SINCERE AIR-CONDITIONING CO LTD v. A. S. WATSON GROUP (HK) LTD t/a FORTRESS

HCCT 53/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 53 OF 2006

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J U D G M E N T

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I.       INTRODUCTION

1.  Fortress was Chun Wo’s sub-contractor at a Tin Shui Wai residential building construction project which extended from 2002 to 2004.  Fortress sub-contracted the installation of split-type air-conditioners (STACs) at the site to Sincere.  Fortress supplied the Toshiba brand STACs which Sincere installed.

2.  By this action Sincere claims the unpaid balance of monies due for work on site.  Fortress counterclaims against Sincere for an indemnity against contra-charges which Chun Wo is seeking to impose on Fortress.

3.  The main issues which I have to decide are accordingly as follows:-

(1)     Whether Sincere is to entitled to be paid by Fortress for certain additional or variation work.

(2)     Whether Fortress is entitled to claim contra-charges against Sincere.

(3)     Whether Fortress should be credited with $69,200, such amount being alleged to have been directly paid by Fortress on Sincere’s behalf to Sincere’s sub-contractors.

II.      BACKGROUND

4.  In July 2002 Mr. Eric Chan (a Manager in Fortress’ Contract Sales and Service Department) invited Mr. Pak Chi Sing (Sincere’s Managing Director) to take over the installation of 4,044 STAC sets at the site in place of Wan Lee.  Mr. Pak only reluctantly agreed because (according to Mr. Pak) the price of $1,700 per set was low.

5.  The normal rate for STAC installation at the time was $1,900 per set.  But Mr. Pak agreed the low rate because (as he said in evidence and as I accept) Mr. Chan told him that the majority of sets were to be installed “back-to-back”.  This meant that there would be no need to install large quantities of condensate drainage pipes (CDPs), indoor brackets, or covering bulkheads.  On the understanding that only minimal lengths of CDPs (estimated by Mr. Pak at about 300 m), minimum quantities of indoor brackets and few (if any) bulkheads were required, Mr. Pak thought that a rate of $1,700 per set was just acceptable.

6.  Sincere and Fortress then entered into an Agreement dated 16 July 2002.  The Agreement required Sincere “[t]o install all the indoor and outdoor split type A/C units c/w accessories” and “[t]o supply and install all refrigerant pipeworks, condensate drain pipeworks c/w necessary supports and insulation etc.” 

7.  At $1,700 per unit for 4,044 STAC units, the price of installation came up to $6,874,800.  But “the final payment should only be paid on the actual units completely installed”.

8.  The Agreement also included the following express term in its Appendix III:-

Clause 6:-

“This is a lump sum contract.  No variation of work or price fluctuation or extension of time will be granted to the Sub-contractor unless authorized by the Contractor/ Main-contractor in writing.”

9.  From time to time in the course of working on the site, Mr. Pak says (and I accept) that Sincere was orally requested to perform some additional work or to alter some installation work previously instructed and already executed, so as to accommodate some design change.  The requests were made orally by Mr. Chan or by Benny (a site foreman acting on behalf of Fortress).

10.  Mr. Pak complied with the requests, causing Sincere to do the relevant work, even though no written instructions were ever received.  Invoices 061 and Invoice 090 issued in 2004 represent Sincere’s charges for having done such additional and variation work.

11.  In particular, Mr. Pak says (and I again accept) that in August or September 2002 Benny told him that there had been a change in design.  The change included reducing the number of external drainage pipes in the buildings being constructed. 

12.  As a result of the design change, a substantial number of STACs had been re-positioned and were no longer to be installed “back-to-back”.  Instead, the re-located STACs had to be connected to the external drainage pipes of their relevant buildings by significantly longer lengths of CDPs.

13.  Benny gave Mr. Pak some representative drawings with orange highlighting indicting the lengths of CDP now required.  From these, Mr. Pak estimated that the design change of which he was being informed would then require 8,980 m of CDP.

14.  Both Mr. Chan and Benny left the project in mid-2003.

15.  Fortress now denies that Sincere was ever asked to do the majority of additional or variation work invoices.  In any event, Fortress contends that no rates were ever agreed for the work invoiced, even if the same had been requested.

