LEE CHAU MOU t/a CHAU MOU ENGINEERING & CO v. KIN SING ENGINEERING (HK) CO LTD

HCCT3/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 3 OF 2006

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(Case transferred from HCA893/2003 pursuant to
Order of Hon Reyes J on 12 January 2006)

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J U D G M E N T

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I.   Introduction

1. The plaintiff is a principal contractor participating in various government construction projects.  The defendant is a sub-contractor.

2. By Contract No.14/WSD/01 dated 18 January 2002 (“the Principal Contract”) with the Water Supplies Department (“WSD”), the plaintiff agreed to conduct construction works in respect of water supply to Ap Chau and Kat O, North District (“the Works”) for a sum of HK$19,245,850 (“the Price”).  The Works consisted of the following items :

Bill No.	Description	Amount(HK$)
1	General Preliminaries	2,650,600
2	Construction of So Lo Pun Fresh Water Break Pressure Tank	930,520
3	Construction of Sai Lau Kong Fresh Water Break Pressure Tank	1,065,430
4	Laying of Watermains within Portions D, E & F	12,019,450
5	Laying of Watermains within Portions D, E & F (Affected by Tidal Waters)	1,048,310
6	Dayworks	450,900
		—————
	Total :	19,248,850
		—————

3. In the main, the Works involved the laying of about 10,000 watermains (both exposed and buried) and the construction of 1,000 concrete supports for exposed watermains at Sam A Chuen, Lai Chi Wo, Sai Lau Kong, Cheung Shek Tsui, Kat O, Ap Chau and So Lo Pun.  The time for completion was 550 days after commencement, which fell on 2 September 2003.

4. By a Chinese contract dated 18 March 2002 (“the Sub-Contract”), the plaintiff sub-contracted the Works[1] to the defendant for 89% of the Price as remuneration.  The plaintiff would be entitled to the remaining 11% as administration and consultation fees.  Within two days upon receipt of the interim payment from WSD, the plaintiff shall pay the 89% thereof to the defendant.

5. Clause 5 of the Sub-Contract (“Clause 5”) provided :[2]

“Upon receiving notice or warning for slow progress of works or other no-compliances, if no improvement and no rectification is made or continuous occurrence of slow progress of works or even deliberately cease works without acceptable reasons, [the plaintiff] shall have the rights to terminate this Contract and all cost incurred from the damages made shall be solely responsible and liable by [the defendant] without objection.”

6. The defendant entered the site on 1 March 2002.  Pursuant to the Sub-Contract, it had to complete the Works on or before 31 August 2003.

7. Disputes subsequently arose.  On 14 January 2003, the plaintiff purported to exercise his right under Clause 5 to terminate the Sub-Contract and re-entered the site.

II.  The action

8. In March 2003, the commenced the present action.[3]

9. In the Amended Statement of Claim, the plaintiff complained that the progress of the defendant’s work was slow and unsatisfactory.  Despite repeated warnings, the defendant had failed to remedy the breach.  The plaintiff therefore exercised his right under Clause 5, terminated the Sub-Contract and re-entered the site on 14 January 2003.  The plaintiff now claims for the loss and damage in the sum of HK$2,401,451.26.

10. The plaintiff also seeks, inter alia, an indemnity from the defendant for the amount that he had paid to the defendant’s workers in the proceedings in the Labour Tribunal (LBTC1685/2003) pursuant to the provisions in Part IXA of the Employment Ordinance, Cap.57 (“the Ordinance”) in the sum of HK$241,182.50 plus legal costs of HK$8,500 for obtaining legal advice on the effect of Part IXA of the Ordinance.

11. In the Amended Defence and Counterclaim, the defendant first raised a number of implied terms :

(1)   Under Clause 5, the plaintiff is entitled to terminate the Sub-Contract only if the defendant fails to remedy delay or non-performance that are substantial or fundamental in nature to the extent that it amounted to a repudiation of the Sub-Contract.

(2)   The plaintiff shall procure on behalf of the defendant the raw materials required for the laying of exposed watermains which mainly included pipes and pipe fittings.

(3)   The plaintiff shall promptly apply for restricted area work permits for the defendant’s workers whenever so requested by the defendant.

12. The defendant next denied that it was guilty of the delay as alleged.  Thus the plaintiff was not entitled to terminate the Sub-Contract pursuant to Clause 5.

13. The defendant went on to plead that, if there were any delay, it was caused by the plaintiff in that he had failed :

(1)   to procure the relevant raw materials to arrive in accordance with pre-planned progress schedules;

(2)   to promptly apply for restricted area work permits for the defendant’s workers upon the defendant’s requests and on some occasions even refused to apply for such permits despite repeated requests; and

(3)   to pass on to the defendant 89% of all interim payments received by the plaintiff during the period between 1 March 2002 and 14 January 2003.

Further, any delay was in any event not substantial enough to entitle the plaintiff to terminate the Sub-Contract.

14. As to the claims arising from the LBTC1685/2003, the defendant made no admission of the amount paid by the plaintiff and in any event denied liability for the legal costs of HK$8,500.

15. Finally, the defendant counterclaimed for, inter alia, damages that it had suffered as a result of the plaintiff’s breach of the Sub-Contract in the sum of HK$4,896,556.  However, in his closing submissions, Mr Chiu, counsel for the defendant, drastically reduced the quantum to HK$696,190.73, having conceded that there is no evidence to substantiate the counterclaim is its entirety.

16. At the trial, the plaintiff gave evidence.  He also called Mr Lee Wah Mou (“Mr WM Lee”) and Mr Vincent Yiu Chi On (“Mr Yiu”) to give evidence.  Mr WM Lee is the plaintiff’s brother.  He and Mr Yiu were appointed by the plaintiff as site foreman and site agent respectively to oversee the execution of the Works in late August 2002.[4]  The defendant called Mr Lee Kin Fan (“Mr KF Lee”), a director, to give evidence.

