SHIU KONG ENGINEERING LTD. v. WINNING GODOWN LTD.

1988, No. A6396

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The bases of the plaintiff's claims as presented are reasonably clear and this Court should not feel, in justice, inhibited by any imprecision in the pleadings. These claims were mounted against the defendant on three fronts : first, by an agreement dated 12th September 1986, the defendant allegedly assumed responsibility for, inter alia, all future payments for the plaintiff's steel works at the building site in Kowloon Bay, NKIL 5836. Secondly, independently of this 12th September agreement, the defendant, by the verbal assurance of its then Managing Director, Mr Lawrence Chong, was alleged to have embraced the same responsibility. Such assumption of responsibility was, either in writing or orally, of the nature of a guarantee or an indemnity or a surety. Thirdly, the defendant was said to be liable to pay the same amount to the plaintiff by way of quantum meruit.

2. In November 1985, the defendant entered into a Building Contract with one Sam Yu Construction Company (hereinafter referred to as "Sam Yu") for the erection of a 12-storeyed factory on the said site NKIL 5836 for $34,682,295.57. Completion was promised in a year from 12th November 1985 to 12th November 1986. This Building Contract contained the usual provisions for a payment schedule, a retention fund, the employer's right to make direct payment to nominated sub-contractors, a Performance Bond and the employer's right of termination for acts of neglects or defaults. A Performance Bond was procured from the Tai Ping Insurance Company Ltd.

3. After the signing of this Building Contract in November 1985 between the defendant as employer and Sam Yu as main contractor (I shall call this Building Contract "the Main Contract"), Sam Yu took the plaintiff on as the steel sub-contractor under a Sub-Contract dated 13th November 1985. The plaintiff was appointed a domestic sub-contractor and it was not a nominated sub-contractor under the Main Contract.

4. Work commenced both under the Main Contract and the plaintiff's Sub-Contract for steel. Problems arose in form works. On 30th June, the steel workers went on strike. By then, works on NKIL 5836 were some 90 days behind. The "critical time path" for construction works had thus been breached. At a June meeting between Mr Siu of the plaintiff and Mr Sung of Sam Yu in the company of the architect, Mr Ng Kwok-hing, Mr Siu was airing his disappointment in non-payment and exploring the feasibility of a bank guarantee or a guarantee from the defendant owner. Mr Siu of the plaintiff added that the question of guarantee was only tentatively broached. The plaintiff had thereafter continued with the steel works on site without any guarantee. A follow-up letter of complaint to Sam Yu dated 2nd July 1986 was despatched by the plaintiff. In the last paragraph of this letter of complaint, the plaintiff sought particulars of Sam Yu's shareholdings as well as Sam Yu's financial standing with its bankers (inappropriately translated as "Letter of Credit") and threatened to stop work. Mr Siu admitted that no mention was made of any guarantee from the employer/defendant in this letter, but he maintained that at that end-of-June meeting, he had it clearly said : "Unless we get the guarantees from the owners of the two sites, then we will terminate this consideration." Mr Siu was also adamant that the plaintiff "would only accept a guarantee". However, the sub-contracted steel works were proceeded with without the benefit of any guarantee until 5th September. By that time, the plaintiff had been owed as a sub-contractor by Sam Yu some $2.4M, comprising $1.4M outstandings for the month of July and further arrears of $980,000 odd for the month of August. According to Mr Siu, Mr Sung of Sam Yu had undertaken to clear all these $2.4M arrears before 5th September. The plaintiff stopped work on 5th September and wrote to Sam Yu on 9th September. In paragraph 2 of that Chinese letter of 9th September, the plaintiff was admittedly erroneous in that the stoppage on 5th September was there inaccurately denied to have been brought about by Sam Yu's failure to pay the $2.4M outstanding arrears.

