PAK FAI FIRE ENGINEERING CO. LTD. v. SHINRYO (HONG KONG) LTD.

HCA11639/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.11639 OF 1998

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J U D G M E N T

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1. This case arises out of the construction of the new Hong Kong Station for the Airport Railway in Central. The site was known as "MTRC 501". It included the station itself and a subway or tunnel connecting the station to the existing MTR Central Station.

2. The defendant was the building services contractor for the Hong Kong Station site. Its work included fire service installations. This work was subcontracted to Raft (E&M) Engineering Ltd ("Raft") and New Gas & Co. ("New Gas"). The plaintiff first became involved on the site in June 1997 when it started to work as a subcontractor to Raft. There was another sub-subcontractor involved called Kwok Cheung Hong ("KCH"). This company also worked for Raft.

3. In January 1998, the defendant's work was behind schedule and as a result, there was a rearrangement of the work to be done by the various subcontractors and sub-subcontractors. It is not in dispute that the defendant engaged the plaintiff at this time to do fire services work directly for it and not through an intermediate subcontractor. This work was general fire services installation work on the Station site in substitution for that which was originally to have been done by others. It is also not in dispute that the defendant engaged the plaintiff directly as subcontractor for one piece of installation work in Zone A of the subway, and one piece of work of fitting pipes in the air-conditioning room.

4. The plaintiff's case is that it has not been paid in full under any of these agreements. It claims that after all payments have been taken into account, including credit being given for a payment made through the Labour Department to settle an outstanding wages claim by the workers it supplied, the defendant owes it $1,453,724.30. The defendant for its part says that the extent of the work to be done under the oral agreements was not as claimed and the agreed prices of one of the two subcontract works was not as claimed. It accepts that full payment has not been paid but claims that after set-off of the outstanding wages claim which it paid, the plaintiff owes it $103,724, for which it counterclaims.

The Areas of Dispute

5. I will use the architectural divisions of the plan and elevation of the site to refer to the areas in which the various subcontractors and sub-subcontractors worked. The plan of the site was divided into 44 grids. The levels were shown by the height above or below the mean datum, in metres. So there were five Levels, namely +7.100, +1.950, -3.000, -9.870, and -15.145. The subway was divided into five areas, A to E.

6. Up to mid-January 1998, the contractual arrangements were as follows. At and above Level +7.100, on the whole area of grids 1-44, Raft worked under the defendant and KCH under Raft. On the whole of Level +1.950, Raft worked under the defendant and the plaintiff under Raft. On the whole of Level -3.000, Raft worked under the defendant and KCH under Raft. On the two Levels -9.870 and -15.145, at grids 1-23 New Gas worked under the defendant with no subcontractor under it, while at grids 23-44 Raft worked under the Defendant and KCH under Raft. In the subway at Zones B to E, Raft worked under the defendant and KCH under Raft. This is cumbersome to describe but is set out clearly in the diagram at Exhibit P2.

7. Following correspondence and discussions in mid-January, the picture changed. At and above Level +7.100, on the whole area of grids 1-44, Raft came out of the picture and KCH worked under the defendant. KCH also worked directly under the defendant on the whole of Level -3.000 and part of Level -9.870 at which it had been working under Raft. According to the defendant, Raft continued to work under it on the whole of Level +1.950 and the plaintiff continued to work under Raft. Raft continued to work under it on Level -15.145 at grids 23-44, and in the subway Zones B to E but in these areas, the plaintiff took over from KCH as subcontractor to Raft. New Gas stayed on as subcontractor for part of Levels -9.870 and -15.145. Again, all this is shown clearly in another diagram at page 224 of the document bundle.

8. The plaintiff's case is that in the areas where, according to the defendant, it was working under Raft, it was in fact supplying labour and materials directly to the defendant. The labour supply figures are particularised in Schedule 1 to the Amended Statement of Claim. The defendant for its part says that for payment in respect of the Raft areas, the plaintiff should look to Raft. The dispute here is whether this part of the claim is payable by the defendant at all.