17. I will deal with their evidence in detail below.  At this juncture, it is useful to state my finding on their credibility.  Having carefully considered all the evidence, I find that the plaintiff, Mr WM Lee and Mr Yiu are all honest and reliable witnesses.  Their evidence is cogent and well supported by contemporaneous documents.  They were not shaken under cross-examination.  I accept their evidence.  On the other hand, I find Mr KF Lee a poor and unreliable witness.  His evidence, in some material aspects, is self-contradictory and inconsistent with the contemporaneous documents and even his own witness statement, lacks precision and defies common and commercial sense.  I reject his version of the events.

III.  Liability under the Sub-Contract

A.   Main issues

18. The parties’ claims can be broadly divided into two categories :

(1)     Liability under the Sub-Contract; and

(2)     Liability under the Ordinance.

I will first consider the question of liability under the Sub-Contract.

19. Stripped of all technicalities, the parties’ disputes on liability under the Sub-Contract gave rise to the following main issues :[5]

(1)     Whether there was delay in the work carried out by the defendant under the Sub-Contract and if so, the extent thereof.

(2)     Whether the plaintiff was responsible for the delay in the way as alleged by the defendant.  (It will be convenient to deal with the various implied terms contended by the defendant as summarized in paragraph 11(2) and (3) above here.)

(3)    Whether the plaintiff was entitled to invoke Clause 5 to terminate the Sub-Contract or whether the termination was wrongful.  (The implied term contended by the defendant in paragraph 11(1) will be discussed.)

(4)     Subject to the question of liability, the quantum of damages that the parties had suffered.

I will consider them in turn.

B.   Issue 1 — Any delay?

20. As noted, the date of completion of the Works under the Principal Contract fell on 2 September 2003.  For its part, the defendant had to complete the Works under the Sub-Contract by 31 August 2003.

(1)    An overview of the progress

21. The progress of the Works was discussed and reviewed at the monthly progress meetings between April 2002 and January 2003.[6]  The meetings were attended by the representatives of WSD, the plaintiff or his representative(s) and the site agent.  Mr KF Lee also attended some of the meetings.  The minutes of the meetings together with some other WSD’s documents, which are not disputed, provide objective, contemporaneous evidence on the progress of the Works.  An overview is set out below.

22. The site office was erected sometimes in May 2002.[7]  However, up to 8 July 2002, other than some preliminary works at Kat O and So Lo Pun, no laying of any watermains or construction of any concrete supports had been carried out.[8]  This prompted the plaintiff to send a warning letter to the defendant dated 27 June 2002 (“the 1^st Warning Letter”)[9].

23. Up to 5 August 2002, about 320 and 130 meters of watermains had been laid at Kat O and So Lo Pun respectively.  Site clearance and setting out for the proposed watermains alignments were in progress.  WSD was disappointed by the unsatisfactory progress and urged the plaintiff to construct the concrete supports and to deploy sufficient resources for carrying out the mainlaying works in order to catch up the progress.[10]

24. In August 2002, about 790 and 320 meters of watermains were laid in Kat O and So Lo Pun respectively.  The plaintiff issued the second warning letter to the defendant dated 30 August 2002 (“the 2^nd Warning Letter”).  At the progress meeting held on 3 September 2002, WSD noted the slight improvement of the progress but reiterated that more resources should be deployed to catch up the programme especially for the construction of the concrete supports.  WSD requested that in September 2002 the construction of the fresh water break pressure tanks should commence and set the target for the month : construction of 100 concrete supports and laying of 800 metres of watermains should be completed.[11]  After the progress meeting, the plaintiff issued a third warning letter to the defendant dated 4 September 2002 (“the 3^rd Warning Letter”).

25. However, the target set by WSD was not fully met.  Only about 323 and 580 metres of watermains were laid at Kat O and So Lo Pun in September 2002.  No concrete support was constructed.  Work for the break pressure tanks had not commenced.  The plaintiff issued the fourth and final warning letter dated 20 September 2002 to the defendant (“the 4^th Warning Letter”).  At the progress meeting on 2 October 2002, WSD urged the plaintiff to immediately proceed with the construction of break pressure tanks at So Lo Pun and implement the mainlaying works at Sai Lau Kong immediately.  WSD set a similar target for October 2002, i.e. 100 concrete supports and 800 metres of watermains.[12]

26. In October 2002, about 473, 205 and 219 metres of watermains were laid at Kat O, So Lo Pun and Sai Lau Kong respectively.  But the progress was still behind schedule.  By a letter addressed to the plaintiff dated 30 October 2002, WSD expressed great concern about the slow progress of the construction of the concrete supports for the exposed watermains and noted :

“So far, no concrete support have been constructed of the total about 1000 numbers but the time elapsed has been 45%.  There are about 10 months in the remaining contract period for the construction 1000 numbers of concrete supports.”

27. At the progress meeting held on 5 November 2002, WSD was particularly concerned on the unsatisfactory progress of the concrete works and urged the plaintiff to deploy more resources in order to catch up with the progress and imposed a similar target of 100 concrete supports and 800 metres of watermains for November 2002.[13]

28. WSD then issued a quarterly report on contractor’s performance for the period between 1 September and 30 November 2002.  There, the reporting officer of WSD made the following remarks :

“The Contractor’s overall progress has slipped by about 2 weeks in this quarter.  Approximately 4300 km watermains have been laid but only 14 numbers of concrete supports have been completed.  The construction of the two break pressure tanks has been started.”

