GAMMON CONSTRUCTION LTD. v. YUEN CHAK CONSTRUCTION CO. LTD.

1995 No. A11404

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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INTRODUCTION

1. In July 1994, the Plaintiff, Gammon Construction Ltd. ("Gammon"), was engaged by the Defendant, Yuen Chak Construction Co. Ltd. ("Yuen Chak"), to carry out various investigation works at a site in Ma On Shan. Gammon claims that Yuen Chak has failed to pay all the sums due to it. By these proceedings, Gammon seeks to recover the unpaid balance of the invoices which it submitted for the work which it did. It sought summary judgment under Ord. 14. On 20th May, Master Cannon gave the Plaintiff summary judgment for the sum claimed. Yuen Chak now appeals against that judgment.

THE NEW AFFIRMATION

2. At an earlier hearing of the Ord. 14 summons, Master Jones had only permitted the parties to file further affirmations with the leave of the court. Yuen Chak sought to file a further affirmation, being the second affirmation of Ho Kwok Wa, one of its directors. Master Cannon refused to grant Yuen Chak leave to file it. Today, Yuen Chak renewed its application to file it and to rely upon it on the appeal. I read Master Jones' order as applying only to the hearing of the summons at first instance. But even if, on its proper construction, Master Jones' order applied to a re-hearing of the summons on appeal, I nevertheless gave leave to Yuen Chak to file Mr. Ho's second affirmation and to rely upon it. This was one of those cases in which the Plaintiff's case had not been fully apparent until the filing of the second affirmation of Tong Kwok Chuen, one of Gammon's senior project managers.

THE PRINCIPAL ISSUE

3. Gammon submitted a total of 7 invoices for the work which it did. Yuen Chak's first line of defence is that one of those invoices, the fifth invoice, contained items for which Gammon could not properly charge. However, Gammon's first six invoices were only interim invoices. The seventh invoice, which set out its charges for all the work which it had done, was its final invoice. The true question therefore is whether there are any items in that invoice for which Gammon could not properly charge. That is not to say that the fifth invoice is a matter of complete irrelevance. I do not overlook the point made by Mr. Robert Andrews for Gammon that the fifth invoice is a sham, and that Mr. Ho purported to amend it to be able to argue at a later date that Yuen Chak had always been disputing Gammon's charges. I have taken that point into account in determining whether Yuen Chak's assertions are believable. I have also taken into account the fact that Mr. Ho did not object to the first four invoices, which referred to a retention of 5% before he asserted for the first time that the agreed retention had been 10%, together with the other features of the fifth invoice which Mr. Andrews claims goes to the credit of Yuen Chak.

THE ITEMS IN THE INVOICE

4. There are a number of items in Gammon's final invoice which Yuen Chak claims Gammon cannot properly charge for. I shall deal with each of them in turn :

(i) The mobilisation and demobilisation of drilling equipment. Gammon claims that the maximum number of rigs at any one time on the site were six, and it therefore invoiced for the mobilisation and demobilisation of six rigs. Yuen Chak does not accept the accuracy of that figure, but asserts that there were many times when such rigs as there were on the site were either laying idle or under repair, and that in any event Gammon would not have needed as many as six rigs on the site at any one time because the work could have been spread over a longer period. In my view, these considerations raise a triable issue as to whether Gammon can claim for the mobilisation and demobilisation of six rigs, though Yuen Chak accepts that Gammon can claim for the mobilisation and demobilisation of four rigs.

(ii) The setting up of drilling equipment. Gammon claims the cost of setting up drilling equipment at a drill hole which was abandoned because of an obstruction. The issue between the parties is whether Yuen Chak instructed Gammon to abandon drilling at this drill hole or whether Gammon asked to be relieved from drilling at this drill hole because it feared that its equipment would be further damaged. It may be that the positions of the drill holes were chosen by Yuen Chak and not Gammon, but I think that it is arguable that if Gammon chose to abandon drilling at this drill hole (and sought Yuen Chak's indulgence to permit it to do so), Gammon cannot claim the modest cost of setting up equipment at this abandoned drill hole. That is so even if, as Mr. Andrews reminded me, Yuen Chak subsequently relied on the information which drilling at this drill hole provided. There is therefore a triable issue as to whether Gammon is entitled to claim this charge.

(iii) Supply of water for drill holes, the sinking of drill holes to 60 metres and drilling through boulder or rock. The issues which arise on these items are identical to the issues which arise on the cost of setting up the drilling equipment. There is therefore a triable issue as to whether Gammon is entitled to claim these charges in respect of the abandoned drill hole.

