SANFORD ENGINEERING CO v. WU HIN LUK t/a TAK SON ENGINEERING CO AND ANOTHER

DCCJ17058/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17058 OF 2000

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JUDGMENT

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1. The parties worked on a project called Water Mains Diversion for West Rail Contract No. CC403 Mei Foo to Yen Chow Street Tunnel Works (the "Project"). The Kowloon Canton Railway Corporation was the employer; the 2nd defendant was the main contractor; the 1st defendant was a subcontractor to the 2nd defendant. The plaintiff was a subcontractor to the 1st defendant for plumbing work. This judgment concerns only the plaintiff and the 1st defendant, the case against the 2nd defendant having been settled.

2. The plaintiff claims that by a written contract contained in a letter from the plaintiff dated 24 September and signed by the 1st defendant on 28 September 1999 it was agreed that the plaintiff would carry out Subway C extension pipe works, Subway D extension pipe works and temporary pipe works for Subway D at the prices quoted in the quotation attached to the contract. The total price was $1,389,650.00.

3. The plaintiff also claims that at the 1st defendant's request it carried out certain additional work. The plaintiff in a letter dated 20 April 2000 submitted its quotation for this additional work.

4. The plaintiff pleads that it carried out the works contracted for and the additional work, and supplied the materials therefor and received interim payments. However in about September 2000 the 2nd defendant terminated its contract with the 1st defendant. The plaintiff then submitted invoices to the 1st defendant for payment of $383,306.00 which it claims was then due. Now the plaintiff claims that the value of work done and materials supplied under the contract and for the additional work is $1,420,540.00. The plaintiff has been paid or had materials provided to a total of $$1,109,100. Therefore the 1st defendant now owes the plaintiff $311,400.00.

5. In addition there is a claim for $120,000.00 on a cheque for an interim payment, which was dishonoured on 1 December 1999.

6. The 1st defendant's case is that under the contract between it and the 2nd defendant, it was agreed that all the materials for the contract works were to be supplied by the 2nd defendant and the cost thereof was to be deducted from any payment due to the 1st defendant. It was agreed between the plaintiff and the 1st defendant that all the material for the works was to be supplied to the plaintiff and/or procured by the 1st defendant and the exact amount for that material was to be deducted from the payment due to the plaintiff. So far as the additional work is concerned the 1st defendant admits that a quotation was made on 20 April 2000 but denies that it requested or authorised such work and in any event says that the plaintiff did not carry out such work. So far as the cheque for $120,000.00 is concerned the 1st defendant, while denying the plaintiff's allegations says that in any event the payment for that cheque was included in subsequent payments made to the plaintiff.

7. The 1st defendant says that the value of the works done by the plaintiff when its own contract with the 2nd defendant was terminated amounted to $726,200.00 whereas the plaintiff had already received a total of $754,000.00, including a figure of $198,000,00 paid by the 2nd defendant, leaving a balance in favour of the 1st defendant of $27,800.00. Further the plaintiff had failed to settle an amount of $460,615,68 in favour of the 1st defendant pursuant to the arrangement whereby the 1st defendant was to supply materials. The 1st defendant counterclaims for these sums. It also avers that its own contract was terminated because of delay caused by the plaintiff and it counterclaims for loss of profit arising from its contract, as well as loss of a target bonus of $332,000.00 to which it says it would have been entitled if the works had been completed within a reasonable time.

8. The plaintiff by way of reply denies that there was any arrangement for the 1st defendant to supply materials. It avers that it provided all materials save for some which were provided or paid for by the 2nd defendant and avers that credit was given to the 2nd defendant for at least some of the materials supplied. It denies causing delay which led to the termination of the 1st defendant's contract and avers that any delay was caused by the 1st defendant. It takes issue with the 1st defendant's figures and further pleads that the 1st defendant would be unjustly enriched if it were allowed to retain the value of the labour and materials supplied without paying the plaintiff for them.

9. The plaintiff is a family business of which Madam Hai Ka Yiu, also known as Mrs Cheung is the general manager. The 2nd defendant, Mr Wu, trades as Tak Son Engineering Company and at the relevant time a Mr Tin Tak Sung worked in that company; according to Mr Wu he was a director, and shared profits and losses. In any event, most of the dealings between the parties were between Madam Hai and Mr Tin. The latter has not given evidence.

