WOON LEE (HK) CO LTD v. HOLYROOD LTD

CACV 188/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 188 OF 2010

(ON APPEAL FROM HCCT NO. 4 OF 2009)

________________________

________________________

________________________

________________________

Hon Le Pichon JA:

1.  This was an appeal by the defendant from a judgment of Saunders J dated 21 September 2010 whereby the defendant was ordered to pay the plaintiff the sum of $17,316,533.11 together with interest and costs. At the conclusion of the hearing the appeal was dismissed. The reasons appear below.

The background facts

2.  The defendant owner engaged the plaintiff as the contractor for carrying out fitting out and alteration works in a new development at 10-12 Peak Road Hong Kong.  The defendant counterclaimed for defective work.  The defendant is the alter ego of Ms Lillian Oung.

3.  The development consists of 2 blocks of residential units, known as Blocks A1 and A2, each 10 stories high, a detached house and an equipment and maintenance block.  Hip Hing Construction Company Ltd was engaged to erect the buildings in 2001 but left the site in mid-2002 due to disputes with the owner.

4.  Woon Lee Construction Company Ltd (“WLC”), a company associated with, but separate from, the plaintiff took over the construction of the superstructures until the issuance of the occupation permit in March 2005.  A dispute also ensued, culminating in an arbitration between WLC and the defendant.

5.  Initially another company was engaged to carry out the fitting out works.  That contract was terminated.  The plaintiff took over the fitting out works and entered into three contracts with the defendant.  The judgment referred to the contracts as contracts A, B and C and I will adopt the same terminology.

6.  Contract A concerned fitting out works for three units in A2.  Contract B concerned five units in A1.  Work commenced in April and May 2006 respectively and was completed by December of that year.  Contract C commenced in August 2006, relating to 17 units as well as the house.  By early 2008, overall, 93% of the work had been completed.  On 30 December 2008, the plaintiff accepted the defendant’s repudiation and terminated the contract.

7.  While there was no legal requirement to engage an authorised person for the fitting out works, a Mr Dianto, the principal person of an architectural firm owned by the defendant, was the de facto architect and authorised person for the project.

8.  The issues for determination below are set out in §14 of the judgment:

“ The principal issues addressed in the trial were:

(i) Whether or not the owner was liable for variations of the various contracts, evidenced by documentation provided by the contractor that was not signed by Ms Oung;

(ii) the percentage of the work that had been completed in respect of contract C;

(iii) whether or not there were defects in respect of the work in relation to each of the 3 contracts, for which the contractor should be responsible; and

(iv) whether or not the contractor had been entitled to accept the alleged repudiation of contract C in December 2008, and, if having been wrongly prevented from completing the work was entitled to recover loss of profits suffered as a result of that prevention.”

9.  Ms Oung was the principal witness for the defendant.  The judge found her evidence to be “unreliable, and in virtually every respect, simply incapable of belief”.  He accepted the evidence of Mr Y H Wong, the plaintiff’s director and Mr P W Siu, its foreman.  The judge found for the plaintiff, dismissed the counterclaim and awarded damages of approximately $17.3 million to the plaintiff.

The appeal

10.  Mr Yau who (with Mr Harrison Cheung) appeared for the defendant raised several issues, the more significant of which will be addressed below.

The arbitration statement

11.  The judge’s admission of the arbitration statement into evidence was one of the principal grounds of appeal.

12.  In the arbitration between WLC and the defendant, the defendant had made claims in respect of defects.  Mr M H Wong, an authorised person and registered professional surveyor, had prepared a witness statement identifying the defects alleged to be structural defects caused by WLC (“the arbitration statement”).  At the last minute, the defendant abandoned its counterclaim against WLC in the arbitration.

13.  In the course of cross-examining Ms Oung (who was the first witness for the defendant) in the proceedings below, Mr Manzoni (who appeared for the plaintiff) applied for the admission of the arbitration statement to demonstrate that the defendant had made parallel claims in the arbitration and in this action.  Mr M H Wong had submitted a witness statement in this action which had identified exactly the same defects in support of the defendant’s counterclaim.  It was a reasonable inference that it would be adduced in evidence in due course in support of the defendant’s counterclaim which was premised on the defects having been caused by the plaintiff.

14.  The judge overruled the defendant’s objection to the admission of the arbitration statement on the basis that it fell within the exception to the obligation of confidentiality where disclosure is required in the interests of justice, citing London & Leeds Estates Ltd v Paribas Ltd (No. 2) [1995] 1 EGLR 102 and Russell on Arbitration, 23^rd edition, at 5-179.

15.  Mr Yau’s theme was that it was this arbitration statement that had ‘poisoned’ the judge’s mind: it was said to be the foundation for, and lay at the heart of, his evaluation of Ms Oung’s evidence.  It was submitted that the admission of the arbitration statement into evidence was not only wrong in law, but also that but for its admission, the judge would not have rejected Ms Oung’s evidence wholesale.