29. However, the progress of the work did not improve.  At the monthly progress meeting on 5 December 2003, WSD commented that the progress was unsatisfactory and behind schedule and repeated the request that the plaintiff should deploy more resources to catch up the delay especially on the construction of concrete works.[14]  The same target of 100 concrete supports and 800 metres of watermains were set for the following month.  Again, the target was not met.  Only 158 metres of wtermains had been laid and 65 bend blocks constructed.  At the progress meeting on 13 January 2003, WSD repeated its deep concern about the unsatisfactory progress of the work.[15]

30. A weekly summary of the total quantity of work done up to 31 January 2003 was attached to the covering letter dated 17 February 2003 circulating the minutes of the meeting on 13 January 2003.  According to that summary, up to 12 January 2003 (two days before the termination of the Sub-Contract), laying of 5,165 of the 5,300 metres of exposed mains (97.45%) and construction of 35 out of 740 concrete supports (4.75%) had been completed.  And none of the 3,650 buried mains (NS125 PE F.W Mains) and 590 metres buried and 230 metres exposed mains (DN100 MS F.W Mains) had been laid.  By that time, more than 12 months of the original 18 months contract period had already lapsed.

31. In another letter also dated 17 February 2003 addressed to the plaintiff, the Senior Engineer/Construction (2) of WSD wrote :

“I note with concern that your progress of the Works as on 15 February 2003 is six weeks behind the schedule as compared with the Master Programme Version 2 submitted under your letter ref.14/WSD/01/VY-0049 dated 28 December 2002.  Moreover, only 35% of works were completed against 60% time elapsed.

Pursuant to Clause 51 of the General Conditions of [the Principal Contract], I consider that the present rate of progress of the Works is too slow to ensure completion by the prescribed time for completion.  I am of the opinion that the resources you have currently deployed are absolutely insufficient.  You are advised to take such steps as are necessary to expedite the completion of the Works.  You are required to inform me of such proposed steps you intend to take and revise the Master Programme.

…”

32. In my view, it is plain from the undisputable evidence summarized above that there was substantial delay throughout the execution of the Works by the defendant, which persisted up to the termination of the Sub-Contract in January 2003.  And I so find.

(2)     Reasons for the delay

33. Subject to the defendant’s allegation that the delay was caused by the plaintiff’s conduct, which I will deal with in Section C below, I find that on the evidence before me, the delay is attributed to the following reasons.

34. The first reason concerns the site agent.

35. To facilitate the execution of the Works, the defendant had to and did appoint a site agent to, inter alia, coordinate between WSD and the contractors working on the site and supervise the work generally.  The first site agent was Mr Chan Yui.  He worked between 1 March and 31 May 2002.  According to the defendant, Mr Chan’s performance was poor and because of his incompetence, “everything was in a mess”.

36. In June 2002, Mr Chan was replaced by Mr Simon Lam.  However, Mr Lam was absent from the site since 15 June 2002.  In a warning letter dated 26 June 2002 to the plaintiff, WSD expressed deep concern about his absence and remarked that it would seriously affect the progress of the Works.  The plaintiff in turn complained to the defendant about the replacement of the site agent in the 1^st Warning Letter.

37. In July 2002, Mr Lam was replaced by Mr Edmund Lau Kam Kee.  However, Mr Lau was absent from the site on 1, 2, 5, 6 and 8 August 2002.  WSD wrote on 9 August 2002 to the plaintiff raising its deep concern about his absence and drawing the plaintiff to the fact that the progress of the Works had thus been affected.  According to the defendant, Mr Lau left the site for some unknown reasons.

38. The replacements of the site agent and their absence from the site were brought up at the monthly progress meetings held on 5 August and 3 September 2002.  WSD was concerned that the progress of the Works had been adversely affected and delayed.[16]

39. On 17 August 2002, the plaintiff appointed his own site agent, Mr Yiu in order to give support to the defendant in planning and execution of works in compliance with the contract requirements.  The plaintiff further assigned Mr WM Lee as an additional site foreman for monitoring the defendant’s performance.

40. The evidence clearly established that during the first five to six months of the project, the progress of the Works had been adversely affected by the replacements of the site agent appointed by the defendant and their absence.  And I so find.

41. The second reason for delay is that the defendant had not deployed sufficient workmen to work at the site.

42. For the period between March and June 2002, few workers had been deployed.  For each of those months, 71, 119, 89 and 134 man-days were recorded.[17]  The manpower was clearly insufficient for properly executing the Works.

43. More workers had since been deployed.  But even then, it was not sufficient to meet the progress of the Works.  For in every monthly progress meeting since August 2002, WSD urged the plaintiff to deploy more resources to catch up with the progress.  But delay still persisted.  And the defendant had been unable to meet every monthly target set by WSD since September 2002.

44. The plaintiff himself was also aware of the lack of sufficient manpower.  His evidence, which I accept, is this.  A significant part of the Works was to be carried out in restricted areas in the North District of Hong Kong.  Workers who entered into the site had to be issued with permits.  The plaintiff, as the principal contractor, processed the applications for permits for the defendant’s workers.  The applications would normally take a week to process.  However, in many instances, the workers issued with permits did not turn up for work.  The plaintiff also carried out site inspection from time to time and he discovered that only a few workers actually turned up for work.

