BEST PROFIT CONSTRUCTION ENGINEERING LTD v. WUI YIP CIVIL ENGINEERING LTD

DCCJ 1981/2023

[2026] HKDC 1020

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1981 OF 2023

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JUDGMENT

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A.  Background and the factual disputes

1.  The plaintiff claims against the defendant $2,571,884.40[1] as unpaid contract sums in relation to the construction of the Centre Street escalator link.

2.  The defendant argues that there was no outstanding sum payable to the plaintiff. Further, it counterclaims $3 million[2] as the principal sum and interest of loans it extended to the plaintiff over time.

3.  In 2009, the government invited tender to build the escalator link on Centre Street in the Western District on Hong Kong Island. Under Contract No. HY/2009/06 (“the Main Contract”), Highways Department, as the Employer, awarded the works for the construction of the escalator link to the defendant as the main contractor.

4.  The Main Contract was subject to the General Conditions of Contract for Civil Engineering Works (1999 edition) issued by the government, and the Special Conditions of Contract issued by the Highways Department.

5.  Clause 4 of the General Conditions (“GCC 4”) prohibited the defendant from sub-contracting the entire works under the Main Contract. The defendant was only permitted to sub-contract a part of the works in the circumstances as specified in GCC 4.

6.  Clause 14 of the Special Conditions (“SCC 14”) amended GCC 4 by adding the requirement that, if the defendant was not included on the government’s list of approved suppliers and specialist contractors with respect to specific types of works (which the defendant was not), then the defendant should enter in to written sub-contracts with approved contractors on the list for those specific types of works within the ambit of the Main Contract.

7.  On 29 September 2009, the defendant sub-contracted, by way of a written agreement (“the Sub-Contract”), all the works under the Main Contract to SKY Project Management Ltd (“SKY”) by way of the Sub-Contract. Under the Sub-Contract, SKY shall assume and perform all the obligations and liabilities of the defendant under the Main Contract.

8.  I shall comment on the compatibility of the Main Contract with the Sub-Contract in a subsequent part of this Judgment.

9.  The following clauses of the Sub-Contract are relevant to the present case:-

9.1.  Clause 2.1 stated that SKY shall execute, complete and maintain the Sub-Contract Works in accordance with the Main Contract. The term “Sub-Contract Works”, however, was not defined.

9.2.  Clause 2.6 stated that SKY shall indemnify the defendant against all liabilities, claims and expenses, which the defendant might incur due to the default of SKY or breach of the Sub-Contract by SKY.

9.3.  Clause 7.1 stated that payment under the Sub-Contract shall be made on a back-to-back basis.

9.4.  Clause 12.1(ii) stated that the defendant was entitled to set off against monies due to SKY the cost incurred in carrying out the Sub-Contract Works where SKY was unwilling or unable to carry out such works and/or obligations for any reason whatsoever. Clause 12.1(iii) further allowed the defendant to set off any other losses it suffered due to SKY’s default.

9.5.  Clause 13.2 stated that, if SKY failed to honour payment to its sub-contractors, the defendant shall have the right to make direct payment to those sub-contractors, and set off the same against SKY’s account.

9.6.  Clause 19.1 allowed the defendant to charge 5.5% of the Main Contract sum as management fee.

9.7.  Clause 20 was entitled “Variation Order”. I shall set it verbatim as follows:-

“In addition to the 5.5% management fee stated in clause 19.1, [the defendant] is entitled to an additional management fee of x% (x% being equal to half of the Overhead and Profit percentage for the Contract as agreed by the Engineer less 5.5%) on the total amount of those variations, supplementary agreement and claims valued based on rates other than bill rates contained in the Main Contract and valued using the direct cost plus indirect overheads and profit approach.

For the avoidance of details, if the Overhead and Profit (O & P) percentage agreed by the Engineer is 24%, the amount of those variations, supplementary agreement and claims as stated above (if O & P percentage has been included) will be subject to an additional management fee of 4.2% on a total management fee of 9.7% (that is, 12/124 x 100% = 9.7% of the total claimed amount).”