9. The parties are agreed that while there was no change in the defendant's contractual relationship with New Gas, the plaintiff supplied labour and materials directly to it in the New Gas areas described above. The plaintiff also did some work in a New Gas area in the Central MTR Station. This work is particularised in Schedule 2 to the Amended Statement of Claim. The dispute here is about the amount payable.

10. The rates of pay for the labourers which the plaintiff supplied are disputed. However, it is agreed that the night shift rates were calculated in multiples of the day shift. According to the plaintiff, these were :-

1. for the day shift, 9 a.m. to 6 p.m., $880 per labourer;

2. for the period from 6 p.m. to 10 p.m., $1,320 per labourer; i.e. one and a half shifts for four hours' work;

3. for the period from 10 p.m. to 1 a.m., $1,760 per labourer, i.e. two shifts for three hours' work; and

4. for the period from 11 p.m. to 6 a.m., $2,580 per labourer, i.e. three shifts for seven hours' work.

The defendant by contrast pleads that the rates were as follows : -

1. For the day shift, 9 a.m. to 6 p.m., $800 per labourer.

2. For the period from 6 p.m. to 10 p.m., $800 per labourer, i.e. one shift for four hours' work.

11. There is evidence from the defence side, to which I will refer later, that for the period from 10 p.m. to midnight the rate was $800 per labourer, i.e. one shift for two hours' work and for the period from midnight to 6 a.m., it was $1,600 per labourer, i.e. two times a shift for six hours' work.

12. So far as the subcontract works are concerned, there is no dispute that the agreed price of the job at Zone A was $250,000 of which $200,000 has been paid. The plaintiff says that the agreed price of the job at the air-conditioning room was $140,000 whereas the defendant says that the plaintiff accepted a figure of $120,000.

13. It is not in dispute that the plaintiff claimed, and the defendant paid, for the direct labour supply as follows :-

Date	Claimed	Paid
16 February 1998	$290,400.00	$269,200.00
16 February 1998	$74,341.60	$50,000.00
1 March 1998	$115,200.00	$85,000.00

14. Further claims were made, and the defendant says that these have been adjusted by it and agreed by the plaintiff, as follows :-

Date	Claimed	Adjusted
15 March 1998	$39,200.00	$26,400.00
15 March 1998	$72,400.00	$72,400.00
1 April 1998	$150,000.00	$103,600.00
1 April 1998	$53,600.00	$40,800.00

15. It is not in dispute that the plaintiff claimed, and the defendant paid, for the supply of materials as follows :-

Date	Claimed	Paid
24 February 1998	$131,720.30	$32,911.00

The defendant now concedes that it should have allowed a further $7,921 for the materials.

16. The defendant says that the plaintiff accepted the adjusted figures and adjusted payments as being in full settlement of the respective claims. The plaintiff denies this and says they were partial payments only and it is entitled to the full amount of claim.

Evidence for the plaintiff

17. PW1, Mr Chan Pak Kui, was a director and the manager of the plaintiff. His evidence in brief is that by about the end of January 1998, he was not able to recover the full payments due to him by Raft. At the Chinese New Year, Mr Tsang, the Project Manager of the defendant, asked him to provide about 60 labourers to finish the work left undone by both Raft and New Gas. He did not give a definite answer then but talked to his partner, Mr Yiu, after which he met Mr Tsang again on about 6 February. Mr Chan had quoted $880 per labourer per shift in writing, along with other conditions; this was on the quotation for the Zone A tunnel job. The figure was accepted, and it was also accepted that overtime from 6 p.m. to 10 p.m. would be charged at the shift rate times one and a half, i.e. $1,320. He was to be reimbursed for the full amount of materials he supplied.

18. It appears that rates for working times after 10 p.m. were not discussed at first. These came in later when it was necessary for the plaintiff to put men on to work overnight in the New Gas area in the Central Station, while the trains were not running. The statements are not clear as to when, according to the plaintiff, the overnight rates were agreed, but Mr Chan said in cross-examination that this was done on 9 February and the work started right away.

