LEUNG WING KONG t/a KENNETH ENGINEERING CO v. YUEN HUNG WAI t/a TIM LEE CONSTRUCTION CO

DCCJ15042/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15042 OF 2001

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JUDGMENT

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Introduction

1. This action relates to a contract entered into between the parties whereby the Plaintiff was engaged by the Defendant to do the installation of the plumbing works at the Sha Tau Kok Market and Cooked Food Centre. The main contract for the building of the Market was between the Government, represented by the Architectural Services Department ('ASD'), and the Defendant as the main contractor which was signed on 15th December 1995. On 31st May 1996 the Defendant retained the Plaintiff, as a specialist sub-contractor, to do the plumbing and drainage works specified in the main contract. The sub-contract is at pages 160 - 237 of the bundle. An issue has arisen as to whether this was a fixed price contract amounting to $894,634 less 5%, giving a price of $849,902.30 on a re-measurement contract whereby the Plaintiff would be paid on the basis of the work actually done by him as re-measured. To this I must return presently. At all events, the Plaintiff completed the works in late January 1997. He now brings this action for $154,377.30 being the amount that he says remains outstanding. The calculation which appears at page 3 of the Re-Re-Re-Amended Statement of Claim (page 3 of the additional bundle) is based on the contract price of $849,902.30 less $703,645 already paid to him by the Defendant, plus $33,882 for additional works and $983 for three iron pipes which he says have been taken by the Defendant's workmen. This produces a total of $181,122.30. A concession is then made by the Plaintiff 'as a gesture of good will' (para. 11 of the Re-Re-Re-Amended Statement of Claim) by deducting a further $26,665 because, on the Defendant's direction, cheaper cast iron piping was used for the rain water pipe instead of the original UPVC piping. He also concedes a further $80 for the cost of two plans. This therefore results in the balance of $154,377.30 now sued for.

2. The defence and counterclaim, also much amended, (five times) raises three issues. Firstly, and this is the main line of defence, that on 7 October 1999 the parties got together to sort out who owed who and for what items. They negotiated their differences over a period of two hours and signed a Final Account under which the Defendant would pay the Plaintiff $60,285.70 and would consider paying a further $33,882 provided the Plaintiff could prove that some 'additional' 150 mm pipe work was in fact 'additional' to the contract between the parties. If that was not done by the 14th October (within 7 days) then the Plaintiff would be taken to have waived his rights to this amount and accept $60,285.70 in full and final settlement of the contract. If the Defendant can demonstrate that this Final Account was intended to be and is determinative of the outstanding issues between the parties then the action must fail and there must be judgment in his favour.

3. If the Defendant fails to show that the Final Account had disposed of the various issues between the parties at that time then it is submitted on his behalf that the merits of the claim will need to be gone into the determine whether the Plaintiff has proved his case. Quite apart from specific issues as to the works themselves and whether the contract is one for a fixed price or a re-measurement contract consideration will need to be given to the Defendant's counterclaim which seeks liquidated damages for delay in the completion of the works by the Plaintiff. This counterclaim it is said was foregone by the Defendant in the negotiations which culminated in the so-called Final Account but if the Final Account is held not to have concluded the dispute between the parties the matter must remain at large so as to entitle the Defendant to raise the counterclaim based on the contracted $3,000 a day for each day overrun by the Plaintiff.

