WATFIELD TECHNOLOGY LTD v. KENWORTH ENGINEERING LTD AND ANOTHER

HCCT 1/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 1 OF 2008

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(Heard together)

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J U D G M E N T

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I.   INTRODUCTION

1.  These proceedings concern a sewage treatment plant project at Ngong Ping.  Government was the Employer.  Government engaged a Consortium consisting of Kier Construction Ltd. (later known as Kaden Construction Ltd.), Leader Civil Engineering Corp. and Kenworth to carry out the project’s E & M works.  The Consortium sub-contracted those works to the Joint Venture.  The Joint Venture is a limited company owned by Watfield and Kenworth in equal shares.

2.  By a Pre-Tender Agreement dated 15 May 2003 Watfield and Kenworth agreed to tender for the E & M works.  Clause 2.3 stipulated that “Kenworth and Watfield shall be responsible in the ratio of 50% and 50% respectively for all costs throughout the Contract”.  The Contract was defined in the Pre-Tender Agreement as “the contract to be entered into between the Consortium and the Employer for execution and completion of the Projects in the event that the Tender is accepted by the Employer”.  Clause 2.11 provided that each party would indemnify the other against “all losses, damages, costs, charges and expenses suffered or incurred”.  By cl.2.12 each party undertook to act with “the utmost good faith” towards the other in the performance of the Pre-Tender Agreement and the Contract.

3.  By a Shareholders Agreement dated 13 November 2003 Watfield and Kenworth set out how they would run the Joint Venture.  By cl.13A.2, Watfield and Kenworth warranted that they would be “jointly and severally liable to the Consortium and the Employer for the performance of the E & M works tendered for by the parties as stated in the said Pre-Tender JV Agreement”.  In cl.13B.1, they reiterated that each would indemnify the other against “all losses, damages, costs, charges and expenses” suffered as a result of a default in performance of obligations under the Shareholders Agreement.

4.  There are 2 principal issues.

5.  The first issue is whether Watfield is liable to repay a loan of $2.5 million.  Kenworth advanced the money to Watfield under a Loan Facility dated 27 August 2005.  The loan monies were drawn down between September and October 2005.  Kenworth provided the Loan Facility to enable Watfield to contribute working capital to the Joint Venture.  Kenworth itself made a matching contribution of $2.5 million to the Joint Venture.

6.  The second issue is whether Watfield is liable to indemnify Kenworth in the amount of $9,820,819.63.  That amount represents 50% of the $19,641,639.26 which Kenworth paid or incurred on behalf of the Joint Venture in relation to the project’s E & M works.

II.  DISCUSSION

A.  Issue 1: Loan of $2.5 million

7.  Dr. Simon Ho (Watfield’s managing director and major shareholder) appeared for Watfield at the trial.

8.  Dr. Ho argued that Watfield was not liable to repay the loan because the injection of $5 million (that is, $2.5 million each by Watfield and Kenworth) as working capital was only intended to be a “short-term” solution to the Joint Venture’s then cashflow problems.  Watfield only agreed to the arrangement (whereby it would borrow $2.5 million from Kenworth and straightaway inject the same into the Joint Venture) on the assurance (communicated by Kenworth’s managing director Mr. Keung Kwok Cheung) that the Joint Venture would soon have a “credit balance” from which Watfield’s $2.5 million contribution (and thereby the $2.5 million loan by Kenworth to Watfield) could be repaid in priority.

9.  Dr. Ho claimed that Kenworth had supported its “assurance” by showing Watfield a “Rough Cashflow Forecast” dated 13 July 2005 and another dated 2 August 2005.  The former forecast showed the Joint Venture enjoying net balances of $1,239,344; $5,339,344; $6,839,344 and $9,589,344 respectively in the 4 months from 25 December.  The latter forecast suggested that the Joint Venture’s accounts would show net balances of $609,339; $5,209,399; $7,209,399 and $9,959,399 respectively in the 4 months from 25 December 2005.

10.  But actual events (Dr. Ho complained) fell woefully short of what had been forecast in July and August 2005.  Between December 2005 and April 2006 the Joint Venture received only a little under $5 million in payments from the Consortium. The Joint Venture’s available cash (inclusive of the working capital injected by Watfield and Kenworth) seems to have been $1,542,848 in December 2005; $21,634 in January; $19,392 in February; $48,156 in March; and $31,407 in April 2006.