10.  Work for the escalator link commenced on 30 September 2009.

11.  On 11 May 2010, the plaintiff, the defendant, and SKY entered into a novation agreement, by which it was agreed that the plaintiff shall replace SKY under the Sub-Contract. The plaintiff shall observe all the terms and conditions of the Sub-Contract.

12.  The plaintiff was formed by Mr Lee Hoi Nam (“Lee”), Mr Siu Kam Yuen Stephen (“Siu”), and Mr Tang Hing Hung (“Tang”) shortly before the novation agreement. Whilst it is, in my view, ultimately irrelevant to the present case, it appears to me that Lee participated in the bidding of the Main Contract from the beginning, and caused SKY to enter into the Sub-Contract with the defendant once the defendant won the bid for the Main Contract. But SKY’s owners had a change of mind about the profitability of the Sub-Contract a few months after work commenced. Lee then sought the agreement of Siu and Tang to form the plaintiff to take over the Sub-Contract from SKY.

13.  Lee, Siu and Tang each executed a personal guarantee (in identical terms) in favour of the defendant to procure the defendant’s agreement to allow the novation. In clause 2 of each of the guarantee, Lee, Siu and Tang each:

“… irrevocably and unconditionally indemnifies [the defendant] against all losses, damages, costs and expenses suffered or incurred by [the defendant] arising by reason of any act, default or omission on the part of [the plaintiff] in the performance, observance and assumption of [the plaintiff’s] obligations, terms, conditions and liabilities under the provision of the Sub-Contract and of any further agreement entered into between the [the defendant] and [the plaintiff] in connection with the Sub-Contract.”

14.  In the course of the construction of the escalator link, the following events, relevant to the present case, happened:

14.1.  On 10 November 2010, the Engineer under the Main Contract sent a letter to the defendant, confirming that the on-cost percentage for overhead and profit (i.e. the O & P percentage) under the Main Contract was agreed at 29.98%.

14.2.  The defendant entered into agreements with various specialist sub-contractors for the provision of materials and/or services, apparently pursuant to the requirement imposed by SCC 14. These specialist sub-contractors were, adopting the abbreviations used in the present case, United Power, Anlev, Buildmax, Access Control, Paco, and Wing Hing[3]. I shall refer to these specialist sub-contractors collectively as “the 6 Sub-Contractors”.

14.3.  As is customary in the local construction field, contractors seek payment in tranches in the course of a construction projects; these payments are usually referred to as interim payments (IPs), and are numbered sequentially (e.g. IP-1). On 16 August 2011, the plaintiff sent a letter to the defendant. The plaintiff complained that, out of the $828,805.39 it ought to receive under IP-19, the defendant only paid $578,805.39, leaving $250,000.00 outstanding. The plaintiff said it would charge 5% on the $250,000.00 per month as administration cost and interest until the sum was paid. The defendant did pay $12,500.00 as charged for August 2011, and $10,000.00 per month (i.e. 4% per month) from September 2011 to July 2012. The defendant paid the $250,000.00 back to the plaintiff on 13 September 2012.

15.  On 20 February 2014, the Highways Department issued a certificate under the Main Contract to confirm that the works under the Main Contract were substantially complete. Despite the certification, the plaintiff was still applying for interim payments from Highways Department through the defendant.

16.  On the other hand, some of the 6 Sub-Contractors complained that they were not timely paid for the materials they supplied and the services they rendered. The following litigation ensued as a result:

16.1.  United Power commenced a claim in DCCJ 301/2014 against the defendant.

16.2.  On 14 April 2016, Anlev served its writ in HCA 936/2016 on the defendant. On 18 May 2016, a default judgment was entered against the defendant. Anlev subsequently agreed to allow the defendant to repay the judgment sum in 3 installments, and waived interest and costs.

