CHAN WAN CHEUNG t/a YAU SING ENGINEERING CO. v. WING FAI CONSTRUCTION CO. LTD.

HCCT41/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.41 OF 1999

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J U D G M E N T

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1. The plaintiff was a sub-contractor of the defendant carrying out road works. The main contract was between the defendant and the Highways Department of the Government.

2. The claim concerns three different locations of work. They are Victoria Park Road, the Luk Kwok Hotel and Happy Valley. There has been a measure of agreement between the parties on matters of quantum. As a result, only two issues remain to be determined by the court.

THE AGREEMENTS

3. Subject to liability on both the claim and the counterclaim, the following figures are agreed :

(i) On the contract between the parties, in relation to works at Victoria Park Road and near the Luk Kwok Hotel there is a balance due to the plaintiff in the sum of HK$465,540.62.

(ii) In respect of the Happy Valley works, the balance due to the plaintiff is HK$113,531.60.

(iii) The further sum claimed by the plaintiff in relation to price fluctuations on the Victoria Park Road works and the works near the Luk Kwok Hotel is HK$486,685.95. There is no issue as to the correctness of the calculations producing the figure. However, the plaintiff's entitlement to it is disputed.

(iv) The sum of HK$1,881,996.70 is counterclaimed by the defendant being the accumulated interest on sums allegedly advanced by the defendant to the plaintiff and on expenses incurred by the defendant for the purchase of materials for and on behalf of the plaintiff under the relevant contract, 25/HY/93.

THE ISSUES

4. The main issue on the plaintiff's claim is (iii) above. The main issue on the counterlcaim is (iv) above.

THE WITNESSES

5. The plaintiff's witnesses were, himself, Mr Chan Wan Cheung and Mr Leung Kwan Wan who, between 1992 and 1998 had been a measurement co-ordinator employed by the defendant. A plaintiff who is able to call an employee of his opponent has a potential advantage. Mr Leung was a straightforward and helpful witness who, on some issues, bolstered the plaintiff's case.

6. The defence called Mr Chan Chi Tack, a projects manager and Ms Tsui Man Tsui, a member of the defendant's accounts department. Both only became involved in contract 25/HY/93 after the works had been completed, in about 1997. Neither had any direct knowledge of the events at the time the contract was made. Key issues in this case turned on the terms agreed between the parties. There is no evidence of any of the terms of the contract being put into waiting. The defence did not concede that it was an oral contract but I find that it was. I have relied on the plaintiff's evidence to that effect. Moreover, the contrary was not specifically put to the plaintiff in evidence. The plaintiff had contracted, at the material time, with a Mr Li Ki Chan who was in charge of these projects on the defendant's behalf. He and the plaintiff had known each other for about 40 years. The plaintiff gave clear evidence about his agreement with Mr Li. I found the plaintiff to be an honest and reliable witness. He was, and still is, a small firm. He had a good recollection of material events. In the context of his relationship with Mr Li, I did not find it surprizing that this was an oral contract. On all key issues, I am able to rely on the plaintiff's recollection as being very probably true and accurate. He seemed to me to be decent, industrious and honest. I do not say for a moment that Mr Chan Chi Tack or Ms Tsui were deliberately dishonest. However, their involvement was more remote and their evidence carried less weight.

FINDINGS OF FACT

7. The following is a non-exclusive list of the basic findings which emerged from the evidence and upon which I base my decisions which follow :

(a) The plaintiff had been the defendant's sub-contractor on one previous occasion, under contract 25/HY/91.

(b) The plaintiff was one of the twelve sub-contractors under 25/HY/93.

(c) The contract period, including extensions, was from April 1994 to June 1996.

(d) Written contracts from eight of the twelve sub-contractors were produced. The plaintiff's was an oral contract.

(e) The relevant works for Victoria Park Road and near Luk Kwok Hotel were commenced in the latter stages of the contract period. The plaintiff started the Victoria Park Road work in October 1995 and the Luk Kwok Hotel work in December 1995.

(f) The plaintiff's claim for price fluctuations pursuant to his oral contract, was first quantified only after the Highways Department had produced the relevant figures for fluctuations in 1998, according to the appropriate index published by the Government. The price fluctuation index caters for inflation when costs are incurred later than the time of the original contract (which was a maintenance contract and, obviously, not a fixed price contract).

(g) The calculation of interest, the subject of the counterclaim, was made for the first time in December 1998, after (f) above and after Mr Li had left the defendant and there had been a change of management.

(h) There had been no continuing calculation of interest prior thereto and no reference to interest was made in the monthly statements prepared by the defendant.

PRICE FLUCTUATIONS

8. The plaintiff's evidence, in summary, is simply as follows. The Victoria Park Road and Luk Kwok Hotel jobs were subsequent variations to the main contract. Mr Li asked the plaintiff to undertake them in the latter part of 1995. The oral agreement between them, for these works, was different from the earlier works. It was agreed that the plaintiff would be paid for the value of work done plus a figure to be calculated by the price fluctuation index, all less 9%. The reasoning was obvious. Because of inflation, the plaintiff would have made a loss otherwise. The plaintiff and Mr Li were on good terms and I accept that Mr Li would not have held the plaintiff to terms which were adverse to him.