(iv) The provision of four sets of the final report and four sets of photographs. Gammon claims the cost of providing four sets of the final report. It asserts that it provided draft reports on the first 13 drill holes, but admits that it provided no reports, whether final or draft, on the 14 remaining drill holes. Whether or not it has a satisfactory explanation for not providing reports on the 14 remaining drill holes is beside the point. It is undoubtedly arguable that it cannot charge for reports which it did not provide. Accordingly, to the extent that Gammon claims charges for reports in respect of those 14 drill holes, there is clearly a triable issue as to its entitlement to do so.

5. Yuen Chak does not dispute that Gammon provided draft reports on the first 13 drill holes. In my view, there are two important gaps in the evidence here. Gammon asserts that once a draft report had been prepared, it was for Yuen Chak to obtain the engineer's comments on it for inclusion in the final report. However, there is no assertion by Gammon that Yuen Chak failed to do that. For its part, Yuen Chak does not dispute that it was its obligation to obtain the engineer's comments on the draft report. However, there is no assertion by Yuen Chak that it did so. Its failure to do so means that it has not satisfied me that there is a triable issue as to whether Gammon can claim the cost of providing those draft reports. Since Yuen Chak has not asserted that there is a difference in cost between draft reports and final reports, Gammon's judgment for the cost of the reports as if they were final reports must stand.

6. It is common ground that photographs of only 7 drill holes were provided by Yuen Chak. There is a dispute as to why no other photographs were supplied to it. All that is irrelevant. That is because no charge was made for any photographs by Gammon. Mr. Ho does not assert that the charges for the reports included charges for the photographs. Accordingly, if Gammon was in breach of any obligation to provide photographs, that can only be reflected by awarding damages to Yuen Chak by way of counterclaim.

7. Finally, Mr. Ho asserts that Gammon's failure to provide the final reports and the photographs, "being the sole purpose of doing the site investigation work in the first place", was a fundamental breach of the contract which disentitled Gammon to any payments under the contract at all. While not abandoning the argument that that failure constituted a fundamental breach of contract, Mr. Adrian Bell for Yuen Chak realistically accepted that the breach would not have had the effect contended for by Mr. Ho.

(v) The cost of drilling using triple tube barrel. There is an issue of fact as to whether the rate claimed by Gammon was agreed. The rate claimed by Gammon was the rate quoted, and Gammon contends that Yuen Chak agreed to the rate by letting Gammon proceed with the work without objection. Yuen Chak claims that it did object to the rate, and that it was agreed that the architects and quantity surveyors would determine the rate. No such rate was in fact determined by them. In my view, although the decision is a close one, I have come to the conclusion that there is a triable issue as to whether Gammon is entitled to claim sums in excess of $25,000.00 which Yuen Chak claims represented the total charge at a reasonable rate.

(vi) The cost of coring in iron ore formation. Gammon claims the cost of coring in iron ore formation. The issue is whether it is entitled to do so. Gammon originally quoted for drilling through boulder and rock. It did not restrict its quotation to soft substances, and since iron ore is just one type of boulder or rock, Yuen Chak claims that any additional costs for coring in iron ore formation should have been absorbed by Gammon. There is, in my view, clearly a triable issue on the topic, relating as it does to the proper construction of Gammon's quotation. The fact that there is a factual dispute as to whether Yuen Chak was requested to discuss the matter with the architects, the engineers and the quantity surveyors simply does not affect that.

(vii) Retention. Yuen Chak was entitled to retain a percentage of the sums due to Gammon until three months after the issue of a certificate of practical completion for the work. Gammon's final invoice did not deduct a retention. Gammon's claim therefore proceeds on the basis that the certificate of practical completion had been issued at least three months before the issue of these proceedings. Yuen Chak does not assert that the certificate of practical completion had not been issued at least three months before the issue of these proceedings. There is therefore no evidential basis on which I can say that there is a triable issue as to whether Yuen Chak remained entitled to retain a percentage of the sums due to Gammon.

YUEN CHAK'S COUNTERCLAIMS

8. In addition to disputing Gammon's claim, Yuen Chak claims that it has a counterclaim against Gammon, and that that counterclaim operates as an additional defence to Gammon's claim by way of set off. That counterclaim is in two parts, and I must deal with each in turn :

