FALCON CONSTRUCTION ENGINEERING LTD v. KIRIN CIVIL ENGINEERING CONTRACTORS LTD

HCCT 11/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 11 OF 2003

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J U D G M E N T

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I.       Introduction

1.  Kirin engaged Falcon as sub-contractor for piling works at a Tai Po Kau building site.  The site comprised 4 areas of work. Of these, the trial has concerned 2: the Residential and Retaining Walls Areas (collectively, "the 2 areas").

2.  On 19 February 2002 by consent Falcon obtained interim judgment against Kirin for $1,409,791.96.  The balance of Falcon's claim, then in the sum of $117,057.50, was left for trial.  Execution on the judgment was stayed pending resolution of Kirin's Counterclaim, but on condition that Kirin pay $500,000 into court.

3.  On the eve of trial, Falcon abandoned its outstanding claim.  Thus, only the Counterclaim remained to be tried.  That left 3 broad issues:-

(1)     Whether Falcon was liable for a large quantity of piles in the 2 areas deviating from contractually permitted tolerances of 75 mm and 1°.

(2)     Whether Falcon was liable to Kirin for 63 days of delay on the project.

(3)     Whether Kirin was precluded from making any claim for pile deviation or delay by an alleged "Final Agreement" reached with Falcon on 5 October 2000.

II.      Background

4.  The project's developer was Maple Crest Development Ltd. ("the Employer").  The Employer engaged Kumagai Gumi (HK) Ltd., later known as Hong Kong Construction (Holdings) Ltd. ("HKC"), as Main Contractor.  The Employer used Maunsell Consultants Asia Ltd. as Engineer.  HKC employed Kirin as sub-contractor for site formation and piling work at the site.  Kirin in turn engaged Falcon for some piling work.

5.  By letter dated 29 December 1998 marked for the attention of Mr. Yum Yok Cheng (Kirin's manager), Falcon proposed to do the piling work at the Residential Area for $10,093,160.  Falcon stated that its price did not include "Setting out and Levelling" and "Monitoring Works" among other items.  Falcon's quotation specified that "quantities of work shall be measured according to actual work on site".  The quotation also assumed that the work involved driving a total of 3,687 m of H-piles.

6.  By letter dated 18 March 1999 also marked for Mr. Yum, Falcon offered to do the foundation works for the Retaining Wall Area for $3,021,260.  The quotation was later revised downwards. Kirin engaged Falcon as its sub-contractor for Retaining Walls Nos. 5 and 6 by letters dated 30 June and 2 November 1999 respectively.

7.  By fax dated 21 April 1999 Falcon provided Kirin with a programme PH-1 for the Residential Area.  PH-1 assumed a start date of 26 April 1999 for Blocks 2, 3 and 5; a 21 May 1999 handover for Blocks 12 and 15; a 1 July 1999 handover for Block 1; and a 10 July 1999 handover for the Kindergarten Block.  PH-1 gave a completion date of 22 September 1999 (150 days).

8.  At the bottom of PH-1, Falcon wrote the following:-

"Time is provisional and subjected to actual time taken by BD.

Schedule of Plant:

Block 2, 3 & 5              2 nos. Drilling Rigs, 1 no, of Crane

Block 1                         2 nos. Drilling Rigs, 1 no, of Crane

Block 12 & 15              2 nos. Drilling Rigs, 1 no, of Crane

Kindergarten                 2 nos. Drilling Rigs, 1 no, of Crane"

9.  On 7 May 1999 piling work commenced at the Residential Area.

10.  On 23 June 1999 Falcon submitted a revised programme PH-2 for the Residential Area.  That was based on a 26 April 1999 commencement date for Blocks 3 and 5; a handover of 28 June 1999 for Blocks 12 and 15; and an anticipated handover of 17 August 1999 for Blocks 1 and 2 and the uncompleted part of the Kindergarten Block.  The bottom of PH-2 contained a similar note to that under PH-1.  PH-2 envisaged completion on about 15 November 1999.

