PRUDENTIAL PROJECT LTD v. LAU HON KWONG HENRY t/a HANG YU DECORATION CO

HCA 4403/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4403 OF 2002

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J U D G M E N T

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Background

1. The Plaintiff was a sub-contractor of Chun Fai Construction Company Ltd ("Chun Fai"), which was the main contractor of a residential project developed by the Sun Hung Kai Group at 1-3 Po Shan Road (the "Site"). The Defendant was a sub-contractor of the Plaintiff in respect of interior decoration and fitting out works at the Site (the "Works"). The terms of the sub-sub-contract, including a detailed breakdown of the scope of works and specifications, were set out in two quotations: the first quotation dated 14 October 2001 and a revised quotation including additional works dated 19 October 2001 (collectively called the "Contract"). There were three main categories of works: supplying and installing doors and woodwork, painting and installing bathroom accessories. The Contract price was $4,300,000 plus a further sum of $528,273 in respect of variation works. However, variation works to the value of $20,900 was cancelled. The Defendant commenced work in October 2001. The Plaintiff made a total of twenty-five periodic payments to the Defendant amounting to $4,080,326 as at 3 October 2002. These payments are not in dispute. In addition, the Plaintiff also paid a total of $879,940.70 on behalf of the Defendant in respect of materials and labour for painting work which formed part of the Works to be executed by the Defendant.

2. The Plaintiff's case is that the Defendant failed to progress with the Works diligently and regularly, the materials supplied, mainly the doors, were not of merchantable quality and the Defendant failed to carry out the Works with reasonable care and skill. Since June 2002, the Defendant was unable to pay his workers and his performance and progress deteriorated. The materials supplied to the Site were substandard and labour was inadequate. Despite repeated warning, the Defendant did not improve and did not rectify defective works. Eventually the Defendant abandoned the Site on 21 October 2002, owing wages to his workers. As a result the Plaintiff accepted the Defendant's repudiation of the Contract and completed the outstanding and rectification works and made various other payments on behalf of the Defendant. The Defendant denied the Plaintiff's allegations of delay, defective materials and workmanship. He claimed that Works had been executed in accordance with the Contract but were damaged by workers of the Plaintiff or those of its other sub-contractors. He further alleged that as the Plaintiff failed to provide financial support he was unable to carry out rectification work and it was agreed at a site meeting on 21 October 2002 that the Plaintiff would carry out rectification works itself. He denied having repudiated the Contract.

3. The dispute between the parties is a factual one. The parties' case stands or falls on my finding of the credibility of their witnesses. The Plaintiff called three witnesses: Miss Mak, Mr Patrick Lau and Mr Thomas Li. Miss Mak is the Plaintiff's Executive Director who was responsible, among other things, for overseeing all financial matters relating to the Contract. Mr Lau was the Site Supervisor who supervise the progress of the Works at the Site. He spent about 90% of his time at the Site. Mr Li was the Project Manager responsible for compiling the quotations and tender documents supplied to the Defendant which comprised of the bill of quantities, the special terms, additional terms, schedules, plans and drawings. He discussed the quotations and tender documents with the Defendant on a number of occasions on the telephone and at the Plaintiff's office. He was also responsible for overseeing the Defendant's payment applications. The Plaintiff's witnesses are all familiar with the Defendant, having known him in connection with other building projects. Their evidence is corroborated by contemporaneous site documents and records. I find them credible and have no difficulties in accepting their evidence. On the other hand, the Defendant's evidence is not so supported. I do not find the Defendant credible. His defence lacks conviction and does not appear to be bona fide. I do not accept his evidence.

Payment terms

4. The payment terms as such were not pleaded by the Defendant as a defence. They were raised by the Defendant to explain why he did not carry out rectification work necessitated by damage to the Works caused by workers of the Plaintiff or those of its other sub-contractors. In essence, the Defendant pleaded that he completed the Works in accordance with the contract. It was a term of the contract that the Defendant was responsible for providing protection for the finished Works. Thus, even if the Works had been satisfactorily completed in accordance with the contract, it remained the Defendant's duty to have the Works protected at least until delivery to the Plaintiff. The question of payment terms therefore does not arise. While some of the paintwork on the ceiling might have been damaged by the workers of other sub-contractors, the majority of the defects complained of by the Plaintiff was in relation to the woodwork, in particular the way the doors were finished for which the Defendant alone was responsible.

