WUI FU DEVELOPMENT CO. LTD. v. TAK YUEN CONSTRUCTION CO. LTD.

CT40/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN THE MATTER BETWEEN

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JUDGMENT

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1. The plaintiff is the owner of a piece of land at 39 to 41 Hill Road (the site) on which there is now a composite building. A contract for the construction of the superstructure of this building was entered into by the plaintiff with the defendant on 12 April 1997. The plaintiff pleads that the defendant was employed as the main contractor, and there is no dispute about this. The strange thing is that, before entering into the contract with the defendant, the plaintiff also employed another company called Wing Bo Building Construction Company Limited (Wing Bo) as the main contractor, and, contractually, it remained so, although, in reality and for all practical purposes, the defendant was the main contractor, and carried out most of the work up until its contract came to an end. There was no contractual relationship between the defendant and Wing Bo. The relationship between the plaintiff and Wing Bo was clearly a cosy one; Mr Wong Wing Fu (Mr Wong) and his brother were directors of both the plaintiff and Wing Bo.

2. Mr To Tak Kin (Mr To), who acted for Keith To Architects Limited (the architect), gave me the impression of being somewhat perplexed by this situation, as well he might have been. The architect was appointed as the architect for the contract with Wing Bo, but Mr To insisted that the architect was not the architect under the contract with the defendant. Although Mr To was well aware that this was not the situation, he said that he treated the defendant as the sub-contractor of Wing Bo. Wing Bo made claims, and the architect issued certificates for payment, as if Wing Bo was the main contractor and the defendant the subcontractor, the documents issued by the architect were submitted to a bank to justify the drawing-down of loans for the construction.

3. Mr Wong says that, after the contract with Wing Bo, the contract with the defendant was entered into because the defendant was a cheap contractor, and, that way, "we" could make more money. But, if by "we" Mr Wong meant the plaintiff, that does not make much sense because most of the money received from the bank was paid over to Wing Bo, for very little input, and Wing Bo repaid the plaintiff some of the money to pay the defendant.

4. In the pleadings, the plaintiff says that the contract with the defendant was in the standard form of building contracts for use in Hong Kong, and cites clause 25, which relates to the defendant, without reasonable cause, wholly suspending the carrying out of works, or failing to proceed with them regularly and diligently, and the architect giving notice, specifying the default. In this event, if the defendant continues "such default" or repeats it, the plaintiff was entitled to determine the employment of the defendant. This clause also says that the employer's notice shall not be given unreasonably or vexatiously.

5. The statement of claim says that the defendant, since 1 October 1997, suspended the works or failed to proceed with them regularly and diligently. This is what the plaintiff's pleading says, but Mr Chain, in his opening, said that the plaintiff was basing its case "only on a suspension of work". There is no doubt that Mr Chain firmly nailed his colours to this mast because Miss Cheng asked for his confirmation that this was indeed the plaintiff's case, and he said it was. I think Mr Chain was less unambivalent about this in his closing, but Miss Cheng conducted her case on the basis of this unambiguous statement, and the plaintiff cannot withdraw from it now.

6. The plaintiff goes on to allege that, by a letter dated 20 October 1999, the architect gave notice under clause 25, but this notice said nothing about suspension of works; only that the defendant was in default in respect of its failure to proceed regularly and diligently.

7. The next allegation is that, following this notice, the defendant continued to suspend works or failed to proceed regularly and diligently so, by letter dated 6 November 1997, the plaintiff's solicitors determined the contract. In fact, the letter determined the defendant's employment, mentioning the defendant's default, without specifying it.

8. The plaintiff alleges that the defendant did not vacate the site until 21 November 1999, and, as a result of this, the plaintiff suffered loss and damage. This is the only allegation of damage. There are no particulars pleaded of any special damages. During the trial, Mr Chain sought to lead some evidence of special damages. I ruled this inadmissible as not going to any allegation of special damages. Mr Chain asked for leave to amend to allege these damages. I refused leave on the grounds that it was far to late to do this, and would result in prejudice to the defendant.