5. On 12th September 1986, by pre-arrangement, the plaintiff, the defendant, Sam Yu, the architects and the bank met in the offices of the defendant. At the conclusion of the meeting well past mid-night, an agreement was entered into. That agreement was signed by the defendant and Sam Yu as parties under the description "agreed and accepted by". Representatives of the plaintiff and the financier bank signed by way of confirmation. The agreement was witnessed by the two architects, the defendant's clerk of works on site, the assistant of Mr Lawrence Chong and the then Assistant General Manager of the bank, signing as witnesses.

6. The allegation of the plaintiff was that by the agreement and/or the oral assurance of Mr Lawrence Chong on 12th September, the plaintiff had secured a direct contractual liability from the defendant to pay all future payments for steel and steel works on NKIL 5836. An ambiguity was introduced by Mr Siu who said at one time that such liability was one of meeting these future payments only up to the roof. It is, of course, debatable as to whether the claimed "future payments" would include monies retained under the Sub-Contract. In any case, so the plaintiff maintained, the defendant is liable to pay the same claim to the plaintiff on a quantum meruit basis.

7. Evidently, the plaintiff was not a party to the agreement dated 12th September 1986. Both the plaintiff as sub-contractor and the bank financing the project merely signed to confirm the arrangements made between the employer and the main contractor with a view to putting in place modified payment terms and schedule under the Main Contract. In the amended mode of settling Payment Certificates for work done under the Main Contract, the plaintiff was to be one of the preferential recipients as a sub-contractor and the bank committed itself to divert funds in an account with it operated by main contractor, Sam Yu, for the same purpose. The agreement dated 12th September was to record and formalise such a re-arrangement and authorize Sam Yu's banker to implement it so that payments out of a portion of the funds standing in Sam Yu's account with the bank could be made in priority to the plaintiff and Gloria Concrete Ltd. The re-arrangement would also have the side-effect of preventing Sam Yu from siphoning money off the NKIL 5836 construction project to his other commitments.

8. The agreement of 12th September made it possible for the plaintiff to be paid the outstanding $2.4M of which $400,000 was to come direct from Sam Yu with the balance of $2M to be laid out first by the defendant. The defendant was to pay "on behalf of Sam Yu" such $2M on the security of 15% of all future payments for further construction works to be done on NKIL 5836 by Sam Yu under the Main Contract. Out of the remaining 85% of future certified payments under the Main Contract, Sam Yu agreed with the defendant as parties both to that agreement and the Main Contract to allow the claims of the plaintiff and Gloria Concrete Ltd. to be preferentially settled. I cannot construe or deduce from the provisions of the agreement dated 12th September 1986 any of the obligations or liabilities which the plaintiff set out to prove.

9. At the meeting on 12th September as pre-arranged on the day before, Mr Siu of the plaintiff was the last to arrive. The defendant had been comparing notes with the architects. Mr Chong attended with his assistant as well as the defendant's clerk of works on site. Mr Chong had been shown some correspondence, but I accept that he read the plaintiff's said letter of complaint dated 2nd July 1986 for the first time in court. Mr Siu conceded that guarantee was then discussed tentatively, and Mr Lawrence Chong explained that only matters of importance would reach the top level in the defendant company. San Yu was represented by Mr Sung and Eddie Lui. The architects were present; Mr Ng Kwok-hing attended with his associate, Mr Anthony Wong. Mr Lam, the then Assistant General Manager of the financier bank which was also the plaintiff's banker, attended with his colleague, Mr Frank Ho. Mr Siu of the plaintiff came alone. Despite Mr Siu's denial, I also accept and find that there was a commotion generated by the heated argument and hurled abuses as between Mr Siu and Mr Sung of Sam Yu. Mr Siu had every right to feel disappointed. Sam Yu had wrongfully diverted payments under the Main Contract, part of which was destined for the steel sub-contractor, to his other operations. Everyone present had an interest of his own to serve. From the outset, it must be noted that the plaintiff was not a nominated steel sub-contractor under the Main Contract. The plaintiff was appointed a domestic steel sub-contractor to whom no direct payment by the defendant as employer under the Main Contract was permissible. At about 8:00 p.m., Mr Lawrence Chong was briefed by Mr Siu of the outstanding $2.4M due from Sam Yu under the Sub-Contract. Mr Siu and Mr Sung were sensibly segregated for their hostility and put into different rooms in the offices of the defendant. At about 9:00 p.m., instalment payments to the plaintiff were seriously examined with Mr Siu. Apparently, Sam Yu had acknowledged the accuracy of Mr Siu's claim for $2.4M. At about 10:00 p.m., Mr Lawrence Chong was able to table the proposal to Mr Siu who was to receive $400,000 in mid-September and $2M at the end of September. By 11:00 p.m., the scheme as finalised was agreeable to the plaintiff and thereupon the agreement of the 12th September 1986 was drafted by the architect who interpreted in detail to all present, including Mr Siu of the plaintiff, before it was signed. The dialect used was Cantonese, spoken by all.

