LO KWOK HUNG t/a GAR WING HUNG KEE CONSTRUCTION COMPANY v. KWAN LEE CONSTRUCTION COMPANY LIMITED

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. Both parties in this action were concerned with the construction of a slatted factory for the Housing Authority at Cheung Sha Wan. The defendants were, I think, the main contractors on the site. The plaintiffs were specialist sub-contractors concerned with the supply of ready-mixed concrete. The dispute arises between them on the construction and effect of a price variation clause in their contract.

2. The contract is dated 25 May 1983. It is in the form of a letter addressed by the plaintiffs to the defendants, and countersigned as accepted and confirmed by the defendants. It is for the supply and placing of approximately 40,000 cubic metres of ready-mixed concrete. The contract specifies four different mixes, and a given price per cube is fixed for each mix. It is made clear that the plaintiffs are buying ready-mixed concrete from Glorious Concrete Ltd. They are not making it themselves. It is inferential from that, and indeed shown by the parallel contract that the plaintiffs would be buying the contract concrete from Glorious at a delivered measure. In contrast, the payment provision in this contract is based upon volume, "as calculated from the drawings or measurements taken from the actual structures whichever is the bigger quantity." I.e. the plaintiffs were going to be paid on measured volume.

3. Then I come to the all important variation clause which is Clause 2F. It reads as follows:-

"Material index are based on the ex-quarry prices of Anderson Quarry of HK$50.00 per tonne of 20 mm. and 10 mm. coarse aggregates and HK$52.00 per tonne of crushed fine. Cement are based on the Asano Bulk Cement ex-works at the rate of HK$390.00 per tonne. Any variation in the said aggregate and cement prices, our company will absorb the first 5% up or down of each change in aggregate and cement prices, and the rest will be borne by the defendants as mentioned in material index."

The whole argument turns upon that particular clause.

4. In relation to it, the plaintiffs' submission is that only two things are necessary. First they say, that they have to show there has been an increase in index prices, within the meaning of that clause, over the prices stated in it. Secondly as from the date of such increase, having absorbed the first 5%, (the calculation being based upon the original index price stated in that clause) they are entitled to recover the balance from the defendants. That should be calculated in this way, by taking the total increased weight of the specific ingredients, as supplied, in the total quantity of ready-mixed concrete. It is the plaintiffs' submission that if they can show these two things, they are entitled to an increase price, as a direct result of this contract variation clause.

5. The defendants on the other hand accept that the plaintiffs must show the first stage. And they do not dissent from the method of calculation asserted at stage 2. But they said two more things are necessary. First, it must be shown not simply that there has been an increase in the underlying prices of one or more of the material stated, but that that must be related to the prices Glorious charged the plaintiffs for the ready-mixed concrete; and it must be shown that there is a direct causal connection between the increase in the price of the underlying materials and the corresponding increase of Glorious' price to the plaintiffs. Finally, they say, that the plaintiffs must also show that the materials which were used during the period of change relied upon, were bought respectively either from Anderson Quarry or from Asano Bulk Cement. The sting of that submission is this. Although the cement seems to have been bought from Asano from start to finish, as from January 1985, a substantial quantity of aggregates and fines were bought not from Anderson but from a quarry in Macau.

6. At the outset I have to resolve those issues on the construction of this clause. Before doing so, I think it is necessary to look at the position in the market in Hong Kong at the time this contract was made. Upon the evidence that I have heard, it seems to me apparent that the word 'index' had acquired something of a term of art in the construction industry in Hong Kong at that time, particularly or certainly in relation to the commodities with which I am concerned i.e. aggregate and cement. Taking cement first of all, there exists, as I understand it, a Cement Manufacturers' Association which periodically comes together to consider the sufficiency of the then basic price. If the Association decides that some alteration is necessary, the alteration is in fact published through Green Island Cement. But it was emphasised to me that it was an Association price not simply a Green Island price. Then I was told as from the date of publication, that price becomes the (and I emphasise the definite article) index price. As from that date, all cement suppliers tend to offer their cement at that basic price. The same is true, I was told in the aggregate market. Here the market leader is Anderson Quarry mentioned in the contract. It is closely associated with another firm called Asia Stone Co. Ltd. They are both subsidiaries in the Hutchison Group. Anderson is, I was told, accepted as the market leader, and when Anderson's price goes up, all the other quarry owners move in concert.