10. The total price of the contract between the plaintiff and the 1st defendant was $1,389,650.00. Details are to be found in five pages of quotation attached to the plaintiff's letter, setting out the materials and labour charges. It is not in dispute that there was a collateral agreement between the plaintiff and the 1st defendant for payment for work done, by fortnightly instalments. The plaintiff submitted invoices on the basis of percentages of work completed.

11. The work commenced in September 1999. According to Madam Hai the plaintiff did not know of any agreement between the defendants for the supply of materials or she would not have quoted for materials in her quotation. However it is not in dispute that the 2nd defendant supplied some materials. According to Madam Hai, she was told that the 2nd defendant would supply materials and was shown a quotation for $460,615.68; that is the figure which, on the 1st defendant's case, was never settled by the plaintiff under the charge-back arrangement. According to Madam Hai she negotiated the figure down with Mr Tin to $355,100.00. Mr Tin's signatures appear against deletions of some of the items in the quotation.

12. Between 1 October and 28 December 1999 the plaintiff submitted invoices periodically on the basis that 20% and then 50% of the work had been completed. The total invoiced was then $320,083.75. This allowed for a deduction of $340,000.00 for materials. On 28 December 1999 the plaintiff submitted another invoice on the basis that it had completed 60% of the works. The cumulative figure invoiced was $442,100.50. It is not in dispute that the 1st defendant made total payments of $360,000.00 by cash and cheque up to 3 February 2000.

13. It is not in dispute that the 1st defendant had difficulty in paying the instalments. Following correspondence there was a meeting between representatives of the plaintiff and both defendants at the site office on 27 March 2000. The minutes of the meeting show that the plaintiff estimated that it had not been paid $230,000 for the work done to date. The plaintiff and the 1st defendant advised that the material and installation costs for the forthcoming works would be about $180,000.00 and $400,000.00 respectively. The 2nd defendant asked the 1st defendant to submit a formal letter with the material list, to request assistance. But the 1st defendant was told to deal directly with the plaintiff concerning the outstand $230,000.00.

14. On 29 March April 2000 the plaintiff issued to the 2nd defendant an invoice for 6 items of materials amounting to $196,000.00 and labour costs of $400,000.00. This was signed by Mr Tin of the 1st defendant on 31 March. The 2nd defendant paid the plaintiff $196,000.00 on 17 April 2000. It is not in dispute that the 2nd defendant paid a further $50,000.00 as a partial payment of the outstanding amount due by the 1st defendant. It also paid $148,000.00 on behalf of the 1st defendant in July 2000. This was in respect of 37% of the $400,000.00 for labour on the invoice of 29 March.

15. The plaintiff therefore says that it has received a total of $794,000.00 plus materials worth $355,100.00, either from the 1st defendant or from the 2nd defendant on the 1st defendant's behalf. The figure of $794,000.00 is not disputed; but the 1st defendant says that credit has not been given for the full original figure of $460,615,68 for the materials supplied at the start of the contract.

16. The plaintiff's claim for additional works to Subway D is set out in its invoice dated 20 April 2000. It is not entirely clear when these works started. The evidence of Madam Hai is that they were done on the instructions of the KCRC and the Water Supplies Department, through the defendants, but there are no available documents to support this. In any event the total figure is $288,340.00 which includes $39,000.00 for labour. The major individual item is a figure of $150,000.00 for a material change from China "Xinxing" pipe to pipe of Japanese and UK origin.

17. It is also not in dispute that the 2nd defendant terminated the 1st defendant's contract following a written warning given on 31 July 2000 to resume outstanding works on Subway C within 7 days. The plaintiff invoiced the 1st defendant for $383,306.00 on 22 August 2000. On 26 August there was a joint inspection of the site by Mr Lee Chi Keung of the plaintiff and Mr Wu, the 1st defendant. They used some of the sheets from the quotation (for the Subway C and D extension pipe works, the labour but not the materials sheets, and for the Subway D temporary works, the combined labour and materials sheet) to record at least some of the works which they agreed had been done. I will refer to the labour sheet for Subway C extension pipe works as page 354, and that for Subway D extension pipe works as page 353, for they appear (as part of an appendix to the 1st defendant's expert's report) at those page numbers in the document bundle.

