RE HONG KONG CONSTRUCTION (WORKS) LTD.

HCCW 670/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 670 OF 2002

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D E C I S I O N

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1. This is an application taken out by Hong Kong Construction (Works) Limited ("the Company") to strike out the petition to wind up the Company presented by Bachy Soletanche Group Limited ("the petitioner") on the ground that the same is an abuse of process, there being a bona fide dispute on substantial grounds as to the alleged debt on which the petition is founded.

2. The debt in the petition is for the sum of HK$6,693,517.75. This sum is said to be due to the petitioner under a sub-contract ("the Sub-contract") for bored piling and barrette foundation works for the west nullah wall at the Siu Hong Station of the Kowloon Canton Railway Corporation ("KCRC") West Rail Project. The Company was the principal subcontractor for piling works to the main contractor on the project, the HK ACE JV ("the Main Contractor"). The petitioner was one of the piling sub-contractors of the Company.

3. It is asserted by the petitioner that the parties have agreed that the petitioning debt is due as an "agreed final account sum", pursuant to an agreement contained in or evidenced by a letter dated 7 February 2002 from the Company to the petitioner. The Company had not paid the amount due. As a result, a statutory demand was served by the petitioner's solicitors on 23 May 2002. The petition was presented on 24 June 2002.

4. The Company denies that there was a binding agreement for an "agreed final account sum". It is contended that there was nothing more than a provisional agreement on the value of the work done at the relevant time, and that this was subject to the assessment of contra charges due to the Company and liquidated damages for delay to the Sub-contract works. In accordance with the financial assessment and payment procedure adopted by the parties, it is asserted that a payment certificate was required to be issued by the Company before it could be said that any sum was agreed to be due. No such certificate was issued in respect of the petitioner's application for interim payment No. 12.

5. Further, it is alleged by the Company that certain items should be deducted from the amount claimed by the petitioner, and/or the Company is entitled to set off certain sums against the petitioning debt. These items may be grouped under the following heads:

(1) out of tolerance barrettes in the sum of HK$1.5 million;

(2) contra charges in the sum of HK$1,100,437.25;

(3) adjustments to provisional final account being HK$4,051,615.59; and

(4) liquidated damages at HK$3,747,465.00.

The total of the above items is HK$10,399,517.84, which exceeds the petitioning debt by HK$3,796,000.09.

The legal principles

6. Before I go to the facts, it would be convenient to set out the legal principles on the court's approach where a debt is bona fide disputed on substantial grounds so that the petition should be struck out on that basis. The relevant principles may be stated as follows:

(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, "substantial" means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company's evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward "sufficiently precise factual evidence" to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely "raising a cloud of objections on affidavits" or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.

(The above principles are taken principally from Re ICS Computer Distribution Ltd [1996] 3 HKC 440; Re Welsh Brick Industries Ltd [1946] 2 All ER 197; Re Claybridge Shipping Co. S.A. [1997] a BCLC 572; Re a Company No. 006685 of 1996 [1997] BCC 830).

(5) If there is a debt which in part above the statutory minimum is indisputable, a petition can validly be presented even if the debt as claimed in the petition is for a larger sum, part of which is bona fide disputed. The court would not as a general rule strike out a petition or restrain its advertisement even though the petition also refers to sums claimed by the petitioner in relation to which there is a dispute (Re Tweeds Garages Ltd [1962] Ch. 406 at 411 to 414; Re Taylor's Industrial Flooring Ltd [1990] BCC 44 at 48H; Re Pendigo Ltd [1996] BCC 608 at 610B to D).

(6) Where a company does not or cannot dispute the petitioning debt, but puts forward a counterclaim which is disputed, on an application to strike out the petition or to restrain its advertisement, it could not be said that the petition is an abuse of the process of the court, even though the existence of the cross-claim may be relevant to the exercise of the court's discretion on the hearing of the petition. After advertisement of the petition, the views of all the creditors who appear on the petition will be a material consideration to be taken into account (Re a Company No. 006273 of 1992 [1992] BCC 794 at 795B to 796B; Re Pendigo Ltd, supra. at 610F).

The background

7. The background facts and matters not in dispute may be stated as follows.

8. In April 2000, the Company engaged the petitioner as its sub-contractor for the construction of bored piles (these are cylindrical piles) and barrettes (these are rectangular-shaped piles) at the Siu Hong Station of the KCRC West Rail Project. The Sub-contract was contained in the following documents:

(1) a letter dated 27 March 2000 from the petitioner to Hong Kong Construction (Holdings) Limited, the parent company of the Company, with a price and quantity build up, a sub-contract offer dated 28 March 2000 ("the Sub-contract Offer"), a layout plan and a programme;

(2) a letter dated 31 March 2000 from the petitioner to the Company;

(3) a letter dated 7 April 2000 from the petitioner to the Company;

(4) a letter dated 14 April 2000 from the Company to the petitioner accepting the offer;

(5) a letter dated 14 April 2000 from the petitioner to the Company confirming acceptance by the Company; and

(6) the Sub-contract Agreement between the parties (see the Sub-contract Agreement, Second Schedule, Part I listing the further documents forming part of the Sub-contract).