(i) Additional drill holes. Yuen Chak claims that as a result of Gammon leaving the site without completing the work which it had contracted to do on drill holes with the prefix "ABH", it was obliged to call upon other contractors to complete the work. The urgency of finding other contractors and the small number of drill holes remaining meant that those contractors charged much more than Gammon would have charged if it had completed the work. Yuen Chak claims the difference between what the replacement contractor charged and what Gammon would have charged. However, the replacement contractor's invoice was accompanied by a breakdown of the work, and that shows that the drill holes on which it worked had the prefix "BBH". Not surprisingly, Gammon claims that these were different drill holes from those which it had agreed to work on. That was asserted in the second affirmation of Mr. Tong. Mr. Ho had the opportunity of putting that in issue in his second affirmation. He did not do so. Assuming, therefore, in Yuen Chak's favour, that Gammon had left the site without completing the work which it had contracted to do, Yuen Chak has not satisfied me that there is a triable issue as to whether the work, which the replacement contractor did, related to work which Gammon had agreed to do. In the interests of clarity, though, I should add that there is no question of my rejecting Yuen Chak's counterclaim in this respect. All I am saying is that the evidence at present does not permit me to say that that potential counterclaim can be relied upon by way of set off against Gammon's claim.

(ii) The termination of Yuen Chak's sub-contract. Yuen Chak had been sub-contractors on the site. It alleges that in July 1995 the main contractor's engagement was terminated, and that had the practical effect of terminating its own engagement. Yuen Chak blames Gammon for that. A trial pile indicated that at least one of the drill holes had been drilled to an insufficient depth, and that threw the reliability of all Gammon's site investigation work into doubt. Moreover, Yuen Chak asserts that the site investigation work was only part of the job which Gammon was contracted to perform on the site. Gammon had also contracted to carry out site formation works, pipe piling works and pre-boring works. The value of the works under that contract was much higher than the value of the works under the site investigation contract. Yuen Chak claims that Gammon's work in those areas was "defective, sub-standard, over-claimed and unreliable". All of that contributed to the termination of the main contractor's engagement, and hence its own engagement. Yuen Chak wishes to counterclaim for the losses it sustained as a result of the termination of its sub-contract.

STAY OF EXECUTION

9. However, Yuen Chak proposes to claim these losses by way of counterclaim in another action which Gammon has brought against it. Since it will be claiming in that action the losses which it claims it suffered as a result of the termination of its engagement, it would not be right, in my view, to deny Gammon judgment on its claim in these proceedings, simply because those losses are alleged to have arisen from the defective performance not merely of the contract for all the other works but also of the less valuable site investigation works contract. The fact that Yuen Chak is counterclaiming in the other action is better reflected by staying execution of the judgment in these proceedings, if that is appropriate, pending the determination of Gammon's claim and Yuen Chak's proposed counterclaim in the other action.

10. Not without hesitation, I have reached the conclusion that a stay of execution is appropriate. Having regard to the four categories of cases referred to by Bingham L.J. (as he then was) in United Overseas Ltd. v. Peter Robinson Ltd. (Court of Appeal transcript 91/0297), I think that this case comes more closely within Bingham L.J.'s third category than his fourth category. I appreciate that the counterclaim arises for the most part out of the alleged defective performance of a separate and distinct transaction, but to the extent that the counterclaim is dependent on the alleged defective performance of the site investigation works contract, I judge Yuen Chak's counterclaim to be a plausible one, though whether it would be established at trial is, of course, another matter altogether.

CONCLUSION

11. The fact that I have found there to be triable issues in relation to some, though not all, of Gammon's heads of claim means that Master Cannon's order has to be varied. That is not a reflection in any way on Master Cannon. Once she had refused Yuen Chak leave to file Mr. Ho's second affirmation, it was not surprising that she reached the view that she did. I have not worked out what the judgment sum should be varied to, and I leave it to the parties to work that out in the light of this judgment.

12. Accordingly, the order which I make is that the appeal be allowed, the sum for which judgment was entered will be varied to such sum as the parties agree in the light of this judgment, and execution of the judgment will be stayed pending the trial of Yuen Chak's counterclaim in the other action. Yuen Chak will have unconditional leave to defend the balance of Gammon's claim in these proceedings, and I give the parties liberty to restore this appeal to me in the event of them being unable to agree the sum for which, according to this judgment, Gammon should have judgment. I shall hear counsel as to whether this action should now be transferred to the Construction and Arbitration List, and on the question of costs. If it is to be transferred to the Construction and Arbitration List, I propose to leave it to the judge in charge of that List to decide whether it should be consolidated with the other action which is already pending in that List, and to give directions for the filing of the further pleadings.

13. Finally, I should add, for the avoidance of doubt, that I have used the phrase "a triable issue" in this judgment as shorthand for the proper test to apply in Ord. 14 proceedings. Lest it be thought otherwise, I am aware that the test is whether Yuen Chak has satisfied me that there is a fair and reasonable probability of showing a real or bona fide defence to Gammon's heads of claim. In that connection, the question is not whether Yuen Chak's assertions of fact will be believed, but whether they are believable.