16.  The first matter to note is that in §19 of his judgment, the judge explained in some detail the matters that caused him come to the view (in §18) that:

“… it was not upon her demeanour alone that I have reached the conclusion that I cannot rely on any of the evidence given by Ms Oung. Certain of her evidence demonstrated that … Ms Oung was either deliberately dishonest, or held such a radically different view of reality from that which was plainly the case, that her evidence simply could not be accepted.”

The making of parallel claims was but one of the list of nine matters set out in §19.

17.  It would appear that Mr Yau’s foundation for the alleged error of law was the fact that, in the events that happened, the defendant actually had abandoned the claim made in the arbitration and did not pursue its claim in the arbitration that the defects itemized in the arbitration statement were due to water leakage and damage caused by structural defects due to works carried out by WLC prior to the issue of the occupation permit.

18.  The difficulty with Mr Yau’s submission is that he accepts that Mr M H Wong could have been asked in cross-examination as to his earlier stance in the arbitration regarding those defects and the same effect, namely, the fact that the defendant had made parallel claims (albeit subsequently abandoned in the arbitration), could have been achieved without the admission of the arbitration statement.  It is the fact of making parallel claims or allowing them to be made (rather than whether or not they were pursued when there is no valid explanation for the making of such claims) that is relevant to the honesty or otherwise of Ms Oung.

19.  Mr Yau also complained that despite the arbitration statement having been admitted into evidence, the plaintiff did not use it for the purpose for which it was admitted namely, to show that Mr M H Wong had given inconsistent evidence in a material respect.  But the fact was that when Mr M H Wong gave evidence, he made it clear that he was not attributing blame for the defects itemized in his survey report of February 2009 following the inspection he had carried out in late 2008 and documented by photographs.  That rendered it unnecessary to pursue any further the arbitration statement he had made earlier.

20.  I should also add that as a matter of law, Mr Yau has not shown that there was any error in the application of the proposition stated in Russell on Arbitration.

21.  In my view, this ground of appeal was hopeless from the start.

The counterclaim

22.  It was further submitted that even if the judge were right in admitting the arbitration statement into evidence, he should not have used the statement for the purpose for which it was admitted.  Mr Yau referred the court to an elaborate analysis (described below) seeking to classify the defects into various categories with a view to showing that parallel claims affected only a small proportion of the defects in terms of value.  It was said that the judge was wrong to have concluded that the entire counterclaim was launched with deliberate dishonesty.

23.  Since Mr M H Wong accepted in cross-examination on day 3 (transcript pages 109-115) that the defects were the same in both cases, it was certainly open to the judge to accept that evidence and there would be no basis for this court to interfere with such a decision.

24.  As regards the analysis, it was headed “Analysis of the composition of the defects identified and described in Mr M H Wong’s witness statement (Appendix VIII)”. It was said to be compiled from primary data, that data being none other than Appendix VIII attached to the witness statement of Mr M H Wong.  The analysis is in the form of a chart with various columns.  Column A is headed “claim identical to WLC arbitration” and column D “Counter-claim attributed to [plaintiff] defect”.

25.  When questioned by the court, it transpired that this analysis was never put before the judge but created subsequently for this appeal; it was an analysis upon which the plaintiff has not had the opportunity of countering, either orally or by putting in other evidence; and it was an analysis based on the defendant’s subjective appreciation of Appendix VIII.  In light of the above, the analysis can have no practical utility and cannot advance the defendant’s case.

26.  That aside, the judge also set out other reasons (in §§67-84 of his judgment) for rejecting the defects claim.  It is obvious from §§81-82 that the judge did direct his mind to the question whether the defects claimed had any merit but he concluded that it had not been established on the evidence.  In §81, for example, he dealt with a claim in respect of the absence of the floor drain in a toilet and commented that:

“81. … But the photograph does not show the entire area of toilet floor, no plan or specifications were produced to show a requirement to install a floor drain, and, as Mr Siu said, the floor drain may have been a vertical drain on wall, which he pointed out in photograph 19.”

The judge (in §82) then dealt with allegations that some flats had not been constructed in accordance with the approved drawings.  He noted however that no approved drawings had been produced and that the deviations had not been identified.

27.  Moreover, the defendant’s claim for defects was fraught with difficulties.  15 out of the 26 units in question as well as House B had been occupied during the period between completion of work and the allegation of defects being made.  In some cases, the occupation lasted some 2 years.  By way of illustration, Mr Yau was asked to show the court one of the defects claimed by reference to Mr M H Wong’s photographs.  Mr Yau selected two photographs at random.  They happened to relate to Flat A, 2/F, Block A2 which, as Mr Manzoni pointed out, had been occupied for about two years before the claims were made.

28.  It is clear that it is impossible to tell from the photographs that the defects had been caused by the plaintiff.  Anything could have happened in the interval.  Quite simply, the defendant was unable to discharge its burden of proof to show that it was the plaintiff who was responsible for the defects claimed. In my view, the counterclaim was rightly rejected.