5. On the evidence, the parties have not reached any agreement as to the terms of payment. No payment terms were stipulated in the two quotations or other contract documents. According to Miss Mak, which was not disputed by the Defendant, the parties' past practice and therefore their understanding in relation to the Contract was that the Plaintiff would pay the Defendant as and when the Plaintiff was paid by its principal contractor and that payment would be calculated according to works done and materials delivered to the site and subject to the usual 10% retention held by the Plaintiff. These are the usual payment terms in the construction industry. In the absence of express provision and in view of their past course of dealing, I find these were the payment terms under the present Contract. But whatever may have been the terms implied into the contract, there was absolutely no room for an implied term that the Plaintiff shall finance the Defendant's performance of the Contract.

6. However, this mode of payment was not strictly followed as the Defendant had established long-term and satisfactory business relationship with the Plaintiff and as the scope of works was much larger than the Defendant had ever sub-contracted from the Plaintiff, the Plaintiff appreciated that the Defendant needed extra cash flow for manufacture of woodwork. Miss Mak was more relaxed in releasing payments to the Defendant. The Defendant's applications for payments were usually approved without verification from the site supervisor that works had been completed and/or a certain percentage of materials had been delivered to the Site, until at a later stage when the Defendant's performance became questionable. No retention money had been held by the Plaintiff. Thus, although Chun Fai paid the Plaintiff twice a month, the Plaintiff paid the Defendant whenever the Defendant submitted payment applications or approached Miss Mak. Payments were made as often as several times a month. When it became obvious that the Defendant did not have sufficient workers to perform the painting work and progress was far behind, with the Defendant's consent, the Plaintiff arranged for the Defendant's former painting sub-contractor to perform the painting work and paid for the materials and labour on the Defendant's behalf. Twenty five payments were made in the ten months ending September 2002 totalling $4,080,326 and five additional payments were made between August and October 2002 to cover materials and wages of the Defendant's employees. These payments were far in excess of the value of works carried out by the Defendant, even assuming the works were up to standard. I find that the relaxed way in which payments were made was the result of indulgence on the part of the Plaintiff rather than as a result of any payment terms under the Contract. In any event, as the Plaintiff had paid in excess of the contract sum, payment terms cease to be an issue at all. This shows the Defendant's complaint of lack of financial support is groundless and not bona fide made.

Doors and woodwork

7. The main complaint of the Plaintiff is that the doors supplied by the Defendant were substandard. The supply and installation of the doors formed the major part of the Works and accounted for $2,690,600 of the contract price. The quotations and special terms and additional terms contained detailed specifications for these doors and door frames. These specifications required Chun Fai to provide general plans for the doors from which the Defendant shall prepare shop drawings for approval by the architect. All doors shall be sanded and finished before delivery to the Site. Before installation, the door frames shall be painted with wood preservative.

8. The Plaintiff had the woodwork examined by Furgo Technical Services Limited ("Furgo") for preservative treatment. Prior to the examination, the Defendant acknowledged on the Plaintiff's site memo dated 29 July 2002 that he would be responsible for the costs of the examination if the woodwork failed the test. The result of the examination was negative. Though the Defendant insisted that he had treated the woodwork with preservative, he did not vigorously dispute the analysis by Furgo. As the woodwork had already been installed, the Plaintiff decided to accept the defect and did not claim any damages other than the costs of the analysis.