45. The third reason relates to the defendant’s financial ability.  It is not in dispute that the defendant had considerable cash flow problem as the project went along.  This, in my view, explains the replacements of the site agent and the insufficient manpower.  The defendant’s financial difficulty inevitably impacted upon the progress of the Works.  The defendant’s case is that its cash flow problem was caused by the plaintiff’s default in passing on all the 89% of the interim payments that he received between March 2002 and January 2003.  And because of the cash flow problem, the progress of the Works was adversely affected.  The plaintiff’s case is that the defendant had been plagued by the cash flow problem from the outset and he had to and did provide financial assistance to ease the problem.  In paragraph 51 of his witness statement, the plaintiff said that up to November 2002, because of his assistance to relief the pressure of the defendant’s cash flow problem, the progress was not adversely affected.  But it would appear to be a fair understanding of the his evidence in its entirety including his oral testimony that the progress of the Works had in fact been affected by the defendant’s cash flow problem despite his financial assistance.  In the circumstances, I find that the defendant’s cash flow problem did constitute a reason for the delay.  I will address the reason for the cash flow problem in Section C below where I will determine if the plaintiff was responsible for the delay.  To that I now turn.

C.    Issue 2 — Was the plaintiff responsible for the delay?

(1)     Raw materials

46. The defendant first complained that in breach of the implied term referred to in paragraph 11(2) above, the plaintiff had failed to procure on behalf of the defendant the arrival of the raw materials required for the laying of the exposed watermains in accordance with pre-planned progress schedules.

47. The obvious question is : whether the alleged implied term existed.  There are considerable difficulties with the defendant’s case.

48. Clause 7 of the Sub-Contract (“Clause 7”) provided that the defendant “shall undertake the execution and completion of [the Works] including all costs incurred from procurement of materials, transportation and labour wages in compliance with the Specifications of the Principal Contract”.  The obligation to procure raw materials lied squarely with the defendant.  The alleged implied term contradicts Clause 7, an express term of the Sub-Contract.  It is not permissible : see BP Refinery (Westernport) Pty Ltd v. President and Councillors and Ratepayers of Shire of Hastings (1978) AJLR 20 at p.26E (PC).   On this ground alone, the defendant’s case must fail.  (I note that it is not the defendant’s case that Clause 7 had been varied to the extent that the plaintiff shall procure the raw materials on behalf of the defendant.  So I will not consider this point any further.)

49. In any event, the evidence, when viewed in the round, does not support the defendant’s case.

50. In paragraph 8 of his witness statement, Mr KF Lee had this to say :

“However I was informed by [the plaintiff] that most of the essential pipe materials had been ordered by [the plaintiff] on our behalf before we even got onto the site, and it was not necessary for us to source those materials.  [The plaintiff] told me that they took the initiative to order the materials for us because he had the ‘contacts’ with the suppliers.  Therefore [the defendant] did not take any part in the ordering of these pipe materials and simply paid for them when [the plaintiff] forwarded to us the relevant invoices.”

Under cross-examination, Mr KF Lee said that it was a Mr Pang Ying Kim (“Mr Pang”) procured the materials for the defendant.  (I digress to deal with Mr Pang.  According to the plaintiff, he knew Mr Pang for about six to seven years.  It was Mr Pang who introduced the defendant to him for the Sub-Contract.  The evidence suggested that the plaintiff regarded Mr Pang as representing the defendant on matters relating to the Sub-Contract.  For example, the four warning letters that the plaintiff issued to the defendant in the course of the project were all addressed to Mr Pang.)  When pressed, Mr KF Lee said it was Mr Pang who told him that the plaintiff would be responsible for procuring the materials for the defendant.  When pressed further, he said the plaintiff did say that he would procure the materials.  But he was unable to say when the plaintiff said so.  He then said that he seldom had contact with the plaintiff.  Finally, he said that Mr Pang/the plaintiff never mentioned that the defendant needed to pay for the materials, suggesting that the plaintiff would procure the materials for the defendant for free.

51. The plaintiff’s evidence on the arrangement of how the materials were to be sourced is this.  He had pressed the defendant to place orders for materials.  Mr Pang then discussed with Mr KF Lee.  Mr Pang then placed orders in the name of the plaintiff according to the usual practice of ordering materials.  The plaintiff accepted that the plaintiff had good contacts with suppliers and could bargain for a better price.  But he was adamant that the procurements of materials were made by Mr Pang on behalf of the defendant, although the orders were placed under the plaintiff’s name.  And the plaintiff placed the orders for the defendant after being so informed by the defendant.

52. I am unable to accept Mr KF Lee’s evidence.  His answers as to who actually told him that the plaintiff would procure the materials for the defendant were unsatisfactory.  Further, his allegation that the plaintiff would procure the materials on behalf of the defendant for free flatly contradicted what he had said in his witness statement and Clause 7.  More importantly, it dose not make any commercial sense at all.  On the other hand, I find the plaintiff’s evidence credible and accept it.

53. The sourcing arrangement did not impose on the plaintiff an obligation, as alleged, to procure raw materials on behalf of the defendant.  In the circumstances, I find that the alleged implied term did not exist.

54. In any event, the defendant had failed to substantiate the allegation that the materials did not arrive according to the pre-planned schedules.

55. For the above reasons, the defendant’s complaint that the plaintiff had acted in breach of the alleged implied term must fail. 

(2)     Permits

56. The defendant next complained that in breach of the implied term referred to in paragraph 11(3) above, the plaintiff had failed to promptly apply for restricted area work permits for the defendant’s workers.

57. The plaintiff accepted that the permits had to be applied for by him as the principal contractor.  Thus I find that a term should be implied into the Sub-Contract that the plaintiff should apply for the permits for the defendant’s workers as and when required as part of his implied duty to co-operate to ensure the performance of the Sub-Contract : see Chitty on Contracts, 2004, Vol.1, para.12-011 at p.779.  However, I am not satisfied that the plaintiff had breached the implied term as alleged.  Apart from bare allegations, the defendant had adduced no evidence to substantiate the alleged breach.  On the other hand, the plaintiff said that he had never refused to process the application put forward by the defendant on behalf of its workers.  The applications normally took about one week to process and no difficulty arose.  He found that there were occasions where the defendant’s worker who were issued with the permits did not always turn up for work.  In my view, it is inherently improbable for the plaintiff to have failed to duly process the application for permits.  Had he done so, it would only cause disruption to the progress of the Works.  This defies any common and commercial sense.  I accept the plaintiff’s evidence.