18. There are two major issues so far as the plaintiff's claim is concerned. The first is the amount of work done by 26 August 2000. The second relates to the additional works. I am obliged to counsel for the plaintiff, Mr Ho, for his useful schedules which set out the figures which are in dispute.

19. The plaintiff's case on the Subway C extension pipe works is that labour had been done to the value of $65,950.00, and materials supplied to the value of $143,300.00, by 26 August 2000. The 1st defendant's case, particularly as it appears from the evidence of his expert, is that only $39,000.00 worth of work had been done and no materials supplied. The main dispute is about the first item on page 354, namely the new installation of 47 metres of 600mm flange pipe. Both the 1st defendant and Mr Lee signed for this but there appears and handwritten legend which suggests that only 22.5 metres had been installed. The 1st defendant and his witness rely on this. Madam Hai says that 22.5 metres of new pipe was installed and the balance was made up by using existing pipe demolished earlier. Mr Lee corroborates this. The 1st defendant's evidence was quite self-contradictory. At one stage it appeared that he admitted that 47 metres had be installed. At another stage he denied it. Another item, the installation of a blank flange on the 600mm. pipe was also denied, but again it was spoken to by Madam Hai and Mr Lee and the defendant under cross-examination admitted that it had indeed been installed. So far as materials go, the plaintiff's evidence is that all the material was delivered to the site. In fact all but $40,440.00 worth of material is covered by delivery orders. Madam Hai says that the relevant delivery orders were lost.

20. I turn to the Subway C extension works. The plaintiff claims labour charges of $175,600.00 and materials amounting to $216,450.00. The 1st defendant's case is that labour was done to the value of $109,300.00 and no materials were supplied.

21. The labour and materials on this were spoken to by Madam Hai and Mr Lee. The former explained why works shown as Items 8, 10, 16, 17 and 18 on page 353 were carried out. Her account seemed straightforward. Mr Lee corroborated her evidence but said that in some cases he had omitted to sign for the items at the inspection. In cross-examination the 1st defendant agreed that Items 8 and 10 had been carried out, or carried out to the extent that the plaintiff's witnesses said, even though these had not been signed for. He also admitted that some of the testing work (Item 18) at least had been carried out; but he said that it should be worth $15,000.00 and not the $41,000.00 claimed.

22. As to materials, some of these are covered by the 2nd defendant's purchase order referred to above. $141,000.00 worth of material must have been supplied for that is what was found on inspection to have been installed. Some delivery orders were lost, according to Madam Hai; but some of those lost covered materials found on inspection to have been installed. Those not covered by inspection or delivery order total $39,800.00.

23. It seems to me impossible to say that no material had been used even on the 1st defendant's case on labour. At least that for which the 1st defendant admitted the work had been done must have been supplied. Most of the materials were supported by inspection and/or by delivery orders, and/or by the 2nd defendant's purchase order dated 31 March 2000 for materials worth $196,000.00; this had been invoiced by the plaintiff to the 1st defendant and the plaintiff's invoice had been signed by Mr Tin of the 1st defendant. (In fact it was for future work to both subways).

24. The 1st defendant did not say in his Defence or his witness statement that materials were not delivered. That only came out in oral evidence. However he admitted that he did not check the quantity of materials delivered at the site and could not be sure that all the materials stipulated in the contract were not delivered. If there had been a shortfall it would have had to be supplied by the 2nd defendant under the agreement made on 27 March 2000; but there is no evidence that this was done or indeed that it was asked for.

25. There is also the evidence of the 1st defendant's witness Mr Chu who, according to the 1st defendant and himself, carried out some of the work not done by the plaintiff in both subways before the 2nd defendant terminated the 1st defendant's contract.

26. There can be no doubt that the plaintiff supplied at least those materials which are covered by inspection and delivery orders. As to those which are not so covered, I am less sure. It is always easy to say that a document is lost. On the other hand some materials actually found to have been installed were not covered by delivery orders.