16.3.  On 12 July 2016, United Power issued another claim in DCCJ 3378/2016 against the defendant.

16.4.  On 26 February 2021, United Power and the defendant reached a global settlement for both DCCJ 301/2014 and DCCJ 3378/2016.

17.  It is the defendant’s case that it paid Anlev and United Power on the plaintiff’s behalf, which the plaintiff should reimburse it.

18.  Further, the defendant claims that it also paid various levies on the plaintiff’s behalf, for which the plaintiff should also reimburse it. Of those levies, the defendant claims that the plaintiff has yet to reimburse it for the payments made to the Pneumoconiosis and Mesothelioma Compensation Fund (“Pneumoconiosis Levy”).

19.  The plaintiff found it difficult to present its case to the Highways Department, through the defendant, to seek final payment under the Main Contract. Thus, it hired Cheung Hung Cheung (“Cheung”), a freelance quantity surveyor, to help with rendering the final account and documentation to seek final payment. Whilst Cheung started work without signing a formal contract with the plaintiff, they did enter into a written contract on 10 July 2017 to formalize the engagement. The plaintiff confirmed that it would pay 15% on all sums it received since IP-73 as Cheung’s remuneration.

20.  The defendant claims that it helped the plaintiff to pay some of the remuneration due to Cheung, but the plaintiff has yet to reimburse it.

21.  The plaintiff accepts that it ought to reimburse the defendant for the sums the latter paid to the 6 Sub-Contractors and Cheung, and for the Pneumoconiosis Levy. It accepts that the total sum comes to $2,781,736.01. The defendant claims that the total sum should come to $3,098,555.11. The difference represents the legal costs that the defendant paid to defend United Power’s claims.

22.  On top of the reimbursement, the defendant also claims that the plaintiff agreed to pay interest on the sums the defendant paid on the plaintiff’s behalf.

23.  The defendant pleads that, since January 2016, the plaintiff was unable to keep up with its obligation to pay its sub-contractors and suppliers. The plaintiff allegedly requested the defendant to provide loans to the plaintiff to tie the latter over. The defendant alleges that an oral agreement was reached between Lee and Tang for the plaintiff, and Mr Mok Kin Wui (“Mok”) for the defendant that, for the sums the defendant paid on the plaintiff’s behalf, the defendant would be entitled to charge interest; such interest would be set off from the interim payment(s) and/or final payment payable to the plaintiff under the Sub-Contract. I shall refer to this alleged oral agreement as “the Loan Agreement”.

24.  The plaintiff denies the existence of the Loan Agreement; it does not agree it has to pay any interest on the sums the defendant paid on its behalf.

25.  Highways Department made, inter alia, the following payments to the defendant after the substantial completion of the Main Contract:

25.1.  On 4 October 2016, retention money of $442,375.18 was released to the defendant.

25.2.  On 14 February 2018, $41,679.58 was paid under IP-74.

25.3.  On 4 May 2018, $245,140.52 was paid under IP-75.

25.4.  On 8 August 2018, $193,685.27 was paid under IP-76.

25.5.  On 3 August 2020, $418,696.09 was paid under IP-77.

25.6.  On 29 March 2021, $673,630.14 was paid under IP-78.

26.  Originally, Highways Department rejected the claim for final payment, which the plaintiff submitted through the defendant. As a result, the defendant brought Highways Department to arbitration. The claim was finally settled with Highways Department agreeing to pay $3,650,000.00 as the final payment. The defendant received it on 22 March 2023.

27.  Hence, the defendant received a total of $5,665,206.78 for the retention money, IP-74 to IP-78, and the final payment.

28.  The plaintiff claims that, after deducting 5.5% management fee, and $2,781,736.01 that it ought to reimburse the defendant, the defendant had to pay $2,571,884.40 back to it.