7. Now, there are three aspects of this which seem to me material to this case. The first is that this index is a basic asking price. It is a basic market price. It is the price at which all suppliers tend to start. And it is also probably the maximum market price in the sense of no one can live in the market who was trying to sell for more. Secondly, this is purely a price and it carries no indication of source at all. It is intended to be a market price to cover the whole market, and it is a price at which anyone will normally be able to acquire that material from anyone in that market.  The third thing to note is that this is not necessarily the actual price anyone pays. It is the initial asking price, perhaps the maximum. But everyone in the market buying, has different market strengths and skills. Some buying very large quantities, may well be able to get a discount, others may be able to get a discount in respect of cash. So it is a concept rather than a reality.

8. These three factors seem to me important, when one comes back to the construction of clause 2(F). Looking at the words used by the parties, and putting, I think, a generms construction upon them, because the grammar is not, perhaps perfect, I think it is apparent, first of all that the parties were trying to provide for a base price for materials. They were facing up to the problem of anyone who tries to draft such clause, of trying to get some defined public, or quasi public listing, upon which to base themselves. They not unnaturally took the index price in the Hong Kong sense. When the draftsman uses this phrase 'material index', I think it is really a form of shorthand for saying there are three indexed materials for the purposes of this contract, which are to be regarded as indexed for the purposes of this contract under these descriptions and under these prices.

9. As far as the aggregate is concerned, they chose the market leader 'Anderson' and no difficulty arises. In respect of cement, they chose a market follower, Asano, not the market leader. I therefore have to consider what is meant by a material index based on an Asano price. I think it must be an Asano price which can still be described as an index price. It would be, if it followed the Green Island price, because that is the index price. I do not think it can mean any Asano price, which is special to any customer or actual to a customer, and particularly any Asano price which is special or actual to Glorious. It seems to me that that is the starting point, the way in which one has to look at these words to begin with. That leads one to the prima facie conclusion, that these words operate whenever there is an alteration in a material index price which answers that description: that nothing more is necessary: and that if there is things happen, the price variation clause bites. As it is a calculation of price, you can refer it a debt calculation and not a damages assessment.

10. In particular, it does not seem to me that any particular source of material is called for by these words. That seems to me inconsistent with the concept of index itself. These persons are named as representatives of the market price but not as specific suppliers. I do not think it is necessary in order to operate this clause, to prove that the aggregates and the cement came from any particular named source. The index price is a market price, not a special price from any particular person. That is why one finds the phrase 'based upon' used in this clause.

11. Finally it does not seem to me that it is either necessary or indeed possible to start looking at Glorious's actual prices to the plaintiffs. This clause is put in a contract which shows clearly two things. First of all, the plaintiff is never going to be paying any of these prices for raw materials at all. The party who is going to buy these raw materials is Glorious.  Secondly, the plaintiff is going to be paying Glorious, not by the weight of raw materials but by a delivered volume. In those circumstances it seems to me that it would lead to total confusion if one tried to relate this clause to the Glorious price.

12. There are very powerful arguments for not doing so; powerful arguments for keeping this assessment quite separate from any Glorious price variation. First because it is based upon a market concept, a public concept, a notorious price concept, which is quite different to the ruling price which may have been agreed on a totally different basis between Glorious and the plaintiffs. Secondly, it is important that a clause is based upon a public price rather than a private one, where you have got a clause which says each variation has got to be looked at separately, and 5% of that is to be absorbed by one party, because the parties between themselves may agree, as indeed happened here, many more variations than were in fact publicly announced by the basic materials supplier.

13. So I construe this clause in the way in which I am invited to do so by the plaintiffs. I think that this is simply a price variation clause which applies when a variation takes place in the basic material index prices within its meaning. Therefore I turn on now to consider whether in fact any such variations took place.