27. Overall, the plaintiff's witnesses appeared credible enough and there is support for their evidence in the documents. The 1st defendant was rather self-contradictory and it does not appear that he had much first-hand knowledge of what went on on the site; as I have indicated most of the dealings on site were done by Mr Tin. Where there is a conflict I prefer the evidence of the plaintiff's witnesses. I am satisfied on the balance of probabilities that the work done and materials provided up to 26 August 2000 were as they say.

28. I turn to the additional works. The problem with these is that the first document relating to any of them is the plaintiff's quotation dated 20 April 2000 (page 215). There are no orders emanating from the Water Supplies Department or the 2nd defendant. By that date the additional work had been done.

29. The dispute relates to Item 1, for additional works to Subway D according to the Water Supplies Department's requirements plus repair of damage to the 450 mm. pipes on two occasions; Item 2 which is for 12 days' pumping out of water from Subway C, and Item 3 which is a tender material change from China "Xinxing" pipe to pipe of Japanese or UK origin.

30. According to Madam Hai, the labour and materials in Item 1 were carried out under the order of the 2nd defendant and Mr Tin of the 1st defendant. There are no orders but she refers to some drawings which she says related to these works, and were not the same as the drawings she received when she gage her original quotation. There does not seem to be any dispute that these works were done but the 1st defendant's position is that they should have been within the scope of the contract, or in the case of the W.S.D. tie-in materials that they were provided to the W.S.D.

31. I have no doubt that these works were done. The 1st defendant could not say they were unnecessary. I do not see how it can be said that they should have been included in the original contract.

32. As to Item 1(d) for pipe repairs again it does not seem to be disputed that repairs were necessary. According to Madam Hai, it was the 1st defendant's own workers who damaged it. A special coupling had to be fitted to fix the damage. According to the 1st defendant, he did not know who caused the damage but all that should have been needed was for the pipes to be disconnected and the flanges, the flanges re-aligned and the rubber gaskets replaced; so the charge should not have been so high. Again, this is not something of which the 1st defendant seems to have much direct knowledge, and I think the evidence of Madam Hai is to be preferred.

33. As to Item 2, the pumping, Madam Hai and Mr Lee say that this was necessary because of the ingress of rain water to Subway C. It was necessary to have men on duty to watch the pumps for twelve days, according to Madam Hai; though Mr Lee could not remember the number of days. Madam Hai further said that her workers only started pumping when the 1st defendant's people had pumped for two days, without success. Again there does not seem to be any dispute that pumping was done. The 1st defendant could not however give an alternate number of days. According to him the water came out when the old pipework was demolished, and that should have been anticipated and allowed for in the contract; but curiously enough there is nothing to this effect in his witness statement.

34. The tender material change is the major item. Madam Hai's evidence was that originally she quoted for more expensive materials, but Mr Tin told her to use the Xinxing pipes because they were cheaper. However when the temporary pipework was tested it was found that the permanent pipe needed to take a pressure of 16 Bar. The Xinxing pipes could only take 12 Bar; so they had to be replaced. She was instructed to do this by a Mr Dave Chan of the 2nd defendant and by Mr Tin. When this was put to the 1st defendant he said he disagreed because Mr Tin had told him nothing of this matter.

35. I found Madam Hai's evidence on the pressure rather unsatisfactory. Apparently she could not test the pipes to 16 Bar; it seems that the gauge or equipment would not do it. She could test and had tested them to 12 Bar for two hours and there was no problem. A test record was produced. I put it to her that this did not mean that they would not take 16 Bar but she could not explain further; she said it was a technical matter.

36. What is clear is that when the order was put in for future work one 30 March 2000 the pipes specified were of Japanese and the valves and couplings of British manufacture. There is also a fax message from the plaintiff to the 2nd defendant dated 5 July 2000 concerning the availability of Mainland pipe as against Japanese or British pipe. All this tends to suggest that at some point a decision had already been made not to use Xinxing pipe.

37. So far as the additional work is concerned, overall I think that the evidence of Madam Hai is to be preferred. Again I am satisfied on the balance of probabilities that the work was done and the materials supplied and that the figures given by the plaintiff are correct.

