SINCERE AIR-CONDITIONING CO LTD v. A. S. WATSON GROUP (HK) LTD t/a FORTRESS

CACV 84/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 84 OF 2008

(ON APPEAL FROM HCCT NO. 53 OF 2006)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal by the defendant (“Fortress”) from a judgment of Reyes J of 11 March 2008 ordering Fortress to pay the plaintiff the sum of $2,846,495.57 with interest.  At the conclusion of the hearing judgment was reserved which we now give.

Background

2.  The plaintiff was Fortress’ subcontractor for the installation of split-type air-conditioners (STACs) in a residential development at Tin Shui Wai.  Fortress was to supply the STACs in question, the plaintiff being responsible for their installation.  Fortress itself was a subcontractor of the main contractor, Chun Wo.

3.  Before the plaintiff came on to the scene, Wan Lee was supposed to carry out the work for Fortress.  In July 2002, Eric Chan who was then a manager with Fortress and who had a good relationship with Pak Chi Sing, the plaintiff’s managing director, invited Mr Pak to take over the installation of 4044 STACs in place of Wan Lee to be paid at the same rate as Wan Lee i.e. $1700 each.  The normal rate at the time for installation of STACs was $1900.  As recorded in § 5 of the judgment, the judge found that:

“…Mr Pak agreed that low rate because (as he said in evidence and as I accept) Mr Chan told him that the majority of sets were to be installed “back-to-back”.  This meant that there would be no need to install large quantities of condensate drainage pipes (CDPs), indoor brackets, or covering bulkheads.  On the understanding that only minimal lengths of CDP’s (estimated by Mr Pak at about 300 m), minimum quantities of indoor brackets and few (if any) bulkheads were required, Mr Pak thought that a rate of $1700 per set was just acceptable.”

4.  Shortly thereafter, on 16 July 2002, the plaintiff and Fortress entered into a written contract.  “The Works” itemised in Appendix I included the following:

“ a)  To install all the indoor and outdoor split type A/C units c/w accessories.

  b)  To supply and install or refrigerant pipe works, condensate drainpipe works c/w necessary supports and installation etc.

  …

  h)  Attendance of necessary site co-ordination and site meeting.”

Clause 6 of Appendix III provided as follows:

“This is a lump sum contract.  No variation of work or price fluctuation or extension of time will be granted to the Sub-contractor unless authorised by the Contractor/Main-contractor in writing.”

5.  The plaintiff entered the site and commenced work.  Various events then occurred.  As they gave rise to various findings by the judge, it would be convenient to set out what is recorded in the judgment:

“9.  From time to time in the course of working on the site, Mr. Pak says (and I accept) that Sincere was orally requested to perform some additional work or to alter some installation work previously instructed and already executed, so as to accommodate some design change.  The requests were made orally by Mr. Chan or by Benny (a site foreman acting on behalf of Fortress).

10.  Mr. Pak complied with the requests, causing Sincere to do the relevant work, even though no written instructions were ever received.  Invoices 061 and Invoice 090 issued in 2004 represent Sincere’s charges for having done such additional and variation work.

11.  In particular, Mr. Pak says (and I again accept) that in August or September 2002 Benny told him that there had been a change in design.  The change included reducing the number of external drainage pipes in the buildings being constructed.

12.  As a result of the design change, a substantial number of STACs had been re-positioned and were no longer to be installed “back-to-back”.  Instead, the re-located STACs had to be connected to the external drainage pipes of their relevant buildings by significantly longer lengths of CDPs.

13.  Benny gave Mr. Pak some representative drawings with orange highlighting indicting the lengths of CDP now required.  From these, Mr. Pak estimated that the design change of which he was being informed would then require 8,980 m of CDP.