10. It was alleged by the plaintiff that at about 10:00 p.m., Mr Siu was enquiring as to whether the defendant would directly pay all future payments and that at about 11:00 p.m., the defendant, through Mr Lawrence Chong, agreed to assume such direct responsibility. Mr Siu elaborated that Mr Chong assured him that the defendant would meet all such payments up to the roof. At another time, Mr Siu maintained that Mr Lawrence Chong gave a sweeping indemnity that the defendant would see the plaintiff paid all entitlements, presumably including any monies retained under the Sub-Contract. That is the plaintiff's pleaded ease. In addition, so Mr Siu told the Court, the architect, Mr Ng, also confirmed that Clause 6 of the agreement made on 12th September "would ensure that (he) would receive $2.4M and future payments from the owner of Winning (Godown Ltd)".

11. It is common ground that almost until the very end Mr Siu had insisted on a guarantee from the defendant or at least on the defendant stepping into the shoes of Sam Yu in respect of the steel works executed and to be executed on NKIL 5836. The plaintiff was little known to the defendant. Mr Lawrence Chong spoke to Mr Siu for the first time at the meeting of 12th September. Engagement of or supervision over sub-contractors is no simple or easy task. It would have been extraordinary for the defendant to have immediately taken upon itself the direct responsibility to the plaintiff without enquiry. Mr Siu himself conceded that such alleged guarantee was uncommon. There was little assurance that co-ordination and co-operation could be readily maintained by relieving the main contractor of his control and separating the steel workers from the other works under the Main Contract. It is ground principle that a main contractor's tender would adequately cover all managerial and supervisory aspects. There is no evidence that the scale charges of the main contractor were in any way revised and his stipulated obligations re-adjusted. I have also noted the other matters raised by Mr Fok on behalf of the defendant. I agree that they are relevant considerations. Of course, the defendant as owner was keen to see works resumed and the critical time path re-aligned, but the plaintiff's allegation of assumed direct responsibility could hardly be practicable or commercially viable. It is improbable, I find, that Mr Chong so directly committed the defendant as alleged.

12. Mr Siu even went so far as to suggest that the plaintiff had become a party to the Main Contract and that his own Sub-Contract was simultaneously terminated. There is no evidence that the other obligations under the Main Contract were accordingly re-defined. Payments were continued to be applied for at the agreed rate under the Main Contract subject to its provision for retention money. The same application procedure for certification and evaluation of interim payments was followed. If Mr Siu had been genuinely mistaken in what I might describe as his far-fetched claims against the defendant, he must have misled himself or allowed the wrong conclusion to be drawn. He gave evidence in these terms : "As long as there is an agreement, I felt I had the guarantee. I do not know whether it is a main contract or sub-contract so long as we receive our pay for our work"; "I consider it (i.e. having become a party to the Main Contract) was so intuitively because so many people affixed their signatures." Mr Siu wrote to the bank expressing his gratitude for the bank's participation in the said re-arrangement, but there is no evidence that he thanked the defendant for allegedly becoming directly involved in paying the plaintiff's outstanding entitlements, past and future. Mr Siu suggested that the defendant must have also been communicated with in similar terms, but no such letter was produced, nor included in the Lists of Documents.