11.  Dr. Ho contended that Watfield had been seriously misled.  Had Watfield known what the true position was going to be, it would not (Dr. Ho said) have agreed to borrow $2.5 million from Kenworth in order to inject further capital into the Joint Venture.  Dr. Ho submitted that in consequence there should be “rescission back before 27 August 2005”.  That date was that of the Loan Facility for $2.5 million and a Supplementary Agreement whereby (among other things) Watfield agreed to contribute additional working capital of $2.5 million to the Joint Venture.

12.  I am unable to accept Dr. Ho’s contentions.

13.  First, the July and August 2005 cashflow charts were, as their title described them, merely intended as “rough forecasts”.  The “forecasts” could not (whether in fact or law) constitute a representation that cashflows would be as anticipated.  The “forecasts” were merely the best predictions that Kenworth could make on the facts as then known.

14.  Second, sometime in July 2005, Standard Chartered Bank (SCB) informed Kenworth that it was not prepared to extend more credit to Kenworth in connection with the project.  SCB required that outstanding Trust Receipts (that is, the security which Kenworth had provided to SCB in return for financing) should be paid up.  This constituted a major drain on the cash available to the Joint Venture.

15.  Dr. Ho accepts that it had always been understood that the capital injected into the Joint Venture in August 2005 and receipts from the Consortium would be used in the first instance to pay off the outstanding amount (about $14 million) due on the Trust Receipts.

16.  It also appears from cl.2.3 of the Supplementary Agreement that the parties agreed that, the Trust Receipts having been discharged, some $2.5 million would be allocated out of the Joint Venture’s funds, as a matter of next priority, to reimburse payments already made by Kenworth to the Joint Venture’s sub-contractors.

17.  That means that at least $16 million of the Joint Venture’s available cash had been earmarked for payment as an initial priority.  Even if there had been an assurance that the $2.5 million loan to Watfield would be paid off thereafter in preference to the claims of any other sub-contractor or supplier, such assurance could only bite on available cash after the $16 million had been paid off.

18.  But, between December 2005 and July 2009, the Consortium only paid the Joint Venture some $10 or $11 million.  In August 2009, an additional $5 million approximately was received by the Joint Venture.  The Joint Venture does not seem to have had any other major source of income.  Consequently, the Joint Venture never had a sufficient credit balance against which the $2.5 million loan to Watfield could have been set off.

19.  Third, in any event, I do not believe that an assurance was given by Kenworth as Dr. Ho now alleges.

20.  At trial, both Mr. Keung and Kenworth’s project director Mr. William Lo were asked whether Kenworth had represented to Watfield that, within a few months after extra capital had been injected, the Joint Venture would enjoy a “credit balance” against which the loan to Watfield could be set off.

21.  Mr. Keung denied point blank that there had been any assurance.  When asked, how then Kenworth envisaged that Watfield (which was undergoing cashflow difficulties at the time of the $2.5 million loan) could repay the monies advanced by Kenworth, Mr. Keung replied that it was common for construction companies to experience temporary liquidity problems.  He suggested that, as far as he was concerned, Dr. Ho had other businesses which could bring in the cash needed to help Watfield out.

22.  In Mr. Lo’s case, there was a long silence (lasting a few minutes) while he considered the question.  He finally replied that “no particular assurance” had been given to Watfield.

23.  I confess to being initially troubled by the time taken by Mr. Lo to answer what one might have thought was a straightforward question.  His initial silence and his possibly qualified answer that “no particular assurance” was given caused me to wonder whether an “assurance of some sort” (albeit possibly vague) was in fact given.

24.  In the course of the trial, Dr. Ho has not shied away from repeatedly accusing Kenworth of deceit.  This is despite warnings from the bench during case management conferences (when Watfield was still represented by solicitors and counsel) that it was not appropriate to make accusations of fraud without a sound evidential basis.  As far as Dr. Ho is concerned, there has been “a meticulous set-up” of Watfield by Kenworth.

25.  Nonetheless, having reflected on Dr. Ho’s accusations, I unable to find a shred of evidence supporting his allegations of fraud.  I do not think that they should have been made in this case.