16.  Neither Mr. Chan nor Benny were called by any party to give evidence at trial.  Mr. Pak noted that, although Mr. Chan was prepared to give evidence on Sincere’s behalf, Mr. Chan was afraid that any such evidence might jeopardise his relationship with Fortress (with whom Mr. Chan still has some business).

II.      DISCUSSION

A.      Sincere’s claim for additional and variation work: $2,354,550

17.  In this section, I shall go through the individual items in Invoices 061 and 090 and assess Sincere’s entitlement to the same.

A.1    Additional 50 STACs under Invoice 061: $95,000

18.  The need for more STACs was principally occasioned by the decision to add an extra floor, the 52nd floor, to the building project. 

19.  Mr. Pak says that a rate of $1,900 per STAC unit installed was orally agreed between him and Mr. Tse Kar Mong, Fortress’ consultant engineer on the project.  Mr. Tse denies any agreement.

20.  Mr. Pak says that a higher rate of $1,900 (as opposed to $1,700) per unit was quoted and accepted, because by then it had become apparent that much longer lengths of CDP were generally required to install STACs at the site than what Mr. Chan had earlier suggested to Mr. Pak.

21.  I accept Mr. Pak’s evidence on the matter. 

22.  Where there is a conflict between his evidence and that of Mr. Tse (who also appeared as a witness), I generally prefer that of Mr. Pak.  Mr. Pak appeared to me to give evidence in a precise and accurate manner, to the best of his recollection.  He was on site for considerable periods on a near daily basis in contrast to Mr. Tse who only visited the site once a week for a half-day at a time.  For much of his information, Mr. Tse had to rely on reports from Benny.  It seems to me therefore that, being intimately involved with the actual day-to-day work on the site, Mr. Pak’s recollection is apt to be more reliable than that of Mr. Tse.

23.  Ms. Gekko Lan (appearing for Fortress) has pointed out that, according to the “as-fitted” drawings, only 44 STACs were installed on the 52nd floor.  She therefore submits that, insofar as I find that a rate of $1,900 per unit had been agreed, that should only apply to the installation of 44 of the 50 units.  The balance of 6 units should have been charged (Ms. Lan suggests) at the old rate of $1,700 per unit in accordance with the Agreement.

24.  I disagree.  I think that here Ms. Dora Chan (appearing for Sincere) is right.  If $1,900 per unit was agreed for the installation of 50 STACs, that rate should apply for all 50 units regardless of where they were eventually installed.

25.  I would therefore allow Sincere’s claim for $95,000 ($1,900 per unit x 50 units).

A.2    Variation works under Invoice 090: $2,259,550

26.  The additional work is not supported by any written instruction.

27.  Fortress accordingly argues that it need not pay the same by reason of Agreement, Appendix III, cl.6.  However, Fortress’ argument does not seem to me tenable.  The requirement of writing for a variation instruction could be waived by Fortress. 

28.  Thus, if Fortress orally instructs Sincere to do some variation work X and Sincere performs X in accordance with the instruction, it would be unconscionable for Fortress to rely on cl.6 as a reason for non-payment in respect of X.  In the circumstances, Fortress must be deemed to have waived the protection afforded to it by cl.6.  Otherwise, Fortress would have obtained the benefit of Sincere’s compliance with its oral instruction without having to pay for that benefit.

A.2.1 Dismantle 7 re-do 25 sets at GRC position: $12,500 (25 STACs at $500 per set)

29.  According to Mr. Pak, Benny instructed him to re-install 25 STAC sets in order to accommodate a design change.  That change was the incorporation of a decorative feature (which Mr. Pak called “GRC”) in the façade of some of the site buildings.  Some 25 sets which Sincere had already installed interfered with the location of the GRC and therefore the sets had to be re-done.

30.  Here I accept Mr. Pak’s evidence for the reason which I have already mentioned.

31.  Much play was made at trial of a site memo dated 17 July 2003.  The memo was a complaint by Benny to Chun Wo about delay to the project which Benny attributed to Chun Wo.  The memo refers to the GRC being installed in August 2003. 

