WAI NAM ENGINEERING LTD v. NGA LUEN CONSTRUCTION & ENGINEERING COMPANY LTD

DCCJ 1806/2021

[2023] HKDC 1447

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1806 OF 2021

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DECISION

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INTRODUCTION

1.  This is the plaintiff’s appeal against the decision of Master Eva Leung made on 21 December 2022 allowing the defendant’s application by summons dated 31 August 2022 to re-amend its Defence and Counterclaim, and dismissing the plaintiff’s application by summons dated 31 October 2022 for judgment against the defendant for the sum of HK$1,288,600.00 on admission of part of the plaintiff’s claim.

2.  At the hearing before the Master, the plaintiff had opposed the parts of the proposed re-amendments[1] that amounted to a withdrawal of the previous admissions made by the defendant in its Amended Defence and Counterclaim concerning the value of certain alleged variation or additional works carried out by the plaintiff under a subcontract entered into with the defendant referred to below.

BACKGROUND

3.  Both the plaintiff and the defendant are companies carrying on the business of building and construction.  In December 2018, the defendant was awarded a main contract that included certain rectification works to be completed at the Jockey Club Tuen Mun Home for the Aged Blind of the Hong Kong Society for the Blind.  The Social Welfare Department of the government is to pay the defendant for the works to be carried out, from public funding.

4.  By a subcontract dated 22 December 2018 (“the Subcontract”), the defendant subcontracted part of the works under the main contract to the plaintiff concerning certain fire services rectification measures works to be carried out at the aforesaid venue.  There is no dispute by the plaintiff that the Subcontract is a lump sum contract without bill of quantities, in the amount of HK$2,909,110[2].  However, during the negotiation of the Subcontract, the plaintiff was given a schedule of quantities and rates that amounted to the eventual sum agreed upon (“the Subcontract Sum”).

5.  Pursuant to Clause 6.1 of the Subcontract, the Subcontract Sum shall be paid within 30 days after the completion and acceptance of the subcontract works, or in accordance with the payment term under the main contract.

6.  The plaintiff claims that during the course of the subcontract works, it had undertaken certain additional works in the total value of HK$1,556,110 which is stated to be subject to assessment by expert evidence in the Statement of Claim[3].  The various items of additional work as pleaded were included in the following invoices issued by the plaintiff to the defendant:-

Item	Date	Invoice No	Amount
1	7/8/2019	WN-INV-190002(P6)	HK$284,600.00
2	7/8/2019	WN-INV-190002(P7)	HK$72,300.00
3	7/8/2019	WN-INV-190002(P8)	HK$1,118,150.00
4	10/7/2019	WN-INV-190002(P10)	HK$22,400.00
5	14/7/2019	WN-INV-190002(P9)	HK$34,350.00
6	7/1/2020	WN-INV-19154	HK$5,000.00
7	7/1/2020	WN-INV-19154(P2)	HK$19,300.00

7.  The subcontract works and the additional works are said to have been completed by the plaintiff in or about July 2019, and had been accepted by the defendant upon site inspection.  There is no dispute that the defendant had made partial payment in the total sum of HK$2,374,300 in 2019, but the plaintiff claims that it has failed to pay the remainder of the outstanding sums, in the amount of HK$2,090,910, including payment for the additional works.

8.  As the plaintiff has pointed out, under the Amended Defence and Counterclaim, the defendant’s pleaded case gave rise to the following issues:-

(i)   Insofar as the agreed sum under the Subcontract is concerned, the defendant alleges that there had been a subsequent agreement between the parties that the scope of the works under the Subcontract was varied such that the plaintiff was only required to replace the ceiling tiles, but not the supporting ceiling frame.  The agreed sum under the Subcontract was thus reduced by HK$620,520 (see paragraphs 5 and 10 of the Amended Defence and Counterclaim);

(ii)  Further, it is alleged by the defendant that the plaintiff had failed to complete certain works under the Subcontract in the sum of HK$69,600 (see paragraph 11 of the Amended Defence and Counterclaim);