Variation orders

29.  §35 contains a summary of the effect of the evidence of the plaintiff’s witnesses:

“Mr Bell said that the pleaded case of the contractor was that in circumstances where Ms Oung had not signed a quotation, there was an understanding whereby if she did not sign or reject a quotation within a reasonable time it would be assumed that she had agreed to it and it would be as valid as if countersigned. That was not in fact the pleaded case, but it was the effect of the evidence of the contractor’s witnesses.”

Of the 69 variation orders, 7 had been signed by Ms Oung.  Liability in respect of those orders cannot be disputed.

30.  Mr Bell’s criticisms (made on behalf of the defendant) are recorded in §§36-37.  In §§38-41 of the judgment the judge rejected them and explained why:

“38. Those are all arguments which may be made, but they ignore the reality of the way in which many construction projects proceed. I do not find it incredible, even in the present circumstances, that a contractor, or his foreman, would accept oral instructions in respect of variations to work, and carry out that work, subsequently confirming the arrangement by way of an invoice. In the absence of any credible evidence from Ms Oung as to the circumstances in which the variation quotations were made, it is open to me, on the balance of probabilities, to accept the evidence of the contractor.

39. Some of the quotations were sent after the work was either started or even after the work was completed. There was nothing in the evidence to suggest that parties might not orally agree to a particular variation, with the arrangement being subsequently confirmed by an invoice.

40. It is right that Mr P W Siu, who was the general foreman who supervised works on the project for the contractor, was not involved in contractual matters, but there was no reason why he would not be involved in, as Mr Y H Wong said, “getting on with the work”. As a result of that, if requested to undertake certain work by either Ms Oung or Mr Dianto, there was no reason why Mr Siu would not do so, leaving costing and the price for the work to be dealt with by Mr Y H Wong. That Mr Siu was not involved in contractual matters, did not impact upon his credibility.

41. The case of the owner is no better in respect of the four specific variations which were challenged.  Each of these items depended upon evidence from Ms Oung as to the original scope of work. That evidence has been rejected.”

31.  Mr Yau’s arguments on appeal amount to no more than a repetition of Mr Bell’s arguments.  He sought a retrial because it was said that the judge’s finding could not stand on the basis that it resulted from the wrongful admission of the arbitration statement.  But that submission has already been rejected.

32.  During the hearing, Mr Yau tried to put forward an alternative case to the effect that there should be a retrial in relation to quantum.  That implied that there had been some form of limited agreement as to the items of work done but not the price.  The difficulty with the alternative case is that it had not been pleaded nor had it been put forward at trial to which Mr Yau had no real answer.

33.  Then it was said that the judge was wrong to have treated it as an “either or” situation, that the rejection of Ms Oung’s evidence did not mean that the plaintiff’s evidence had to be accepted and so there was scope for a proper assessment of quantum.

34.  But of the variations that had not been signed by the defendant, there was Mr Y H Wong’s evidence that apart from variations listed in §85 of his witness statement (comprising 22 variations), there was an oral agreement between him and Ms Oung as to both scope and price.  It is also a fact that quotations had been delivered to the defendant for all variation orders (albeit some of it was sent subsequently) but until these proceedings the defendant had never challenged those quotations.

35.  In those circumstances, plainly, it was open to the judge to accept the evidence of the plaintiff.  This ground has no merit.

Percentage for overheads and profit

36.  This concerned the assessment of the value of partially completed work.  The judge assessed the profit figure to which the contractor would be entitled at 30%.

37.  Mr Yu, the defendant’s expert agreed that there are, generally speaking, 3 methods of valuation: (1) based on the contract entirely; (2) based on contract rates but with adjustments to suit new and different conditions; and (3) a fair and reasonable rate if all else fails.  He accepted that if there are appropriate contract rates, those should be adopted. (Transcript, day 6, pages 28-29).

38.  For the plaintiff, Mr Battersby had come up with a figure of about 29% (before taking into account preliminaries for 5.13 %), based on a breakdown of the actual contract costs.  Mr Yu, the defendant’s expert, initially took the view that the profit should be no more than 15% based on the Architectural Services Department rate book (thus using the third or fall-back method mentioned above).

39.  In §54 of the judgment, the judge referred to Mr Yu’s “consideration of unredacted documents evidencing the actual costs incurred by the contractor”, following which a supplemental report was produced in which Mr Yu reached a figure of 25.28% (said to be provisional) except for items 19 and 49 because of the absence of any appropriate unit rates for those items in the contract.  This figure was before adding preliminaries of about 5%, as to which there was no disagreement.

40.  In those circumstances, I fail to see in what respect it could be said that the judge had erred in adopting a figure of 30%.  In my view, the criticism is unfounded.

41.  In short, none of the issues raised had any merit.

Hon Kwan JA:

42.  I agree with the Reasons for Judgment of Le Pichon JA.

Hon A Cheung J:

43.  I also agree.