9. The Sub-contract was a measurement and value contract with a cap on the value of the barrettes, being HK$50,318,506.50. If the measured value of the barrette works is greater than the cap, the amount paid will be HK$50,318,506.50. If the measured value is less, the saving will be shared between the Company and the petitioner. Any increase in quantities required due to requirements beyond those allowed for in the Barrette Detailing Design Statement will be re-measured and paid for as additional works (see the letter dated 7 April 2000 from the petitioner to the Company, and the Sub-contract Agreement, Third Schedule, Part I).

10. Other relevant provisions of the Sub-contract are as follows:

(1) The petitioner shall execute the Sub-contract works in accordance with such programmes as the Company may from time to time be obliged to comply with and without delay, except such delay as may be expressly sanctioned or ordered by the Company (the Sub-contract Agreement, clause 6.3).

(2) If the petitioner shall be delayed in the execution of the Sub-contract works by, inter alia, any circumstances or occurrence entitling the Company to an extension of its time for completion of the works under its contract with the Main Contractor, the petitioner shall be entitled to such extension of the date for completion as may in all circumstances be fair and reasonable (the Sub-contract Agreement, clause 6.4).

(3) The petitioner shall not less than 7 days before the first calendar day of each month submit to the Company a written statement of the petitioner's assessment of the value of all work properly done under the Sub-contract and of all materials delivered to the site for incorporation in the Sub-contract works. Within 58 days of the presentation of the payment application by the petitioner on the specified date, there shall be due to the petitioner in respect of the value of work and materials included in a valid statement, payment of a sum calculated in accordance with the rates and prices specified in the Sub-contract, but subject to the deductions of previous payments and of retention monies (the Sub-contract Offer, clause 3.0; letter of acceptance dated 14 April 2000 from the Company to the petitioner; the Sub-contract Agreement, clauses 15.1 and 15.2).

(4) In the event of the Company withholding any payment, it shall notify the petitioner of its reasons in writing as soon as is reasonably practicable (the Sub-contract Agreement, clause 15.3).

(5) In the event that the petitioner commits any breach of its obligations under the Sub-contract, the Company shall be entitled to withhold or defer payment of such part of any sums otherwise due to the petitioner in respect of any losses, costs, claims or expenses made, incurred or suffered by the Company as a result of such breach. The Company's rights in this respect shall not be limited to losses, costs, claims or expenses actually incurred at the time of such set-off, but shall extend to potential losses, claims or expenses reasonably anticipated by the Company or intimated to it by the Main Contractor or by any other person (the Sub-contract Agreement, clause 16.1).

(6) In the event that the Company fails to pay the petitioner any amount due within 30 days of the last date upon which the same ought to have been paid in accordance with the Sub-contract, then provided that after the expiry of the said 30 day period the petitioner shall have given the Company notice requesting the payment to be made and the Company shall have remained in default for a further 14 days, the petitioner shall be entitled to suspend the execution of the Sub-contract works or to terminate the Sub-contract by giving further notice to the Company. The bona fide exercise by the Company of either a right of set-off or counter-claim or a right under or in connection with the Sub-contract to deduct amounts from monies otherwise due shall not be treated as a failure by the Company to make payment for this purpose (the Sub-contract Agreement, clause 18.6).

(7) Retention monies will be 10% up to a maximum of 5% of the Sub-contract Sum of HK$72,105,463.77 (the Sub-contract Offer, clause 4.0; the Sub-contract Agreement, Third Schedule, Parts I and II).

(8) Liquidated damages for delays are limited to HK$20,000.00 per day, and the total aggregate of liquidated damages under the Sub-contract is limited to 5% of the Sub-contract Sum (the Sub-contract Offer, clause 6.0).

(9) The Sub-contract Agreement and the documents referred to in it as comprising the Sub-contract constitutes the entire agreement and understanding between the parties (the Sub-contract Agreement, clause 23).

11. The petitioner commenced the Sub-contract works in May 2000 and made a total of 12 applications for payment. The first application was made in June 2000 and was settled by the Company. The second to 11th applications were made between June 2000 and mid 2001. Payments on these applications were made on behalf of the Company by the Main Contractor or by another main contractor on a different project.

12. The 12th application for interim payment was made on 3 October 2001 and this covered works completed up to 30 September 2001. By then, the Sub-contract works had been completed save and except for four pad footings mentioned below, so this application was in effect the final account submitted by the petitioner. The amount claimed based on the petitioner's measurement was HK$11,570,197.72. On 3 November 2001, the Company issued a valuation for interim certificate No. 12 with an amount due on the certificate in the sum of HK$4,828,270.45. Unlike interim certificates Nos. 1 to 11, which were paid, this certificate was only signed by the person who prepared the certificate; the other two places for signature marked "checked by" and "certified by" were left blank.

13. Following a meeting of the parties on 10 December 2001 to discuss the 12th application for payment, on 14 December 2001 the petitioner sent the Company a draft final account statement for the latter's review. According to that statement, the outstanding sum due to the petitioner was HK$6,693,5176.76, and this had included the sum of about HK$4.8 million in interim certificate No. 12. The petitioner indicated in its covering letter that it would appreciate release of the outstanding amount before 31 December 2001. The effect of this would appear to be that the petitioner had accepted a substantial reduction of the amount claimed, from HK$11.5 million in the 12th application for payment to HK$6.69 million.