(iii) As for the additional works, the defendant admitted liability for the same except that for Item 3 above (ie Invoice No WN-INV-190002(P8)), where the item referred to in that invoice as “newly made smoke detector light” was already included in the Subcontract, and thus should not be double-counted as an item of additional work.  Further, it was pleaded that Items 6 and 7 above were included in another project subcontracted by the defendant to the plaintiff and should not be included in the Subcontract.  On the basis of the above, the defendant admitted liability for the additional works but in a reduced amount.  In paragraph 9(3) of its Amended Defence and Counterclaim, the defendant pleaded “[i]t follows that the total amount of Additional Works agreed upon between the parties was only HK$1,288,600 rather than HK$1,556,100”;

(iv) As a result, taking into account the above, it is pleaded in paragraph 16 of the Amended Defence and Counterclaim that the defendant is only required to pay an outstanding sum to the plaintiff in the amount of HK$1,157,590, before taking into account its counterclaim in the sum of HK$492,250.90.

THE APPLICATION TO WITHDRAW THE ADMISSIONS

9.  By its Re-Amended Defence and Counterclaim, however, the defendant has now resiled from its previous case concerning the additional works.  The defendant now only admits that the parties had only agreed to carry out some of the additional works, withdrawing its previous admissions as to previously undisputed items in three of the plaintiff’s invoices referred to above (see paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim).  As a result of the change of its pleaded case, the amount of additional works undisputed by the defendant has been reduced to a sum of HK$264,650[4].

10.  The defendant’s current position concerning the additional works as pleaded in paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim can be summarised as follows:-

(a)  Paragraph 9 – several amounts listed in Item 3 above (Invoice No WN-INV-190002(P8)) are now not admitted.  The plaintiff is particularly put to strict proof of the location and quantities of two of the items[5] amounting to HK$3,200 and HK$23,800.  It is also averred that the plaintiff had agreed to carry out the fire safety rectification measures to meet the statutory requirements.  The plaintiff well knew that it was necessary for it to supply and install new sprinkler heads and smoke detectors at various locations at the site when it entered into the Subcontract and held a site inspection and had been provided with the drawings under the main contract.  The plaintiff ought to have realised the actual number of such sprinkler heads and smoke detectors and their locations.  As such, the plaintiff is not entitled to charge for such additional items in the sums of HK$491,200 and HK$119,850 respectively[6].  The same would apply to relocation of existing sprinkler heads and smoke detectors in the sum of HK$61,600[7].  The plaintiff is also not entitled to claim for alleged additional works in relation to the FS system and FS panel under that invoice for the sums of HK$66,000 and HK$25,000 respectively[8].  Further, it is also alleged that the plaintiff is not entitled to additionally charge for item 7 of that invoice in the sum of HK$243,200, namely the remote indication lights, as the same had already been included in the Subcontract.  Also, as was originally pleaded, for Items 6 and 7 above (Invoices Nos WN-INV-19154 and WN-INV-19154(P2)), these were included in another project subcontracted by the defendant to the plaintiff and are not related to the Subcontract;

(b)  Paragraph 9A – in respect of Item 1 above (Invoice No WN-INV-190002(P6)), it is averred that the plaintiff has not provided sufficient particulars for the alleged additional works relating to the dismantling and reinstalling of ceiling-mounted fans, amplifiers and lights, (namely items 3.1, 3.2 and 3.7 of that invoice), amounting to a total of HK$211,800, and the same are now not admitted.  It is also alleged that such works were already within the scope of the Subcontract and included in the agreed sum.  The plaintiff is therefore not entitled to separately charge for the same.  Further, the plaintiff is also put to strict proof of items 3.3 to 3.6 of that invoice for the sum of HK$55,800, including the quantities and locations of the items installed.  As for item 4.1 of that invoice, amounting to HK$23,000, being the dismantling of the false-ceiling frame and air duct on the first floor, it is now alleged that such item is already included in the original scope of the Subcontract and the agreed contract price;