14. The claim here relates to variations which it is said took place in respect of both aggregates and cement, from 5th October 1983, which was some months after the contract delivery started. The very first delivery in fact was before the date of the letter, it was 31st March. The first variation claimed is in respect of aggregate and fines. Here the concept is really very simple. The plaintiffs are able to point to the named figures of $50 and $52 in the contract, which were in fact based on Asia Stone rather than Anderson. This is an error in the defendants' favour. Then they ran point to 2 circulars Nos. 28 and 29 of the 30th September 1983 when Anderson and Asia moved in unison and pushed up the price of both aggregate and fines to $57 a tonne. It seems to me that that increase is sufficient to trigger this clause.

15. Secondly, and on the same date, there was a variation in the price of cement. Here the problem for some time in the course of the evidence, appeared rather more complicated. We know from a document dated 10th December 1982 that the Nihon basic published price as from that date was HK$398 per metric tonne (ex our Silo). Indeed that is the apparent basis for the figure in the contract. Again come 5th October, or shortly before 5th October, it is apparent that the cement suppliers generally were not satisfied with the then existing price structure. As from 5th October, (although the document is not in front of me, I find it is a fact) Green Island put up the basic index price by a figure of $60. This meant that the basic index price for cement went from $390 to $450.

16. At the same time Nihon looked at its relationship with Glorious. Although before that date, Nihon's basic price had been $390, it had been allowing Glorious a very substantial discount. Glorious is very concerned about disclosing its actual prices, but very sensibly, and by agreement with counsel, documents were produced simply to me and to them this morning which show the actual figures. It is quite unnecessary for me to mention the figure. All I need to say in it was very much less than $390. When Nihon then came to look at its costings in September 1983, it decided to do two things. It increased its basic price in two stages. First of all, it added the $60 which was the increase in the index as published or to be published by Green Island. In addition it decided that it had been over-generous in the past to Glorious, and decided to knock $30 a tonne off the discount. The result is a letter dated 28th September from Nihon to Glorious, in which it says that the price will be increased by $90 per metric tonne en the existing prices. That letter is totally correct as the documents I saw this morning demonstrated. As from the 5th of October, Nihon's actual price to Glorious went up by $90.

17. The claim as originally formulated by the plaintiffs was based upon that $90 figure. The arithmetic went like this. Look, before it was $390; you then add $90 to $390, and the index price becomes $480.  It is quite apparent from what I heard today that that is not the right approach.  The letter is totally correct.  The existing price went up by $90.  The effect on the index, price properly so called, in my judgment was it went up by $60. That curiously was the way in which Glorious's personnel read the letter when they were passing on this increase to the plaintiffs themselves.  As a result of that, they increased the price, their Glorious price to the plaintiffs, by the equivalent of $60 a tonne.  In the context of the variation clause in the contract before me, I have no doubt at all that there was a variation as from 5th October, in what can be called the index price, or if you prefer it, the Nihon index price. But that increase was $60 and not $90.

18. It follows in my judgment that the plaintiffs' claim is made out upon the amended basis advanced this morning by Mr Woo, which substitutes (I am looking at what has been called Table A in Bundle A) which substitutes the figure of $40.50 for $70.50 under the heading of cement in that table. Because all the quantities figures, and the weight proportion figures in this table are accepted. If you make the substitution I have just mentioned, the increase in respect of cement comes out at $447,300.75 and the total variation comes out at $642,987.19. It seems to me that by operation of this variation clause that that is the sum to which the plaintiffs are entitled to judgment,

19. There has also been an argument about interest.  I have no doubt about my jurisdiction to award interest, in the circumstances of this case, at the same time as I am giving judgment. It also seems to me to be right to make an award of interest here, because although the plaintiffs originally, in my judgment, overcalled their hand, they have still recovered a substantial sum, and conversely the defendants' main defences based upon reality rather than concept, in my judgment have failed. The first question is the starting date. The claim was initially formulated on 30th December 1983. There was then a good deal of discussion. I think that a fair date to take for the initial payment on account which should have been made at that time, is 1st April 1984. I think that interest should run from 1st April 1984 to the end of that year, on my judgment sum, at half a commercial rate. I define 'commercial 'rate as 2% over prime rate for the time being, and invite the parties to arrive at some detailed or average calculation for that period. As from 1st January 1985 to today, it should be at a commercial rate on that sum.