14. The next important letter is the letter dated 7 February 2002 from the Company to the petitioner. The caption of the letter is "final account" and the letter reads as follows:

"Further to the various meetings and telephone discussions between your Mr Yves Chiffoleau [the managing director of the petitioner] and our Mr H Yoshida [the project director and a director of the Company] and Mr John Champion [the chief quantity surveyor of the Company] held regarding the account for the above and the payment of outstanding monies for completed works, we confirm the following.

It was agreed that the outstanding balance for completed works is as indicated on the attached account summary i.e. HK$7,633,517.76. This amount includes a provision for construction of pad footings, which have not yet been constructed. It also includes an amount for contra-charges, which have not yet been finalised but is the amount that we agree is correct to date.

We are unable to make any further payment until the pad footings are complete and until we have agreed and received the final payment from the Main Contractor.

If the above principles are acceptable to you we will be pleased to arrange a meeting soon after the coming holidays to discuss the future steps to be taken to resolve this matter."

15. The author of this letter, Mr Yoshida, has accepted in his 2nd Affirmation filed on 13 November 2002 that he was wrong to state in the letter that any payment to the petitioner is dependant on an agreement and receipt of final payment from the Main Contractor.

16. Attached to the letter was a statement of account giving the calculations of the "final account" and the "outstanding amount due". They may be summarised as follows:

Total bill for barrettes	HK$50,636,215.85
Total bill for bored piles	HK$24,314,095.59
Total for barrettes and bored piles	HK$74,949,311.44
Less retention monies (to be paid later in accordance with contract)	(HK$3,448,582.00)
Less contra charges (may be subject to change pending who supplies materials for pad footings)	(HK$13,546,848.84)
Less amount paid (certificate No. 11)	(HK$50,320,352.84)
Total outstanding amount for final accounts (includes pad footings)	HK$7,633,517.76
Less demobilisation for barrettes (to be paid on completion)	(HK$500,000.00)
Less construction of pad footings (to be paid on completion)	(HK$440,000.00)
Outstanding amount due	HK$6,693,517.76

The sum of HK$6,693,517.76 is the subject of the statutory demand made on 23 May 2002 and upon which the petition is founded.

17. The pad footings mentioned above were proposed by the petitioner as an alternative to the construction of barrettes BA21, 23, 24 and 25. The proposals were made as a result of the extremely high rock level in the ground conditions in the area and because of access constraints due to the presence of a temporary footbridge and its foundations. The petitioner submitted the proposals of the alternative design to the Company on 27 March 2001. The petitioner anticipated that if this was approved by the engineer, the pad footings would be constructed by the Main Contractor when the temporary footbridge had been removed and the bulk excavation completed to a reduced level. On that basis, the petitioner requested the Company to delete the four barrettes in question from its scope of work and the lump sum in the Sub-contract.

18. It was only on 13 March 2002 that the engineer approved the alternative design for the pad footings to replace the four barrettes. At that time, the site was not available to the petitioner as the temporary footbridge was not removed.

19. On 22 April 2002, the petitioner's solicitors sent a letter to the Company demanding payment of HK$6,693,517.76 within 14 days. The Company replied on 29 April 2002 disputing that the amount was "presently due" to the petitioner and stated its position as follows. Firstly, the petitioner had not completed the Sub-contract works in that the four pad footings had not been constructed and such work had been substantially delayed. It was asserted that arising out of such delay, the Company might face damages and costs from the Main Contractor. In the circumstances, it would not be appropriate to release further payment to the petitioner until such works are completed and the Company's liabilities with the Main Contractor are established. Secondly, it was alleged that the works completed by the petitioner "contain numerous defects", "being primarily substandard founding material below certain barrette foundations", and such defects are "serious and sufficiently [sic] so to preclude an entitlement to payment for those foundations". Further, the Company is also exposed to possible contra charges from the Main Contractor arising out of the defects. Thirdly, it was alleged that the "final account" was only "provisionally agreed" with the petitioner and the account would undergo an internal audit check and verification by the Company's consultant quantity surveyor pending formal certification.

20. The petitioner's solicitors responded on 7 May 2002 refuting the allegation of any delay in the construction of the pad footings being attributable to the petitioner and sought particulars and reasons relied on for this allegation and the allegation of defects. It would appear that the Company made no reply to this letter.

21. On 13 May 2002, the petitioner served a notice on the Company to suspend work under clause 18.6 of the Sub-contract Agreement due to non-payment of the amount as demanded in the letter of its solicitors. As mentioned earlier, the statutory demand was served on the Company on 23 May 2002 and the petition for winding-up was presented on 24 June 2002.

22. On 10 July 2002, the Main Contractor issued an instruction to the Company to carry out the construction of the pad footings and stated that the location in question "will be made available to [the Company] on 15 July 2002". The instruction was passed on to the petitioner by the Company the same day. The petitioner did not proceed with the work, as it had served a notice of suspension.

23. On 29 August 2002, the Company's solicitors wrote to the petitioner's solicitors referring to the statutory demand and stating that the debt is disputed. Further, it was alleged that the petitioner was indebted to the Company in the net sum of HK$6.2 million odd (which has since been reduced to about HK$3.7 million as mentioned earlier). The Company's solicitors enclosed a notice of dispute as a preliminary step under the Sub-contract Agreement for the dispute to be referred to arbitration.