(c)  Paragraph 9B – in respect of Item 2 above (Invoice No WN-INV-190002(P7)), the plaintiff has not provided sufficient particulars of the additional works referred to in items 3.1, 3.2 and 3.10 of that invoice, and it is put to strict proof.  Further, it is averred that the said items in the total sum of HK$21,500 for the dismantling and reinstalling of ceiling-mounted fans, amplifiers and lights were of the same descriptions as items 3.1, 3.2 and 3.7 of Invoice No WN-INV-190002(P6) and are thus duplicated.  In any event, it is also averred that these works were generally necessary under the Subcontract and were already included in the agreed contract price;

(d)  Paragraph 9C – as a result of the above newly pleaded case, the plaintiff’s alleged additional works in a total sum of HK$1,267,150 are now denied, and the plaintiff is put to strict proof of the disputed items mentioned above.

11.  As for the reason why the defendant is seeking to withdraw its previous admission in relation to the alleged additional works undertaken by the plaintiff, and putting forward its newly pleaded case above, the defendant explains, in short, that the withdrawal of its admission concerning the additional works was partly due to the advice given to it by its new legal team that there are good grounds to challenge some of the previously undisputed items.

12.  Further, the defendant says that the final account under the main contract has not yet been approved, such that there was a chance that the Social Welfare Department may disapprove the additional works in full or in part, in which case the defendant would have to pay the plaintiff out of its own pocket.

13.  The defendant also claims that it was under an honest but mistaken belief that the plaintiff had a strong and valid claim for the additional works.

APPLICABLE LEGAL PRINCIPLES

On appeals against a Master’s decision

14.  It is trite that an appeal against a Master’s decision is by way of a rehearing as though the application has come before the judge for the first time, and the court’s discretion is not fettered by the previous exercise of discretion by the Master – see Hong Kong Civil Procedure 2023, Vol 1, para 58/1/2.

15.  In any event, the defendant has pointed out at the hearing of the appeal, and it is noted, that the learned Master was satisfied that the defendant’s application to withdraw the admission was made in good faith and that there is a reasonable prospect of success of its case as re-amended.  It was further pointed out by the defendant that the learned Master was of the opinion that regarding the dispute of liability and quantum of the additional works, the court could not decide without determining the credibility of the witnesses after trial.  Further, in granting leave to the defendant to withdraw the relevant admission and to re-amend its case, the learned Master was of the view that the plaintiff would not suffer any prejudice which could not be compensated by costs.

ON WITHDRAWAL OF ADMISSIONS

16.  There is no dispute that, as the plaintiff pointed out, the court would expect a party seeking to withdraw an admission to put forward a convincing and credible explanation of the circumstances in which the admission was made under a mistake – see Tse Yuk Tin, administrator of the estate of Tse Yat Hung, dec’d v Chee Cheung Hing & Co Ltd [1984] HKLR 391 at 395E–G.  See also Ho Wai Yin v Cheng Suet Yee, HCAP 18 of 2003, 29 June 2005, Andrew Cheung J (as the Chief Justice then was) at paragraphs 3 and 8, and Hua Tyan Development Ltd v Zurich Insurance Co Ltd [2012] 5 HKC 117 at paragraph 16.

17.  Both parties have also referred to the case of Re Ng Wai Jing [2016] 2 HKLRD 1460 at paragraphs 18 to 21 where the Court of Appeal, following the English Court of Appeal’s decision in Sowerby v Charlton [2006] 1 WLR 568 summarised the factors to be considered in relation to the withdrawal of admissions.  These considerations are to be taken into account in view of the underlying objectives in O 1A r 1(a) to (d) and (f) of the Rules of the High Court, Cap 4A.  They are as follows[9]:-

“(1) In exercising its discretion the court will consider all the circumstances of the case and seek to give effect to the overriding objective.