26.  I am equally unable to infer anything sinister about Mr. Lo’s silence.  It seems to me that he was most likely casting his mind back to events of long ago in an effort to remember what precisely had been said and done.  I think on balance that it would be wrong to disbelieve his evidence merely on the basis of his long pause.

27.  Mr. Keung answered directly without hesitation.  He was plainly not involved in the project on a day-to-day basis.  He left Mr. Lo to handle details.  I doubt that he would have had a clear idea about the Joint Venture’s cashflow position at any given time.  That would have been the responsibility of others.  I do not think that Mr. Keung was in a position to have given Dr. Ho any assurance about the Joint Venture’s position in 2, 3, 4 or 5 months’ time after August 2005.  Contrary to Dr. Ho’s suggestion, I think that it is implausible that Mr. Keung would have made any representation about the likely state of the Joint Venture’s future credit balances.  I accept Mr. Keung’s evidence on the matter.

28.  Fourth, assume that there had been some misrepresentation as Dr. Ho suggests.  It is doubtful that such representation would be actionable.  That is because the alleged representation relates to a future (as opposed to a present) state of affairs.  Normally, only representations as to present fact are actionable.

29.  But assume that the alleged misrepresentation is actionable and the Loan Facility and the Supplemental Agreement were somehow rendered voidable as Dr. Ho argues.  Rescission of the latter agreements would still entail the consequence of Watfield having to repay the loan monies of $2.5 million.

30.  There is no question that Watfield obtained the benefit of the same.  Although the loan monies were paid directly by Kenworth to the Joint Venture upon drawdown, this was pursuant to Watfield’s prior instruction.  It follows that avoidance of the Loan Facility due (say) to some alleged misrepresentation, would leave Watfield under an obligation to make restitution by refunding the $2.5 million advanced.  There is no basis for suggesting (as Dr. Ho does) that Watfield is absolved from the obligation to return the $2.5 million.

31.  For the foregoing reasons, I conclude on this issue that Watfield is under an obligation to repay a principal amount of $2.5 million to Kenworth.

32.  The Loan Facility was drawn down as to $1 million on 1 September 2005; as to $600,000 on 17 September 2005; and as to $900,000 on 7 October 2005.  The loan carried interest at 1% over the prime lending rate of Hongkong Bank from time to time until repayment.  Kenworth is accordingly entitled to interest on the loan tranches from their respective dates of drawdown until the date of this Judgment at the rate specified in the Loan Facility.  Thereafter interest will accrue at the judgment rate until payment.

B.  Issue 2: Indemnity of $9.8 million

33.  Dr. Ho argued that, despite cl.2.3 of the Pre-Tender Agreement, Watfield was not liable to indemnify Kenworth against 50% of the costs of the E & M works for various reasons.

34.  First, Dr. Ho noted that cl.2.1 of the Pre-Tender Agreement stated that “[t]he split of works are anticipated to be in the following proportions: Kenworth: 50% [,] Watfield 50%”.  The Joint Venture sub-contracted the EIBS works on the project to Allied Electric Co. Ltd. (AEC) (an associate company of Watfield).  But such EIBS work constituted only 20% (not 50%) of the E & M project works.  The remainder of the project works were awarded by open tender to persons not associated with Watfield.

35.  Dr. Ho reasoned from this that, not having received 50% of the works as anticipated in cl.2.1, the liability for 50% of the costs in cl.2.3 was inoperative.  Kenworth (it is said) would have known from the beginning that, without the income from 50% of the E & M works, Watfield could never have funded 50% of the operation costs of such works.

36.  Second, contrary to what had been envisaged between Watfield and Kenworth, Dr. Ho maintained that he was systematically marginalised and isolated by Kenworth.

37.  Although he was supposed to be Project Manager for the E & M works, Dr. Ho complained that Kenworth prevented him from so acting.  Instead Kenworth caused Mr. Lewis Chau to replace Dr. Ho as project manager.  Further, having initially allowed him to attend Consortium meetings as Kenworth’s representative, Kenworth suddenly barred Dr. Ho from so doing. Since Watfield was not a party to the Consortium, Dr. Ho was thereafter kept in the dark about what the Consortium was doing.

38.  Dr. Ho also said that he repeatedly pressed Kenworth to give him project cost reports and cashflow forecasts.  But Kenworth, according to Dr. Ho, did not do so.  Nor (Dr. Ho contended) did Kenworth respond to Dr. Ho’s queries for justifications of particular expenses.