The Final Account

4. The document which constitutes the Final Account is at page 90 with its translation at 90A. According to Mr. Yuen, the Defendant, this is the product of two hours of negotiations between the parties. As the evidential burden is on the Defendant to show the binding nature of this account it is appropriate to take his evidence on this matter first. His statement which stands as part of his evidence-in-chief starts at page 67. The background to this begins with the Plaintiff's tendered account for $181,122.30 dated 31st December 1997 (page 89) which included an account for additional pipe works of $33,882 as well as $983 for three pipes. This account was of course disputed by the Defendant. At the meeting on the 7th October the Plaintiff attended with a Mr. Poon to whom he had himself sub-contract the entire contract and who was therefore familiar with the details of the work that had been done. The Defendant attended with his brother, who is his partner, and Mr. Chong who was the charge hand on the site. Mr. Yuen's evidence about the various items of the account at page 90 should be noted. As to the first two minor items of $60 and $20 for the drawings there is no dispute. This the Plaintiff accepts. Items 3, 8 and 9 can be taken together. The Plaintiff kept a storage container on the site which contained amongst other things tools and equipment which were required as the work was progressing. By December 1996, at which time the main contract was very much at the stage where the site needed to be cleared and handed over to the ASD, Mr. Yuen had asked the Plaintiff on a number of occasions to remove this container. Eventually the Plaintiff agreed that it would be removed for him by the Defendant and kept at the Defendant's builders yard at Yuen Long. In the event it was stored there for a year, until December 1997 when the Plaintiff arranged for its removal. The Defendant says that he agreed in the course of the negotiations of the 7th October that these amounts should be deducted from the contract price. Item 4 which is a substantial deduction of $59,859.50 concerns a change in the specification by the architect during the course of the works which resulted in cheaper materials being used. Items 5 and 6 refer to some lesser alterations ordered by the architect which had the effect of cutting the cost as reflected in the 'agreed' figure in the account. Item 8 concerns an allegation by the Defendant of defective workmanship by the Plaintiff which had to be put right by the Defendant at a cost of $20,000 but, having regard to the ebb and flow of negotiation the Defendant agreed to reduce the deduction to $2,500 to secure agreement with the Plaintiff. There are then three items which appear at the end of the Account (page 90B) which apart from setting the seal to the agreement also provides, at No. 2, the Plaintiff with an opportunity to re-instate the 'additional works' so-called, said to be worth $33,882 provided he could demonstrate within seven days that these works were truly outside the scope of the contract and therefore liable to be paid for separately. Item 3 provides that the resulting balance of $60,285.70, leaving aside the issue of the 'additional works', is to be paid within three days. The Defendant says that on 8th October 1999 he spoke to the Plaintiff on the telephone inviting him to come to his office to collect the agreed amount.

5. The Plaintiff declined to do so and sought to re-visit the issue of the 'additional works' insisting that the invoice for these works (page 97) dated 13th June 1996 had been accepted by the Defendant and that this should now be paid for. The Plaintiff's case on the Final Account is that he was obliged to sign the document under the threat that if he did not agree to these proposals he would get nothing beyond what he had already been paid. He says that there was no agreement. The main sticking point was the invoice for $33,882 and although he was not happy with the other deductions that had been imposed on him he might have been prepared to settle the matter had the Defendant been prepared to do the decent thing and pay for the extra work which he had undoubtedly carried out. He says that no proof was required within seven days or any other period of time. The work was there and plain to see.

6. Whilst now, four years after these negotiations, the parties have indulged in a dispute before me about the justification for these deductions, as appear at page 90, and there is also a real contest as to the valuation of the deductions, my primary task is to decide whether; notwithstanding the fact that the parties were negotiating against the background of a dispute about what should come off the contract price, assuming it was a fixed price contract; they eventually came to terms and finally agreed to put those differences aside and agreed to resolve the matter on this basis with a view to putting an end to a matter that was by then getting stale. In arriving at a conclusion on this vital aspect of the case, whilst the merits of each sides complaints on the various deductions is important as providing some indication as to whether there was an eventual meeting of minds, it seems to me that I am not required to come to any final view in respect of these complaints in deciding this issue. It is sufficient for me to observe that the Plaintiff, in particular, was not at all happy with these deductions save for the minor one's which he accepts and to have regard to his attitude in deciding whether there was this all important consensus as a means of putting an end to the dispute. It is only if I find that there was no binding agreement that I will need to go into some aspects of the merits with a view to making findings about those complaints.

