XCHRX SHUN CHEONG ELECTRICAL ENGINEERING CO LTD. v. WAI SHUN CONSTRUCTION CO LTD.

HCA851/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.851 OF 1999

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J U D G M E N T

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Introduction

1. This is the Defendant's appeal against the order of Master Cheung dated 16 July 1999 entering final judgment against it in the sum of $3,157,581.73 together with interest and costs.

2. It is common ground between the parties that :

(a) the Plaintiff's claim arises from the work done by the Plaintiff under a Government Contract No.003/ASD/92.

(b) The employer of that Contract was the Hong Kong Government and the main contractor thereof was Gammon Construction Limited ("Gammon").

(c) The Plaintiff was one of the sub-contractors of that Contract responsible for certain electrical installation works.

The Plaintiff's claim is for the costs and charges for the said work in the said sum of $3,157,581.73 allegedly due and owing since 2 July 1998.

3. The Defendant has not disputed the quantum of the Plaintiff's claim in the hearing before the Master, nor has it done so in this appeal. The Defendant's lines of defence are :

(a) the Plaintiff was the sub-contractor of Gammon;

(b) alternatively, the Plaintiff was the sub-contractor of a partnership called "Wai Shun Construction Company" ("Wai Shun") and not the Defendant.

4. For the avoidance of doubt, in deciding this appeal, I have borne in mind :

(a) the burden is on the Defendant to show that there are issues to be tried, or that for some other reasons the matter ought to be tried;

(b) for leave to defend to be given, the Defendant's evidence needs not be believed; the proper test is whether its evidence is "believable".

Was the Plaintiff Gammon's sub-contractor?

5. The Defendant relies on the following materials to show that the Plaintiff was Gammon's sub-contractor :

(a) Paragraph 6 of the affirmation of Cheng Kit Yin, Kelly dated 18 March 1999 which averred :

" In my belief, the Plaintiff was the electrical sub-contractor to [Gammon], rather than the Defendant .....",

and para.8 thereof which averred :

" Further I deny that the Defendant ever agreed to or did appoint the Plaintiff as its sub-contractor .....",

as well as paras.22 to 27 of the affidavit of Choy Ye King, Andy dated 2 July 1999.

(b) A copy of "Re-Tender" submitted by Gammon to ASD (exhibit "CYKA-7" to the affidavit of Andy Choy). Clause D, item (II) ("Approved sub-contractors") of the "Sundry Requirements" of the "Re-Tender" stipulated that :

" The Contractor [Gammon] is required to select from List of Approved Suppliers of Materials and Specialist Contractors for Public Works under the category of Electrical Installations in Appendix DD and state here the name of the sub-contractor he will employ throughout the Contract ...."

The names of the Plaintiff and another contractor called "Amec" were inserted thereunder.

(c) A copy of the Plaintiff's letter dated 26 February 1992 to Gammon (exhibit "CYKA-8" to the affidavit of Andy Choy). It stated :

"The undersigned [the Plaintiff] confirm that [sic] our intention to enter the above stated Domestic Electrical Sub-Contracts with [Gammon] ....".

(d) A copy of a letter dated 20 March 1992 from Gammon to the ASD (exhibit "CYKA-9" to the affidavit of Andy Choy) which stated :

"We write to confirm that the following domestic and/or specialist subcontractors shall be employed for the captioned project ...."

The Plaintiff's name appeared in the list which followed.

(e) A copy of a letter dated 22 July 1998 from the Plaintiff's solicitors (exhibit "SCN-1" to the affidavit of Sammuel Cheuk Sum Ngo dated 28 October 1999). In this letter the Plaintiff's solicitors demanded payment of $3,135,722.41 from Gammon allegedly due under the same Contract.

6. On the other hand, the Plaintiff relied on the following materials to show that the Plaintiff was the subcontractor of the Defendant (or the partnership firm, Wai Shun) :

(a) The third and fourth affirmations of Ou Ka Chi respectively dated 13 May 1999 and 12 July 1999.