39.  Dr. Ho contended that Kenworth simply kept spending on the project, expecting Watfield to foot half the total bill, without giving Watfield a proper account of what was going on and why.  Kenworth and Watfield were supposed to be jointly engaged on the project as equal managers acting towards each other in good faith.  But (Dr. Ho suggested) there was no such equal management or good faith.  Dr. Ho went so far as to submit that Kenworth had deceived Watfield into entering into the Pre-Tender Agreement.

40.  Third, Dr. Ho argued that Kenworth had wrongly diverted money payments from the Consortium to the Joint Venture.

41.  From about mid-January 2006 Kenworth caused payments from the Consortium to the Joint Venture to be paid into Kenworth’s account with Wing Hang Bank (WHB).  This was contrary to cl.8 of the Pre-Tender Agreement, requiring payments from the Consortium to be deposited into an account controlled by Watfield and Kenworth on behalf of the Joint Venture.

42.  According to Dr. Ho, having mixed the Joint Venture’s funds with Kenworth’s monies in the WHB account, Kenworth wrongly used the combined amounts not just for the purposes of the Joint Venture, but also for the purposes of Kenworth’s other construction projects.

43.  Fourth, Dr. Ho submitted that, if Kenworth wished to raise more capital for the Joint Venture, the proper course was to call a meeting of the Joint Venture’s board.  At that meeting, a resolution to seek further capital from the shareholders could be voted upon.  If the resolution did not pass, the Shareholders Agreement provided for one shareholder to buy out the other and (if neither shareholder was interested in acquiring the other’s shares) for the Joint Venture to be liquidated.

44.  In case of a liquidation, Watfield’s liability (the submission goes) would have been limited to capital already injected by it into the Joint Venture.  Kenworth would not be entitled under the Shareholder Agreement to call for more capital from Watfield (whatever amount Kenworth might have spent on behalf of the Joint Venture).

45.  Fifth, Dr. Ho argued that Watfield had been left out of a mediation between the Consortium and the Employer.  By the mediation, the Consortium and Employer agreed to settle prolongation and variation claims by the Consortium at about $5 million.  Originally, the Consortium had claimed over $20 million in relation to prolongation and variation.  The settlement sum of about $5 million was paid over by the Consortium to the Joint Venture and credited to the WHB account in August 2009.

46.  Dr. Ho suggested that, had Watfield been involved in the mediation, it could have persuaded the Employer to settle the Consortium’s claims for significantly more than the settlement amount.  The Joint Venture might then have received more money from the Consortium and any 50% indemnity claim by Kenworth from Watfield would be correspondingly reduced.

47.  I am unable to agree with Dr. Ho’s contentions.

48.  First, the Pre-Tender Agreement is clear.  Watfield was to be responsible for 50% of the total costs incurred in relation to the E & M works.  This obligation was unqualified.  The Pre-Tender Agreement nowhere provided that Watfield was to be absolved of its obligation to pay 50%, if what the parties had “anticipated” did not materialise.

49.  It may have been “anticipated” at the outset that the Joint Venture would award Watfield or its associates (such as AEC) 50% of sub-contract works.  But there was no obligation on the Joint Venture (or Kenworth) to do so.  The Joint Venture awarded sub-contract works following competitive tendering.  There is no suggestion (or evidence) that such awards of tenders were wrong or unfair.

50.  Second, there is no evidence that Dr. Ho was marginalised in the way he now asserts.  The evidence (as Mr. Jenkin Suen appearing for Kenworth stresses) is to the contrary.

51.  Kenworth repeatedly invited Watfield to inspect the Joint Venture’s books and accounts from early 2005 onwards.  Dr. Ho did not do so. Instead, he argued that, inspection was useless, because he could not tell whether the books and accounts being inspected were true or not.

52.  Budgets were given to Watfield in May 2003, July 2004 and September 2005. Project costs and cashflow forecasts were provided in July and August 2005.  Thereafter, Kenworth routinely sent monthly management accounts to Watfield.  From these accounts, it would be possible to work out project costs and cashflow forecasts.

53.  It is correct that Mr. Chau replaced Dr. Ho as Project Manager, in the sense of being the person on-site having responsibility for overseeing the day-to-day management of the project.  But this was done with Dr. Ho’s full approval.