13. According to Mr Lawrence Chong, despite the defendant's outright rejection, Mr Siu was vigorously pressing, in anger, for a new pay-master in the defendant and for an early settlement of his unpaid $2.4M, but in the course of the protracted meeting, he gradually became responsive, in apparent great relief, to the increasing prospects of the plaintiff being paid its substantial outstanding arrears. Mr Chong denied these allegations of Mr Siu. For all the reasons I have given and am about to add, I accept his denials.

14. It is inconceivable that being apparently independent and impartial in the negotiation, Mr Ng, the architect, could have deliberately misled Mr Siu as to the true effect of Clause 6 of the agreement dated 12th September. His interpretation was accepted by the defendant's witnesses as accurate. I accept the version of Mr Chong and the evidence of Mr Lam of the bank that the architect explained to all, in some detail, the provisions in and effect of the agreement dated 12th September 1986. Mr Lam was emphatic that it was done point by point and that every one understood before the signing. Clarifications were also frequently sought from and given by Mr Ng during his interpretation. The Sub-Contract was in English. Mr Siu claimed not to be conversant with the English language, but it would be incredible that Mr Siu, with all his 30 years of experience in the construction trade, would not have later caused the same document gone over with the aid of his subordinates in the plaintiff company. No evidence was led that before the dispute arose, the plaintiff had ever complained of the terms of the agreement dated 12th September being, in any way, at variance with Mr Siu's understanding. Moreover, the plaintiff was content to accept the $400,000 in a cashier order of 17th September without much ado and the remaining $2M was similarly accepted on 29th September. Mr Lam, the then Assistant General Manager of the financier bank, recalled that in the course of the interpretation, Mr Lawrence Chong spoke to Mr Siu thus : "Don't worry about the $400,000 which Sam Yu would pay to Shiu Kong" and as to "whether Sam Yu could raise the $400,00 within a few days i.e. from 12th to the 15th", "set your mind at ease". Clearly, these were comforting words which are too vague for any legal effect and, taken in their proper context, could give rise to no binding obligations.

15. At all material times before litigation was contemplated, there were two direct communications between the plaintiff and the defendant. The first is a letter from the defendant to the plaintiff dated 10th October 1986 and the second is the 13th Payment Certificate dated 11th November 1986 from the plaintiff addressed to the defendant after site closure. Mr Chong and Mr Siu both agreed that documents concerning evaluation and assessment of the executed works and their worth were copied to the defendant. No payment was made to the plaintiff by Sam Yu after the 11th Payment Certificate. The 13th Payment Certificate was channelled directly to the defendant. The previous 12th Payment Certificate dated 17th October 1986 (for calculations up to 1st November 1986) was addressed to Sam Yu. The site was closed on 24th October. In fact the plaintiff was locked out as from 20th October. The plaintiff's 13th Payment Certificate dated 11th November 1986 (for calculations up to 26th November) may be called a post-closure communication. (The information supplied within the above brackets do not seem to have been translated, but they can hardly be open to any dispute). I would therefore attach no significance to the direct despatch of the 13th Payment Certificate to the defendant. As for the letter dated 10th October 1986, it reiterated the understanding among all, including the plaintiff and the defendant on evaluation and assessment. What happened was that the Quantity Surveyor of the defendant adopted a cut-off date different from that selected by Mr Siu for his submitted invoice to Sam Yu as steel sub-contractor. The different cut-off dates accounted for the discrepancy of half a floor in the works as certified by the defendant's Quantity Surveyor. The Quantity Surveyor of the defendant calculated only up to half of the 8th Floor whilst Sam Yu, on invoice delivered by the plaintiff as steel sub-contractor, included the entire 8th Floor in its submission. The defendant explained to the plaintiff as sub-contractor of Sam Yu that entitlement under the Main Contract would only be $812,847.55 of the adjusted assessment by reason of what Mr Chong described as "timing discrepancy". The bill of Sam Yu dated 30th September had been adjusted down from $1,146,615.56 to $1,019,448.30. Of that adjusted sum, only $812,847.55 calculated on the basis of the cut-off date of the defendant's Quantity Surveyor, i.e. up to half of 8th Floor, was certified due and payable under the Main Contract. The explanation given to the plaintiff by the defendant was recorded in this letter of 10th October to the effect that the balance of $206,600.75 would be settled by the defendant "on behalf of Sam Yu" upon completion up to the roof. In the words of Mr Chong, the letter, in its paragraph 3 in particular, reflecting "a timing discrepancy" obvious to all in the trade, was simply stating a matter of fact beyond any argument, like a natural phenomenon - the rising and the setting of the sun - for the benefit of the sub-contractor of Sam Yu. After all, Sam Yu had submitted the application for an Interim Payment Certificate on the force of the plaintiff's invoice. This letter did not create any new or further agreement between the plaintiff and the defendant; nor can this letter of 10th October 1986 be taken as any confirmation or fortification of the direct responsibility allegedly assumed for all future payments to the plaintiff under the Main Contract or the Sub-Contract. I should reiterate that the Sub-Contract was in fact claimed by Mr Siu to have been terminated. No intention to create any relationship, legal or otherwise, could be spelt out of the terms of this letter.