14.  Both Mr. Chan and Benny left the project in mid-2003.”

6.  The plaintiff issued invoices totalling $2,354,550 in respect of additional and/or variation work.  Invoice 061 (for $95,000) related to an additional 50 STACs to be installed and invoice 090 (for $2,259,550) related to 10 items of additional work/variations carried out.  Apart from the installation of the additional STACs, Fortress denied requesting additional work and, in any event, it denied ever agreeing rates for the work invoiced.  In addition, Fortress sought to pass on to and recover from the plaintiff certain amounts claimed by Chun Wo from Fortress for statutory penalties, penalties for incomplete works, charges for employing services of other subcontractors and other expenses set out in a list of contra charges said to be in respect of the plaintiff’s performance of the contract.

7.  Neither Mr Chan nor Benny who were acting on Fortress’ behalf at the relevant time gave evidence at the trial.

8.  After considering the plaintiff’s claim item by item, the judge allowed the amounts claimed by invoices 061 and 090 in full.  He went through the same exercise with Fortress’ claim and disallowed all the items save those (totalling $9,330) admitted by the plaintiff.  He noted (at § 89) that the ‘loss’ sustained by Fortress had not yet crystallised, Chun Wo and Fortress being still in negotiations relating to the items the judge had disallowed and expressed doubts as to whether Fortress could claim an indemnity in those circumstances.

This appeal

9.  Ms Cheng SC who appeared for Fortress submitted that the judge erred in law in two fundamental respects in his treatment of the plaintiff’s claim.  The first concerns the proper construction of the contract and the second, the basis for allowing the items claimed under invoice 090.  There were also ancillary points made to the effect that there had not been a fair trial in the context of his treatment of Fortress’ claim for contra charges.

Construction of the contract

10.  The gravamen of Miss Cheng’s submissions was that the written contract between the parties does not contain any provision to the effect that the STACs are to be installed “back-to-back”.  She submitted that what the judge did was to construe the contract as if it had contained such a term, the error of law being the insertion of a term into the contract that was not there.

11.  A contract for work to be carried out cannot be construed in a vacuum.  It would normally require a context or reference point.  It is not disputed that prior to or at the time of entering into the written contract, the plaintiff had not been provided with any drawings.  In the present case, had relevant drawings been provided, in all probability, they would have constituted the appropriate factual matrix but that did not happen.  The only factual matrix available to the judge was a discussion between the plaintiff and Mr Chan as recorded in § 5 of the judgment.  That factual matrix is thus relevant in determining the parties’ contractual obligations.

12.  The judge also found that a design change had been made in August/September, reducing the number of external drainage pipes.  These were shown in representative drawings Benny had given Mr Pak.  The judge found that as a result a substantial number of STACs had to be repositioned, requiring significantly longer lengths of CDPs.  The design change highlights the need to resort to the factual matrix, absent which it would not be possible to determine whether or not there had been variations.  In my view, the criticism levied at the judge’s finding that the parties contracted on the basis described in § 5 of the judgmentis without merit.

Items allowed under invoices 090 and 061

(a)  Quantum meruit

13.  The requests for additional work or alterations to work already done necessitated by design changes were made orally.  Although in paragraph 9 of the amended statement of claim, the plaintiff claimed quantum meruit in the alternative, that alternative claim was expressly abandoned at the trial.  Ms Cheng submitted that as the basis of the claim for the 10 additional items under invoice 090 was contractual, it was incumbent on the plaintiff to prove that the unit rates stated in the invoice were agreed between the parties.  It was not open to the judge to make any award on the basis of quantum meruit.

14.  Ms Cheng submitted that of the 10 items, the judge found an agreement on the price only in respect of item 3 and as regards the other items, the judge either made no findings at all or ruled that the rates charged were “not unreasonable”.  She submitted that as regards the former, it must be taken that the judge was unable to find any agreement on the evidence as to rates because otherwise he would have made express findings as in the case of item 3.  In any event it was said that the latter amounted to an award based on quantum meruit and, as such, was an error of law, the plaintiff having expressly disavowed such a claim.

15.  The short answer to the quantum meruit point is to be found in the evidence of Mr Pak.  § 35 of his witness statement reads:

“35.  As to the price of the additional works, Eric and I expressly agreed the unit rate to be used as reflected in the invoices.”

How the unit rates came to be agreed appears from the following excerpt from Mr Pak’s cross-examination:

“Q.  Now, you said you gave Eric a quotation – of course we don’t have the document – did you keep a copy of that quotation?