(2) Amongst the matters to be considered will be:

(a) the reasons and justification for the application which must be made in good faith;

(b) the balance of prejudice to the parties;

(c) whether any party has been the author of any prejudice they may suffer;

(d) the prospects of success of any issue arising from the withdrawal of an admission;

(e) the public interest, in avoiding where possible satellite litigation, disproportionate use of court resources and the impact of any strategic [maneuvering].

(3) The nearer any application is to a final hearing the less chance of success it will have even if the party making the application can establish clear prejudice.  This may be decisive if the application is shortly before the hearing.”

18.  The defendant also referred to the case of Wingames Investment Ltd v Mascot Land Ltd [2013] 1 HKLRD 26 at paragraphs 26(2)-(4) where the Court of Appeal emphasized that absent real prejudice to the plaintiffs, fairness requires that the defendants be permitted to advance their true case.  When the proceedings are at a very early stage, holding defendants to the admission would clearly be prejudicial to the defendant, and “it would not be right to punish them for a slip or error on their part, or that of their legal advisors, when this could be corrected without prejudicing the plaintiffs”.

19.  In Singh Balwinder v Sino Pil Engineering Services Ltd [2007] 1 HKLRD 560, the court allowed an application to withdraw an admission because of a lack of proper legal advice.  Lok DJ (as he then was) held, at paragraph 13, that the fact that the applicant should have been more alert did not destroy his good faith in making the application to withdraw the admission.  In the interest of justice, it was held that the applicant should be allowed to reopen the issue.  The learned judge further stated that it would not be proper to embark on a mini-trial of the issues, which should be properly left for the trial judge to determine.  If there is some justification to make a challenge on the issue, it would be fair and just to allow the applicant to reopen it.  See also Chow Ching Yee v Wong Hng Kee [2020] HKCFI 2555 at paragraph 33(1) where Godfrey Lam J (as he then was) also referred to Singh Balwinder and remarked that it is not incredible for a litigant to say that he has not received sound or adequate legal advice.  It is important to consider all the circumstances of the case, and the primary aim in exercising the powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties[10].

20.  Concerning prejudice, the defendant referred to the case of Re Chung Wong Kit (a bankrupt) [1999] 1 HKLRD 410 where the Court of Appeal held at 414B-C that:-

“[I]n determining whether it is fair to allow a party to resile from an admission, it is not sufficient for the Court to presume prejudice to the opposing party but it is necessary to balance the prejudice suffered by the admitting party if deprived of his right to resile against any prejudice which the relying party has specifically established he will suffer if the admission is withdrawn”

21.  Bearing in mind the above principles, I shall consider the contentions of the parties and the explanations given by the defendant for making the admission.

DISCUSSION

Whether the application to re-amend was made in good faith

22.  In the Affirmation of Lau Wai Man, the defendant’s director dated 6 September 2022, it was said that when the Defence and Counterclaim was prepared and filed in July 2021, the defendant had harboured an honest but mistaken belief that the plaintiff had a valid claim for the additional works. This was due to the parties’ previous course of dealings and a belief that the defendant would be paid by the Social Welfare Department for the plaintiff’s claims.  It is said that the plaintiff and the defendant had started to co-operate in construction projects some years ago, and they had worked together in about five to six construction projects in the past, prior to entering into the Subcontract.  In those projects, the parties did not any face material challenges regarding additional works from the previous employers.  The defendant did not foresee that there would be such strong challenges from the client or the Social Welfare Department in the present case.

23.  The defendant further contends that by the time when it made the application to re-amend its Defence and Counterclaim on 31 August 2022, the defendant had already filed 7 explanatory letters concerning the variation orders with the client’s architect.  The defendant further referred to a Summary of Variation Works dated 26 April 2021 issued by the employer’s architect to the defendant setting out the various challenges on the variation works from the Social Welfare Department. It is said that the summary shows that the Social Welfare Department has taken the stance that some of the plaintiff’s claims for additional works ought not to be allowed. The defendant says there is therefore a real probability that the Social Welfare Department might refuse to pay for the additional works claimed by the plaintiff in full or in part.