7. In determining whether there was a concluded agreement between the parties, Miss Tse who appears for the Plaintiff, has drawn my attention to correspondence that passed between them which she says provides a strong indication that the matter remained unresolved. This starts with a letter from the Plaintiff to the Defendant at page 276 where he seeks to hold his ground on the additional works and wishes to be paid the $33,882 before he will agree to put an end to the matter. Two days later on the 15th October the Defendant replies. The counter-argument is put as to why this work is part and parcel of the main contract and should not attract separate and extra payment and ends with a request that a substantive reply be made to this letter by the 22nd October 'including the total work price and outstanding payment, so that procedures can be cleared (see page 279). The Plaintiff replied on the 21st October (page 282) repeating the argument and asking to be paid $33,882 '.... so as to clear up the procedures'. Then on the 26th October (page 285) the Defendant replies with a detailed reply and calculation to demonstrate how the final 'agreed' amount of $60,285.70 has been calculated. It invites a reply within seven days ".... so that our precious time will no longer be wasted and our company's resources be consumed'. Far from letting the matter lie, more correspondence is exchanged on this issue. On the 1st November (page 289) the Plaintiff is asked by the Defendant '.... to submit proof and ground of disagreements so that my company can re-consider or if there is no more new reason and backup, we regret my company will not waste time and will settle according to the calculated amount in our letter of last time for payment of the outstanding amount and retention money, which is altogether $60,285.70. If you shall be agreeable, please sign and fax back to our company, so that we can issue a cheque and end the matter for both parties'. Back comes the Plaintiff on the 10th November (page 292) - 'Please do not twist facts again, please deal with the matter sincerely and pay up the balance as earlier as possible and do not delay any more'. Lastly, the Defendant replies on the 1st December (page 294) effectively repeating the contents of his letter of the 1st November (page 289).

8. Miss Tse submits that it would be strange indeed, had there really been agreement on the 7th October, to see correspondence of this sort following it. She also points to the fact that nowhere in the Defendant's post 7th October letter is any reference made to the binding nature of the 'Final Account' that had been signed by both parties on the 7th October and nowhere therefore is the Plaintiff reminded of his obligations under the 7th October Final Account to accept $60,285.70 and leave the matter that.

9. Mr. Harrison for the Defendant, has pointed to the course of the Plaintiff's evidence in respect of the events of the 7th October. Firstly, reference is made to paragraph 18 of his witness statement of 18th May 2002 where he says; 'On 7th October 1999 I once agreed to receive $60,285.70 so as to end the matter, as he agreed to pay within three days.' Reliance is placed on the fact that the Plaintiff accepts that he agreed to this although its right to say that he goes on to say in the same paragraph: 'I also thought he would in addition pay me $34,865. So I did not want to waste my energy in chasing for the unpaid amount. My consent was made without additional benefit, but only with loss to be suffered. Yet I still agreed because he agreed to pay me within three days. But in the end he did not pay during the agreed period'. Mr. Harrison then refers to the Plaintiff's supplemental statement (page 64 para. 5) as evidence showing that the Defendant was willing to pay him $60,285 within three days. The net effect of this supplemental statement is to make clear so far as the Plaintiff is concerned, at all events, that he was disposed to accept $60,285.70, albeit reluctantly, provided the Defendant also paid for the additional works of $33,882 and $983 for the three pipes making a total of $95,150.70. Mr. Harrison has sought to make something of the fact that despite the fact that the Plaintiff in this paragraph accepts that the Defendant wished to pay him $60,285.70 within three days he refused to admit when confronted with this passage in cross-examination that the Defendant had contacted him the following day and offered payment of this amount.

10. Criticism is also made of the Plaintiff's evidence as being inconsistent in relation to the meeting of the 7th October and the signing of the Final Account and, what followed that meeting particularly, in relation to the correspondence to which I have already referred. Overall, I am bound to say the matters raised by Mr. Harrison are not particularly significant. In his supplemental witness statement the Plaintiff has remarked that he was insistent that the Defendant would pay the extra $34,865 ($33,882 + $983), but in the exchange of correspondence the sum referred to is $33,882 for the 'additional' works. The figure of $983 for the pipes is no longer referred to. That having been said the overall picture remains with the Plaintiff being adamant that he requires to be paid for these additional works. This failure to refer to the amount as being $34,865 is not something that is to be taken as damaging the Plaintiff's credibility by itself.

11. What is more disturbing in the Plaintiff's performance in the witness box. He was particularly obtuse and repeatedly failed to engage clearly put questions and was more interested in either scoring points or providing answers to questions which had not been asked if him in order to get his own point of view over.