54.  The reality is that Dr. Ho had other businesses with which to concern himself.  By his own admission in cross-examination, Dr. Ho was not interested in the day-to-day details of the project site.  He was more interested in the “bottom line,” namely the project’s cashflow and profitability.

55.  In any case, even after Mr.Chau took over as the person on site, nothing prevented Dr. Ho as project director and Mr. Chau’s boss from visiting the site as often as Dr. Ho wished.  But Dr. Ho, of his own volition, chose not to visit the site so frequently.

56.  It is correct that at a certain point Kenworth refused to allow Dr. Ho to represent Kenworth in Consortium meetings.  But (as Mr. Keung explained) this was because AEC (which Dr. Ho controlled) was then suing the Joint Venture for alleged unpaid work.  Kenworth did not think that it was appropriate in those circumstances for Dr. Ho to represent Kenworth, particularly when the Consortium might have to discuss the extent and quality of AEC’s work in a given meeting.  Dr. Ho would have been in a position of conflict.

57.  In fact, Dr. Ho regularly attended E & M coordination meetings and progress meetings.  Nothing and no one prevented him from doing so.  There was therefore every opportunity for him to keep abreast of what was going on in the project.

58.  As I have stated, there is no shred of evidence of any fraud or conspiracy being practised by Kenworth on Watfield.  Neither Watfield nor Dr. Ho was kept in the dark or marginalised by Kenworth.

59.  Third, it is correct that Kenworth caused payments from the Consortium to the Joint Venture to be paid directly into the WHB account.  This was contrary to the Pre-Tender Agreement, especially the parties’ obligation of utmost good faith.  Thus, Kenworth acted wrongly in mixing its monies with those of the Joint Venture.

60.  This might possibly have been a legitimate source of complaint on the part of Watfield.  In the normal course of events, I might have ordered an account where there was any substantial query over particular receipts or expenses shown in the WHB statements.

61.  But, since these proceedings have begun, Kenworth has made discovery of the following:-

(1) Draft audited accounts for the Joint Venture for the period up to 31 March 2009 prepared by Ernst & Young.

(2) Management accounts for the Joint Venture from June 2005 until September 2009.

(3) All letters of intent, sub-contracts, purchase orders and order confirmations relating to the project from 17 October 2003 to 5 April 2008.

(4) All interim payment certificates from the Consortium to Kenworth.

(5) Accounts payable and ageing reports from September 2005 to November 2009.

(6) The Joint Venture’s General Ledger and supporting accounting documents.

(7) WHB statements showing payments received from the Consortium and expenses paid on behalf of the Joint Venture (albeit with receipts and payments alleged to have been made in connection with other Kenworth projects blacked out).

62.  Although repeatedly invited to identify precisely which receipts or expenses are being queried by Watfield, Dr. Ho has not condescended to particulars.  He has not pointed to specific transactions or entries, much less cogently explained why he believes that the Joint Venture’s accounts are wrong.

63.  Dr. Ho has instead left his complaints vague.  He has asserted that he is not in a position, without even further information, to comment on the masses of documents made available by Kenworth.  Dr. Ho has not stated what other material (apart from those already provided) is required for the more detailed investigation of Kenworth’s accounts which he invites the Court to conduct.

64.  In contrast, Kenworth (especially through the evidence of Ms. Sharon Wong) has given chapter and verse of its case in relation to monies paid into or out of the WHB account.  Kenworth has attempted to match the payments-in discernible in the WHB statements with the Consortium’s interim payment certificates.  It has also sought to substantiate the payments-out (expenses) identified in the WHB statements.  In a sense, whatever may have been the position previously, Kenworth has in the course of these proceedings and trial made a thorough account.

65.  A Court should not normally order a roving inquiry without any clear notion of what is supposed to be investigated.  This is because an open-ended inquiry risks being little more than a fishing exercise or a waste of money.  In a construction case, it is incumbent on a plaintiff contractor to give particulars of its complaint.  What items of income or expense are accepted?  What items of income or expense are disputed as wrong or unreasonable and why?  One cannot shrug away the responsibility of having to be specific by saying (as Dr. Ho does) that, because of the volume of documents involved, the task of particularisation is too onerous for a small company like Watfield.