9. As for the calculation of the fluctuation figure, the plaintiff points to two documents which emanate from the defendant company. Firstly, a document headed "Total of pay list amount" dated 3 May 1999 is a list of all the sub-contractors. Against the plaintiff's name, under the heading of "Fluctuations" appears the pleaded sum (slightly adjusted downwards). Also, in a document dated 2 February 1999 called "Detail pay list for work orders", the pleaded sum appears under "Price fluctuation adjustment" against the plaintiff's job number for these works. It is acknowledged that these documents are not proof of entitlement. It is also acknowledged that earlier similar documents which were created during the contract do not record an amount for price fluctuations. However, they are consistent with the plaintiff's claim and, in any event, would only have been created after the contract when the Highways Department applied the appropriate index to the final figures.

10. In seeking to resist the claim for price fluctuation, the defence rely on the following. They say :

(i) there is no documentary evidence in support of the plaintiff's entitlement to the price fluctuations;

(ii) where there were written contracts, the issue of price fluctuations was sometimes referred to. In one contract, for example, a 50% entitlement was recorded;

(iii) if the Victoria Park Road works and the Luk Kwok Hotel works were variation work, the original schedule of rates would not apply and could, therefore, not be subject of fluctuations; and

(iv) it was a large project with a total value of about HK$10 million. In such circumstance, there would have been a written contract which would have dealt with the question of price fluctuations.

11. In my judgment, the issue comes down to whether or not the court feels it can rely on the plaintiff's testimony as to the existence of an express term in his oral contract. My comments on the plaintiff need not be repeated. I accept his evidence. The high water mark, in summary, of the defence opposition really goes no further than saying - we think there would have been a written contract which would have said the plaintiff was not entitled.

12. The plaintiff succeeds on his claim.

INTEREST EXPENSES

13. The defendant counterclaims interest, which was first calculated in November 1998, at rates of prime plus 3% and prime plus 5%, on all payments advanced to the plaintiff and on all sums expended by the defendant for materials.

14. They plead that there was an express term that interest would be charged. Alternatively, they rely on an implied term to the same effect :

(a) Express term

15. The express term relied on is extracted from the defendant's standard form sub-contract for 25/HY/93 (In Chinese). The term was originally pleaded as saying "all necessary expenses". The certified translation did not bear out this pleading. After discussion between the parties, a different translation, namely "required cost" was agreed. The defendant submits that this expression should be interpreted as including the interest accruing on the costs of materials after the money has been spent. I do not agree. I accept the plaintiff's argument that it means no more than the cost required to buy the materials.

16. In any event, the standard form sub-contract relied on by the defendant does not necessarily reflect the oral agreement between the parties. It only binds those sub-contractors who signed it and, in any event, could be amended to suit the work of the particular sub-contractor in question.

17. A further weakness in the defence case on this issue is that much of the interest calculated is on payments which were made to the plaintiff which the defence describe as "advance payments". These figures are extracted from the monthly statements. In fact, according to the plaintiff's evidence, which I find to be logical and reliable, the monthly statements were not to be regarded as a reflection of the plaintiff's contractual entitlement each month. They were the defendant's internal accounting statements. The plaintiff was entitled to be paid within a reasonable time for work done and such payments that he did receive were not advance payments but contractual payments for work done.

(b) Implied term

18. The defendant's pleaded case is that a term requiring the plaintiff to reimburse the defendant for interest should be implied as a matter of "custom and/or usage and/or the practice of the defendant and/or as a result of the dealings between the plaintiff and the defendant".

19. As evidence of previous dealings, the defendant relies on the fact that interest was charged in contract 25/HY/91. This was the only other contract between the parties. There are no other dealings save this one. This cannot amount to a course of dealing. Furthermore, the plaintiff does not admit that he paid interest on that contract. Also, the figures for interest on that contract (again calculated after the event) are very small by comparison with the very large sum counterclaimed in these proceedings.

20. Further weakness in the defendant's counterclaim can be discerned from the fact that in 25/HY/93, there is no calculation of interest in the monthly statements (whereas in 25/HY/91 there had been). Thus, even though the final amount is a large sum, the defendant had not been calculating it in their own records as the contract went along. Furthermore, the format of the monthly statements in 25/HY/91 and 25/HY/93 are different. Both these facts contribute to the court's finding that these two contracts cannot be regarded as a course of dealing (even if one previous contract was sufficient to constitute a "course").

21. Overall, there is considerable force in the suggestion that the defendant's late claim for interest was only formulated to bolster its opposition to the plaintiff's price fluctuation claim. I have already found that, in the absence of a written contract, their opposition to the price fluctuation claim must fail. So too must its counterclaim for interest.

ORDER

(1) Judgment for the plaintiff in the sum of HK$952,226.57 (contract 25/HY/93) plus interest at prime + 1% from the date of writ (24 April 1999) to the date hereof.

(2) Judgment for the plaintiff in the sum of HK$113,531.60 (Happy Valley contract) plus interest at prime + 1% from 18 March 1997 to date hereof.

(3) The counterclaim is dismissed.

(4) Costs of the claim and counterclaim to the plaintiff and to be taxed if not agreed.