12. Mr. Harrison took him carefully through memoranda which pre-dated the meeting of the 7th October which established that a number of the deductions which appear in the Final Account had already been raised by the Defendant as deductions. This in order to show that when the discussions took place on the 7th October these deductions would not have come as a surprise to him. Many of the Plaintiff's responses were designed to avoid the evidential 'inconvenience' created by these faxed memoranda by saying that particular documents had not been received by him when quite obviously they would have been received, they having been transmitted to his admittedly correct fax number.

13. The whole tenor of his approach was to reject any possibility that he had signed a binding agreement on the 7th October and that nothing would persuade him away from that even if it meant providing answers which were palpably incorrect or non-answers to questions which he perceived to be unhelpful to his case.

14. As between the Plaintiff and the Defendant I prefer the Defendant's evidence and account of what occurred at the crucial meeting of the 7th October. Of the two he has presented a logical account of what had occurred there and why it had been held in the first place. This in my judgment was a perfectly sensible way of resolving the parties outstanding issues. I am satisfied that the Plaintiff, supported by his own sub-contractor, who had an intimate knowledge of the works, was able to hold his own in the negotiations and indeed this is more than amply demonstrated by him being able to draw the concession from the Defendant about the additional works by having inserted a term into the final account that, provided he could show evidence that these works were indeed 'additional' within seven days, the Defendant '.... may re-consider it' otherwise the Plaintiff will be deemed to have waived his rights under the invoice.

15. Subject to the crucial element as to whether, as a matter of law, this 'Final Account' is capable of amounting to a binding compromise, which I will need to consider shortly, I am satisfied beyond any doubt that when the parties signed the Final Account they expected to have it performed on both sides. I am convinced that what actually happened, which resulted in its non-implementation, was that when the Plaintiff went to see his father following the signing of the document he got something of a 'rocket' from the old man who told him that it was quite unacceptable for him to have signed-off on an agreement which gave away so much of the original account of $181,000. What was particularly unsatisfactory was the failure to secure payment for the 'additional works' and, to a lesser extent, for the three pipes. I am conscious of the fact that I have not heard evidence from the Plaintiff's father but I know from the Plaintiff's own evidence that his father founded this business and that he is now carrying on what his father had started, and that his father retains a full interest in its operation with particular responsibility for the accounting side of the business. It is the father's reaction which then stimulated the line taken by the Plaintiff in the post 7th October correspondence by taking a hard line on the invoice for $33,882. In my view it was by then too late. The account had been signed - the only question was whether the Plaintiff had done enough to provide evidence that these works were beyond the scope of the original contract - but even then the term attached to the Final Account refers to the Defendant's obligation to 'may reconsider it', it does not require any higher duty than that.

16. I have no doubt that the Defendant was keen, having got the Plaintiff's signature, to carry the matter into effect and I accept his evidence that as soon as the following day he telephoned the Plaintiff to come to the office to collect his cheque. He would have had every reason to want to rid himself of this account at the earliest opportunity. I reject the Plaintiff's evidence that there was no such telephone call. Of course by then he had spoken to his father and between them they had decided to change tack and stand firm on getting paid for the invoice for $33,882.

17. I have read the post 7th October correspondence with a view to deciding whether, on its proper construction, it tends to show that the Final Account does not evidence a concluded agreement, or as showing that the Defendant had waived his rights under the account by choosing to continue the negotiations with the effect that the matter was re-opened and therefore at large yet again and open for further re-negotiation. In my judgment this correspondence only serves to show the Defendant as wishing to close the matter in accordance with the 7th October account and of the Plaintiff trying to get a second bite at the cherry by insisting on getting paid for the extra $33,882, after the door had been firmly shut following his signature of the account. What had happened was that he felt, after the event, that he had lost out on the rough and tumble of the commercial bargaining and horse trading that had taken place on the 7th October and he now wished to do better after the event. I am satisfied that at the time of signature the Final Account represented as a matter of fact a concluded agreement. On its true construction term 2 (90B) was of limited assistance to the Plaintiff because even if he was able to provide the evidence the Defendant was under no obligation to pay it. He should really have insisted on language that obliged the Defendant to pay it rather than having to '[may] reconsider it'. But in any event even if that construction is too ungenerous to the Plaintiff I am satisfied that these so-called additional works were within the scope of the original contract. One only needs to go to the works described in the specification or in the drawings to see that these are included in the original contract. I refer to page 176, para. 1:1; page 228, paras. 3 (A) (a) and (b); page 236, paras. (B) and (C). The specification itself states that the scope of the works include the entire potable water system, page 178 para. 1.5 (a), including the cold water pipes from the town mains connection point to the meter points, and from the meter points to the water tanks/usage point, page 182 paras. (e) and (f). For these reasons therefore, on any view of the matter, the Plaintiff would not be entitled to payment of these works as being 'additional'.