58. For the above reasons, the defendant’s complaint about the permits also fails.

(3)     Failure to pass on 89% of the interim payments

59. Finally, the defendant complained that the plaintiff had failed to pass on all the 89% of the interim payments that he received between January 2002 and March 2003,which resulted in the defendant’s cash flow problem throughout the entire project.

60. Under the Sub-Contract, the plaintiff had to pay the defendant the 89% of the interim payment that he received from WSD within two days after the receipt thereof.  Up to February 2003, WSD had paid 10 interim payments to the plaintiff.  See the table set out in paragraph 70 below.

61. Mr KF Lee denied that the defendant had any cash flow problem in the beginning of the project.  He said that he was not aware of the interim payments until the 5^th interim payment (29 August 2002) when he pressed the plaintiff for interim payments.  But even then, the defendant was only paid HK$277,099.50.  In October 2002, the defendant again experienced financial difficulties as it had only received from the plaintiff HK$374,574 by way of two payments on 21 and 29 October 2002.  The last interim payment that the defendant received was from the 7^th interim payment in the sum of HK$81,982.10.

62. In gist, the plaintiff’s case is that he had paid the defendant various payments of outgoings on its behalf and advanced payments and settled outstanding wages of its workers and even lent money to the defendant.  Mr KF Lee agreed that those payments and loans were to be set off against the interim payments.  The plaintiff’s evidence is summarised in paragraphs 63 to 68 below.

63. Before signing the Sub-Contract, he told Mr KF Lee that in light of the scale and duration of the project, the defendant should have about HK$3 million as operation fund for buying materials, plants and equipments, paying wages and other general expenditure in order to carry out the Works.  Mr KF Lee said that he understood the financial requirement and he could arrange HK$3 million as operation fund.  However, as early as April 2002, the plaintiff became aware that the defendant had not paid wages to the site agent, Mr Chan Yui, and some other workers.  The plaintiff became concerned about the defendant’s financial ability.  He then asked Mr KF Lee for his assurance of the defendant’s financial ability.  Then Mr FK Lee admitted to him that the defendant did not have sufficient cash in hand to execute the Sub-Contract.  It had difficulty in paying for the general overhead expenses of site office and materials.  He asked the plaintiff to pay in advance on behalf of the defendant for various items, including materials, costs for rental of helicopter services for conveying materials to the site and other site office overhead expenses.  The plaintiff was shocked but in order to avoid disruption of the progress of the Works acceded to the defendant’s request on the condition that the amount(s) so paid by the plaintiff would be deducted from the monthly interim payments payable to the defendant.  The defendant agreed.

64. Pursuant to the above agreement that the plaintiff paid various payments on behalf of the defendant.  In the beginning of September 2002, the plaintiff was advised by Mr Yiu to review and summarise the financial status of the account between the plaintiff and the defendant.  Up to 3 September 2002, the plaintiff had received a total of HK$1,672,398.20 from WSD under the 1^st to 5^th interim payments.  89% of that sum amounted to HK$1,488,434.40.  The total outgoings that the plaintiff had paid on behalf of the defendant was HK$1,251,334.90.  Thus the balance due to the defendant as at 3 September 2002 was HK$(1,466,434.40 – 1,251,334.90 =)227,099.50.  The plaintiff paid the defendant that sum on the following day.

65. The plaintiff had lent the following loans or advanced payments to the defendant to ease the pressure in its cash flow which had been set off against various interim payments :

Date	Loans/advanced payments (HK$)
21/10/02	200,000.00
29/10/02	74,151.00
	100,423.30
	25,425.70
31/10/02	150,000.00
12/11/02	100,000.00
20/11/02	218,000.00
13/12/02	300,000.00

These loans and advanced payments were all evidenced by receipts.  Further, Mr KF Lee signed a promissory note for each of the three loans made in November 2002 (of the same date of the loan).  There, he acknowledged that the defendant borrowed the money because of inadequate cash flow and he agreed that the loan be deducted from the interim payment.

66. In respect of the loan of HK$300,000 made on 13 December 2002, the plaintiff’s evidence is that the defendant’s workers went on strike on 10 and 11 December 2002 because of outstanding wages.  He had an urgent meeting with Mr KF Lee on 13 December 2002.  Mr KF Lee said that he was unable to pay the wages and the additional human resources to catch up the progress of the work.  He asked the plaintiff to make another advance payment of HK$300,000 to settle the wages.  The plaintiff very reluctantly agreed.

67. Further, the plaintiff had paid two further sums totalling HK$136,000 to the Labour Tribunal to settle claims lodged by the defendant’s workers for outstanding wages for the month of October 2002.

68. The plaintiff further denied Mr KF Lee’s allegation that the defendant was not aware of the interim payments until he pressed for payment in August 2002 because it was the site agent appointed by the defendant who made the applications for interim payments.  He also said WSD would notify the defendant of the interim payments.  Mr Yiu also said that WSD Mr KF Lee would know about the interim payments from WSD.