16. As for the evidence of Mr Siu conflicting with that given by Mr Chong, I have no hesitation in preferring the latter to the former. Mr Chong is, by far, a more impressive witness of the two, even though understandably the evidence of Mr Siu lacks precision as that coming from a man of little polish. Mr Siu did exaggerate the strength of his alleged guarantee/indemnity/assurance/promise claim as compared to the guarantee allegedly extracted from owner of the other site 5870. Mr Chong was not himself consistently accurate throughout his evidence, but these are peripheral shortfalls which do not materially affect my assessment of the credibility of the witnesses or findings. I have dealt with the evidence of Mr Lam. The evidence of the other witnesses is, by and large, uncontroversial.

17. The plaintiff was under sub-contract to supply and install steel to NKIL 5836. It was highly improbable that the plaintiff would have agreed with yet a party other than Sam Yu to supply and install like quantity to the same site. I find that no agreement was intended or reached in writing, orally or by implication between the plaintiff and the defendant to support any of the alleged clams, including the one raised on a quantum meruit basis.

18. As Mr Fok submitted with care and clarity, the scenario, the provisions of the agreement dated 12th September, the events both prior and subsequent to this agreement and the documentation under the Main Contract and Sub-Contract up to the time of closure of the site clearly demonstrate that no direct agreement could have been intended or struck expressly or by implication between the plaintiff and the defendant for the supply and installation of steel to NKIL 5836. I do not attach any significance to the comparison between the contract price under the Main Contract and the total actual outlay with a substituted main contractor after site closure on 24th October 1986. Suffice it for me to say that by reason of the $2M having been advanced by the defendant to Sam Yu, the mere further $1.6M worth of work then being expected to be carried out by the plaintiff under the Sub-Contract, the balance of the $206,600.75 (subject matter of the letter of 10th October 1986 from the defendant to the plaintiff) having been given credit to in the final accounts on which the defendant now claims against Sam Yu for $4.349M and the payment by Tai Ping Insurance Co. Ltd. of $1.7M under the Performance Bond, there seems to be hardly anything due to Sam Yu after the 11th Interim Payment Certificate. The site was closed on 24th October 1986. Sam Yu, this Court was told, has become bankrupt. There is clearly no legal liability proved against the defendant on any of the allegations made by the plaintiff. On the known facts, the Court is not driven to the conclusion that the plaintiff has, in any way, been unfairly treated by the defendant.

19. The claims by the plaintiff against the defendant as formulated by counsel, therefore, fail. Only the question of liability was left in the hands of this Court. It was agreed that assessment of quantum would be for the master. In view of my decision against the plaintiff, this action must stand dismissed with costs for the defendant. Referral to the master is no longer necessary.