Is the Final Account binding as a matter of law?

18. Having resolved the factual basis of the Final Account in the Defendant's favour it is essential to determine whether, as a matter of law, the Account binds the Plaintiff. Miss Tse has submitted very strongly that there simply was not a meeting of minds - that issue must fall to be decided in the Defendant's favour on the facts. I have already held that the parties had decided to agree the matter on the basis of the Account as drafted and signed by them. Chitty Volume 1 para. 23-013 says that a compromise agreement is an agreement reached by the parties where the parties agree to compromise their dispute on terms mutually agreed between them. This is a question of fact (para. 23-022). Foskett's 'The Law and Practice of Compromise' 5th Edition 3-01 sets out the essential requirements of a valid compromise as follows:-

(i)	That there is an identifiable agreement which is complete and certain. I have held that the Final Account constitutes that agreement as 'complete and certain'.
(ii)	That the parties intended to create legal relations. They both signed to confirm the matter and terms 1 and 2 at page 90B serve to confirm that they signed on the basis that the Final Account should have a binding effect on both of them. And;
(iii)	that there is consideration for the Final Account.

Mr. Harrison suggests that there are four different ways in which consideration has been provided. It is only necessary to take the first which is that the parties have mutually abandoned their existing rights. This is undoubtedly the case in my judgment. The Plaintiff gave up his rights to sue for the other items contained in his gross account of $181,042.30 subsequently reduced to $154,377.30 as a gesture of good will. For his part the Defendant gave up his rights to put forward a claim for liquidated damages based on delay, which is now raised as his counterclaim in the event that he fails to show that the Final Account was dispositive of the dispute. He also gave up his rights to contend for defective workmanship and incomplete works and also the right to have the works re-measured. This of course is the essence of a compromise agreement, the consideration arising from the give and take which results in the final agreement. For this reason I find that the necessary consideration had passed between the parties so as to create a legally binding agreement as contemplated in the passage in Foskett to which I have just referred.

19. Miss Tse, based on the Plaintiff's evidence, has suggested that even if there is a binding agreement the Plaintiff should not be held to it by virtue of duress or, to express it in a less legalistic way, unlawful pressure. More than once the Plaintiff has said that he was really forced to sign because otherwise he could see no way of getting paid anything. The cases on duress show that the party seeking to set aside an agreement must show that he was left with no practical choice other than to sign the agreement. He has come nowhere near to showing that. It may be that the Defendant, as the main contractor was the senior partner in the negotiation but the evidence shows elements of give and take. It may be that the Plaintiff got slightly the worst of it but that happens everyday in the rough and tumble (as Mr. Harrison describes it), of commercial negotiation. I am satisfied that the Plaintiff at the end of the day could have pressed for better terms and certainly that he had a practical choice in deciding whether or not to sign. I do not believe the agreement falls to be set aside for those sort of reasons.

What is the result?

20. Because I am satisfied, for the reasons that I have given, that as a matter of fact and in law the Final account represents a legally binding compromise, the Plaintiff is not able to bring this action and ask for more than the $60,285.70. Accordingly, the action must stand dismissed. Subject to what I will need to say about how the $60,285.70 is to be dealt with by the Defendant it must also follow that the counterclaim must stand dismissed. That was of course brought as a 'long stop' in case the defence based on the Final Account failed and in these circumstances I have not been required to rule on its merits or on the alternative basis that the Defendant has advanced for defeating the Plaintiff's claim.

Costs

21. Given the terms of my judgment the Plaintiff must pay the Defendant's costs of the claim and on the counterclaim. Whilst the counterclaim has been dismissed it was entirely reasonable to have pleaded it as a precautionary measure having regard to the Plaintiff's stance on the effect of the Final Account. To also make it absolutely clear the costs of the claim must take into account the costs of defending the claim on the alternative basis which has been necessitated by the Plaintiff having challenged the validity of the Final Account.