32.  On the strength of the memo, Ms. Lan submitted that Benny (who left Fortress in August 2003) could not conceivably have instructed Sincere to re-do the 25 sets as Mr. Pak stated in evidence.

33.  I am unable to infer anything from the memo.   Precisely when it was decided to have the GRC feature is unknown.  It was perfectly possibly that Benny told Mr. Pak to re-do the 25 sets long before the GRC was actually to be installed, but shortly after a decision to include the GRC feature was taken.

34.  Ms. Lan has also suggested that, if the 25 sets had to be re-installed, that must have been due to Sincere’s fault.  Sincere (Ms. Lan argues) had an express duty under the Agreement to coordinate installation of STACs with the work of other contractors.  If it had to re-do work, that must have been due (Ms. Lan reasons) to a failure to coordinate properly.  The 25 sets (Ms. Lan concludes) were thus installed prematurely.

35.  I am unable to accept Ms. Lan’s contention.  It is pure speculation, unsupported by any evidence.  I do not see why it was for Mr. Pak to second guess design changes.  Nor do I see why installing 25 sets before a decision to add the GRC feature was taken amounts to a failure of coordination.

36.  I would allow this item.

A.2.2 Additional drain pipes: $718,400 (8,980 m x $80 per m)

37.  Ms. Lan contends that I should disregard Mr. Pak’s evidence of a change in the estimated requirement of drain pipe from 300 m to 8,980 m.  How can the change (Ms. Lan asks rhetorically) have been so dramatic?

38.  I am not persuaded by Ms. Lan’s argument.  I accept Mr. Pak’s evidence of what he had been told by Mr. Chan. 

39.  It seems to me wholly possible that Mr. Pak’s estimate changed from 300 m to 8,980 m as a result of the perceived change in installation design.  Having come into the project believing that STACs were largely to be installed back-to-back, he later found that was not the case.  He then had to revise his estimate of CDP required drastically.

40.  Ms. Lan attempted to demonstrate that some alleged tender drawings for the project required a significant number of STACs to be installed otherwise than “back-to-back”.  According to Ms. Lan, much more than 300 m of CDP would have been needed on the basis of such tender drawings.  It was therefore wrong (Ms. Lan said) for Sincere to charge for the entire 8,980 m of CDP as being brought about by any later change of design. 

41.  But, in the absence of expert evidence on the matter, I could not accept Ms. Lan’s submissions as to what units were or were not to be installed “back-to-back” and as to what lengths of CDP were originally required according to the alleged tender drawings.

42.  Prior to trial, Sincere’s lawyers repeatedly asked Fortress’ lawyers whether Fortress would be adducing expert evidence.  Fortress replied in the negative. 

43.  But, during trial, Ms. Lan sought belatedly to introduce expert evidence through Mr. Tse (an engineer) relating to the lengths of CDP that were required for the installation of STACs in accordance with alleged tender drawings.  Ms. Lan then sought to compare that with her calculations of CDP actually used as indicated by “as-fitted” drawings.

44.  I rejected the attempt to adduce expert evidence through Mr. Tse. 

45.  First, it was far too late to embark on such a course.  Any new evidence would necessitate a lengthy adjournment which would, by delaying payment to Sincere, lead to liquidity difficulties, the bane of sub-contractors in construction projects. 

46.  Second, there had previously been a summary judgment application by Sincere.  In giving Fortress leave to defend, I nonetheless made it clear that I expected the trial to proceed expeditiously and gave directions to that effect.  On that basis, there was no good reason to delay trial, only because at the last moment, contrary to all previous indication, Fortress suddenly wished to adduce expert evidence.

47.  Third, if the comparison exercise proposed by Ms. Lan was to be meaningfully carried out, it would have been necessary to go into the history of the drawings and design changes which took place on the project.  That would again have necessitated a long adjournment without adequate explanation why the point was only being belatedly raised at trial.  Sincere’s case of a design change had already been signalled at least as early as the summary judgment application.