29.  The defendant argues that, part of IP-74, the whole of IP-75 to IP-78, and the whole of the final payment were in fact payments for variation orders requested by Highways Department subsequent to the formation of the Main Contract. It claims to be entitled to charge 9.7% as management fee instead of 5.5% on these payments relating to variation orders. Factoring in the interest the plaintiff has to pay pursuant to the Loan Agreement, the defendant says the plaintiff in fact owes it $5,257,907.62. It thus counterclaims this sum from the plaintiff; it agrees to limit the counterclaim to $3 million in light of the jurisdiction of this court.

30.  The parties agree that I should decide the following issues. For convenience, I also set out the parties’ stance in brief:-

30.1.  What is the management fee percentage to be charged against the amount of $5,665,206.78?

The plaintiff says 5.5%; the defendant says partly 5.5% and partly 9.7%.

30.2.  Setting aside interest allegedly chargeable by the defendant, what is the amount of set off for the 6 Sub-Contractors, Cheung, and the Pneumoconiosis Levy, which shall be deducted from the amount due to the plaintiff?

The plaintiff says $2,781,736.01; the defendant says $3,098,555.11.

30.3.  Did the plaintiff and the defendant enter into the Loan Agreement in January 2016?

The plaintiff says no; the defendant says yes.

30.4.  Were the 6 Sub-Contractors the plaintiff’s suppliers and sub-contractors?

The plaintiff says no; the defendant says yes.

30.5.  If (i) the Loan Agreement existed, and (ii) the 6 Sub-Contractors were the plaintiff’s suppliers and sub-contractors, is the defendant entitled to charge interest for payments made to the 6 Sub-Contractors and the Pneumoconiosis Levy?

The plaintiff says no; the defendant says yes.

30.6.  If (i) the Loan Agreement did not exist, but (ii) the 6 Sub-Contractors were the plaintiff’s suppliers and sub-contractors, is the defendant entitled to set off its finance cost against any sum due to the plaintiff, or to seek an indemnity from the plaintiff?

The plaintiff says no; the defendant says yes.

30.7.  Was the interest rate of 4% per month (or 48% per annum) allegedly chargeable by the defendant unenforceable or extortionate as per the Money Lenders Ordinance?

The plaintiff confirms at trial that it no longer argues the interest rate under the Loan Agreement is extortionate.

30.8.  Was there a loan agreement between the plaintiff and the defendant in 2011 with interest rate of 4%? If so, is it relevant to the present case?

The plaintiff says it is irrelevant; the defendant says it is relevant as showing the previous practices between the parties.

30.9.  What ought to be the net amount payable by the plaintiff and/or the defendant under the Sub-Contract?

The plaintiff says it should receive $2,571,884.40 from the defendant; the defendant says it should receive $3 million from the plaintiff.

31.  Tang and Lee gave evidence for the plaintiff; Mok and Cheung stood as witnesses for the defendant. I shall refer to their evidence in court when I analyze below the agreed issues, insofar as it is relevant to my determination of the issues.

B.  The management fee chargeable

32.  In my view, the plaintiff is right to say that the only basis allowing the defendant to charge 9.7% instead of 5.5% as management fee on the sums payable to the plaintiff under the Sub-Contract is Clause 20 of the Sub-Contract.

33.  I agree with the plaintiff that the defendant has failed to show, on a balance of probabilities, that it was entitled to charge 9.7% as the management fee on any sums it ought to pay the plaintiff under the Sub-Contract.

34.  First, I agree with the construction of the Sub-Contract as advocated by the plaintiff. Clause 20 does not simply say that a higher management fee is chargeable on all sums related to variation orders. The natural and ordinary meaning of the clause restricts the applicability of the higher management fee to variation orders valued on rates other than bill rates contained in the Main Contract, and using the direct cost plus overhead and profit approach. With respect, I do not think the defendant has pointed to any evidence which tends to show that Clause 20 should be read in a way different from its natural and ordinary meaning.