11.  On 11 December 1999 Falcon and Kirin signed a formal sub-contract for piling work in the Residential Area.  The contract sum was $9,386,638.80.  The sub-contract stated that "Setting out and levelling" and "monitoring works" were to be provided to Falcon by Kirin free of charge.

12.  The piling work had certain distinctive features.  It involved both vertical and raking piles.  The cut off level of many piles was below ground level.  Thus, upon completion of the piling work, many of the piles were buried underground and had to be uncovered before sub-structure construction could commence.

13.  Falcon had completed its piling work in the 2 areas on 1 March 2000.  On 9 March 2000 Falcon and Kirin agreed that a total of 4,593 m of pile had been driven in the Residential Area.

14.  Piling deviations were discovered in June 2000 after Kai Tai Construction & Engineering Co. Ltd. (the pile cap contractor) had moved into the site.

15.  HKC and Kirin undertook a joint survey of piles in parts of the Residential Area on 25 July 2000.  They conducted a survey of piles in the kindergarten block of the Residential Area on 3 November 2000.  These surveys confirmed that numerous piles deviated from contract specification.

16.  On 5 October 2000 there was a meeting among Mr. Nelson Ng Lee Chin and Mr. Edmond Leung of Falcon and Mr. Wong Hung To, Mr. Yum, Mr. David Lam Tin Hung and Mr. Barry Yeung Yau Lau of Kirin.

17.  Mr. Ng and Mr. Leung are Falcon directors, with Mr. Leung in charge of the management of the project for Falcon.

18.  Mr. Wong is Kirin's managing director.  Mr. Lam was Kirin's site agent for the project.  Mr. Lam was the quantity surveyor then working for Kirin.

19.  A dispute list prepared by Falcon was tabled for discussion.  The dispute list set out 5 items which one party claimed had to be paid by the other in relation to work done, omitted to be done, or wasted (as the case may be) in the course of the project.

20.  The meeting reached a compromise on how to deal with the 5 items.  On some items, Falcon yielded; on others, Kirin.

21.  Shortly thereafter, Mr. Yeung prepared a final assessment of agreed amounts for the Residential Area.  He gave these to Mr. Lam and Mr. Leung for signature.  The latter signed the assessment on about 6 October 2000.

22.  Mr. Yeung then assembled together the final assessments for the Elevated Road, Recreational Area and Residential Area works on the project.  On his own initiative, Mr. Yeung added a cover sheet to the documents entitled as follows:-

"FINAL AGREEMENT OF H-PILING WORKS AT

1)      RECREATION AREA (60 nos.)

2)      ELEVATED ROAD (32 nos.)

3)      RESIDENTIAL BLOCK (253 nos.)

         (1, 2, 3, 5, 12, 15 and KINDERGARDEN)"

Mr. Yeung provided a copy of the resulting bundle to Falcon for its records.

III.     Discussion

A.      Pile deviation

23.  The procedure for placing a pile was as follows:-

(1)    Kirin's surveyors worked out the design coordinates of the piles from working drawings.

(2)     Basing themselves on the design coordinates, Kirin's surveyors marked out a block with reference pegs to show where piles were to be placed.  For vertical piles, a peg identified the relevant spot. For raking piles, a peg would identify where the foot of a pile was to be, a second peg where the head was to be.

(3)     Falcon drilled a 630 mm diameter hole at a given pile location identified by Kirin's surveyors.  In the course of excavation, a temporary casing was gradually inserted into the ground down to rockhead level.

(4)     A hammer was inserted down the drilled hole and excavation continued to pile founding level.

(5)     An H-pile was installed into the hole.  The pile's position was inspected by Kirin's surveyors to confirm that the location conformed to design coordinates.