9. The major defects complained of are that the main door surfaces were ridged ("un-flat") and patterned with four and half pieces or six pieces of veneer instead of four pieces making the pattern unsightly and the vertical and horizontal members of the door frames were not properly jointed with 45 degree joint. There were problems with the main doors almost on every floor. The Defendant said the workmanship of the doors had been accepted by the Plaintiff before production started. However, the evidence was that in March 2002, the Plaintiff's and the Chun Fai's representative had visited the Defendant's factory in Dongguan with the Defendant to inspect the Defendant's woodwork. After the visit, the Plaintiff issued a site memo No. 13 dated 28 March 2002 with twenty-four photographs identifying the defects of the Defendant's woodwork and demanding rectification. This rebutted the Defendant's allegation that the Plaintiff accepted the workmanship of the doors. In another site memo dated 10 October 2002, the Plaintiff requested seventy-seven doors of various types to be replaced due to problems of the ridges and pattern. There were many more similar separate requests documented in the defect reports issued by Chun Fai. The Defendant ignored the requests. At a site meeting on 21 October 2002, the Defendant insisted that the Plaintiff provide additional finance by way of additional payment otherwise he would not order the replacement doors. As by that time, the Defendant had already been overpaid in excess of the contract sum and in view of the Defendant's various delay and unsatisfactory progress, the Plaintiff refused the Defendant's request. This triggered the Defendant's repudiation of the Contract.

10. Another serious complaint is that the colour of the doors and frames did not match. This was caused by the fact that some of the woodwork were painted in the Defendant's factory in Dongguan while others were painted locally at the Site. There are other complaints about damage, paintwork and workmanship in installation such as levelling, gaps and that the locks were not properly installed. There were about 800 items of complaints made by Chun Fai during the joint inspection on 26 October 2002 alone. Even assuming that many of these complaints were fault finding and frivolous, the number is still very substantial.

11. Chun Fai also discovered by sawing open some of the doors selected on a random basis that the inside of the doors were not made of solid wood as required by the contract document but by plywood. Chun Fai did not pursue the matter further, presumably because of the tight schedule. Thus it passed on the breach to the developer and ultimately to the purchasers. As the doors were manufactured by the Defendant's own factory, the inference is that the Defendant deliberately produced doors using substandard materials and veneer pieces of inappropriate size to cut costs. For the same reason, he did not apply preservative to the woodwork.

12. The Plaintiff's complaints are corroborated by the numerous contemporaneous inspection reports prepared by Chun Fai, the site memos issued by the Plaintiff to the Defendant and photographs. The Defendant's denial is just a bare denial without substance. I accept the Plaintiff's evidence that many of the doors supplied by the Defendant were of substandard quality and in breach of the quotations and contract documents. Altogether ninety-seven doors had to be ordered from Artwood Contracting (HK) Limited ("Artwood") to replace the defective ones manufactured by the Defendant and to provide for the insufficient number supplied by the Defendant. I am also satisfied that as a result of the Defendant's defective workmanship, the Plaintiff had to incur costs in refitting some of the doors and painting them.

Painting

13. Since June 2002, the Defendant failed to pay wages to his workers and was unable to provide adequate labour at the Site. By 5 September 2002, the Defendant was badly behind in painting work due to insufficient labour and Chun Fai demanded the Plaintiff to start the painting work. As the Defendant was unable to confirm when he would arrange for the painting workers to start the work, with the Defendant's consent, the Plaintiff arranged for one of the Defendant's former painting sub-contractor, Mr Choi, to take over part of the painting work from the Defendant on a sub-contract basis. Mr Patrick Lau obtained the contact telephone number of Mr Choi from the Defendant and made the arrangement. On 5 September 2002, the Plaintiff faxed a site memo to the Defendant informing him of the arrangement and inviting him to attend the Plaintiff's office for a discussion otherwise the Plaintiff would proceed with the arrangement. The Defendant did not respond. Accordingly the Plaintiff brought the arrangement into effect. Mr Patrick Lau prepared a schedule showing the number of workers employed and the number of days worked and requested the Defendant to acknowledge. Upon the Defendant's acknowledgement, the Plaintiff effected the payment and faxed the payment record and receipts to the Defendant for his record. The Defendant did not object to the deduction of these payments from the payments due to him from the Plaintiff. He also repaid an amount of $177,200 thus paid on his behalf to the Plaintiff. Despite the arrangement, the painting work was largely incomplete at the time the Defendant left the Site. I reject the Defendant's evidence and accept the Plaintiff's. I find that the painting work was incomplete and the Plaintiff had to incur costs to complete the outstanding painting work.