9. The plaintiff claims a declaration that it has lawfully terminated the contract, damages for breach of contract (although there is no allegation of damages for breach of contract), possession of the site (which the plaintiff already has), and an injunction (which is no longer necessary).

10. In its defence, the defendant says that the plaintiff was obliged to appoint an architect willing to discharge the functions of an architect under the contract, but failed to do so, as result of which the defendant suffered damages in the sum of $1,337,321 in respect of work done described in the defendant's 4th application for interim payment (AIP) dated 28 August 1997. On 30 September 1997, the defendant submitted its 5th AIP in respect of a cumulative total of $2,554,145.

11. The defendant goes on to plead that, although the architect was not the architect for the contract, it gave an assessment of the value of work done by the defendant up to 30 September 1997 as $1,322,796.20, excluding unused materials. The plaintiff says no payment in respect of these sums has been made.

12. The defendant denies suspending the works of failing to proceed regularly and diligently, saying that it was unable to "maintain normal progress of the works" after 30th September because the plaintiff did not make the payments of the sums alleged.

13. The plaintiff says it received the notice from the architect, but it had not failed to proceed regularly and diligently, that the architect was not the architect for the purposes of the contract, and that the notice was given unreasonably and vexatiously. The defendant denies that the plaintiff was entitled to determine the contract.

14. In its counterclaim, the defendant claims $3,531,734.80 damages as a result of the plaintiff's failure to appoint an architect, being $6,723,180 as the value of its work in its 6th AIP dated 31 October 1997, and $542,062 being the value of work done from 1 November to 21 November 1997, less retention and previous payments. Further, or in the alternative, the defendant claims $3,072,125.20 being retention money of $726,524.20, loss of profit of $2,270,601 and removal costs of $75,000 as damages for the plaintiff's unlawful repudiation of the contract. The defendant also claims damages in respect of its liability to subcontractors and suppliers, and interest.

15. In its reply and defence to counterclaim, the plaintiff insists that the architect was appointed under this contract. It also pleads that, alternatively, the defendant waived the "non-appointment". The plaintiff denies that it is liable to the defendant on the counterclaim.

16. The first issue to be resolved in this litigation is whether or not the plaintiff lawfully terminated the contract in the manner alleged by it. I emphasise that I must consider only the manner of termination alleged by the plaintiff. If indeed an architect was not appointed by the plaintiff under the contract, it may be that the plaintiff could have lawfully terminated the contract by means other than that specified in clause 25, but this is not alleged and has not been explored. If the manner of termination alleged by the plaintiff was not lawful, then its conduct was a clear wrongful repudiation of the contract.

17. As I have said, the plaintiff alleges that it terminated the contract under clause 25. That procedure requires that the architect issuing the notice was properly appointed and was acting under the contract.

18. Mr To says his company was appointed architect for "the building works" at the site, and was the authorised person in respect of these works. He says that the contract between the plaintiff and the defendant was made without his knowledge. He was told by the plaintiff that the defendant was fully responsible for the site. He told the plaintiff that he would not administer the contract, and would not certify payment. He was told by the plaintiff that the plaintiff and the defendant had their own arrangement for assessing payment.

19. Mr To said several times during his evidence that his company was not the architect under this contract, and anything the architect did in connection with the works was as architect under the contract between the plaintiff and Wing Bo, or as the authorised person. He said that, although he knew this was not the case, he treated the defendant as the subcontractor of Wing Bo. The certificates for payment that he issued were in the standard form, and were in respect of work purportedly done by Wing Bo. The document that he issued on 14 October 1997 was what he called an "assessment", not a certificate for payment. It was not in the standard form. He agreed that this document was not a certificate under clause 30 of the contract between plaintiff and the defendant, because the architect was not the architect for the contract with the defendant.