19. Mr Chan said that he put in a daily labour report to the defendant for all his work. He relied on a large number of such reports. They were exhibited to his first statement. He said that he had not kept copies of all of these reports and so could not prove all the work done. He said that other records, photographs and a camera had gone missing from his site office. All the copies which he did have were chopped as having been received by the defendant; some were signed as having been checked by the defendant's engineer. Mr Chan could not explain fully why some were and some were not so signed.

20. Mr Chan said that his first application for payment of the defendant, made on about 15 February, covered work at the Raft and at the New Gas areas and was for $650,000. Mr Tsang tore it up and told him to prepare a separate report of the two areas. This he did, but in the Raft application he included an amount which Raft already called him and again Mr Tsang tore these up. After this, the defendant's quantity surveyor went to see and told Mr Chan that if he wanted to be paid, he must calculate the labour costs on the basis of $800 per shift. Because he was under severe financial pressure, he prepared his application for the New Gas area at $290,400. This application Mr Tsang accepted, and took away.

21. Mr Chan then made another application for payment in relation to the Raft areas and submitted it on 17 February, but Mr Tsang refused to accept this, saying that the application for the payment for the New Gas area would be paid the next day. In fact, this application was not paid out until 26 February, when a colleague of Mr Chan accepted that cheque for $269,200. Mr Chan said that he did not know why the amount had been reduced.

22. Because Mr Chan was desperately in need of payment, he prepared all his subsequent payment applications on the basis of $800 per shift for day and night. Throughout, Mr Tsang refused to accept any application so made in relation to work in the Raft areas. Mr Chan decided not to pursue these applications at that stage because he was afraid that if he did, he would not be paid anything.

23. He said that the payment application dated 1 April 1998 covered work both for New Gas and Raft. This was unilaterally reduced by the defendant. Mr Chan accepted this, again because he was threatened that if he refused to agree, he would not be paid at all.

24. As to the subcontract agreement, Mr Chan said that the first one was originally quoted for $400,000 but was reduced after negotiation to $250,000. For the air-conditioning job, he quoted $200,000 and the job was agreed at $140,000.

25. Under cross-examination, Mr Chan agreed that he eventually applied for payment at the rate of $800 per shift. He said that he had no other choice. He accepted that the normal procedure in construction contracts was for the contractor to quote a price, which would then be negotiated, sometimes downwards. Some payment will be made in the course of the contract. The employer would check the amount paid and if satisfied that it was correct, would pay out. There would be further discussions until a figure would be reached as to what would be paid. A prudent employer would get a receipt.

26. Mr Chan agreed that his case essentially rested on the absence of documents such as those which, according to him, Mr Tsang had torn up, as well as his missing records and photographs.

27. He was cross-examined at some length about the figures for overnight work but insisted that these were correct and that the very high figures for working through the night were necessary to get people to work while the trains were not running.

28. He denied having discussed the claim for $290,400 with Mr Tsang and his colleague. He denied having accepted the reduction. He also denied having discussed the second application for payment which was reduced from $74,000 to $50,000. He said that while he had signed this paper, he had been forced to do so.

29. He agreed that his case was that in the Raft areas, he had been working for the defendant who would pay, and not for Raft. It was put to him that Raft's application to the defendant for payment dated 1 March 1998 was inconsistent with this, but he said that nevertheless, Mr Tsang had told him that he was now working for the defendant. As to his own application to Raft for payment, he said that the relationship between himself and Raft had come to an end; his applications were for outstanding payments going back to November, or for work at Lai King Station in the period 31 January to 28 February 1998.