(6)     The hole was filled with grout forced down a tremie pipe.  While grout was being applied, the temporary casing was slowly extracted.  To overcome friction as the casing was removed, vibrators were used.

24.  Falcon accepts that a substantial number of piles deviate from the approved design in excess of the specified tolerance.  Falcon also accepts that the tolerance of 75 mm was incorporated into its sub-contract with Kirin.

25.  But Mr. Dawes (appearing for Falcon) submits that it is not liable because deviation could have resulted from a cause attributable to Kirin.

26.  In particular, the sub-contract expressly excluded setting out from Falcon's scope of work.  Kirin's surveyors were responsible for setting out.  Bad setting out (Mr. Dawes says) cannot be ruled out as a cause of deviation.

27.  Mr. Dawes says that Falcon erected piles in accordance with Kirin's setting out.  He stresses that Kirin's surveyors checked the installed H-piles immediately before grouting.  How then, Mr. Dawes asks, can Falcon be liable for deviation if it only followed Kirin's directions?

28.  Falcon's expert Mr. Colin Jesse suggests that it would take about 80 tons of force to move a 20 m long H-pile embedded in 10 m of soil and 10 m of granite over a distance of 100 mm.  In practice (Mr. Jesse thinks), there is no way that such force could be exerted by the casing extraction process.  The hoist or crane used to remove the temporary casing could only exert some 36 tons of force at best.

29.  Consequently, if piles were correctly placed before grouting and if casing extraction could not have disturbed piles significantly, setting out by Kirin (Mr. Dawes reasons) must be to blame for deviations.

30.  I am unable to accept Mr. Dawes' argument.

31.  Falcon contracted to produce a result.  It agreed that no H-pile would deviate from the designed locations beyond the permitted tolerance of 75 mm.  That did not happen.  It follows that Falcon is liable.  The reason why an H-pile deviated, whether due to conduct by Falcon or Kirin, whether by negligence or not, is irrelevant.  The question of fault does not enter into the equation.

32.  To show breach of contract, all that Mr. Lai (appearing for Kirin) needs to do is to establish the fact of deviation. He has done so.  The fact of deviation is not disputed.  Mr. Lai has discharged his burden.

33.  Even if it was open to Mr. Dawes to advance a positive case for pile deviation being due to Kirin's setting out, Mr. Dawes must at least show that setting out was to blame on the balance of probability.  I do not think that he has done so.  The best that can be said on the expert evidence is poor setting out cannot be excluded as a possible cause.

34.  Mr. Jesse inferred from his calculation that an 80 ton force was needed to move an embedded H-pile 100 mm, that deflection during removal of the temporary casing was "unlikely". But, as Mr. Lai points out, Mr. Jesse's reasoning makes certain assumptions.  Those assumptions may not have been valid in the present situation.

35.  For example, Mr. Jesse assumed that the pile was rigidly fixed at its foot.  In fact, as the casing was being  extracted, the pile would be surrounded by grout which would not yet have solidified.  The pile would not be wholly rigid.

36.  To take another example, Mr. Jesse was unsure how much force would have been applied by the crane or hoist being used to raise the temporary casing.  He suggested a maximum of 36 tons, but acknowledged that he had not specifically enquired about this from Falcon.

37.  At the end, Mr. Jesse could not rule out the possibility that a pile might deviate by a maximum of "2x" mm plus 10 mm.  The factor "2x" was used at trial as shorthand for the difference between the external diameter of the temporary casing (610 mm) and the cross-sectional diagonal of an H-pile (457.10 mm for the Kindergarten Block, 469.10 mm for other blocks in the Residential Area).

38.  If there had been a setting out error, one would expect the piles to deviate from design coordinates to a consistent direction and extent.  If there had been poor setting out, one would expect to see systematic error in the location of the piles.

39.  But Mr. Dawes accepted that in general terms the as-built pile locations deviated from design coordinates in random fashion.