24.  Apparently, it is now admitted by the defendant that due to its mistaken belief that it would get paid for the claims of the alleged additional works, it did not pay much attention to them and was careless in not carrying out its own assessment of such additional works. It is said this was also attributable to the original pleader.

25.  The plaintiff, on the other hand, submitted that if there had been any incorrect legal advice or wrong interpretation of the facts by its former legal team, the defendant had not pinpointed the same in its evidence, apart from bare assertions. It is further contended that the defendant had already amended the Defence and Counterclaim once, and ought to have had the chance to review its stance and pleaded case then. It has also changed its stance, for example, in respect of the replacement of ceiling frames. It was originally pleaded by the defendant that the plaintiff had failed to undertake this part of the work, but when faced with contradictory documentary evidence, the defendant changed its case to say that the parties had agreed to vary the scope of the Subcontract such that the plaintiff was no longer required to replace the supporting ceiling frame, so that it ought not be paid for that.

26.  Whilst there is some force in the argument that the defendant had already had a chance to review its case when amending the Defence and Counterclaim for the first time, this in my view does not eradicate the possibility that the defendant had not realised its mistake on that occasion.

27.  Further, in light of the explanations given by the defendant above, it would seem to me that only so much could be said about the statements of truth signed by the defendant in respect of its previous pleadings, in terms of the defendant’s belief at the time. Of course, it cannot be disputed that statements of truth should be taken seriously, and one could certainly foresee that this is a matter of credibility that would be explored with the defendant’s witnesses at trial.

28.  Considering the above explanations proffered by the defendant, I do not find that the explanations were incredible. I am satisfied that the defendant had mistakenly and genuinely believed that the plaintiff had a valid claim for the additional works without having made any proper assessment. Although the plaintiff has understandably raised vehement objections, there is insufficient material to show that the application to re-amend the Defence and Counterclaim was not made in good faith. This is so even when admittedly, the defendant had been careless.

29.  Also, on the basis of the reasons given by Mr Lau Wai Man that led to the holding of the mistaken belief, this is very much a matter of the defendant’s self-induced belief, irrespective of whether there had been any incorrect legal advice. As such, in my view, the arguments by the plaintiff based on a lack of particulars of incorrect legal advice given by the defendant’s legal team is of limited force.

Whether there are triable issues

30.  The defendant contends that there was no assessment of the additional works by the defendant because the Social Welfare Department and the client have been slow in assessing the final account under the main contract.  The defendant’s director, Mr Lau Wai Man said that as at the time when he made his affirmations in September 2022 and November 2022 in support of the application to re-amend, the Social Welfare Department was still in the process of assessment.  Since they have not yet approved the defendant’s application for the variation orders, the architect appointed by the client had not yet certified or allowed payment for the variation orders claimed.  As such, the defendant could not finalise the account with the plaintiff.

31.  The defendant now says that it has not reached any agreement with the plaintiff in relation to the entitlement or value of the additional works claimed by the plaintiff.  There was in fact no factual basis to support the averment that the additional works were in the value of HK$1,288,600 as explained above.  Hence, the defendant sought to re-amend its pleadings to reflect the matters now pleaded in paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim.

32.  On the other hand, Mr Wong Chung Ying, the plaintiff’s project manager, has in his Affirmation dated 31 October 2022 said that from the aforesaid Summary of Variation Works dated 26 April 2021 issued by the architect, it appears that the defendant has not made a claim for a number of additional works now claimed by the plaintiff[11]. He further stated that it seems the rest of the relevant additional works were not challenged by the architect[12]. The defendant submits that the said summary was only an internal document between the architect and the defendant, and the final decision rests upon the Social Welfare Department in raising any challenges or making any decisions.