(b) A copy of a letter dated 7 November 1997 from the Defendant to the Plaintiff (exhibit "RO-4" to Ou's 3rd affirmation), it stated :

"We refer to your payment application and our meeting last time concerning the payment of sub-contracting fee. As our audit accounts has [sic] not been finalized, you claim [sic] amount is still under investigation .... without prejudice, we agree to pay you part of the subcontracting fee on behalf of [Wai Shun]. Please find enclosed a cheque amounted [sic] $500,000.00 in favour of you.". (underline supplied)

(c) A copy of a letter dated 18 November 1997 from the Defendant to the Plaintiff (exhibit "RO-4" to Ou's 3rd affirmation). It stated :

"On 5 November 1997, we had paid you $500,000.00. Thus, the outstanding balance, if any, should be $2,131,175.75. As we are checking with [Gammon] on amount [sic] they had paid to us, we cannot promise you full settlement before mid-January 1988 [should be 1998] as requested by you. However, we suggest that those payments with voucher date before April 1997 should be first settled. ..."

A four-instalment payment schedule followed and the letter continued :

"Upon the verification of settlement from [Gammon], we will notify you the updated payment schedule as soon as possible."

(d) A copy of a letter dated 19 May 1998 from the Defendant to Gammon (exhibit "RO-6" to Ou's 3rd affirmation), it said :

"We advise that according to our records, a sum of HK$1,924,460.60 has already been paid to [the Plaintiff] to date. Please note there is still an outstanding balance of HK$1,439,927 (as at 31 December 1997) to be paid to us by you in relation to subcontract works performed by [the Plaintiff] under the captioned contract. We will release their claimed amount upon our receipt of the above mentioned outstanding balance from you.

We therefore object to the direct payment by you to [the Plaintiff] and hereby give you formal notice that any payment made to [the Plaintiff] by you shall not constitute a valid payment to us by you as specified in the contract signed between us." (underline supplied)

This letter was signed by Andy Choy for the Defendant.

(e) A copy of a letter dated 6 July 1998 from the Defendant to the Plaintiff (exhibit "RO-6" to Ou's 3rd affirmation), it stated :

"We refer to your letter dated 3 July 1998 .... regarding your claim of $3,135,722.41.

..... Gammon did not substantiate the payment with relevant payment vouchers. This makes us difficult [sic] to identify which part of Gammon's payment is related to your claim. We are now requesting Gammon to release copies of these payment vouchers to us so that we could make possible verification to your claim. Upon the completion of this verification process, appropriate payment arrangement to settle your claim will be proceeded at our full discretion." (underline supplied)

This letter was also signed by Andy Choy for the Defendant.

7. The last two letters from the Defendant referred to in sub-paras.(d) and (e) above are crucial to this issue. In particular, the letter dated 19 May 1998 expressly referred to a contract signed between the Defendant and Gammon. It also expressly referred to the subcontract work of the Plaintiff. The only reasonable inference is that the Defendant was made a principal subcontractor standing in-between Gammon and the Plaintiff. Further, according to the Defendant's letters dated 19 May 1998 and 6 July 1998, it must have been a term of this Contract that Gammon had to make full payments to the Defendant first, and it would be for the Defendant to pay the Plaintiff.

8. In fact, this arrangement of a total subcontracting by Gammon to Wai Shun and/or the Defendant was referred to in the Defendant's written skeleton argument : see paras.14 and 17 thereof. This arrangement may or may not be known to Government and may possibly be in breach of the Main Contract signed by Gammon with the Government. However, this is not a matter which requires a definitive finding to be made because this action is only related to the position of the Defendant vis-à-vis the Plaintiff.