A.  I faxed the quotation to him.

Q.  Now, I have seen in the bundles that you have all the memos and correspondences kept in quite good record, now for that particular quotation did you also keep a copy of that?

A.  Before Eric left we did not have to keep copies because I had known Eric for over 20 years.  If after we faxed documents to him and if he has no objection then we would go ahead, we didn’t keep copies.  Why I start to keep copies of documents because later – at a later stage when I send invoice to Fortress to claim money, they said they did not receive it, that’s why I had to deliver the documents by hand and to keep a copy for myself.

Q.  Now, according to you, you trusted Eric insofar as these variations is concerned, right?

A.  After the variation I had in fact telephoned Eric and said something had been altered, and he said, “Well, you just go ahead,” and I then carried out the work and claimed money.”

(Tr. 55A-H)

16.  Ms Cheng’s criticisms as to the lack of specificity and particulars regarding when and where each of the unit rates was agreed is beside the point when Mr Pak was never cross-examined on that issue at trial.  In the absence of any challenge, his unequivocal evidence is more than sufficient to justify the judge’s acceptance of the unit rates set out in the invoice.

(b)  Miscellaneous

17.  In addition to quantum meruit, Ms Cheng sought to challenge the judge’s finding of liability.  The main challenges are dealt with below.

Item 3 - pipe sleeves ($90,000)

18.  Ms Cheng challenged liability for this item on the basis that on the proper construction of the contract, the item falls within the description of a) or b) of Appendix I (as to which see § 4 above).  It was submitted that pipe sleeves fall within the meaning of “accessories” to the A/C units or constituted “necessary supports” for the condensate drainpipe works.

19.  In my view, one has to approach the construction of the contract with a dose of common sense.  One would not normally associate pipe sleeves with A/C units and/or condensate drainpipe works to render them “accessories” or “necessary supports”.  I agree with the judge that the installation of pipe sleeves is a job that is distinct from the installation of STACs.  In my view, he was right to hold Fortress liable for this item.

4 - re-doing damaged refrigerant pipes ($450,400)

20.  Ms Cheng challenged this award on the basis that the only contemporaneous document was a site memo dated 5 July 2003 (listing 216 locations) whereas the invoice, issued over a year later, related to 1126 locations without particulars.  It was submitted that the judge erred in disregarding the contemporaneous evidence or failed to attach due weight to it.

21.  The site memo was actually sent by Benny (on behalf of Fortress) to Chun Wo.  It referred to refrigerant pipes installed on the external wall having been repeatedly bent and damaged as from May 2003.  While it listed 218 (not 216) locations, that was a “preliminary” assessment.  Chun Wo was urged to remind other contractors working on the external walls not to damage the refrigerant pipes.  However, five days later, Benny had to send another memo to Chun Wo recording that, notwithstanding the earlier memo, workers for other contractors had been found damaging the pipes.  This would suggest an evolving, as distinct from a settled, state of affairs, quite apart from the ‘preliminary’ nature of the 5 July memo.  In my view, the judge was entirely justified in taking the view that the site memo of 5 July 2003 was “far from conclusive”.

22.  Mr Pak’s evidence was that the pipes had to be redone at 1126 locations.  No questions were raised in cross-examination concerning the locations.  It was plainly open to the judge to accept Mr Pak’s evidence.  In those circumstances, no case has been out for this court to interfere with the judge’s finding of fact based on that evidence.  The challenge to this item must therefore be rejected.

Fortress’ claim for contra charges

23.  Chun Wo seeks to make deductions amounting to $1,310,593.66 from the sum it should pay Fortress.  Fortress, in turn, seeks to pass these deductions on to the plaintiff.  As earlier noted, the plaintiff admitted items totalling $9,330 but otherwise denied liability.