24. On the same day, the Main Contractor wrote to the Company stating that it had agreed to the suggestion of the Company to delete the construction of the pad footings at BA21, 23, 24 and 25 from the scope of works of the Company and that it had contacted the petitioner who had agreed with the Main Contractor to perform the work subject to some conditions. The deletion was acknowledged by the Company on 13 September 2002.

Was the final account sum agreed

25. The Company has alleged that the "final account" in February 2002 was but a provisional agreement on the value of work done, as a number of items of work and the full extent of contra charges had not yet been determined, and the amount of liquidated damages had not yet been assessed. Hence, no money is payable at all on the provisional agreement for the final account. What took place between the parties during December 2001 and February 2002 were merely attempts to "settle the final account on a commercial basis" but these discussions did not result in any agreement.

26. It is further alleged that there was a procedure adopted by the parties for the application, assessment and payment of monies for work done by the petitioner, which would require a payment certificate to be issued by the Company for payment to be made to the petitioner in accordance with the payment certificate. It is contended by the Company that in the absence of such a payment certificate issued by the Company in respect of the petitioner's application for interim payment No. 12, even where an assessment of the application has been made, such an assessment would be provisional, pending the evaluation of the completed works, the costs of remedial works and other loss and damage caused by the petitioner which would be deducted from the provisional assessment.

27. As regards the value of the four pad footings provided for in the accounts agreed in February 2002, it is pointed out by the Company that at that time, no instruction had been given to the petitioner as yet to change from construction of the four barrettes in question to pad footings and in requesting for the change, the petitioner bore the sole risk that the alternative proposal of pad footings might not be acceptable to the Main Contractor and the engineer and assumed the sole responsibility of all consequences for the change requested.

28. The alleged practice of a payment certificate issued by the Company as a condition for payment is not provided for in the Sub-contract. Indeed, this would appear to be inconsistent with the relevant contractual provisions that I have set out earlier, which laid down clearly the time within which necessary steps are to be taken to give rise to a payment obligation of the Company. I agree with the submissions of Mr Yu, SC, who appeared for the petitioner, that the payment obligations as provided in the Sub-contract are clear and unequivocal, and the fact that interim certificate No. 12 issued by the Company on 3 November 2001 was only signed by the person who prepared it and not signed by the two persons who should have checked and certified the document would not have altered the contractual position. I am satisfied that an obligation to pay had arisen within 58 days of the presentation of the petitioner's application for payment on 3 October 2001, which was assessed by the Company on 3 November 2001 to be about HK$4.8 million.

29. As for the letter dated 7 February 2002 from the Company to the petitioner, it seems to me that the wording is sufficiently clear that there was an agreement that "the outstanding balance for completed works is as indicated on the attached account summary i.e. HK$7,633,517.76", and although the amount for contra charges has not been finalized, the amount of contra charges as included in the account "is the amount that [the parties] agree is correct to date". There is no justification for reading into the letter any indication that the account is provisional and subject to deduction for liquidated damages and other loss and damage as subsequently claimed in the letter of the Company dated 29 April 2002, which was only written in response to the letter of demand of the petitioner's solicitors. Further, as I have stated earlier, it has now been accepted by the Company that it was not correct to say in the letter that any payment to the petitioner was dependant on an agreement and receipt of final payment from the Main Contractor. It is also pertinent to note in the letter that it was stated that "[the Company is] unable to make any further payment until the pad footings are complete". The reason for not making further payment was the inability of the Company to do so, not that the petitioner was not entitled to further payment.

30. I attach no significance to the fact that when the account was agreed in February 2002 providing for an amount to be deducted for the pad footings which had not been constructed, the Main Contractor had not yet approved the alternative design of the pad footings to replace the four barrettes in question. Although approval was given by the engineer only on 13 March 2002, it would appear from the correspondence between the Company and the Main Contractor dated 8 February 2002, 22 February 2002, 5 March 2002 and 8 March 2002 that it was anticipated that pad footings would be constructed in lieu of the barrettes.

31. Last but not least, there are the retention monies which amounted to HK$3.4 million as stated in the account attached to the letter of 7 February 2002, and which would be paid to the petitioner subsequently in accordance with the Sub-contract. If there were potential losses, claims and expenses not within the reasonable anticipation of the Company at the time it was obliged to make payment to the petitioner for the Company to invoke its right to withhold or defer payment of such sum as might be appropriate under clause 16.1 of the Sub-contract Agreement, the Company could have resort to the retention monies in this situation. What is not permissible under the Sub-contract is for the Company to withhold or defer payment even though there were no potential losses or claims within its reasonable anticipation when it came under an obligation to pay. In the event of the Company withholding any payment, it is obliged under clause 15.3 of the Sub-contract Agreement, to notify the petitioner of its reasons in writing as soon as is reasonably practicable. Here, the obligation to pay at least HK$4.8 million had arisen in early December 2001. It was not until 29 August 2002 when the Company's solicitors wrote to the petitioner's solicitors that proper notice under clause 15.3 was given to the petitioner.

32. On the existing evidence, I find that there is clearly a liability to pay the amount demanded by the petitioner which was the agreed final account sum.

33. I turn to consider the items that the Company claims should be deducted or set off from the amount claimed by the petitioner.

Out of tolerance barrettes

34. Three Non-conformity Reports dated 27 November 2001, 14 January 2002 and 26 February 2002 were issued by the engineer in respect of 24 barrettes built by the petitioner which are out of tolerance. By the reports, the Company was requested to submit remedial action plan for the engineer's review. The Company passed on the reports to the petitioner for its action.