38. A further issue is the existence of a "charge back" clause by which the 2nd defendant was to supply all materials and deduct the cost from payments due to the 1st defendant, and the further agreement between the plaintiff and the 1st defendant that the cost of materials would be deducted from payments due by it to the plaintiff.

39. There is nothing to support the existence of a general agreement between the 1st and 2nd defendants as to the supply of materials. No written contract has been produced. If there was such an agreement there is no evidence that the plaintiff knew about it. Madam Hai says that she did not. Having heard her evidence and that of the 1st defendant I do not believe that there was a general agreement for the latter to supply all materials and charge back for them.

40. It is not in dispute that some materials were supplied. The 1st defendant says that they were worth $460,615,68. Madam Hai says that this was reduced by agreement with Mr Tin to $355,100.00. Support for this is to be found in the alterations to the quotation (page 178) signed by Mr Tin for the 1st defendant. I accept Madam Hai's evidence on this.

41. It follows that the plaintiff has made out its case that it carried out work and supplied materials to a total value of $1,420,540.00. It is not in dispute that the plaintiff received direct payments of $360,000.00 from the 1st defendant and $394,000.00 from the 2nd defendant. Further materials were provided to the value of $355,100.00. So the plaintiff has been paid or had materials provided to a total of $1,109,100. Therefore the 1st defendant now owes the plaintiff $311,400.00.

42. I turn to the 1st defendant's counterclaim. On my findings above the claims for overpayment of $27,800.00 and repayment of $460,615,68 cannot stand. But there remains the claim for loss of profit and loss of target bonus, which the 1st defendant says was caused because it was the fault of the plaintiff that the work was not completed diligently and therefore that the 2nd defendant terminated its contract with the 1st defendant.

43. There seems to be nothing more than the 1st defendant's own assertion to support the allegation that the plaintiff's delay caused the 2nd defendant to terminate the contract.

44. According to Madam Hai the plaintiff's work in Subway C slowed down in July 2000. But this was because it had to wait for others to do the concrete plinth work. As to Subway D, connection was required to existing pipes after May 2000 but the plaintiff was waiting for materials. The 1st defendant had, on his own admission, 5 subcontractors working for him. As may be seen from the arrangements made in late March 2000 with the 2nd defendant, the 1st defendant was short of money to pay his subcontractors. After that date the plaintiff was not paid for its continuing works until July 2000. It seems unlikely that the 1st defendant was in a position to pay its other subcontractors. Overall it seems to me impossible to infer that the delay was caused by the plaintiff.

45. Mr Chu Tin Sung says that he worked for the 1st defendant some time in July and August. He charged $85,000.00 for labour and used existing materials available on site. Curiously enough the amount paid to him is not pleaded as a loss of profit. No indeed does he appear in the pleadings. It does not appear that the plaintiff was ever told that some other contractor would be taking over its work; at most the 1st defendant could say that it was indicated that this might happen. There is no specification of what Mr Chu did for his $85,000.00 and no record of invoice or payment. Nor indeed is there anything in the inspection records at 26 August 2000 to show that any of the work which was agreed to have been done, had been done by Mr Chu. In the circumstances I am not satisfied that Mr Chu did the work, or, if he did it, that it was work which should have been done by the plaintiff.

46. As to the general claim for loss of the profit which the 1st defendant could have made but for early termination there is no evidence to substantiate this. Nor is there anything, except the assertion of the 1st defendant to substantiate the alleged loss of bonus.

47. The 1st defendant has to prove his case on the counterclaim and I am not satisfied that he has done so.

48. The final result is that the plaintiff's claim succeeds and the defendant's counterclaim fails. There will be judgment in favour of the plaintiff for $311,400.00 with interest thereon at the prime rate plus 1% from the date of the Writ to the date of judgment, and thereafter at the judgment rate until payment, and costs to be taxed if not agreed. The 1st defendant's counterclaim is dismissed with costs to the plaintiff to be taxed if not agreed. Certificate for counsel. The plaintiff's own costs are to be taxed in accordance with the Legal Aid Regulations.