24.  No deductions have yet been made by Chun Wo.  That was the position when the defence and counterclaim was amended in January 2008, it remained the position at trial in March 2008 and is still the position at the date of the hearing of the appeal.  Apparently Chun Wo and Fortress are still in negotiations over the amount of the deductions.  Fortress is clearly not yet in a position to seek reimbursement or deduction of specific amounts because, as the judge observed, Fortress has not yet sustained any loss, much less one that can be shown to be attributable to the plaintiff.

25.  Ms Cheng sought to get over that difficulty by asking for an indemnity.  But to indemnify against what?  The parameters of the indemnity that Fortress seeks from the plaintiff cannot remain ‘at large’, bearing in mind that Fortress is one of a number of different subcontractors of Chun Wo and Fortress itself has sub-sub-contracted work to a number of different subcontractors.

26.  In my view, Fortress is plainly not entitled to an indemnity from the plaintiff for whatever amount that may eventually by deducted by Chun Wo.  Not only has that amount to be found ‘due’ to Chun Wo, it has to be shown to be attributable to the plaintiff and not some other subcontractor or sub-subcontractor.  For my part, save to the extent admitted by the plaintiff, I consider any such claim to be premature and I would dismiss the appeal on the contra charges on that basis.

27.  Even if I were wrong about that, this part of the appeal still falls to be dismissed for the following reasons.  An overall criticism of the judge is said to be his ‘unfair’ treatment of Fortress’ claim.  It was said that the judge appeared to have adopted a very different approach when assessing the evidence on Fortress’ counterclaim, that he adopted a higher threshold when it came to assessing the counterclaim.  The criticism appears to me to be misconceived.  As explained in § 25above, the plaintiff was but one of Fortress’ subcontractors, any one of whom could have been responsible for the items appearing in the contra charge list whereas work done by the plaintiff was for Fortress alone.  Therefore it was incumbent on Fortress to demonstrate that the particular item was properly attributable to the plaintiff and to no one else.

28.  The contra charge list contains four sections, each comprising a large number of items.  The judge dealt with 7 of the items.  Ms Cheng’s skeleton on appeal addressed only 2 of the items, namely, penalties totalling $6,500 for absence from safety working cycle morning briefings and rubbish removal charges of $90,000.

29.  Dealing with the latter claim first, Ms Cheng’s submission was that the judge erred in not holding the plaintiff liable for at least the sum of $90,000 on the basis that the plaintiff had admitted that amount.  The admission was said to be contained in a letter dated 20 March 2004 from the plaintiff to Fortress which was in these terms:

“Our company have received from your company a Contra Charge List compiled by Chun Wo Building Construction Company Ltd.  Our Company would only admit HK$90,000.00 rubbish fee and site access card fees and would not admit other items.  We urge you to raise objection in writing as soon as possible.”

30.  It would appear from the letter itself that it was written in response to the contra charge list received from Fortress and presumably also a demand that the plaintiff accept liability for those deductions.  The contra charge list shows that the claim for removal of rubbish was over $504,000.  The judge was clearly not satisfied that the rubbish concerned was generated by the plaintiff.  He considered that the letter was an offer, by way of compromise, to settle the claim for rubbish removal and because Fortress never accepted that offer, he was not prepared to hold the plaintiff liable for that amount.

31.  Fairly read, the letter was a proposal to compromise all the claims made under the contra charge list.  That appears to be the thrust of Mr Pak’s evidence at pages 106-7 of the transcript.  21 months later, in December 2005, there is a detailed letter from the plaintiff to Fortress dealing with the contra charge list item by item and stating why nearly all of those charges were unjustified.  This letter would not have been written had the offer made in March 2004 been accepted.

32.  As to the question of penalties, the judge dealt with this matter in § 71 of his judgment.  Plainly Fortress cannot make out its claim by relying on paragraph h) of Appendix I alone for the reasons given by the judge.  Ms Cheng has not explained in what way the judge’s reasoning is wrong and, accordingly, the challenge must fail.

Conclusion

33.  I would dismiss this appeal.  I would propose that there be an order nisi that the costs of the appeal be to the plaintiff.

Hon Burrell J:

34.  I agree.

Hon Wright J:

35.  I agree.

Hon Le Pichon JA:

36.  There will accordingly be an order in terms of paragraph 33.