20. Mr Chain argues that the architect was the architect under this contract. He says this, as I understand him, because the plaintiff, the defendant and the architect behaved as if this were so. It is true that the parties treated the architect as the architect for the building works, but I do not accept that there was an valid appointment of the architect as the architect under this contract. There is no letter of appointment, and, indeed, Mr To says that he did not even know about this contract until after it had been executed. He has made it more than abundantly clear in evidence that he did not consider his company was the architect for this contract, and said so clearly in a contemporaneous letter. It is not possible for an architect to be an architect under a contract if he does not consider himself to be such. The appointment of an architect is not a formality. He holds an important office, and one of his duties is to hold the balance between the employer and the contractor. He cannot do that if he is unaware that he is the architect. It may be that the defendant thought that the architect was the architect under this contract; the contemporaneous correspondence says as much. But the defendant's assumption that the architect had been properly appointed cannot make it so. He was clearly not so appointed, and the attitude of the parties cannot change this.

21. In this context, it is important to note that the plaintiff does not make any allegations in its pleadings that, by some conduct, the defendant is estopped from denying that the architect was not appointed. What the plaintiff alleges is that, assuming there was no appointment, the defendant is estopped from complaining that there was a breach arising from the "non-appointment". In any event, I do not think that the defendant can be estopped in this respect when the circumstances are that it assumed, as it clearly did, that the architect had been properly appointed. Where, after investigation, it appears that there was no such appointment, the defendant is entitled to plead, in essence, that it was mistaken in its assumption, and is now aware that, in fact, the architect was not properly appointed. It appears that the defendant only became aware that the architect was not the architect for its contract when the architect said so in its letter dated 9 October 1997, and explained that it was supervising the works as an authorised person. In answer to this letter, the defendant, in a letter dated 13 October 1997, tried to persuade the architect to exercise the functions of the architect, but the architect would go no further than making an "assessment" of the value of the work "as an independent consultant". Clearly, by declining to issue an architect's certificate, the architect refused the defendant's invitation to act as architect.

22. The only time that the architect seemed to act as architect under this contract was when he purported to issue the notice to the defendant under clause 25 of the contract. I do not know why the architect did this when it knew that it was not the architect for the contract, and had told the parties this. Perhaps the architect thought that, when doing this, it was acting as architect under the contract with Wing Bo, but, if so, the action was wrong. Clause 25 requires that this notice be issued by "the architect", meaning the architect under the contract concerned, not as the authorised person in respect of the works, or as architect under some other contract. It is also so that an architect, when issuing such a notice, is exercising one of his balancing functions; he is bound to give serious consideration to whether or not such a notice is justified, and he cannot possibly do that unless he is the architect under the contract so that he can consider the relevant circumstances.

23. It follows, in my view, that the notice issued under clause 25 was not a valid one to trigger the determination mechanism under that clause.

24. In any event, a valid notice must be one "specifying the default". This notice specified that the defendant had failed to proceed regularly and diligently, a ground no longer relied upon by the plaintiff.

25. Even if the notice had specified the ground now relied upon - "if he without reasonable cause wholly suspends the carrying out of the Works" - the fact of the matter is that it is beyond doubt that the defendant had not wholly suspended the carrying on of the works. What the defendant was doing was operating a "go-slow" policy, and it was doing this because the plaintiff had not paid it for work already done. That is a failure to proceed regularly and diligently, not a whole suspension of the works.

26. Miss Cheng argues further that, in any event, the suspension, if there was one, was not "without reasonable cause". The relevant facts are that, at the relevant time, the plaintiff, on its own assessment, admitted that it owed $314,336.48 to the defendant. I find that the plaintiff unjustifiably failed to pay this money to the defendant. I do not accept as legitimate any of the silly excuses that Mr Wong advanced for not paying this. Mr Chain agues that, even I were to find as I have, the cases say that this does not justify a suspension of work. I am not sure that the cases do say this. In neither of the two cases relied upon by Mr Chain - Lubenham Fidelities & Investments Co Ltd v South Pembrokeshire District Council (1986) 33 BLR 39 and Canterbury Pipe Lines Ltd v The Christchurch Drainage Board (1979) 16 BLR 76 - was there a situation in which the employer was, without any justification whatsoever, withholding money properly due to the contractor. The amounts allegedly due were in dispute. In JM Hill & Sons v London Borough of Camden (1980) 18 BLR 31, there was a situation in which the employer was withholding money legitimately due and the dicta in that case seems to tell me that the court believed that this conduct by the employer was such that the contractor was not acting unreasonably in determining the contract. It seems to me to follow from this dicta that the withholding of a substantial sum legitimately due to a contractor would be unreasonable. I believe that an architect exercising his balancing function when considering whether or not to issue a notice under clause 25 must consider whether or not a suspension was with "reasonable cause" when the employer is deliberately, without any reasonable cause, withholding a substantial amount of money rightly due to the contractor. I think that, if an architect had done this, it would have been inevitable that he would have concluded that the suspension was not without reasonable cause because it would be totally unreasonable to expect a contractor not being paid a large sum undeniably due to him to continue with the works and, in effect, finance the employer's building operations to an extent beyond that contemplated by the contract.