66.  Fourth, assume (without necessarily accepting) that, as Dr. Ho maintained, the Shareholders Agreement requires that additional capital for the Joint Venture be first approved by a board resolution.  Assume further that such resolution procedure was not followed here.

67.  Even on those assumptions, the Pre-Tender Agreement and the obligation to bear 50% of total project cost, would remain valid. A failure to abide by the procedure set out in the Shareholders Agreement could not at law affect the continued and continuing operation of the Pre-Tender Agreement. If (for instance) the Joint Venture were wound up as a result of Watfield’s failure to put up necessary capital, Watfield would still be liable for the costs of the project works under the Pre-Tender Agreement.  The terms of the Shareholders Agreement do not modify or change the latter obligation under the Pre-Tender Agreement.

68.  Fifth, on the evidence, Watfield was not informed by Kenworth of (and Watfield did not participate in) the mediation.

69.  Watfield complained about the holding of the mediation on the eve of trial.  It said that it did not become aware of the mediation until a late stage.  Watfield then applied belatedly to amend its pleading to allege that by entering into the mediation Kenworth “excluded [Watfield] from the management of [the Joint Venture] completely”.  Watfield also alleged that any settlement reached was invalid since Kenworth had “no authority to represent [the Joint Venture] to enter into any agreement with the Employer on the unpaid fees of the Project”.

70.  I disallowed the application to amend Watfield’s claim to introduce the foregoing allegations in relation to the mediation.

71.  I did this because, to begin with, what transpires in a mediation is private to the parties participating in the mediation.  The Court, therefore, will not normally look into what one party said or did or what happened in a mediation.  To do otherwise would undermine the element of confidentiality which is essential to the effectiveness of mediation as a means of dispute resolution. Parties must feel free frankly to communicate their true concerns to a mediator without fear that such concerns may one day be ventilated in public in open Court.

72.  In any event, it would have been unfair to Kenworth to have allowed Watfield’s allegations to have been pursued at such a late stage of the action.  There was no question of adjourning the start of trial, a milestone date.

73.  Not having participated in the mediation, Watfield is self-evidently not bound by the result.  However, regardless of when it learned of the mediation, nothing prevented Watfield from pleading at the earliest stage of these proceedings that, because of the Joint Venture’s prolongation and variation claims against the Consortium, the true loss against which Watfield must indemnify Kenworth is much less than the $9.8 million claimed.

74.  I add that there is no evidence that Watfield could have obtained a better result from the Employer, whether by a straightforward claim, by mediation or by any other method.  Nowhere has Watfield condescended to precise particulars about the nature of the prolongation or variation claims which were advanced by the Consortium or the Joint Venture.  Nowhere has Watfield intimated (whether in a witness statement or document) exactly how it could have secured any better deal.  Thus, even if Watfield’s pleaded allegation on the mediation had been allowed, there would have been little or nothing in the way of cogent material before the Court supporting the allegation.

75.  Now Watfield says that Kenworth had no authority to act for the Joint Venture in the mediation.  But the mediation was as a matter of fact between the Employer and the Consortium.  Kenworth was a member of the Consortium.  Accordingly, Kenworth did not require authority from the Joint Venture to act on behalf of the Consortium.

76.  Watfield alleges that Kenworth participated in the Consortium as an agent of the Joint Venture.  But I am unable to see that such was the case.  Watfield gives no particulars as to how the supposed agency arises.  The mere fact that Watfield and Kenworth formed the Joint Venture and entered into a Shareholders Agreement in relation to the Joint Venture’s operation would not, without more, turn Kenworth into the Joint Venture’s agent.  Nor is it sufficient to give rise to an agency on Kenworth’s part that Dr. Ho (as he has claimed) introduced Kenworth to Kier and Leader.

77.  Dr. Ho’s stresses that under the Pre-Tender Agreement, Watfield and Kenworth were required to act towards each other with the utmost good faith.  There is a suggestion that, as a member of the Consortium, Kenworth would be in a position of conflict of interest, militating against the duty of utmost good faith to Watfield.

78.  This is because the Employer contracted with the Consortium and the Consortium sub-contracted with the Joint Venture.  Thus, on the one hand, as member of the Joint Venture, Kenworth was bound to press the Consortium for payment of claims made by the Joint Venture.  On the other hand, as member of the Consortium, Kenworth would have an interest in cutting down the Joint Venture’s claims.