Bathroom accessories

14. The defective workmanship complained of is that some of the accessories were not properly insulated and that, in some cases, the marble works were damaged by the installation through want of care. These complaints were supported by the record of the conduction tests performed by Chun Fai and Chun Fai's site memo dated 8 October 2002 holding the Plaintiff liable for the damage to the marble works. In addition, the installation of these accessories was not completed by the time the Defendant abandoned the Site.

15. The Defendant said that the Plaintiff had not provided drawings in respect of the installation. He gave particular reference to the towel racks. This was denied by Mr Patrick Lau who said he had shown the drawings to the Defendant and explained to him the installation method. The fact that the majority of the accessories including the towel racks passed the conduction tests suggest that the drawings must have been supplied to the Defendant but were not followed by the Defendant's workers. The Defendant had complained to Mr Patrick Lau that it was difficult to follow the installation method as specified in the drawings. That is no defence. I find that these works were not completed nor carried out in accordance with the quotations and contract documents and the Plaintiff had to incur costs to complete the work and to rectify the defects.

Slow progress

16. Though there was no scheduled completion date under the two quotations, a sub-contractor is not to proceed with works at his own pace. He is under an implied duty to progress with work diligently and regularly and in accordance with the programme of the principal contractor. Evidence is lacking on the Chun Fai's programme of work. However, there are site memos from the Plaintiff requiring, for example, that all door frames be installed by 14 December 2001 and all doors be delivered by 22 April 2002 and certain doors be installed also by that date. In general, there was substantial delay by the Plaintiff and other sub-contractors of Chun Fai. Programme had been revised from time to time to allow the Defendant more time to complete various items of the Works. These revisions are documented. Eventually, 30 September 2002 was set as the overall completion date for the Works. The Defendant was unable to meet this completion date and abandoned the Site altogether on 21 October 2002.

17. One particular incidence of delay is that as a result of the Defendant's failure to meet the programme, fire service inspection was re-scheduled to 15 June 2002. The Defendant was informed to complete all fire service items by 10 June 2002. Again, the Defendant was unable to meet this dead line. This necessitated Chun Fai having to erect temporary cement partitions in some of the lift lobbies in lieu of the panels to be installed by the Defendant. Subsequently, Chun Fai invoiced the Plaintiff for costs of the cement partitions in the amount of $7,278.

18. The Defendant's slow progress was documented in Chun Fai's complaints and the Plaintiff's site memos to the Defendant. According to these documents and the evidence of Mr Patrick Lau, the slow progress was due to inadequate supervision, poor management and inadequate labour. Since the Defendant had difficulties in paying his workers in June 2002, he did not attend the Site regularly. There was no foreman in charge of the Defendant's work which resulted in a total lack of supervision and ineffective co-ordination which was left to a senior workman. This delay is not a material issue as there is no claim by the Plaintiff for penalty for delay in completion nor is there any evidence that the Plaintiff had paid any penalty to Chun Fai.

Breach of contract and repudiation

19. On 20 October 2002, the Plaintiff considered the Defendant's breach serious and outstanding work substantial. A large number of doors had to be replaced due to substandard workmanship, much of the painting work had not yet been completed and some of the bathroom accessories had not yet been installed. The Plaintiff had a meeting with the Defendant on 21 October 2002 to discuss remedial works. By that time, the Plaintiff had already overpaid the Defendant beyond the contract sum and refused to make any further payment. The Defendant confirmed that he had not ordered the replacement doors from his factory in Dongguan and offered no remedial actions to rectify the defects or assurance to complete the outstanding Works. Eventually, he agreed to vacate the Site.