27. Clause 25 requires that notice of determination given by the employer "shall not be given unreasonably or vexatiously". For reasons similar to those in the paragraph above, it seems to me that an employer who seeks to determine a contract on the grounds that the contractor has suspended work or is failing to proceed regularly and diligently with them, when the employer well knows that this is because he has failed to pay the contractor a considerable sum of money which he himself has assessed as properly due, is acting unreasonably. The remedy lay in the plaintiff's hands. It should have paid the defendant, and, if the defendant had then failed to proceed, it had its remedies.

28. Accordingly, on all these grounds, I find that the plaintiff did not lawfully determine the contract, and wrongfully repudiated it.

29. It follows that the plaintiff's claim must be dismissed.

30. Miss Cheng also sought to argue that the notice by the architect was not valid because the plaintiff caused it to be issued. Indeed, the plaintiff does say that it caused it to be issued, and that may be the reason why the architect, when it knew it was not the architect for this contract, quite inexplicably issued the notice. A notice that has been issued by an architect without proper independent consideration of the merits and under the influence of the employer would not be valid, but I do not think there is sufficient evidence before me to find that this is the case.

31. The defendant's claim must be allowed. I have found that the plaintiff did not appoint an architect, and the damage that flows from this is equivalent to the money that should have been properly certified as due to the defendant by an architect under the contract. In addition, the defendant is entitled to damages flowing from the plaintiff wrongful repudiation of the contract.

32. There remains the question of what is due to the defendant.

33. The starting point, as agreed by both counsel, is the architect's "assessment" of 14 October 1997. This assesses that the value of the work done by the defendant is $1,322,796.20. This assessment does not take into account unused materials. To this must be added the retention money admittedly due of $481,086.58, making a total sum of $1,803,882.78.

34. The plaintiff says that, to this, must be added certain additional sums.

35. The preliminaries were assessed by Mr To in the document of 14 October 1999 as at 30 September 1997 by using the fraction of five-eighths. The defendant says that, by reason of additional work and time for the months of October and November, this fraction should be increased to seven-eighths. In my view, this is an unrealistic approach. The reason that Mr To assessed on the basis he did was because the work was progressing as might be expected. After the end of September 1997, the work did not progress as it had before. The defendant was conducting a go-slow policy. Nevertheless, some work was done after the end of September, and some allowance should be made for this. Doing the best I can with the materials available, I assess that the additional amount should be $20,000.

36. The next additional item claimed is in respect of reinforcement. This claim also, in my view, is inflated. The defendant claims for 454 metric tonnes, but produces invoices for only 423 metric tonnes. The defendant says all the reinforcement was used. The contract quantity was 534 metric tonnes, but the defendant had completed only 14 floors, leaving 11 floors to be done. On this basis, there was only 110 metric tonnes left for the remaining floors, instead of 173 metric tonnes. It seems to me that neither 454 nor 423 metric tonnes should have been used to complete the first 14 floors. I accept Mr To's assessment as reasonable. I make no award in respect of this item.

37. I am satisfied that the claim in respect of form-work premoulding should be allowed in part. Mr Chain argued that this is equivalent to a tool of the trade, or should be considered an investment in order to earn a profit. I do not accept this. As I understood the evidence, this device was for this building, and similar to the form-work itself. I do feel, however, that I cannot rely on the defendant's evidence as not inflating this item. I will allow $50,000 for this.