79.  However, although the contractual structure may have been self-contradictory, this was the regime which Watfield and Kenworth both agreed.  They both approved the unwieldy arrangement from the outset with eyes wide open.

80.  Both Watfield and Kenworth are experienced businesses.  Dr. Ho himself referred in evidence to his 30 plus years in the construction industry.  Given that commercial experience, the parties having agreed to manage their affairs under a particular regime, there is no reason for the Court to interfere and re-write their bargain.  This would be the case even if the chosen structure for carrying out the project has (with the benefit of hindsight) proved to be cumbersome.

81.  In short, I do not accept Dr. Ho’s underlying theme that, because the project experienced a substantial loss despite having had a budgeted surplus, there must (at least prima facie) have been some sinister wrongdoing on Kenworth’s part.

82.  Dr. Ho is no doubt deeply disappointed by the fact that the project made a loss.  This was despite the project having originally been budgeted as potentially generating a profit of some $6 million.

83.  In evidence, Mr. Lo explained why the budget eventually proved to be way off.  Mr. Lo attributed the deficit in the project to the following 4 factors:-

(1) Significant under-estimates of the cost to the Joint Venture of sub-contracting the works (including the need to re-do the work of certain sub-contractors);

(2) Significant reduction in the amount obtained from the Employer by the Consortium in relation to prolongation and variation claims;

(3) Exchange rate losses due to the appreciation of pound sterling (in which certain key items for the project were denominated); and,

(4) Delay on the project.

84.  In my view, the 4 factors identified by Mr. Lo (as opposed to any deliberate wrongdoing by Kenworth) are capable of explaining the significant discrepancy between the $6 million profit initially forecast and the $20 million or so loss actually incurred.  It is unnecessary for me to come to any firm conclusion on the actual cause of the discrepancy.  I simply point out that there is no basis for inferring wrongdoing merely because of the discrepancy.

85.  It follows that Watfield is liable to indemnify Kenworth in the amount of $9,820,819.63.

86.  The disclosure of the WHB statements must be regarded as an important element of any accounting by Kenworth to Watfield pursuant to the duty of utmost good faith under the Pre-Tender Agreement.  Consequently, because the WHB account statements were not disclosed until a late stage, I do not think that it is right to charge interest on the $9.8 million for the period from the date of Writ to the date of this Judgment.

III. CONCLUSION

87.  Watfield’s claims are dismissed.  Kenworth essentially succeeds on its claims.

88.  There will be judgment in favour of Kenworth for the principal amounts of $2.5 million and $9,820,819.63.  Interest is to run on the $2.5 million as set out in §33 of this Judgment.  Interest is to run on the $9,820,819.63 from the date of this Judgment until payment at the judgment rate.

89.  In relation to costs, there will be an Order Nisi as set out in §§90 and 92 below.

90.  Subject to §92 below, Watfield is to pay Kenworth’s costs in HCCT Nos.1 and 2 of 2008, such costs are to be taxed if not agreed.

91.  Kenworth originally produced a 30 volume (lever arch file) trial bundle.  The Court returned that bundle to Kenworth’s solicitors as excessive and not in keeping with the parties’ obligation to ensure that only essential documents are inserted into a trial bundle.  Kenworth then reduced the trial bundle to 12 volumes.  That was still excessive.  Many documents (such as invoices) were not referred to in the course of trial.  Other documents (such as contracts) appeared in multiple versions.  Little thought was given to arranging documents (such as pleadings) in a user-friendly sequence.  Had greater attention been paid to the preparation of the reduced trial bundle, it could easily have been further trimmed by at least 50%.

92.  Consequently, Kenworth should bear the costs of preparing the 30 volume trial bundle and 50% of the costs of preparing the 12 volume trial bundle.

93.  Mr. Suen asked the Court for an indemnity against 50% of any future losses that Kenworth may suffer as a result of the ongoing disputes between the Consortium and Joint Venture in relation to the project.

94.  But the Court does not give a blanket indemnity in such situations. Instead, I will adjourn the Court’s consideration (as to whether there should be an indemnity in relation to future losses) sine die.  There will liberty to the parties to apply for directions for the disposal of such questions (if any) in relation to future losses that may arise.  In this, I follow the approach recommended in Trans Trust SPRL v. DanubianTrading Co. Ltd. [1952] 2 OB 297.