35.  Secondly, I further agree with the plaintiff that the defendant has never shown the alleged variation orders were indeed valued using the direct cost plus overhead and profit approach. The defendant has not directed me to any documentation which shows the calculation of the value of any such variation orders using that approach. Mok could not provide any useful evidence as well under cross examination.

36.  Thirdly, Mok’s answers under cross examination were incompatible with the defendant’s stance. He agreed that, up to IP-71, the defendant only charged 5.5% on the sums released to the plaintiff as management fee. But at the same time, he also accepted that variation orders were present even before IP-71; for example, in IP-69, variation orders valued at up to $7.5 million were already included. Mok could not explain how the defendant identified the particular sums payable to the plaintiff as subject to 9.7% management fee.

37.  Fourthly, I find the defendant’s stance of adopting 9.7% as the higher management fee problematic. In my judgment, the natural and ordinary meaning of the second paragraph of Clause 20 was intended to be an illustration only, since it put forward a hypothetical that the O & P percentage agreed by the Engineer under the Main Contract was 24%. But as matter of fact, as confirmed by Cheung in response to my question, the Engineer under the Main Contract fixed the O & P percentage was 29.98% instead. Adopting the formula used in Clause 20, the higher management fee should have been:

(14.99[4] / 129.98) x 100%

= 11.53%

38.  I find the defendant’s case of using 9.7% instead of 11.53% inexplicable. The O & P percentage fixed by the Engineer was in existence in around a year after work under the Main Contract commenced. Surely, there would have been no difficulty to know the correct management fee to be applied, if the variation orders were indeed calculated using the direct cost plus overhead and profit approach. In my judgment, this supports an inference that the defendant’s interpretation was wrong.

39.  I find that the defendant is only entitled to charge 5.5% as management fee on the sums it ought to pay the plaintiff under the Sub-Contract.

C.  The correct amount of set-off apart from interest

40.  In my judgment, the defendant is right to submit that the legal costs it incurred in the litigation with United Power should also be reimbursed by the plaintiff.

41.  I accept the defendant’s submissions that the plaintiff ought to reimburse the legal costs it paid in the course of the litigation with United Power.

42.  I agree with the defendant that the reason it entered into contractual relationships with the 6 Sub-Contractors instead of the plaintiff was the restriction imposed by the Main Contract against wholly sub-contracting the works therein. Hence, vis-à-vis Highways Department, the defendant must remain to be the contractor responsible to perform under the Main Contract. However, as between the plaintiff and the defendant, the Sub-Contract had the effect of transferring all obligations under the Main Contract to the plaintiff. In my judgment, the natural and ordinary meaning of Clauses 2.6 and 12.1 requires the plaintiff to pay for the incidental cost arising out of the performance under the Main Contract.

43.  I do not find the plaintiff’s stance convincing. It is difficult to justify how it ought to reimburse the defendant for payments due to the 6 Sub-Contractors, but not the incidental cost involved in litigation. I do not accept that the defendant had to pay for the litigation expenses because it was the entity sued by United Power, or it had any control over the litigation. When the plaintiff was novated to the Sub-Contract, it must have agreed to such an arrangement knowing full well the Sub-Contract was created to service the Main Contract, but it did not sit well with the restriction under the Main Contract against wholesale sub-contracting. The plaintiff must have accepted that the performance of the Sub-Contract had to conform with the terms of the Main Contract. In my judgment, the plaintiff must have (at least implicitly, if not more) accepted that the defendant might need to incur contractual obligations on its behalf. Also, if the plaintiff had any qualms about the defendant managing any litigation with the 6 Sub-Contractors, it could well have intervened and took over control of the same, as it was the entity who was ultimately liable under the Sub-Contract to pay for the litigation.

44.  I do not accept the perception of Tang and Lee that the defendant was responsible for paying the 6 Sub-Contractors as correct; I also reject their evidence that the plaintiff was only making payment on the defendant’s behalf.