38. The defendant then claims $120,600 for door-frames supplied. This claim is supported by an apparently genuine invoice. I see not reason why it should not be allowed.

39. There is then a claim for $81,728, plus 5%, for gas installation works. Again there are invoices supporting this claim, and there is no reason to think they are not genuine. Mr Chain's only argument against this is that the plaintiff must have paid the bills. But there is no evidence of this, which I would have expected if this were the case. I allow $85,814 for this.

40. There is an additional claim for back-filling work in the sum of $14,700. The evidence is that work of this nature was done after 30 September, and the quantum is not seriously contested.

41. The defendant also claims the sums of $6,740, $7,740 and $25,000 in respect of lime cement and pipes. These items are not seriously contested, and there is no evidence to the contrary.

42. The defendant claims for additional electrical work done after 30 September 1997. I believe this claim is inflated. I do not consider that the defendant's evidence is reliable on this. I will allow only $30,000 for this additional work.

43. The defendant claims $75,000 for removal expenses and $39,480 for materials on site. These claims are not seriously contested, and I accept them.

44. There remains a claim by the defendant for loss of profits on the work not done at the date of termination. This would, in the ordinary course, be a percentage of the total work value ($13,197,340.70) less the value of works done ($5,210,939.78), being $7,986,400.92. The percentage, it is accepted, would normally be between 10% and 15%. The problem with the defendant's claim here is that it wrote a letter to the plaintiff on 19 September 1997 saying, in essence, that it would make a loss on the project. The defendant's explanation for this is that the statement that it would make a loss was a negotiating tactic to extract money due from the plaintiff, but it was not true. In fact, the defendant says, it anticipated making a profit. I accept that this is probable, and that its explanation for saying otherwise in the letter mentioned has the ring of truth about it. The defendant is an experienced contractor. It is not likely that it entered into this contract with a view to making a loss. There is no evidence that anything happened between the time of the contract and the wrongful repudiation that would have changed an expectation of a profit to an anticipation of a loss, except perhaps the plaintiff's unwillingness to pay for work done. It is my conclusion on the evidence, including the defendant's letter of 19 September, however, that the defendant had quoted a cheap price, and, for that purpose, had pared down its potential profit. I believe a reasonable assessment of that profit is 5%. This gives a figure of $399,320.

45. Accordingly, I find that the total due to the defendant is $2,678,276.78 on the basis of the following table.

46. The defendant is also entitled to an award of damages to be assessed in respect of any liability to its subcontractors and suppliers arising from the plaintiff's repudiation of the contract.

47. The defendant also claims interest. Miss Cheng seeks compound interest. She accepts that the court should award such interest only where, in this context, the debtor is in a fiduciary position to the creditor. This is undoubtedly so far as concerns the retention money, but Miss Cheng argues that, in view of the cosy relationship between the plaintiff and Wing Bo and the fact that the amounts due to the defendant were received by the plaintiff and used for its own benefit, I should find that, in effect, the plaintiff was holding the other money as a fiduciary for the defendant as well.

48. The nature of the plaintiff's relationship with Wing Bo and the reasons for the strange arrangements made for the construction of the building are murky, but I do not think that I am in a position to conclude that this resulted in the plaintiff holding all the money as a fiduciary for the defendant. The consequences of the plaintiff's shenanigans are clear from this judgment, but I do not consider that I am able to carry these any further.

49. In the result, I award compound interest to the defendant on the sum of $481,086.58 at the rate of prime plus 1% from 6 November 1997 to date, with monthly rests. I award simple interest on the sum of $1,322,796.20 at prime plus 1% from 28 October 1997, and on the balance at that rate from 21 November 1997, to date. The whole sum awarded will bear interest at the judgment rate from today until date of payment.

50. There seems no obvious reason why the costs should not follow the event. I make an order nisi that the plaintiff pay the defendant's costs of the claim and counterclaim as taxed, if not agreed.

51. There may be applications arising out of this judgment. If so, I will hear these in chambers at 11 am on 11 November 1999.