Evidence for the defendant

30. Mr Tsang said that at the end of December 1997, he spoke to Mr Wu of KCH and Mr Chan and asked them to take over and provide direct labour in the Raft areas. Mr Wu agreed and Mr Chan did not. He wanted to continue in his subcontracting relationship with Raft. As to the defendant's own relationship with Raft, Mr Tsang denied that the defendant had been failing to pay Raft. He said that most of Raft work was subcontracted, and Raft had a minimal supervision team on the site.

31. This is what appears in the second and subsequent statements and in oral evidence. It is not consistent with what appears in the first statement, which is that the defendant asked the plaintiff to supply labour for the completion of Raft's subcontract work; that Mr Chan gave a quotation for the supply of labour and that this was agreed. No differentiation was made in this statement between the Raft work and the New Gas work.

32. Mr Tsang said that Mr Chan quoted for a day work rate for providing labour in the New Gas areas and he also provided a quotation for the subway Zone A subcontract. The day work rate quoted was $880 but Mr Chan had, after discussion, agreed to $800. Mr Tsang had altered the figure on the quotation accordingly. This was done in the presence of Mr Jason Wong (DW2).

33. Mr Tsang said that the day rate was $800 and that for 6 p.m. to 10 p.m. was also $800. In his statement, he said that the rate for 10 p.m. until midnight was $400 but in his oral evidence, he contradicted this and said it was $800. He said that for the midnight to 6 a.m. shift, he paid $1,600.

34. In fact, this was only agreed after it was found that Mr Chan had been charging a triple rate for the overnight shift when he made his claim for $74,341.60. This was unreasonable and contrary to trade practice. He had a meeting with Mr Chan and Mr Gary Wong of the defendant; the latter adjusted the figure on the bill to $50,000 on the basis that $1,600 would be paid for the overnight work and Mr Chan accepted this.

35. Mr Tsang said that these agreed overtime rates were in accordance with the trade practice of the construction industry. As I have noted, he was evasive, and in particular on this point when cross-examined, he purported not to know anything about trade practice; a strange lack of knowledge for a project manager.

36. He said that he had spoken at one stage to Mr Chan about the Raft areas. He had told Mr Chan to increase the number of labourers in these areas because the work was not progressing properly. He did not, however, agree to pay the plaintiff for working in these areas. He intended simply that the plaintiff should take steps to complete its subcontract work in those areas.

37. About the air-conditioning work, he said that originally this was to be done by Lee Tak Engineering Co. Ltd ("Lee Tak"). They were to subcontract to the plaintiff. The plaintiff quoted $120,000 to Lee Tak. He had asked Mr Chan if he was willing to work directly to the defendant on this job, which Mr Chan was. Mr Chan quoted $140,000 for this job, but following discussions, and in particular about the court which he had given to Lee Tak, Mr Chan agreed to reduce the price to $120,000. In fact, this is what the plaintiff claimed for.

38. As to the daily labour reports relating to the claim in the first schedule, Mr Tsang said that all these relating to work done in the Raft areas and was payable by Raft. The explanation as to why the defendant had chopped these reports was to this effect. In early February, Mr Chan told the site engineer that Raft had failed to pay him. He asked the engineer to witness the daily labour reports. The defendant had acknowledged the presence of such daily labour reports but did not check them and had not kept copies.

39. Under cross-examination, as I have indicated, Mr Tsang agreed that the rate for work from 10 p.m. until midnight was $800. He would not agree that this applied to the rest of the night, but, as I have indicated, at this point he became evasive about the trade practice.

40. Another point to be noted from the cross-examination is this. Mr Tsang agreed that because of shortage of labour and an approaching deadline, he had promised Mr Chan to pay what it cost for labour. He said that this was in the areas of New Gas and KCH. It was put to him that this included Raft areas and he said that he did not really agree and that Raft still had the responsibility to complete. It was then put to him "in part you agree you asked plaintiff to do part of the work you took over from Raft." He answered affirmatively.

41. In re-examination, there was some exploration of the position with New Gas. Mr Tsang said that in addition to its contract with New Gas, the defendant had a concurrent contract with the plaintiff to the same areas. For that, he had made a contra-charge against New Gas.