40.  Mr. Jesse detected a consistent discrepancy of about 283 mm between the design coordinates used by the Maunsell and those used by Kirin when ascertaining the extent of pile deviation in Blocks 12 and 15.  He suggests that this shows systematic error on Kirin's part and thus raises a possibility of Kirin's setting out having been wrong.

41.  But Mr. Jesse could not say that the 283 mm discrepancy showed that Kirin's setting out of Block 12 and 15 was wrong on the balance of probability.  Error on the part of Kirin was only one of a number of possible explanations, including purely clerical error on Maunsell’s part.  None of these explanations could be said on the available evidence to be more likely than the others.

42.  Maunsell itself eventually appears to have acknowledged that Kirin used the correct coordinates and that Maunsell's coordinates may have been mistaken. 

43.  Mr. Barrett, Kirin's expert, checked the coordinates himself and did not think that there had been any 283 mm shift in the location of Blocks 12 and 15.

44.  In light of the evidence, I am not persuaded that a case has been made out on the balance of probability that Kirin's setting out was systematically wrong.

45.  That leaves the possibility of non-systematic error. 

46.  The pile deviations may simply have been the result (Mr. Dawes postulates) of Kirin's coordinates being so be-devilled by typographical and random errors.  In support Mr. Dawes points to the fact that Mr. Chan Wai Hing, Kirin's head surveyor had little formal training in surveying and the Tai Po Kau was his first piling project.

47.  I am willing to believe that Kirin's surveyors may have gotten some figures wrong through inadvertence.  Even Homer nods. Falcon is effectively submitting that Kirin's clerical and arithmetical errors were so extensive as to lead to widespread pile deviation.  Absent compelling evidence, I would find this difficult to accept.

48.  The fact that this was Mr. Chan's first piling job is neither here nor there.  Mr. Chan has been conducting survey work for some 20 years.  Mr. Chan was not at Tai Po Kau to do piling. He was surveying the site for the purpose of marking out pile locations.  That would seem to be a straightforward job, probably little different from what Mr. Chan had been doing day-in and day-out in the past.  The fact that the site was to be used for piling as opposed to some other purpose would have made little difference to the essence of the surveying to be done.

49.  Finally on liability, Mr. Dawes submitted that the Court should draw adverse inferences against Kirin because it had lost Mr. Chan's surveying log book.  Without the log book, it was not possible for Mr. Jesse to check whether the setting out had been done properly.  In those circumstances, Mr. Dawes argued Falcon had adduced the best evidence which it could to establish poor setting out by Kirin.  The Court could be bold and (Mr. Dawes contended) visit the consequences of the loss of the log book on Kirin.

50.  It seems to me that the loss of the logbook is a neutral matter.  For all one knows whatever it contained may have assisted Kirin, rather than Falcon.  Alternatively, the log book may have been completely useless in establishing anything.  I do not see how I can assume that, if the logbook had been available, its data would have favoured Falcon.  Nor am I able to say that its non-production was due to Kirin's inexcusable fault so that the Court is entitled to draw adverse inferences.

51.  It follows from the foregoing that Falcon is liable to compensate Kirin for the consequences of pile deviation.

52.  That leaves the question of the quantum of Kirin's damages.  Kirin in effect claims heads of damage as follows:-

(1)     Maunsell's design fee of $160,000 for remedial works.

(2)     The settlement amount of $1,500,582.24 paid by Kirin to HKC to cover:-

         (a)    $600,582.24 of additional building cost due to re-design of pile caps to take account of deviation; and,

         (b)   $900,000 liquidated damages (that is, $20,000 x 45 days) ultimately paid to Kai Tai for delay to the start of its works arising from re-design of pile caps.

53.  It seems to me that Kirin must be entitled to be reimbursed for Maunsell's fee of $160,000.  A direct and foreseeable consequence of the pile deviation is that the pile caps had to be re-designed.