22. Prima facie the Defendant is now liable to pay the Plaintiff the sum owing under the Final Account but given the effect of the costs order in favour of the Defendant which I can confidently predict will greatly exceed $60,285.70 I suggest that this be held back pending taxation of costs. This suggestion is entirely 'obiter' but I suspect if the Plaintiff were to sue for this amount now, citing the effect of this judgment, the costs set-off would almost certainly defeat him.

The Alternative Basis

23. Because I have found for the Defendant on the Final Account it is not necessary to rule on the alternative basis which is of course the way in which the Plaintiff has sought to put his case. But in the event of an appeal it may be useful to express my views on this so as to hopefully avoid the need for a re-trial in the event that I am held to have been in error in deciding in the Defendant's favour on the Final Account.

24. I have said that it is not necessary to rule on the alternative basis. The correct way of looking at it is to say that the alternative basis simply falls away having regard to the effect of my judgment on the Final Account. I will now consider the matter on the entirely hypothetical basis of what would have happened if the Final Account had been held not to apply.

25. The first matter to decide is the nature of the contract. Is it a fixed price contract or a re-measurement contract? Mr. Harrison says that for the purposes of the parties discussions on the 7th October the contract was expressed as a fixed price one, on a notional basis, so that they could have a convenient agreed starting point for any deductions that needed to be made. There really is only one answer to this issue which is provided by Clause 6 of the Specification and Bill of Quantities:

"The contract will be re-measured and subjected to the actual work done on site".

The effect of this is that unless the works have been re-measured by the Plaintiff it becomes difficult for him to justify the claim that he has put forward. He has not led any evidence as to re-measurement and so he is unable to place a value on the work done by him. The only available evidence of the re-measurement is that provided by the Defendant see page 75 para. 33 and its detail which is at page 115. This was done in July 2002. It shows a net of $93.38 owing to the Plaintiff, he already having received $703,645. The re-measured works were valued at $703,738.38.

26. The other element of the claim is the already much discussed invoice for $33,882. I have already disposed of this on its merits as an alternative to my consideration of whether the 7th October Final Account was conclusive. I have found that these works were not additional and part and parcel of the scope of the contract for the reasons that I have already mentioned and on the basis of the evidence that I have referred to which supports that conclusion (see para. 17 of the Judgement). So this element of the claim would therefore have failed.

27. As to the three pipes worth $983 there is not a shred of reliable evidence to show that the Defendant's workmen removed these. The evidence is anecdotal at best, passed on third hand. I am unable to rely on it as credible evidence supporting this allegation and so this part of the claim would have also failed.

28. These findings would have been sufficient to dispose of the claim. The principal reason being, that to succeed on this re-measurement contract the Plaintiff would have needed to demonstrate the actual worth of the works done by him. He has not done so although the Defendant has put in a re-measurement which leaves over a balance of $93 owing to the Plaintiff. That would have been the judgment on the claim. It would have followed that such a claim should never have been brought with the consequence that the costs would have gone to the Defendant on the claim.

29. I am uncomfortable with the counterclaim. There is no doubt there is a contractual right to liquidated damages for delay and much of the trial has been occupied with a consideration of who was to blame for that delay. The issue of late and insufficient workshop drawings and the failure to provide pump positions have all figured in that consideration. In truth there was never going to be a claim for delay until the Plaintiff brought his action. Whilst it was a right which the Defendant can pray in aid and which I have considered as part of what he had given up in order to conclude the agreement on the final account - it was something of value which provided legal consideration for the compromise - in reality it has been raised as a reposte to a bad claim by the Plaintiff which I find the Defendant had no intention of pursuing but for the fact that the claim had been brought against him by the Plaintiff. Had I been put to it I would have dismissed the counterclaim and ordered that each party should have borne their own costs of the counterclaim. It would have been more impressive had the Defendant sought to defend the claim on the alternative basis of the pleaded defence, which would have succeeded save for the worthless balance of $93 owing to the Plaintiff which could never have justified the bringing of this action in the first place.

30. As this judgment is being handed down the order for costs on the effective reasons for the dismissal of the claim must be an order nisi in the usual way.