9. Although the Defendant submitted in the said paragraphs of the skeleton argument that Wai Shun was a "sub-sub-contractor", I find from the materials referred to above that it was in substance a principal subcontractor standing between Gammon and the Plaintiff (as stated earlier). To the extent that the Defendant's evidence is inconsistent with my said findings, I conclude that it is unbelievable. The documents relied upon by the Defendant were (more probable than not) "dress-ups" to conceal the true position from the employer. In any event, I do not consider they have established issues worthy of a trial over this point.

Was the Plaintiff Wai Shun's subcontractor?

10. The Defendant contended that if I should find that the Plaintiff was not Gammon's subcontractor (which I have), the Plaintiff was not its subcontractor but a subcontractor of Wai Shun.

11. The direct testimonial evidence adduced by the Defendant in support of this line of defence is more scanty than the earlier line of defence. The materials relied upon by the Plaintiff on this point include :

(a) A denial in para.8 of the affirmation of Kelly Cheng dated 18 March 1999 that the Plaintiff was its subcontractor.

(b) Paragraphs 4 to 12 of the affidavit of Andy Choy dated 2 July 1999 to the effect that :

(1) up to February 1997, Wai Shun was still paying its subcontractors;

(2) the partners of Wai Shun set up the Defendant in May 1994, the Defendant was partly owned by Benefit Holdings International Limited which in turn was owned by Wing Fai International Limited (later named as "China Rich Holdings Limited"); the partners of Wai Shun resigned their directorship from the Defendant in either October 1997, October 1998 or December 1998; and

(3) as shown in a document dated June 1999, the partners of Wai Shun were no longer involved in China Rich.

12. I consider that the following "admissions" in paras.7 to 9 of the affidavit of Andy Choy to be important to this issue :

(a) the Defendant was set up by the partners of Wai Shun (a Mr Li, Mr Mak, Mr Chan and Mr Wong) in May 1994;

(b) until September 1997, the partners of Wai Shun were the controlling shareholders of China Rich (formerly known as "Wing Fai International Limited"); and

(c) after Central Securities Holdings Limited acquired about 53% of the shares in China Rich, the partners of Wai Shun continued as China Rich's directors and controlled its operations :

(1) Mr Li was its chairman and a director of the Defendant;

(2) Mr Mak, Mr Chan and Mr Wong were also directors of the Defendant.

13. In the 4th affirmation of Ou Ka Chi dated 12 July 1999, a copy of the prospectus of Wing Fai International Limited was exhibited (see exhibit "RO-8"). In this document, the following "admissions" were made :

(a) "In March, 1992, the Group was engaged as a principal subcontractor by [Gammon] in a substantial repair and maintenance contract for land and buildings in Mainland East area for the ASD for 3 years with an estimated contract sum of $700 million." (underline supplied)

(b) At page 26 of the copy prospectus under the heading "Buildings (Contracts which are subcontracted to the Group by [Gammon])" :

Duration	Location	Activities	Client	Estimated contract sum ($ million)	Estimated value of work to be completed after 31st May, 1994 ($ Million)
April 1992 to March 1995	Mainland East Contract Area	Maintenance and repair, alterations and additions to buildings and land	ASD	700.0	230.0

(c) "[The Defendant] commenced business in July 1994 to carry on the business of repair and maintenance of buildings which were hitherto conducted by [Wai Shun] and Wai Shun Engineering Company ("WSE") and acquired the businesses together with the assets and liabilities of these two companies in September 1994. [Wai Shun] and WSE ceased business thereafter; they originally commenced business in November 1990 and October 1980 respectively and were partnerships registered in Hong Kong." (underline supplied)

(d) "On 30th September, 1994, [the Defendant] acquired the businesses of WSE and [Wai Shun] from the executive Directors for a consideration of $3,610,783 and $59,457,961 which were satisfied by the issue to all the executive Directors of a total of 20 shares of $1 each in Wai Shun Limited, credited as fully paid." (underline supplied)

14. In considering these "admissions", it is important to bear in mind that :

(a) The 4 partners of Wai Shun, Messrs Li, Chan, Wong and Mak were the same individuals as the 4 directors of the Defendant (see para.8 of Ou's 3rd affirmation).