48.  Fourth, it was far from clear that what were alleged by Fortress to be tender drawings were in fact the actual drawings which accompanied the tender.  What was sought to be produced seemed far too informal (for example, being held together with scotch tape) to be the actual tender drawings. 

49.  The drawings were disclosed on the eve of trial by Fortress without any good excuse for the lateness of their production.  Sincere did not have any time before trial to investigate the provenance and history of the alleged tender drawings.  It would have been inappropriate to delay trial without any full explanation from Fortress as to precisely why the alleged tender drawings were produced so late.

50.  Fifth, even if the drawings produced were the original ones which accompanied the tender, I doubted that any comparison between them and the “as-fitted” drawings would be helpful. 

51.  According to Mr. Pak, he was told at the outset by Mr. Chan that installation was to be largely “back-to-back”.  Mr. Chan may have said this to persuade Mr. Pak to agree the lower installation rate of $1,700 per unit.  As I pointed out at trial, Mr. Chan’s tactic might not have been so much a lie as something akin to the way that sometimes, in the hope of being quoted a low brief by a barrister over the telephone, a solicitor might minimise the number of actual files involved in a case. 

52.  Mr. Pak says that he saw (and was given) no drawings at the time of the Agreement, but simply relied on what Mr. Chan told him.  Thus, the original design may or may not largely have consisted of “back-to-back” STAC installations. Mr. Pak would not have known.  He merely contracted with Mr. Chan on the express understanding between the 2 that the STACs were largely to be installed “back-to-back”. 

53.  To show then that the tender drawings were different from what Mr. Chan had intimated and in fact required more units to be installed otherwise than “back-to-back”, would not answer Mr. Pak’s case that Sincere initially contracted on the basis of what he had been told by Mr. Chan.  Later, for whatever reason, Mr Pak was told that many more units than anticipated were to be installed otherwise than “back-to-back”.  Consequently Mr. Pak, acting perfectly rationally, accepted the variation work, but charged Fortress for the additional CDP length required.

54.  Finally on this item, Ms. Lan queries the unit rate of $80 per m.  But that does not seem exorbitant or unreasonable on the evidence.  By instructing Sincere to install in a different manner from what Mr. Chan had originally said, Fortress must impliedly have been authorising Sincere to charge at a reasonable rate for the extra CDP required.

55.  I would allow this item.

A.2.3 Reserve pipe sleeves: $90,000

56.  There is no dispute that Sincere installed the pipe sleeves.  Sincere supplied the pipes inserted in the sleeves.  Mr. Pak accepts that the cost of supplying the pipes was for Sincere’s account.

57.  Ms. Lan argues that, if Sincere supplied the pipes on its account, it must follow that it was also obliged to install the pipes installed.   The cost of installation should therefore (Ms. Lan concludes) also be borne by Sincere.

58.  I am unable to accept Ms. Lan’s contention.  There is nothing in the Agreement to suggest that Sincere was contractually bound to install pipe sleeves.  The installation of pipe sleeves is a distinct job from the installation of STACs.

59.  I allow this item.  Mr. Pak says that he orally agreed with Fortress to charge $90,000 for the pipe sleeves.  I accept this evidence.

A.2.4 Re-do damaged refrigerant pipes: $450,400 (1,126 locations x $400 per location)

60.  Ms. Lan queries whether pipes were re-done at the 1,126 locations claimed.  She also queries the rate of $400 per location.  She points to a site memo listing only 216 places.

61.  I accept Mr. Pak’s evidence that the work was done at 1,126 locations.  The site memo (produced by Fortress) is far from conclusive that only 216 locations were involved.  I do not think that the rate of $400 is unreasonable.

62.  I would allow this item.

A.2.5 Dismantle refrigerant pipes at GRC position: $22,500

63.  This refers to dismantling pipes to accommodate the GRC feature mentioned above.  I accept this item for the reasons given above in connection with the re-installation of STACs to make way for the GRC.