69. I have carefully considered all the evidence.  The various payments and loans made by the plaintiff are well supported by documentary evidence.  The defendant has either not challenged those payments or been unable to do so with credible evidence.  In the promissory notes, Mr KF Lee admitted that the defendant needed the loans to ease its cash flow problems.  Further, I fail to see any commercial rationale for the plaintiff to make the payments and loans to the defendant on the one hand and not to pass on the 89% of the interim payments on the other?  What benefit would he reap by such an odd arrangement?  Accordingly, I accept the plaintiff’s case and reject the defendant’s and find that the parties had in effect varied the payment obligation under the Sub-Contract to the extent that the plaintiff was (a) entitled to deduct all the payments and loans that he made to the defendant from the interim payments that he received from WSD and (b) only obliged to pass on the surplus, if there was any after such deduction, to the defendant.

70. Ms Ho, counsel for the plaintiff, has helpfully prepared a table setting out the interim payments received from WSD, the various payments and was paid by the plaintiff to the defendant and the balance.  It is repeated below :

Date	Payment Certificate	89% of payment made by WSD to Plaintiff	Total payment made by Plaintiff to and on behalf of Defendant	Balance by payment period	Cumulative balance
10/4/02	1	$212,739.32	$206,404.00	$6,335.32	$6,335.32
12/2/02	2	$252,784.72	$241,982.90	$10,801.82	$17,137.13
12/7/02	3	$162,195.61	$294,739.08	($132,543.47)	($115,406.34)
14/8/02	4	$157,488.39	$378,657.63	($221,169.24)	($336,575.57)
29/8/02	5	$703,226.37	$366,650.80	$336,575.57	($0.00)
21/10/02	6	$413,033.67	$603,700.09	($190,666.42)	($190,666.42)
13/11/02	7	$480,228.25	$480,228.20	$0.05	($190,666.37)
11/12/02	8	$371,376.91	$410,698.21	($39,321.30)	($229,987.67)
8/1/03	9	$615,733.14	$770,425.04	($154,691.90)	($384,679.57)
5/2/03	10	$416,595.75	$335,917.60	$80,678.15	($304,001.42)

The figures in brackets indicate negative balances.

71. Several points arising from the deductions by the plaintiff need to be addressed.

72. First, there are two small balances after deductions made to the 1^st and 2^nd interim payments.  The plaintiff’s evidence, which I accept, is that by the two faxes dated 29 April and 29 May 2002, he asked Mr KF Lee to confirm the expenses incurred by the plaintiff for the defendant.  I agree with Ms Ho’s submission that as it was plainly foreseeable by the parties that the plaintiff would incur much larger sums for the defendant as the project went along, the parties must have agreed not to distribute them for the time being.  In any event, given the small size of the two sums, it would not have any significant impact on the defendant’s cash flow at the time.

73. Second, Mr Chiu submitted that the plaintiff was not entitled to deduct various sums.  Firstly, there were various insurance premiums (of different amounts) such as that for the site vehicle.  Mr Chiu submitted that under the Sub-Contract, the plaintiff was responsible for take out those insurances.  With respect, it is incorrect.  Under the Sub-Contract, the plaintiff had to take out third party and workmen compensation insurance only.  He was not responsible for the insurances in question.  The defendant was because they formed part of the costs for executing the Works.  Secondly, Mr Chiu argued that the site deposit paid by WSD on 29 April 2002 (HK$6,000) because after the completion of the project, it would be refunded.  But it is undisputable that the deposit had to be paid at the time.  Whether or not it would be refunded remained to be seen and is irrelevant for the purpose for making the deduction there and then.  I see no reason why the plaintiff was not entitled to deduct it, having paid the same on behalf of the defendant.  Thirdly, Mr Chiu argued that a sum of HK$74,151 should not be deducted from the 5^th instalment as the defendant had already reimbursed the plaintiff by cheque dated 19 May 2002.  However, I accept the plaintiff’s evidence that the cheque had been bounced.  Fourthly, Mr Chiu argued that the payments paid to workers who suffered personal injury in the course of the work should not be deducted as they would be covered by insurance.  The defendant had not adduced any evidence to substantiate this point.  Further, the plaintiff’s evidence, which I accept, is that if there were sufficient safety measure then the insurance company would be responsible.  If not, the defendant would be.  According to the workers, the safety measures were inadequate.  So the defendant was responsible. And having made the payments on its behalf, the plaintiff was entitled to deduct them.  Finally, Mr Chiu contended that the plaintiff was not entitled to deduct the third party insurance of HK$90,000 from the 8^th interim payment.  I agree.  Under the Sub-Contract, the plaintiff was responsible for the third party insurance.  However, as can bee seen from the table in paragraph 70 above, the negative balance as at the 8^th interim payments and thereafter well exceeded HK$90,000.  In other words, the deduction of HK$90,000 did not change the fact that for those interim payments, the defendant still owed the plaintiff sums well exceeding HK$90,000.  There was no surplus for the plaintiff to pass on to the defendant.

74. For the above reasons, the defendant’s complaint about the interim payments also fails.

75. All in all, I find that the plaintiff was not responsible for the delay as contended by the defendant.

(4)     Warning letters

76. I now turn to the four warning letters issued by the plaintiff in the course of the Sub-Contract.

77. In the 1^st Warning Letter, the plaintiff complained to the defendant, inter alia, about the replacement of the site agent, the slow progress of the work and the lack of significant progress for the first three months of the project.  The defendant alleged that the complaint was wholly unjustified.

78. On replacement of site agent, the defendant alleged in paragraph 18 of his witness statement that it was incorrect for the plaintiff to say in the 1^st Warning Letter that the site agent had been replace twice.  But in his oral testimony, he admitted that the site agent had been replaced twice as at 27 June 2002.  Further, according to the plaintiff, on or before 26 June 2002, he already knew that Mr Lau would be appointed to replace Mr Lam.  Thus although factually, it was in early July that Mr Lam was replaced by Mr Lau, what the plaintiff said in this regard in the 1^st Warning Letter was not unsupportable.