35. The petitioner engaged its own designer, Maunsell Geotechnical Services Ltd ("Maunsell"), to examine the out of tolerance barrettes. Maunsell issued a letter dated 24 January 2002 giving their opinion that "the as-built deviations would unlikely cause any adverse effect on the system". A copy of the letter was given to the Main Contractor who wrote to the Company on 7 February 2002 stating that a statement from Maunsell that the out of tolerance barrettes are "unlikely to cause any adverse effect" is unacceptable. The Company was requested to obtain a "clear statement from the designer that the barrettes will perform as per design" or to provide remedial measures. Apparently in response to this letter, Maunsell issued a letter dated 21 February 2002 giving its opinion that "the as-built deviations will not cause any adverse effect on the system". The petitioner did not propose any remedial measure for these as-built deviations.

36. It is alleged by the Company that the potential liability in respect of the out of tolerance barrettes has not been resolved and that it is "still possible" that these barrettes may require reinforcement to correct the matter. The Company estimates the costs of modifications and additional attendance by the Company, the Main Contractor and the engineer to correct or compensate for the as-built deviations of the barrettes to be in the region of HK$1 to 1.5 million. There is no explanation how this estimated amount of additional costs is arrived at.

37. The petitioner has denied that there is any real potential liability for the out of tolerance barrettes found by the engineer, and pointed out that the Main Contractor has incorporated these barrettes into the construction of the superstructure for the West Rail project. The petitioner also relies on a letter issued to the petitioner by the Main Contractor dated 13 September 2002 confirming that save for minor issues as detailed in a schedule attached to the letter, which had been the subject of discussions between the Main Contractor and the petitioner and would be addressed by the petitioner to the satisfaction of the Main Contractor and the engineer, the works undertaken by the petitioner as the sub-contractor of the Company "have been completed to a satisfactory standard".

38. On the above evidence, I am unable to find that there is substance in this cross-claim or that the amount claimed in the sum of HK$1 to 1.5 million is a genuine estimate of a potential liability with a real basis. In view of the fact that no remedial measures were required to be proposed by the petitioner or the Company after the second letter of Maunsell, that the barrettes have been incorporated into the superstructure of the project, and that the Main Contractor has issued a letter expressing satisfaction with the work completed, I am inclined to think that it would be rather remote for the Main Contractor to pursue the Company for any loss and damage arising out of the as-built deviations of these barrettes and for the Company to pursue the petitioner in turn for such claims.

39. Apart from the 24 barrettes, the Company has by its letter dated 12 July 2002 informed the petitioner that remedial reinforcement was required to be carried out for three other barrettes BA125, 126 and 127 on an urgent basis as notified by the Main Contractor on 8 July 2002. The petitioner declined to carry out remedial work and stated in its letter to the Company dated 15 July 2002 that it has suspended work under clause 18.6 of the Sub-contract Agreement. The remedial work for these barrettes was carried out by the Company and the cost thereof will be included in the contra charges against the account of the petitioner. It is not, however, apparent from the Company's evidence what these charges are estimated to be. It is also alleged in the letters of the Company's solicitors to the petitioner's solicitors dated 29 August 2002 and 13 September 2002 that the petitioner has failed to carry out grouting work to barrette BA143. There is no suggestion that the retention monies of HK$3.4 million would not be sufficient to cover the cost of the remedial work that has been done by the Company and the grouting work that has not been done.

Contra charges

40. The Company claims that it is entitled to deduct or set off various claims and expenses being contra charges that have not been included in the agreed final account in February 2002. The total sum is HK$1,100,437.25 and it is made up of the following items.

(a) Two defective piles

41. By two letters from the Main Contractor to the Company both dated 7 March 2002, the Company was notified that piles P126 and P132 were constructed out of tolerance and for interim purposes it was estimated that the additional costs to be incurred for remedial work would be in the amount of HK$9,412.00 for each pile, to be deducted as a contra charge against the Company's account. The total amount is HK$18,824.00.

42. The Company was only advised of this contra charge after the final account was agreed with the petitioner on 7 February 2002. As this was not within the reasonable anticipation of the parties when the final account was agreed, the claim could be met out of the retention monies, which are more than adequate for this purpose.

(b) Remedial work to pile P407

43. The amount claimed is HK$50,000.00. By a letter of the Main Contractor to the Company dated 21 December 2001, the Company was informed that the Main Contractor had recently commenced a review of the contra charges previously notified and deducted from the Company's account and that the additional costs of remedial work to pile P407 were revised to HK$50,000.00. The previous estimate for this item was HK$30,000.00. Mr Smith, SC submitted on behalf of the Company that as the increase in this item was not taken into account when the Company agreed the final account with the petitioner in February 2002, the Company is entitled to deduct this item as a contra charge. Mr Yu submitted for the petitioner that as this item was known to the Company when it agreed the final account, the Company is not entitled to claim a contra charge for this item so as to undermine the agreement in the final account.

44. For present purpose, it is unnecessary to resolve the question if the Company is entitled to claim in respect of this item. Assuming that the Company is entitled to recover, this item could also be met out of the retention monies.