54.  By the same token, the additional building cost incurred must also be a direct and foreseeable consequence of pile deviation.  The evidence here is that the project's quantity surveyor, WT Partnership, was prepared to assess a round figure of $600,000 for additional cost.  Kirin should be entitled to damages in that amount (rather than $600,582.24).

55.  I am not, however, persuaded that the $900,000 for Kai Tai was a direct and foreseeable consequence of Falcon's default. 

56.  There is no evidence, for instance, that Falcon was aware at the time of contracting of the amount of liquidated damages payable to Kai Tai. 

57.  Nor is it clear to me that Falcon would or should have realised at the time of contracting that pile deviation was only likely to be discovered by Kirin after the pile cap contractor had moved on site.  Although the cut-off levels of many of the piles were below ground, it does not follow from that alone that Falcon ought to have foreseen that deviations could only be detected after Kai Tai had taken possession and that Kai Tai would then be idle while remedial measures were undertaken.

58.  In those circumstances, I disallow the claim for $900,000.  Falcon's liability for pile deviation would therefore be $760,000.

B.      Delay

59.  Kirin calculates delay by reference to PH-2.  Kirin reckons that there has been 63 days delay and claims $244,364.90 as damages.

60.  Mr. Lai accepts that there was no express contractual provision as to Falcon's time for performance.  He says (and I do not think that Mr. Dawes disputes) that there was an implied term that Falcon was to proceed with due dispatch.

61.  In my view, Kirin has not made out a case for undue delay. I think that by completing its piling works by 1 March 2000 Falcon performed within a reasonable time.

62.  A number of factors contributed to Falcon taking longer than originally anticipated.  These factors were not due to Falcon's fault.

63.  The original handover date for Blocks 1 and 2 of the Residential Area was 17 August 1999.  In fact, I find that the blocks were handed over in 3 stages as follows:-

(1)     Block 2 was handed over on 22 September 1999.

(2)     Block 1 (20 piles) was handed over on 12 November 1999.

(3)     Block 1 (16 piles) was handed over on 19 February 2000.

64.  PH-1 and PH-2 were based on a total of 3,687 m of H-pile having to be driven.  In fact, 4,593 m of H-pile was used on the project.  This constituted an increase of 24.5%.

65.  It is true, as Mr Lai submits, that the number of piles to be driven did not increase and not all of the extra length of pile used would have entailed drilling into hard rock.  But at least some of the extra length would have been through rock.  Rock takes longer to drill through than soil.

66.  Further, as Mr. Jesse pointed out, even if a significant part of the additional length were through soil, the extra length of the drilled hole would mean that it would take marginally longer to suction out the crushed rock from the bottom of the hole.  This is because suction forces decrease over distance.

67.  Mr. Jesse, who revised PH-2 to show how factors beyond Falcon's control delayed completion, did not simply extend PH-2 times by 24.5%.  Instead, Mr. Jesse considered that the increased length of H-pile would, on average, only have increased original PH-2 time periods by half of 24.5% at most.

68.  PH-1 and PH-2 were premised on use of 2 drilling rigs.  But at the start of the Residential Area project, Falcon only had enough area to work a single rig.  Mr Leung says (and I find) that the staggered handover meant that no enough space was available for 2 rigs.  Given the footprint of a drilling rig and its ancillary air compressors and given the need for grouting and H-pile welding plants to be close at hand to a rig, there was simply not enough room provided by Kirin.

69.  There is also the fact that other sub-contractors, including other piling sub-contractors, were working on the site at the same time.  Access roads were muddy and ever-changing and sub-contractors could easily get into each other's way.

70.  Mr. Lai concedes that it would take more than 8 sq. m of space to operate a piling rig on site.  But he criticises Falcon for not coming up with specific dimensions at trial for its requisite space. 

71.  I do not think that there is substance in this complaint. The Court can obtain a qualitative (but reasonably accurate) impression of the sort of area required for 2 rigs from Mr. Leung's evidence in conjunction with the site photographs in the trial bundle.