A.2.6 Dismantle outdoor units due to dismantling of workers’ lift: $22,500

64.  I accept Mr. Pak’s evidence on this item. 

65.  I do not accept Ms. Lan’s contention that the dismantling of STACs (to accommodate the workers’ lift) was due to a lack of coordination by Sincere.  If anything, it was Fortress’ duty to ensure that works by its sub-contractors were properly scheduled. In installing the outdoor units Sincere was merely complying with the schedule which Fortress had provided to it.

A.2.7 Indoor unit brackets: $812,900 (3,250 units x $250 per unit)

66.  This was necessitated by the change from “back-to-back” installation mentioned above.  Much as it led to Sincere needing additional lengths of CDP, the design change necessitated the use of significantly more indoor brackets for the installation of STACs.  It therefore seems to me that Sincere is entitled to charge for this work.

A.2.8 Modify bracket due to switch box: $94,000

67.  The modification was due to accommodate an electric switch box.  I accept Mr. Pak’s evidence that the work was done on Benny’s instruction.  I would allow this item.

A.2.8 Fire-damages units: $27,000 and $9,350

68.  Fortress accepts liability for this item.

A.3    Summary

69.  The end result of the foregoing is that Sincere’s claims in respect of Invoices 061 and 090 are allowed in full.

B.      Fortress’ claim for contra charges

70.  Fortress claims an indemnity against certain payments claimed by Chun Wo against Fortress.  Fortress says that the payments claimed relate to Sincere’s negligence, fault or omission.  In this section I shall run through the items claimed by Fortress against Sincere.

B.1    Contra items claimed by Fortress: $1,094,019.34

B.1.1 Penalty for absence from safe working cycle morning briefings: $6,500

71.  The evidence is that it was Fortress’ obligation to send its representatives to such meetings.  Fortress through Benny asked Mr. Pak to attend as Fortress’ representative.  Mr. Pak refused, rightly pointing out that attendance was not part of his responsibility.  His role being limited to the installation of STACs, Mr. Pak could not usefully contribute to any discussion about overall safety throughout the site.  As a result, no representative from Fortress appears to have attended several meetings.

72.  I do not see how Sincere can be responsible for this item.

B.1.2 Fingerprint card deposits: $8,910

73.  Sincere admits liability for $5,300.

74.  There is no evidence that the balance of deposits relate to fingerprint identification cards for workers engaged by Sincere.  The balance is disallowed.

B.1.3 Photocopying charges: $2,000

75.  Here I accept Mr. Pak’s evidence that any photocopying would have related to instructions by Fortress (communicated through Benny) to Sincere.  I do not see why such photocopying should be for Sincere’s account, rather than Fortress.

B.1.4 Rental of lifts and costs of operation: $361,928.24

76.  This relates to the workers’ lift.

77.  Mr. Pak’s evidence was that his workers used the staircase.

78.  Whether that is right or wrong, I do not see how this item can be attributed to Sincere.  The lifts would have been provided for use of all workers at site, not just those of Sincere.  The basis on which Chun Wo has attributed any amount for use of the lift to Fortress is unclear.  For example, if any amount due is based on a percentage use of the lifts, how was the percentage calculated?  Nor do I understand on what basis Fortress seeks to pass on such cost to Sincere. 

79.  The item is disallowed.

B.1.5 Rental of gondolas: $174,635.70

80.  Ms. Lan argues that the gondolas were used to repair defective outdoor units.  Again, the defects being internal to the STAC units repaired, the gondolas should have been for Fortress’ account as supplier of those units.

81.  This item is disallowed.

B.1.6 Removal of rubbish: $504,202.30

82.  I am far from satisfied that the rubbish concerned was the result of Sincere’s work.  There were many other sub-contractors on site.  Mr. Pak was adamant that the rubbish concerned (whatever it may have been) could not have been Sincere’s.

83.  It may be that, at the time of entry into the Agreement, Mr. Chan mentioned to Mr Pak that Chun Wo would be charging for rubbish removal.  But, contrary to Ms. Lan’s submission, that alone would not make Sincere liable for whatever Chun Wo charged for rubbish removal.

84.  Mr. Pak may have offered, by way of compromise, to pay $90,000 of the cost of rubbish removal by Chun Wo.  But Fortress rejected that offer.  I therefore do not accept Ms. Lan’s suggestion that Sincere should be liable for at least the $90,000 offered.