42. He also said that the day work labour reports relating to the Raft areas were only received by the defendant in early 1999. Curiously enough, many of these bear Raft's Chinese name in characters. Others bear the characters which translate as "substitute labour".

43. DW2, Mr Jason Wong Wing Hong, adopted two statements which were generally in support of what Mr Tang said. The same applied to PW3, Mr Dennis Wong Chi Shing. He produced a schedule of payments which, according to him, had been checked to be legitimate. He also contradicted the evidence of Mr Chan that it was he who had told Mr Chan to reduce his claimed labour rate from $880 per shift to $800 per shift.

44. I turn to the various heads of claim.

The work in the Raft areas (Schedule 1)

45. Much has been made for the defendant of the idea of a chain of contracts. The defendant's position seems to be that if there was still a contractual relationship between Raft and the plaintiff, the plaintiff could not have been asked to supply direct labour. This does not necessarily follow. A contractor might arrange for a sub-subcontractor to work directly under it, cutting out the subcontractor even though this could obviously cause problems with the subcontractor. At the same time if the subcontractor had not finished the work or had not paid the sub-subcontractor to finish it, a direct engagement of the sub-subcontractor by the contractor could produce a practical solution.

46. Neither Mr Chan nor Mr Tsang was an obviously truthful and accurate witness. I have indicated some of the points on which I base this observation above. In considering this part of the work, I have to look at the surrounding facts and circumstances insofar as they support, or do not support the evidence of these rather unsatisfactory witnesses.

47. In the first place there is correspondence between the defendant, Raft and KCH which supports the defendant's evidence of the work taken over by KCH. I refer to Raft's letter of 7 January, dismissing KCH and the defendant's letter of 15 January 1998 to Raft, saying that the defendant would take over the work in the areas where, according to Mr Tsang, KCH thereafter worked.

48. However, according to Mr Tsang, the plaintiff at this time became the subcontractor to Raft for Level -15.145 at gridlines 23-40. There is no correspondence about this. The point was not directly canvassed, but there is no explanation from Mr Tsang as to how the plaintiff came to take over the sub-subcontract work from Raft to KCH at this area. The same applies to the tunnel Zones B-E which, according to Mr Tsang, also passed from KCH to the plaintiff as subcontractor to Raft.

49. Raft continued to be responsible for Level -15.145 at gridlines 23-40. I refer to a letter from the defendant to Raft dated 14 February 1998 which puts on record that the defendant had, in respect of this area and Level +1.95, "directly employed labour to complete, along with your remaining labour, the wet system installations" and indicating that it would "deduct from your account all costs incurred by ourselves in assisting you to complete the Fire Service Installations".

50. I have seen no correspondence between the defendant and New Gas. Whether or not that exists, according to Mr Tsang in re-examination New Gas was still in a contractual relationship with the defendant and, while the plaintiff was to work in the New Gas areas, and be paid by the defendant, the defendant would ultimately charge this back to New Gas. That seems to be exactly the situation between the defendant, Raft and the "directly employed labour" as recorded in the letter of 14 February.

51. In cross-examination, Mr Tsang said it was indeed the plaintiff which had completed the work referred to in this letter; but he denied that the plaintiff had done it at his request to supply labour. This does not make sense. There is nothing to support any duty on the plaintiff to supply labour to Raft in the former KCH area at Level -15.145. Remaining labour at Level +1.95 must have been that of the plaintiff which worked there all along. There is no explanation of where the directly employed labour came from if not from the plaintiff.

52. Finally, the plaintiff has a number of daily labour reports to support its claim under Schedule 1. These bear the chop of the defendant and in some cases they appear to have the signature of the checking by the defendant's engineer. Mr Tsang's explanation for this does not sound entirely likely. The reports have the name of the defendant typed on them so they were obviously intended for the defendant rather than for Raft. The defendant has not seen fit to call as witnesses its personnel who chopped the reports, or in some cases signed them, to explain directly why they did this.