(c) Backfilling

45. By a letter of the Main Contractor to the Company dated 19 April 2001, the Company was informed that the Main Contractor had undertaken backfilling work at pile P151 and the additional costs charged to the Company's account were estimated at HK$7,000.00. Mr Smith made a similar submission that there is nothing in the letter of 7 February 2002 to preclude the Company from claiming this item as a contra charge.

46. This is an insubstantial item and again assuming in the Company's favour that it is entitled to recover, the claim could be met out of the retention monies.

(d) Design conflicts

47. The Main Contractor wrote to the Company on 22 June 2002 allocating a sum of HK$588,250.00 as contra charge for the Company's account as a result of design conflicts between barrettes and nullah wall propping slab. By a letter from the petitioner to the Company dated 15 July 2002, the petitioner has repudiated liability for this item, alleging that according to its offer letter dated 31 March 2000 its scope of work clearly excludes any responsibility for the barrette alternative design, including incorporating that design into the conforming design.

48. This item was raised after the final account was agreed in February 2002. As in the foregoing items, assuming that the Company is entitled to recover, I am of the view that it should be paid out of the retention monies.

(e) Checking fees

49. The Main Contractor notified the Company by a letter dated 25 June 2002 that HK$633,000.00 would be charged to the latter's account being checking fees from 22 March 2001 onwards. The Company has calculated the checking fees attributable to the works carried out by the petitioner to be HK$224,123.25.

50. Again, it seems to me that this item, which was raised after the final accounts were agreed, should be paid out of the retention monies.

(f) Pressure grout

51. This item is HK$24,000.00. I have no information whether this item was known to the Company when the accounts were agreed in February 2002.

(g) Defective piles P267 and P281

52. This item is HK$188,240.00 and this was raised in a letter dated 14 March 2002.

53. In summary, the amounts claimed as additional contra charges, if they are recoverable against the petitioner, should be met out of the retention monies. In any event, the total amount claimed in this respect is only HK$1,100,437.25 and is insufficient to extinguish the petitioning debt of HK$6.69 million.

Adjustments to provisional final account

54. The Company's consultant quantity surveyor, Pearce, Lau & Associates ("PLA") has carried out an internal audit check and verification of the work done by the petitioner and has advised the Company that certain adjustments should be made to the account agreed in February 2002 as follows.

(a) Deletion of four barrettes

55. As stated earlier, four barrettes being BA21, 23, 24 and 25 were not constructed and the engineer had approved the alternative design for the construction of four pad footings. It is alleged that the petitioner's gross final measured value for the barrettes and the balance of the final account assessment should be reduced by at least HK$1.09 million, being the price for the installation of four barrettes.

56. On behalf of the petitioner, it was submitted that this claim is misconceived as the figure in the final account has excluded the estimated cost of the pad footings which were in substitution for the four barrettes. Hence, to give another deduction would be allowing the Company to renege on its agreement in February 2002 and to permit double accounting. I accept this submission. I am not persuaded this is a cross-claim of substance.

(b) Deduction of enlarged bases

57. It is asserted that the final account wrongly included a sum of HK$800,000.00 for enlarged bases to bored piles and that the petitioner has no entitlement for additional payment for the construction of enlarged bases to bored piles under the Sub-contract as this was not included in the pricing document of the petitioner. The petitioner was advised of this by a letter of the Company dated 20 June 2001.

58. The amount of HK$800,000.00 for enlarged bases is the subject of specific agreement in the final account, notwithstanding the earlier letter of the Company in June 2001. Again, this seems to me to be an attempt to renege on the final account agreed in February 2002. I do not think this item is the subject of a bona fide claim.

(c) Saving for 25 barrettes

59. Of the 166 barrettes measured by the petitioner in the final account, only 141 barrettes were constructed. The difference in number, being 25 barrettes, is due to the redesign of the original barrettes by the petitioner to construct a single larger barrette in place of two individual barrettes in those cases. This has led to a saving in costs and PLA has estimated the saving at HK$3.7 million. As the Company is entitled to a half share of any saving pursuant to the letter of the petitioner to the Company dated 7 April 2000, it is alleged that the valuation of the work done by the petitioner should be reduced by HK$1.85 million.

60. On behalf of the petitioner, it was submitted that this claim is misconceived as it was provided in the letter dated 7 April 2000 that there would be a sharing of any saving only if the measured value is less than the cap on the value of the barrettes, being HK$50,318,506.50. In this case, as the cap was exceeded, the provision for the sharing of saving does not apply.

61. Mr Smith recognised the validity of this argument but contended that the cap would not have been reached in this case if a revised lower rate had been used for measuring the larger barrettes, in accordance with clause 9.2 of the Sub-contract Agreement (that in respect of variations, the value shall be such as is fair and reasonable in all the circumstances) and this would have resulted in the saving of HK$3.7 million as estimated by PLA. It is not however the rationale of PLA that different and lower rates should be applied in the measurement and valuation of the larger barrettes so as to arrive at the saving of HK$3.7 million. As explained in the 2nd affirmation of Mr Yoshida, the saving is estimated on the basis of the fixed plant costs for the 25 larger barrettes, which are assessed at HK$173,479.00 per barrette and multiplied by 25 to give a gross saving of HK$4,336,750 and then discounted to HK$3.7 million to allow for a margin for extra fuel that may have been used by the petitioner because of the larger barrettes.