85.  This item is disallowed.

B.1.7 Cost of materials and remedial work: $35,843.10

86.  Sincere admits liability for $4,030 of the amount claimed. That represents $3,640 for Auto CAD files and $390 for Conbextra HF bags.

87.  There is no evidence or explanation establishing how the balance is attributable to Sincere.  The claim for the balance is disallowed.

B.2    Summary

88.  The net result is that, save for certain items totalling $9,330 for which Sincere has accepted liability, all other contra items claimed by Fortress are disallowed.

89.  I note that the contra items claimed by Chun Wo which Fortress seeks to pass on to Sincere have not in fact been agreed between Chun Wo and Fortress.  The items are still under negotiation.  Chun Wo has withheld final payment on the Tin Shui Wai project to Fortress pending resolution of the dispute between it and Fortress.  Therefore, save where Sincere has accepted liability, I have doubts whether Fortress can claim an indemnity in any event for merely potential loss which has not crystallised but remains under discussion.

C.      Alleged credit to Fortress of $69,200

90.  Fortress claims to have made certain payments directly to sub-contractors on Sincere’s account.  These amount to the $69,200 for which Fortress claims additional credit against any liability to Sincere.  In this section, I evaluate the credit items claimed by Fortress.

C.1    Credit items claimed by Fortress

C.1.1 Replacement of damaged STAC parts: $12,250

91.  There is no evidence at all that Sincere’s workers were liable for such damage.  Insofar as the repairs were to due to the malfunctioning of STAC units, Fortress provided such STACs for Sincere to install.  Sincere cannot have been liable for internal malfunctioning of the Toshiba units supplied by Fortress.  Sincere’s responsibility was merely to install the STACs provided.  This item is disallowed.

C.1.2 Wai Kee repair work: $21,750 

92.  This relates to the repair of the internal coils of STAC units.  Again this is a problem of the STAC units supplied by Fortress, it is not a matter of defective installation.

93.  Although Wai Kee was a sub-contractor of Sincere for the installation of STACs, on some jobs Wai Kee was also engaged as a direct sub-contractor of Fortress.  The defective coils were repaired by Wai Kee at the direct request of Fortress. Sincere was by-passed.   

94.  This item is disallowed.

C.1.3 Scaffolding for repair work: $30,800 and $4,400

95.  Fortress’ argument is that the scaffolding was erected during the defects liability period so that Sincere should be liable.

96.  Why precisely the scaffolding was put up is unclear.  It seems that the scaffolding was put up (among possibly other reasons) to enable repairs to be made to defective STAC units.  As I have noted, it was Fortress’ responsibility to ensure that the STAC units which it supplied were functional.  Accordingly, I am far from satisfied that the scaffolding was erected due to any faulty installation by Sincere. 

97.  This item is disallowed.

C.2    Summary

98.  The net result is that the extra credit items claimed by Sincere are all disallowed.

IV.     CONCLUSION

99.  The final position between Sincere and Fortress (taking account of agreed matters) is as follows:-

(1)	Contract Sum	$6,874,800.00
(2)	Additional or variation work	$2,354,550.00
(3)	LESS: Payments already received
	from Fortress [not disputed]	($2,057,836.00)
(4)	LESS: Payments of materials by
	Fortress on behalf of Sincere	($3,717,624.85)
	[not disputed]
(5)	LESS: Payments made by Fortress
	directly to Sincere’s
	sub-contractors [not disputed]	($598,063.58)
(6)	LESS: Admitted contra charges	($9,330.00)
	TOTAL DUE TO SINCERE	$2,846,495.57 ==========

100.  There will be judgment for Sincere in the net amount of $2,846,495.57.  Interest is to run on that amount from date of writ (12 July 2006) until date of judgment at 1% over Hongkong Bank prime.  Thereafter interest will run at the judgment rate until payment. 

101.  There will be an Order Nisi that the costs of this action (including claim and counterclaim) are to be paid by Fortress to Sincere, such costs to be taxed if not agreed.