(b) These partners were stated in the copy prospectus as the only 4 executive directors of Wing Fai International Limited. Among them, Mr Li was stated to be the chairman and the managing director.

(c) The copy prospectus was used to invite applications for subscription on new issue of shares to the Hong Kong public through the Stock Exchange of Hong Kong Limited. Presumably it complied with s.342 of the Companies' Ordinance, Cap.32. Sections 342F and 343F of Cap.32 provided respectively for civil and criminal liabilities for any misstatements therein.

(d) The Defendant has not filed any evidence to dispute the admissions made in the copy prospectus.

15. In light of the above, I find the Defendant's assertions that it had not appointed the Plaintiff to be a sub-contractor is unbelievable. I have borne in mind that, technically speaking, these "admissions" were not made by the Defendant. However, in interlocutory applications, hearsay evidence is admissible : see the Rules of the High Court, O.41, r.5(2). Further, at the time of the copy prospectus, there were common memberships among :

(a) the controlling members of Wai Shun;

(b) the controlling directors of the Defendant; and

(c) the controlling directors of Wing Fai International Limited (as admitted in paras.7 to 9 of Andy Cheng's affidavit) (see also p.6 of the copy prospectus).

In view of the above matters, these "admissions" should be given full weight against the Defendant.

16. I also do not find the materials relied upon by the Defendant to have established issues worthy of a trial over this point. Therefore, insofar as the Defendant asserted that the Plaintiff was not its subcontractor and/or the Plaintiff was Wai Shun's subcontractor, I find it to be unbelievable.

17. In deciding this issue, I have not taken into account the documents relied upon by the Plaintiff under the heading "Was the Plaintiff Gammon's subcontractor?". These documents can only reinforce my conclusion that this part of the Defendant's case is unbelievable.

Other matters

18. Counsel for the Defendant argued that the Plaintiff's verifying affirmation is insufficient, relying on the passage at The Supreme Court Practice 1999, Vol.1, para.14/1/7 (at p.166) which reads :

".... It is submitted that unless on the surviving parts of the pre-amendment Statement of Claim judgment can be given, a proforma affidavit will not suffice."

19. Two matters make the present case different from the passage relied upon by the Defendant :

(a) The amendment to the Statement of Claim was related to matters prior to the incorporation of the Defendant. It does not materially change the nature of the Plaintiff's case which alleges that the liability to pay lies with the Defendant since its incorporation.

(b) More importantly, by the time of this appeal, the verifying affirmation is not the only piece of evidence in support of the Plaintiff's claim.

20. The Defendant also argued that there is a reason why the action ought to be tried. According to the Defendant's evidence, the 4 individuals who might have personal knowledge have left the Defendant (and its parent company China Rich). The Defendant said it may be able to subpoena them to be witnesses at the time of trial. It is implicit in this argument that these individuals may testify in support of the Defendant's case.

21. I do not consider that to be a good reason for giving leave to dedend because even if they were available to testify, and even if they should deny the Defendant's connection to the Plaintiff, such denial will be believable by reason of the matters and documents referred to earlier.

Conclusion

22. I have found both factual defence raised by the Defendant to be unbelievable. I also find the Defendant has not shown that there are any other reasons why the action ought to be tried. The Master's order was correctly made. The Defendant's appeal is dismissed.

The Plaintiff's cross-appeal

23. There is also a cross-appeal brought by the Plaintiff against the part of the Master's order relating to interest on the judgment sum. Having heard the parties, I agree with Mr Lin's submission that interest on the judgment sum should begin to run from 10 July 1998, being the date the Defendant was paid by Gammon in connection with the contract involving Gammon, the Defendant and the Plaintiff.