79. On the slow or lack of significant progress, in light of my finding on this aspect above, this complaint is plainly justified.

80. In the 2^nd Warning Letter, the plaintiff complained that six months had elapsed but the defendant had been unable to catch up with the progress and that the plaintiff had been verbally warned by WSD on the delay.  The plaintiff gave the defendant 10 days to improve failing which, the plaintiff might terminate the Sub-Contract.

81. In the 3^rd Warning Letter, the plaintiff repeated the complaint about delay, reiterated the target set by WSD at the monthly progress meeting on 3 September 2002 and warned the defendant that if the delay persisted, the plaintiff would terminate the Sub-Contract.

82. The 4^th Warning Letter refereed to the discovery by the plaintiff at the site inspection on 19 September 2002 that certain items had not been carried out as requested.  The plaintiff gave the defendant a last warning that if it failed to comply with the instructions set out in the 3^rd Warning Letter and made proposal as to how to complete the Works, the plaintiff would terminate the Sub-Contract without further notice.

83. On the 2^nd to 4^th Warning Letters, Mr KF Lee’s evidence in gist is that he accepted that there was delay but the plaintiff was responsible for it.  This I reject, having regard to my findings on Issue 2.

84. It is also Mr KF Lee’s evidence that the plaintiff had agreed to withdraw all the warning letters at a meeting between the parties on 23 September 2002.  But it is apparent that the warning letters would only be withdrawn if the defendant could achieve the progress and the standard to the satisfaction of WSD : see the letter dated 24 September 2002 issued by the plaintiff to the defendant which, the defendant accepted, recorded an account of the parties’ discussion at the meeting.  As I have already found that the defendant had been unable to catch up with the progress but persisted in delay, there is no basis for him to contend that the warning letters had been withdrawn.

D.      Issue 3 — Was the plaintiff entitled to invoke Clause 5?

85. I next consider if the plaintiff was entitled to invoke Clause 5.

86. As noted in paragraph 11(1) above, Mr Chiu argued that there is a term is to be implied to Clause 5 that it is only upon the defendant’s repudiatory breach that the plaintiff is entitled to invoke Clause 5 to terminate the Sub-Contract.  He relied on Rice (trading as Garden Guardian) v. Great Yarmouth Borough Council, The Times, 26 July 2000 in support.   Ms Ho contended that no such term could be implied.  She relied on the well established proposition that given an express contractual termination clause, it will not be necessary to establish that the breach or event on which the clause is expressly conditioned is of the fundamental repudiatory character required for a common law determination.  It will be sufficient that it has been contractually defined or nominated as a ground for contractual determination : Hudson’s Building and Engineering Contracts (11^th edn), Vol. II, para.12-004.

87. I do not think I need to dwell on counsel’s submissions.  Suffice it to say that having considered the matter carefully, I agree with Ms Ho and find that the plaintiff is entitled to invoke Clause 5 to terminate the Sub-Contract in light of the defendant’s persistent and substantial delay and its failure to remedy despite the repeated warning letters.  Even if I am wrong and Clause 5 is subject to the implied term as contended by Mr Chiu, I am satisfied that the breach committed by the defendant was a repudiatory breach and the plaintiff was fully justified in invoking Clause 5.

88. To complete the discussion, I would mention this.  Mr Chiu took the point that the plaintiff had not given any notice within the meaning of Clause 5 before terminating the Sub-Contract.  This point has not been pleaded in the Amended Defence and Counterclaim.  In the absence of a proper plea, it cannot be argued now.  In any event, I am satisfied that the warning letters are sufficient notice for the purpose of Clause 5.  This notice point must fail.

F.      Issue 4 — Quantum

89. I now turn to quantum.  In this regard, I only need to deal with the loss and damage suffered by the plaintiff.

90. The plaintiff’s claim is divided into four heads, namely :

(1)     Head A — Reimbursement of facilities and equipments for HK$5,280, which is not disputed.

(2)     Head B — Remedial work carried out by direct labour for HK$135,600.

(3)     Head C — Outstanding work carried out by other sub-contractor/direct labour for HK$1,512,309.76.

(4)     Claim D — Others items for HK$516,079.

91. In his supplemental witness statement, Mr Yiu explained in detail how he arrived at the above figures with supporting documents.  He said he was able to make the assessment because he had kept in his computer the necessary records.  Mr Yiu made the assessment of the same in 2004 when the Works were finally completed.  That is in my view understandable as it was only then that the actual costs incurred as a result of the termination of the Sub-Contract could be fully assessed.  His assessment revealed that considerable costs had been incurred in complaint the Works left by the defendant and also in making good the work done by the defendant.  He pointed out that the claims for outstanding works carried out by other sub-contractor were for net costs incurred by the plaintiff after deducting estimated payments received from WSD for the relevant items of Works under the Principal Contract.  He also said that after the termination of the Sub-Contract, WSD had made some variation orders to the Principal Contract.  The plaintiff had accordingly more time to complete the Works without having to pay liquidated damages for late completion.  Thus no liquidated damages for late completion were included in Mr Yiu’s assessment.

92. The defendant had adduced no evidence at all to contradict Mr Yiu.  Mr Chiu tried to attack Mr Yiu’s evidence by way of cross-examination and submissions.  I have carefully considered Mr Yiu’s answers under cross-examination and the points taken by Mr Chiu in his closing submissions.  I will not dwell on details.  Suffice it to say that having considered all the matters carefully, I do not find any substance in Mr Chiu’s attack.  I fully accept Mr Yiu’s evidence.