62. I am not persuaded that this is a serious cross claim made bona fide.

(d) Administrative charge for certain contra items

63. PLA has advised the Company that an additional charge of 15% should be applied to the additional contra charges that have not been included in the final account and the estimated contra charges in respect of certain defective barrettes, so as to cover the overhead and administrative costs that would be incurred by the Company for these items. The amount arrived at is HK$311,615.59.

64. I agree with Mr Yu that there is no contractual basis to support the recovery of this item. There is no provision in any of the documents forming the Sub-contract for the Company to levy an administrative charge for items charged against the petitioner's account.

65. In summary, it has not been demonstrated by the Company that it has a substantial cross-claim in respect of any of the items sought to be made as adjustments to the final account.

Liquidated damages

66. The Company's claim for liquidated damages for delay arises in this way.

67. It is alleged by the Company that the petitioner was responsible for the delay arising out of and caused by the alternative design of the pad footings in substitution for barrettes BA21, 23, 24 and 25. It is asserted that there were no key dates for the Sub-contract works but rather one completion date, being 17 December 2000, according to the revised programme attached to the letter dated 27 March 2000 from the petitioner to the parent company of the Company. No extension of time had been actually granted by the Company, but it is recognised by the Company that extension of time might have been granted to the end of April 2001. Hence, the total length of delay is 488 days, calculated from the end of April 2001 to the end of August 2002.

68. According to clause 6.0 of the Sub-contract Offer, liquidated damages are limited to HK$20,000.00 per day, and the total aggregate of liquidated damages recoverable under the Sub-contract is limited to 5% of the Sub-contract Sum. But for the 5% limit, the total amount of liquidated damages for 488 days would have been HK$9,760,000.00. As it is, the amount recoverable is reduced to HK$3,747,465.57, and this is the amount claimed by the Company for liquidated damages.

69. The petitioner has contended that the claim for liquidated damages is wholly without merit for a number of reasons. Firstly, the petitioner could not have been responsible for the delay as it is shown in the contemporaneous documents that access to the site for the works in question could only be given after 15 July 2002. Secondly, it is clear from the letter issued by the Main Contractor to the petitioner dated 13 September 2002 that the Main Contractor has no intention of claiming any damages against the Company in respect of the delay for the construction of the pad footings so the Company could not have pursued the petitioner in turn for damages arising out of such delay. Thirdly, insofar as any claim might be predicated on the basis of the pad footings being unsuitable, there is no evidence to support this allegation. In any event, the Main Contractor had deleted the pad footings from the scope of work of the Company on 13 September 2002. Fourthly, the amount claimed as liquidated damages is wrongly calculated, as 5% of the Sub-contract Sum should be HK$3,448,582.00.

70. It is necessary to examine the contemporaneous correspondence to see whether this claim is of any substance.

71. On 20 November 2000, the petitioner wrote to the Company giving information on the attempts made to resolve the problem in high rockhead area, which had caused the petitioner to have doubts on the suitability of constructing barrettes in such area. Under a covering letter dated 27 March 2001, the petitioner submitted to the Company drawings for proposed pad footings in lieu of barrettes BA21, 23, 24 and 25 for the approval of the engineer, as I have mentioned earlier. It would appear from the letter that at that time, due to the presence of a temporary footbridge, it would not be possible to construct the barrettes in question or the pad footings in lieu, if and when approved by the engineer.

72. On 23 April 2001, the petitioner wrote to the Company again stating that due to the temporary footbridge, it was impossible to construct the four barrettes and gave notice under clause 6.4 of the Sub-contract Agreement seeking an extension of time. The petitioner also referred to its proposal to replace the barrettes with pad footings and mentioned that for financial and practical reasons, it would be prudent for the Main Contractor to carry out the work on the pad footings.

73. On 29 May 2001, the petitioner wrote to the Company stating that it was given to understand that the technical and financial proposal of the pad footings submitted by the petitioner had not been forwarded by the Company to the Main Contractor. The petitioner held the Company responsible for any adverse consequence which might result from the Company's delay in submitting the design proposal to the Main Contractor.

74. The Company responded by a letter dated 8 June 2001. It was stated that the petitioner's proposal to construct pad footings in substitution of the barrettes in question would require the express instruction from the Company and for the Company to support the proposal, further information was required. The Company alleged that contrary to the letter of the petitioner dated 23 April 2001, the area in question was made available to the petitioner on 1 March 2001 in that the footbridge could have been diverted had the petitioner made a request for diversion through the Company but the petitioner had failed to make such a request. The Company held the petitioner liable for any additional cost or damages suffered by the Company as a result of the delay in completion of the works. Further, the Company instructed the petitioner to complete construction of the four barrettes without further delay, but without prejudice to this instruction, and if the petitioner should still wish to pursue the alternative of pad footings, the petitioner was requested to submit a revised financial proposal of the pad footings for its consideration.

75. The matter did not rest with the letter of the Company in June 2001.

76. The next letter was a letter from the petitioner to the Company on 21 December 2001 putting on record that as of the date of the letter, the petitioner had still not been given access to carry out the pad footings, which had not yet been approved by the engineer. On 8 February 2002, the Company wrote to the Main Contractor putting on record that the working area for construction of the pad footings had not been made available to the Company. After a site inspection on 22 February 2002, the Company wrote to the Main Contractor on the same day again recording that the area for pad footings had not been made available and requesting seven days advance notice for mobilization. The site photographs taken on that day showed that the public was still using the footbridge which occupied the working area.