20. The Defendant denied that the Works had not been satisfactorily completed. His defence is that he vacated the Site on satisfactory or substantial completion of the Contract. On the evidence, it is obvious that this is not the case. In addition, the Defendant had financial difficulties. He was unable to pay his workers since June 2002. He might also have under-priced the doors as compared with the price charged by Artwood. His position was further aggravated by his Dongguan factory producing doors with ridges and the incorrect number of veneer pieces which resulted in their rejection by Chun Fai.

21. I reject the Defendant's evidence. I accept the Plaintiff's evidence that the Defendant was in breach of the Contract in failing to progress with works diligently and regularly, in supplying defective materials and in failing to carry out the Works with reasonable skill. Eventually, he abandoned the Site when he realised that the Contract was no longer viable for him. By so doing, he evinced an intention no longer to be bound by the Contract. The Plaintiff is entitled to accept the Defendant's repudiation of the Contract.

Quantum of damages

22. As a result of the Defendant's breach, the Plaintiff had to complete the Works left unfinished by the Defendant and to rectify the Defendant's defective Works. As at 31 October 2003, the Plaintiff incurred $373,971.76 in completing the Works left unfinished by the Defendant and $1,112,974.40 in rectifying the defective Works done by the Defendant. These claims are supported by invoices and wage records. I allow them in full, i.e. $1,486,946.16.

23. In addition, to these costs, the Plaintiff claims 15% administrative charge on the above sum. This is to cover the Plaintiff's staff costs in administration and in the general supervision of the execution of the Works which would have been carried out by the Defendant. I do not consider the claim justified. Had the Defendant not abandoned the Site, the Plaintiff would still have to supervise the Defendant's performance of the contract and in carrying out rectification work during the defect liability period of one year. The Defendant's delay has caused additional supervision. I assess the additional supervision to be six man-months. At a monthly salary of $10,000, I award the Plaintiff $60,000 administrative charge.

24. Chun Fai deducted $7,278 from the Plaintiff in respect of the temporary cement partitions built in some of the lift lobbies due to the Defendant's delay in installing the panels in order to facilitate fire services inspection. The Plaintiff also paid a penalty of $1,000 for the Defendant's breach of safety regulation and $572 for Defendant's failure to remove refuse. I also allow the Plaintiff's claim in respect of these miscellaneous deductions and penalties in the amount of $8,850.00.

25. The Plaintiff incurred costs in testing the Defendant's woodwork for preservative treatment in the amount of $4,500. The Defendant had agreed to pay these costs if the woodwork did not pass the test. Accordingly, I also allow this claim in full.

26. The Defendant's workers filed claims against the Defendant, the Plaintiff and Chun Fai as their principal contractors with the Labour Tribunal for non-payment of wages. As a result, the Plaintiff was ordered by the Labour Tribunal to pay the wages as the Defendant's principal contractor pursuant to section 43C of the Employment Ordinance. These payments, which amounted to $278,497.59 are supported by orders of the Labour Tribunal and cheques. I allow this claim in full.

27. The Plaintiff claims to have paid $879,940.70 being advances for materials and labour made during the performance of the contract by the Defendant. Only a sum of $235,591.70 is in dispute. Having viewed the invoices and the payment record, I am satisfied that these amounts have been paid by the Plaintiff in settlement of the wages due to the Defendant's workers and in buying materials. In addition, the Plaintiff made twenty-five payments under the Contract to the Defendant in the total amount of $4,080,326. The total amount payable under the Contract, including the contract price and additional and variation works less cancelled works was $4,807,373 ($4,300,000 + $528,273 - $20,900). The amount over-paid was $152,893.70.

28. I assess the Plaintiff's damages to be $1,991,687.45 which is calculated as follows:

Costs of completing outstanding works and rectifying defective works	$1,486,946.16
Administrative and supervision charges	$60,000.00
Deductions by main contractor	$8,850.00
Costs of preservative treatment test	$4,500.00
Labour Tribunal pay-outs	$278,497.59
Over-payment	$152,893.70
Total :	$1,991,687.45
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Conclusion

29. Accordingly, I enter judgment in favour of the Plaintiff in the sum of $1,991,687.45 with costs and interest from 21 November 2002.