53. All these documents support Mr Chan's evidence that he supplied labour directly to the defendant.

54. Of course, one would have expected to see claims made earlier by Mr Chan for this work. He says he did make such claims, and Mr Tsang tore them up and that later he did not put in any further claims for fear of not being paid even for the work in the New Gas areas. I have to say that this is not a particularly likely story but, at the same time, I cannot disregard the daily labour reports themselves. After all no one tore them up; the defendant's employees chopped them as received.

55. There is also the correspondence between the plaintiff and Raft which includes a claim, not just for the period up to November or December 1997, but right through to 28 February 1998. Mr Chan says that this is for work at Lai King Station, but the correspondence is not clear on this. Such a claim, if it is for work at the Central Station site, could not have been made if the plaintiff was only working for the defendant, but it could have been if the plaintiff was still engaged as sub-contractor to Raft, which we know it was, even if at the same time it was supplying direct labour to the defendant.

56. The plaintiff has to establish its case on the balance of probabilities. Having considered all the evidence, including the documents, it seems to me more probable than not that the agreement between Mr Chan and Mr Tsang was for the supply of direct labour in the Raft areas as well as the New Gas areas.

The Shift Rates

57. While Mr Chan says that the daily rate was $880, the fact is that all his claims were presented on the basis of the rate of $800. The only inference to be drawn from that is that the lower figure is the agreed rate. There is a coherent explanation from Mr Tsang and his colleagues as to why the figure was altered on the original quotation and I accept that.

58. Mr Chan's evidence about the night work rates was amply demonstrated in cross-examination to be illogical. However, there is no dispute that the day work rate applied to the period from 6 p.m. until 10 p.m. and - this was conceded by Mr Tsang - to the period from 10 p.m. until midnight. If an employer is prepared to pay this kind of rate from 10 p.m. until midnight, it seems likely that it will pay the same rate for every two hour period through the night.

59. The problem here is that, in respect of the claim for the overnight work, i.e. that on 16 February 1998 for $74,341.60, the figure was adjusted downwards and Mr Chan accepted the adjustment. His claim for this, like other claims, has been chopped and signed for the reduced figure. He has agreed that when claims were put in, there would be discussion and a final figure would be agreed. He might have agreed reluctantly, but he did agree.

Schedule 2

60. I accept that the other claims for the work in the New Gas areas have been adjusted and accepted by Mr Chan. If one signs a document in satisfaction of a claim there is really little use in coming to court later and saying that one did not mean it. It is easy enough to add something to the document to show that it is accepted as partial satisfaction.

The materials claim

61. This is also a claim which has been agreed and paid. Again, it might have been agreed reluctantly that it was agreed, and I do not see how the plaintiff can re-open the matter.

The Air-conditioning Contract

62. The same applies to this claim. I accept that the quotation was for $140,000. That is what the document shows. Mr Chan accepted this deduction. That was his evidence. Again, it may have been reluctant acceptance, but acceptance there was. On this point, as on the others, he is not claiming duress.

The result

63. In the light of my findings above that the agreement did cover the work to be done in the Raft areas, but that the rates relied on by the defendant apply, the plaintiff is entitled to payment for the work claimed for in Schedule 1 but the total has to be adjusted. I calculate that the figure due to the plaintiff is $1,138,800.

64. To this must be added the sums of $413,200 and $7,921 which the defendant admits are due. The payment of $524,845 has to be deducted. The final figures are : -

Schedule 1 :	$1,138,800
Admitted :	$413,200
	$7,921
Sub-total :	$1,559,921
Less paid :	$524,845
Total :	$1,035,076

65. There will be judgment for the plaintiff in the sum of $1,035,076 with interest thereon until the date of handing down of judgment at the best lending rate plus 1% and thereafter at the judgment rate until payment. The defendant's counterclaim is dismissed. Costs nisi to the plaintiff, to be taxed if not agreed.