45.  The plaintiff claims that, out of the legal costs, it actually paid $50,000.00 that the defendant claims to have paid. The plaintiff relies on Lee’s handwritten record that he paid $50,000.00 on the plaintiff’s behalf to the defendant on 21 January 2016. Lee explains that he was told the defendant’s legal representatives would cease to act for the defendant, if the plaintiff did not pay $50,000.00 as the costs of mediation with United Power. After discussing with Tang, Lee agreed to pay $50,000.00.

46.  Lee has not been extensively cross examined on his handwritten record regarding this $50,000.00. His handwritten record contained sequential entries of the expenses he incurred for the plaintiff in relation to the Sub-Contract. The payment of $50,000.00 appears in the middle of the record with no obvious of tampering or subsequent editing.

47.  On a balance of probabilities, I accept this part of his evidence as credible.

48.  Hence, I find the correct amount of set-off, setting aside interest allegedly payable, as $3,048,555.11.

D.  Whether the Loan Agreement existed

49.  The plaintiff correctly reminds this court that the burden of proving the existence of the Loan Agreement rests with the defendant. This court can dismiss the defendant’s case on the Loan Agreement if it finds its existence inherently improbable: Yau Lai Wah v Wong Kan Yu [2021] HKCA 119 (Kwan VP, Cheung & Chu JJA; 26 January 2021) at §§5.8 to 5.10.

50.  Given the alleged nature of the Loan Agreement, I have to assess the respective credibility of the witnesses as part of my consideration on whether the Loan Agreement did exist. The trite principles guiding the court to assess the credibility of a witness have been eloquently summarized in Hui Cheung Fai & Anr v Daiwa Development Ltd & Ors HCA 1734/2009 (Deputy Judge Eugene Fung, SC[5]; 8 April 2014):

77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce) …

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of the events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’ credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).

81. The practical approach to assessing credibility of witnesses in a case such as the present may have best been summarised by the words of Robert Goff LJ, as he then was, in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:

‘Speaking from my experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.’”

51.  The plaintiff first complains that the defendant has failed to properly plead the existence of the Loan Agreement. I agree.

52.  The alleged existence of the Loan Agreement by January 2016 has been pleaded in §6 of the ADCC. In my judgment, the plea in that paragraph is defective, in that:

52.1.  Whilst it is averred that the Loan Agreement was formed orally, no particulars are given as to when, where and how Lee, Tang, and Mok came to agreement.

52.2.  Whilst it is alleged that the plaintiff agreed to pay interest, there is no plea as to the rate of interest the parties agreed on. The applicable rate must be the core term for any alleged loan agreement. It is thus essential for there to be a sufficient plea on the applicable rate if the defendant claims that the Loan Agreement was properly formed in January 2016.

53.  I do not accept the defendant’s submissions that §13 of the ADCC has supplied sufficient particulars to supplement to plea in §6. In §13, it is pleaded that the defendant charged interest at 4% per month, which was the same rate that the plaintiff used to charge the defendant on the $250,000.00 that remained outstanding on IP-19. The defendant does not say in §13 that the parties specifically agreed 4% per month as the interest when they allegedly entered into the Loan Agreement; or at least they agreed at that time to refer to their previous practice to ascertain the applicable interest rate. In my judgment, the plea in §13 does not cure the defect in §6; in fact, it makes the defendant’s plea look more unconvincing.

54.  It is my view that the defective plea regarding the Loan Agreement makes the defendant’s case more implausible.

55.  Furthermore, I find that the alleged existence of the Loan Agreement to be incompatible with the contemporaneous evidence.

56.  On 17.12.2020, a Ms Lam[6] of the defendant sent an email to Tang, enclosing information about IP-77, and also particulars on the sums the plaintiff owed the defendant by then[7]. In the particulars[8], there was no mention of any charge of interest on payments the defendant had made on the plaintiff’s behalf.