77. The Main Contractor replied on 5 March 2002 stating that they did not anticipate the temporary footbridge would be removed until 1 April 2002 and that they had taken note of the Company's correspondence and would give seven days advance notice for commencement of work as requested.

78. On 13 March 2002, the engineer approved the alternative design for the construction of the pad footings. The petitioner was informed of this on 15 March 2002.

79. On 19 April 2002, the petitioner wrote to the Company referring to the information received from the Main Contractor that the footbridge was to be removed in the coming week and requesting the Company to obtain from the Main Contractor their rolling programme regarding the removal of the footbridge and other works and other information as stated in the letter, to avoid any delay or disruption in carrying out the pad footings work. The Company passed on this letter to the Main Contractor on 24 April 2002.

80. On 22 April 2002, the petitioner's solicitors sent a letter of demand to the Company for payment of the amount in the agreed final account and as no payment was made, the petitioner served a notice on the Company on 13 May 2002 to suspend work.

81. The working area was not made available in April 2002 as envisaged. It was only on 10 July 2002 that the Main Contractor issued instruction to the Company to carry out the pad footings work and stated that the location in question would be made available to the Company on 15 July 2002.

82. As mentioned earlier, on 29 August 2002, the Main Contractor agreed to delete the construction of the four pad footings from the scope of work of the Company and contacted the petitioner directly to perform the works.

83. On 13 September 2002, the Main Contractor wrote to the petitioner confirming that as at the date of the letter, they have been unable to afford access to enable the pad footings work to take place and that "the delay in completing these works has had no consequential effect to follow on works". The Main Contractor further confirmed that they "have not and do not intend to levy any damages in respect of delay against [the Company] in connection with any of the foundation works undertaken by [the petitioner] on their behalf and/or the pad footings referred to".

84. It was submitted by Mr Smith that this letter of the Main Contractor should not be taken at face value as the petitioner has been in direct negotiation with the Main Contractor for the construction of the pad footings and the Main Contractor would have a vested interest in making statements to the petitioner to secure the continuing services of the petitioner on the project. Furthermore, the Company is currently pursuing claims against the Main Contractor in excess of HK$95 million, so the Main Contractor would have a motive to exert financial pressure on the Company and to put the Company into liquidation.

85. Save for the assertion in the letter of the Company dated 8 June 2001 that the footbridge could have been diverted on 1 March 2001 had the petitioner made a request through the Company, the evidence is all one way to the effect that the Main Contractor had not made available the area for the construction of pad footings even as late as September 2002. It is not without significance that correspondence was exchanged between the Company and the Main Contractor in February 2002 recording that the working area was not made available and this was at the time when the final accounts were agreed between the Company and the petitioner. If the Company had indeed considered that it was entitled to claim liquidated damages against the petitioner in respect of the delay in the construction of the barrettes or the pad footings, there is no reason why the Company would not have set off or attempted to set off such claim when the final accounts were agreed.

86. I do not agree with the suggestion that the letter of the Main Contractor dated 13 September 2002 is self-serving. If anything, it seems to me that the letter is against the interest of the Main Contractor in that there was a clear acknowledgment on their part that they had not given access for the pad footings to be constructed, that the delay had no consequential effect on the works to follow, and that they do not intend to claim damages against the Company in respect of such delay.

87. In view of the above evidence, it does not seem to me that the cross-claim for liquidated damages is of any merit.

Conclusion and orders

88. In conclusion, I am of the view that there is no genuine dispute on substantial grounds of the liability to pay the debt of HK$6,693,517.75 demanded by the petitioner being the agreed final account sum. As for the cross-claims raised by the Company, in respect of the claim for out of tolerance barrettes of HK$1.5 million, the adjustments to the final account in the total sum of HK$4,051,615.59, and liquidated damages in the amount of HK$3,747,465.00, I am not persuaded that these are bona fide claims of any merit or substance. That leaves the cross-claim for contra charges that have not been included in the final account in the amount of HK$1,100,437.25. I am inclined to think that if these items are recoverable from the petitioner, they should be met out of the retention monies of HK$3.4 million. If I am wrong about this in that there is a bona fide dispute that the additional contra charges should have been set off against the agreed final account sum, the balance of the debt for which there is no bona fide dispute is well above the limit for a statutory demand to found a petition.

89. In arriving at the above conclusion, I have not taken into account a "without prejudice" letter dated 24 July 2002 from the Company to the petitioner, which I have read de bene esse. It was contended by the petitioner that the letter should be admissible in evidence, as the letter could not be regarded as a genuine attempt to compromise a dispute, there being no evidence the parties were in negotiation at the time of the letter. It is not the case that the first letter which is intended to initiate negotiations will not be protected by the without prejudice privilege. From the tenor of the whole letter, I am inclined to agree with Mr Smith that it was written in a genuine attempt to initiate negotiations. I therefore rule the letter inadmissible in evidence.

90. For the reasons given above, I do not think the petition is an abuse of the process of the court. I dismiss the application of the Company to strike out the petition with an order nisi that the costs of the application should be to the petitioner in any event. I further order that the petition is to be restored for hearing at the call-over list on the first Monday after the handing down of this decision.