. First, the hearing in September 2019 was for trial of the preliminary issues as to the existence and scope of the Agreement. Chan was cross-examined on the figures in the accounts prepared for the projects. To the extent that he was not able to explain the figures in detail, I accept his explanation that he was and had been prepared and happy to defer to the evidence of his accountants, if the matter should proceed to a full trial on quantum and damages.

19.  Second, despite the submissions made on behalf of the Plaintiff, that the Defendant’s own employees (Ting the contract manager and Frankie the senior project manager) had affirmed the existence of the profit sharing agreement between the Plaintiff and the Defendant on the LC project, the evidence of Ting and Frankie were not, in fact, to such effect. Ting only stated that he had been told by Chan that the Defendant and the Plaintiff “would work together as joint venture and jointly complete the renovation project” for LC, and that he did not know the details. As for Frankie, his evidence simply was that Chan had told him that the Plaintiff and the Defendant were “business partners” for the LC project. These assertions of the Plaintiff and Defendant working in joint venture and being business partners scarcely support the Plaintiff’s claim, of the Agreement to share the profits on the terms Kwong alleged.

20.  Finally, I agree with Counsel for the Defendant on the entirely unsatisfactory nature of the evidence of Kwong and Ken as to the existence and making of the Agreement in early 2009.  The only evidence from the Plaintiff, on the negotiation and conclusion of the verbal Agreement with Chan, is that of Kwong and Ken. In his witness statement, Kwong claimed that he had asked Ken to inquire with Chan as to whether Chan was interested in making joint tenders, joint completion of the project and sharing of loss and profits, and Ken later informed him that he had spoken to Chan, and that Chan had indicated interest. Kwong then referred to his own discussion with Chan, when he repeated the offer and terms mentioned by Ken. The evidence from Kwong, on Ken’s discussion and agreement with Chan, is accordingly hearsay.

21.  On Ken’s part, however, he did not give any direct evidence as to his discussion and alleged agreement with Chan in early 2009. He only referred to Kwong’s witness statement, and confirmed the truth of its contents, without any elaboration on or independent account of his meeting with Chan. I have placed no weight on Ken’s evidence at all (Ho Sing Yin v Chan Yiu Ling HCA 90/2010, unreported, 13 July 2012).

Conclusion

22.  For the reasons set out in the foregoing paragraphs, I find that there was no Agreement concluded in the terms alleged by the Plaintiff, and as pleaded in paragraphs 3 to 5 of the Statement of Claim. I also find that neither the LC nor the OC projects fell within the Agreement, as alleged.

23.  The Defendant has confirmed that it will not pursue its counterclaim if the Court should find against the Plaintiff on the existence of the Agreement. Accordingly, the findings made in this Judgment should dispose of the entire action including the counterclaim.

24.  The costs order nisi that I make is that the Plaintiff should pay to the Defendant the costs of the entire action including the counterclaim, with certificate for Counsel.