72.  Mr. Lai points to contemporaneous letters from Kirin to Falcon complaining about the use of only 1 rig.  He suggests that, because these letters went unanswered, I should infer that what they alleged was true.

73.  I do not accept that submission.  It often happens that letters are dealt with orally on site.  I cannot assume from the mere fact that letters went unanswered that Falcon made no oral response and accepted what the letters said.  If Mr. Lai wished to make a point about Falcon's silence in the face of such correspondence, he should have raised the correspondence squarely in cross-examination of Mr. Leung.

74.  I note that work was also delayed by a suspension of work in the Kindergarten Block ordered by HKC on 17 June 1999.

75.  Consequently, I accept Mr. Jesse's revised programme which takes the factors enumerated above into account.  Mr. Jesse concludes that work should reasonably have been completed on 10 March 2000.  This means that Falcon was within time, rather than behind.

C.     Final agreement

76.  I do not think that the 5 October 2000 agreement precluded Kirin from bringing a claim for pile deviation.

77.  I accept Mr. Yum's evidence that he specifically interrupted the discussion on 5 October 2000 to warn Mr. Leung of the possibility of a damages claim for pile deviation. 

78.  Mr. Yum stated:-

"I put it clearly to Mr. Edmond Leung that Kirin would withhold all further payment until the question of pile deviation and delay claim were resolved.  On that unfriendly note the meeting came to an end."

Mr. Dawes did not cross-examine Mr. Yum to the effect that this part of his account was untrue.

79.  A similar question of pile deviation had arisen in connection with the Recreational Block.  That had been resolved before October 2000 without financial consequence to Falcon. 

80.  Falcon may have been lulled into thinking that the piling problem with the Residential Area would similarly be resolved without financial implication.  For this reason, Falcon may not have been overly concerned about deviation when raised by Mr. Yum at the meeting. 

81.  Nonetheless, Mr. Yum is adamant that he pointed out to Mr. Leung that the Residential Area could have a different outcome.  This was because the relevant blocks "had already been handed over to the Employer before deviation was discovered by the sub-structure contractor Kai Tai".  In cross-examination Mr. Dawes did not dispute Mr. Yum's claim of having expressly distinguished at the October meeting between the Recreational and Residential Area pile deviation incidents.

82.  Pile deviation was an express reservation to whatever was concluded among the parties in October 2000.  Neither counsel suggested by way of fallback position that, pile deviation apart, the October 2000 meeting was final in respect of all other matters connected with the Residential Area. 

83.  In my view, however, it is likely that the fact of the meeting precludes Kirin from raising a claim for undue delay in connection with the Residential Area.  As a matter of logic and common sense, no reservation having been made about claims for delay in relation to the Residential Area, it would be odd if the parties contemplated at the meeting, that a claim for delay could still be raised despite a final account having been struck.

84.  It is unnecessary for me to explore the point further, given my conclusion that Falcon has not delayed.  I simply indicate that, if I am wrong in that conclusion, I should not be taken as having accepted that a claim for delay remains open to Kirin.

85.  Finally, I note that I attach little weight to the "Final Agreement" cover sheet which Mr. Yeung later prepared.  The critical question is what the parties agreed on 5 October 2000.  The Court must be wary of discerning what was decided on 5 October 2000 by reference to subsequent events.

IV.     Conclusion

86.  Falcon's claim for the remaining balance not already awarded to it by the Interim Judgment of 19 February 2000 is dismissed.  The stay of execution granted by Order of the same date is lifted.

87.  Kirin's Counterclaim succeeds to the extent of $760,000.

88.  I shall now hear counsel on the following matters:-

(1)     interest on the amount due to Falcon under the Interim Judgment and on the amount due to Kirin on its Counterclaim;

(2)     costs; and,

(3)     any other consequential orders, including the payment out of the $500,000 security paid into Court by Kirin.