57.  The plaintiff put to Mok in cross examination that the particulars would not have been worded as such if the parties had already entered into the Loan Agreement. I also queried whether there was any good reason for the defendant not to set out any interest in the particulars, when it claimed that the plaintiff owed more than 1.7 million by then.

58.  Mok disagreed that the calculation of interest should appear in the particulars. I find this answer most incredible. Mok admitted that Ms Lam prepared the particulars upon his instructions. In my view, if the parties did enter into the Loan Agreement back in January 2016, it would be unlikely for Ms Lam not to include the calculation of interest, as the amount of interest must have been substantial by then.

59.  On 17 April 2023, Tang sent an email to Ms Lam and Mr Jacky Mok (“Jacky”) of the defendant, expressing surprise that interest was charged on the payments made by the defendant on the plaintiff’s behalf. He said that it was the first time he learnt that interest was chargeable. He further stated that the plaintiff would not accept any charge of interest[9].

60.  The defendant gave its substantive reply to the plaintiff on 11 May 2023. In relation to the charge of interest, the defendant raised 4 points:-

60.1.  It stated that interest ought to be charged in accordance with Clause 2 of the personal guarantees entered into by Lee, Tang and Siu.

60.2.  It referred to an email it sent to the plaintiff on 12 September 2016, in which it was allegedly stated that interest was chargeable.

60.3.  It referred to the interest charged by the plaintiff between August 2011 and September 2012 on the $250,000.00 outstanding under IP-19.

60.4.  It ended by saying that it was finalizing the accounts for the Sub-Contract. No actual calculation of interest was attached to the letter[10].

61.  First, one can observe that the Loan Agreement was not mentioned by the defendant at all. If the Loan Agreement did exist, it must have been the most obvious basis on which the defendant could have relied on to explain the charge of interest. In addition, it seems to me incredible that the defendant was not able to supply the plaintiff with the calculation of interest, if interest allegedly incurred since shortly after January 2016.

62.  At trial, the defendant emphasized that the email it sent to the plaintiff on 12 September 2016 was corroborative of the existence of the Loan Agreement. The email was sent by Ms Lam to Lee and Tang, and copied to Jacky. Ms Lam stated that Anlev had called the defendant earlier that day, and requested the 3^rd installment payment of $1,054,450.00 by that day. Ms Lam requested the plaintiff to make pay immediately; she also stated that the defendant already paid $800,000.00 on the plaintiff’s behalf. In parenthesis, she ended by saying that the sum had to incur interest.

63.  I do not agree with the defendant that this email can indeed support the existence of the Loan Agreement. Ms Lam did not elaborate on the basis on which interest was allegedly chargeable. In my view, what she said was equivocal: she might have been instructed to tell the plaintiff that interest was specifically chargeable for this $800,000.00 only; or she might be identifying this $800,000.00 as part of the sums subject to interest. Neither Ms Mok nor Jacky is called by the defendant as a witness. The defendant has not satisfactorily explained why evidence from Ms Lam cannot be secured; Mok confirmed under cross examination that Ms Lam was still his employee by the time of the trial, and there was no problem to call her as a witness.

64.  In the circumstances, I agree with the plaintiff that an adverse inference can be drawn against the defendant’s failure to call Ms Lam as a witness. In my judgment, the proper inference to be drawn is that Ms Lam did not intend to refer to the Loan Agreement when she referred to interest being chargeable in this email.

65.  With respect, I do not understand how the defendant’s reliance on Clause 2 of the personal guarantees, and the plaintiff charging interest in relation to IP-19 in its letter corroborative of the existence of the Loan Agreement as well. In my view, these only serve to show that the Loan Agreement did not exist at all. It appears to me that the defendant’s letter sought to justify its decision to charge interest by raising as many grounds as possible. The need for the defendant to do tends to suggest that there was no agreement with the plaintiff at the first place.