33.  In my view, as the grounds of objections to the various alleged additional works are now set out in paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim, one would need to consider those grounds instead of relying solely on the said summary from the architect.

34.  The plaintiff also contends that whether or not the defendant could claim from the Social Welfare Department for the additional works in question is beside the point, as there is no contractual term that the plaintiff’s entitlement to payment shall be conditional upon the defendant’s entitlement to payment under the main contract. As far as I can see, the payment term set out in Clause 6.1 of the Subcontract only stated that the defendant shall make payment to the plaintiff within 30 days after satisfactory completion and assessment, or make such payment according to the terms and conditions under the main contract concerning the payment method. The terms and conditions concerning the payment method under the main contract have not been shown in the evidence, save that Clause 13 of the main contract concerning variations, provisional quantities and provisional items and sums has been exhibited. In any event, the defendant has not alleged that payment to the plaintiff under the Subcontract is conditional upon the defendant having been paid for the relevant additional works. To my understanding, the defendant appears to be only contending that it fears that in the event the Social Welfare Department refuses to pay for some of the items, the defendant would nevertheless have to pay the plaintiff for the same if judgment is entered for those items. This would take away its capacity to challenge those items, as are now pleaded in paragraphs 9 to 9C of the re-amendments.

35.  In my view, the more important question here is whether there is a triable case, or a bona fide dispute as to liability and quantum, as the plaintiff puts it, as set out in paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim.

36.  I am satisfied that based on the matters now pleaded in paragraphs 9 to 9C of the Re-Amended Defence and Counterclaim, there are triable issues with a reasonable prospect of success in relation to the various items of the alleged additional works claimed by the plaintiff.  The court will not at this stage conduct a mini-trial of those issues, but it would seem that the defendant has now set out its dispute of the relevant additional works in detail, and it ought not be deprived of the opportunity to dispute those items as pleaded, and as summarised in paragraph 10 above.

Potential prejudice to the plaintiff

37.  In relation to whether there is any prejudice caused to the plaintiff by way of the withdrawal of the admissions concerning the additional works, I do not find there is any such prejudice that could not be compensated by costs.  The proceedings are at the stage where witness statements are yet to be filed, and that the plaintiff is in any event cast with the burden of proving its case, including the alleged additional works, from the time its pleaded case was settled.  The plaintiff’s contention that it would be placed under unnecessary burden to locate each and every disputed item of the additional works on the site after a long lapse of time, and that it has already left the site, and the plaintiff’s foreman who counted the quantities of the additional works on site is no longer in the employ of the plaintiff, are contentions that would seem more apparent than real, as the plaintiff would have to prove its case in any event.

38.  An important question in this case is whether, on the other hand, the defendant ought to be allowed, in fairness and in the interest of justice, to put forward its real case so that the dispute could be justly resolved. This case is not at its last stage, where for example the trial is imminent, in which case there would be much prejudice if the application to re-open an issue is allowed. In the present case, I find no reason why the defendant should be prevented from putting forward its full case at a relatively early stage of the proceedings.

39.  In the circumstances, I do not find that the plaintiff will have suffered any real prejudice as a result of the withdrawal of the admissions and the re-amendment of the Defence and Counterclaim.

RULING

40.  Based on the above, the defendant’s appeal is dismissed.

41.  As the time limit set out in paragraph 4 of the Order of Master Eva Leung dated 21 December 2022 has lapsed, I grant leave to the plaintiff to re-amend its Amended Reply and Defence to Counterclaim within 28 days from the date of this decision.

42.  I also make an order nisi that the plaintiff shall pay the costs of the defendant in this appeal, with, in fairness, certificate for one counsel only, as I am of the view that the complexity of this appeal does not warrant the engagement of two counsel.  This however in no way detracts from the value of the contribution of both counsel for the defendant.  The costs so ordered are to be taxed if not agreed, to be paid by the plaintiff to the defendant in any event.

43.  Lastly, it remains for me to thank counsel on both sides for their assistance.