66.  I think a similar inference can be drawn with respect to the defendant’s inability to show the plaintiff the actual calculation of interest by 11 May 2023.

67.  In summary, I find the alleged existence of the Loan Agreement an afterthought on the defendant’s part to avoid any further payment to the plaintiff. The escalator link was probably a loss-making adventure for both the plaintiff and the defendant, such that both parties sought to minimize their losses as much as possible. I do not accept that the Loan Agreement came into existence in January 2016, or at all.

68.  The defendant has raised an alternative case in §14 of the ADCC that it is entitled to charge interest based on the terms of the Sub-Contract; and the applicable rate is 4% per month because the plaintiff used the same rate in relation to the outstanding payment for IP-19.

69.  I do not accept the defendant’s alternative case.

69.1.  The defendant argues that the Sub-Contract allows it to recover all losses from the plaintiff; the cost of finance must be included as part of such loss.

69.2.  In my view, the natural and ordinary meaning of the Sub-Contract only entitles the defendant to recover actual loss from the plaintiff, but not the opportunity cost of making those payments instead of using the same money to create other investment return. In an ordinary commercial transaction, it is virtually impossible for contracting parties to predict the extent of the counter-party’s opportunity cost in the absence of detailed financial information supplied by the opposite party. Hence, it would be unlikely for a contracting party to agree to reimburse the opportunity cost of the counter-party unless there are clear provisions otherwise.

69.3.  The defendant has not put forward any evidence to suggest that losses mentioned in the Sub-Contract should extend to opportunity cost.

69.4.  Further, the defendant has not put forward any evidence to show that it did incur any finance cost consequent upon making payments on the plaintiff’s behalf.

70.  In summary, it is my judgment that the defendant is not entitled to charge interest on any payment it made on the plaintiff’s behalf.

E.  The net amount payable by the defendant

71.  In my judgment, out of $5,665,206.78, the defendant can first deduct 5.5% as its management fee. This leaves $5,353,620.41.

72.  The plaintiff has to reimburse the defendant $3,048,555.11. The remaining sum is $2,305,065.30.

73.  The defendant is not entitled to any further deduction as the Loan Agreement did not exist, nor is there any other basis to support such further deduction.

F.  Conclusion

74.  My conclusions for the agreed issues are as follows:-

74.1.  The defendant can only charge 5.5% on all sums payable to the plaintiff under the Sub-Contract as its management fee.

74.2.  I agree with the defendant that the set-off sum, apart from interest, should be $3,098,555.11, in that the plaintiff is liable for paying the 6 Sub-Contractors, Cheung and the Pneumoconiosis Levy, and also the incidental cost arising therefrom. However, the defendant is not entitled to charge for any finance cost in paying those entities on the plaintiff’s behalf.

74.3.  The alleged Loan Agreement did not exist; the defendant is not entitled to charge interest on payments it made on the plaintiff’s behalf. Any previous practice between the parties is irrelevant.

75.  I give judgment for the plaintiff, and award $2,305,065.30 as damages.

76.  I dismiss the defendant’s counterclaim.

77.  Interest on damages shall run at HSBC prime plus 1%, from the date of the service of the Writ on the defendant, to the date of this Judgment; thereafter, interest shall run at the judgment rate up to the date of payment.

78.  The plaintiff is the overall winner; but its case on the amount of set-off does not prevail. I find that the trial could have been much more focused, and the present case more economically run, if the plaintiff took a realistic stance and accepted the defendant’s case on the amount of set-off. Hence, I am minded not to ask the defendant to bear all of the plaintiff’s costs.

79.  Taking into account the time involved in litigating the amount of set-off, and the documentation created for that issue, I order the defendant to pay 75% of the plaintiff’s costs in the present case (including all costs reserved), together with a certificate for counsel.

80.  The above costs order is nisi. Any party wishing to vary it should apply within 14 days of this Judgment.