93. For these reasons, I find that the plaintiff is entitled to the claims on each of Heads A to D in full.

IV.     Liability under the Ordinance

94. I now turn to the question of liability under the Ordinance.  Mr Chiu did not dispute this claim other than the legal costs.

95. The relevant provisions in Part IXA of the Ordinance are :

“43C.   Liability of principal contractor and superior sub-contractor to pay wages of employees of sub-contractors

(1)   Subject to this Part, if any wages become due to an employee who is employed by a sub-contractor on any work which the sub-contractor has contracted to perform, and such wages are not paid within the period specified in section 23, 24 or 25, as the case may be, such wages shall be payable to the employee—

(a)   where the sub-contractor has contracted with the principal contractor, by the principal contractor …

(2)   The liability of a principal contractor … under subsection (1) shall be limited—

(a)   to the wages of an employee whose employment relates wholly to the work which the principal contractor has contracted to perform and whose place of employment is wholly on the site of the building works; and

(b)   to the wages due to such an employee for 2 months without any deductions under this Ordinance and such months shall be the first 2 months of the period in respect of which the wages are due to the employee.

…

43F.        Recovery of wages paid by principal contractor or superior sub-contractor

(1)   If a principal contractor …. pays to an employee any wages under section 43C, the wages so paid shall be a debt due by the employer of that employee to the principal contractor ….

(2)   Any principal contractor …. who pays to an employee any wages under section 43C may either—

 ….

(b)    deduct by way of set-off the amount paid by him from any sum due or which may become due—

(i)    to any sub-contractor to whom he has sub-contracted all or any part of work that he contracted to perform being work upon which the employee was employed, and

(ii)      in respect of the work that he has sub-contracted.

….”

96. Th ree points are pertinent.  First, but for the above provisions, the principal contractor will not be liable for the wages due to the sub-contractor’s employees.  Second, the wages paid by the principal contractor to the sub-contractor’s employees under section 43C shall be a debt due by the sub-contractor to the principal contractor.  Finally, section 43F does not allow the principal contractor to recover anything more than the wages paid under section 43C.  The principal contractor may, if he so elects, deduct by way of set-off the amount paid by him in respect of the work that he has sub-contracted.[18]

97. I now turn to the evidence in support of the plaintiff’s claim, which is undisputed.

98. In January 2003, shortly before the termination of the Sub-Contract, the defendant’s workers threatened to go on strike as the defendant had not paid them wages since November 2002.  The plaintiff then received a letter dated 11 February 2003 from the Labour Department in relation to the claims for arrears of wages made by the defendant’s workers.  The workers then commenced LBTC1685/2003 and the plaintiff were informed of the same by letter dated 25 February 2003 from the Labour Tribunal.  Upon admission, the Labour Tribunal on 24 March 2003 entered judgment against the defendant for HK$566,200.  But the defendant failed to pay up.  The plaintiff was liable to the defendant’s workers under section 43C of the Ordinance for HK$241,182.50, which he
did pay by making two payments into the Labour Tribunal on 17 and 31 May 2003.

99. The plaintiff is plainly entitled to recover the said sum of HK$241,182.50 as a debt under section 43F of the Ordinance.  And I so find.

100. However, I do not think the plaintiff is entitled to recover the costs of HK$8,500 for obtaining legal advice on the effect of Part IXA of the Ordinance.  Mr Ho contended that the plaintiff is entitled to recover the legal costs as part of the damages that he can claim against the defendant under Part IXA of the Ordinance.  This is misconceived.  For under Part IXA, the plaintiff is only entitled to recover the wages as a debt and no more : see paragraph 96 above.  Contrary to Ms Ho’s contention, Part IXA makes no provision for a general indemnity to cover all the loss and damage that a principal contractor may have suffered as a result of its operation.  For completeness, I would add that the plaintiff has not pleaded any alternative basis to support the claim for the indemnity or the legal costs.

V.   Orders

101. For the above reasons, I will enter judgment for the plaintiff for :

(1)     HK$2,410,451.26 with interest at the judgment rate from the date of writ until payment;

(2)     a declaration that the plaintiff is entitled to recover from the defendant the sum of HK$241,182.50 paid pursuant to the award of the Labour Tribunal in LBTC1685/2003; and

(3)     HK$241,182.50 with interest at the judgment rate from the date of writ until payment.

102. I will dismiss the plaintiffs’ claim for the legal costs of HK$8,500.

103. I will also dismiss the defendant’s counterclaim.

104. The plaintiff having substantially succeeded in his claim, I will make an order nisi that he shall have the costs of the action, including any costs reserved, to be taxed if not agree.

[1]     Though of minimal significance and nothing really turns on it, the defendant’s case is that only part of the Works had been sub-contracted.  However, under Clause 1 of the Sub-Contract, the defendant agreed to “undertake the execution and completion of the works as stipulated in the Bills of Quantity No.1 to No.6 under [the Principal Contract]”, which was exactly the Works in its entirety.  Accordingly, I find that the Works in its entirety had been sub-contracted to the defendant under the Sub-Contract.

[2]     Clause 5, in Chinese, read “如該工程進度或其他不合規定之通知或警告後仍不改善和更正或工作緩慢，借故停頓：甲方有權終止合約，所有損失由乙方負全責，乙方不得異議。”  The quote here is its certified English translation.

[3]     Originally, the action was listed as HCA893/2003.  By order of Reyes J dated 12 January 2006, it was transferred to the Construction and Arbitration List as HCCT3/2006.

[4]     See paragraphs 35 to 39 below as to the circumstances leading to their appointment.

[5]     This is broadly how counsel argued the case in their closing submissions.

[6]     The meetings were held on 10 April, 17 May, 7 June, 8 July, 5 August, 3 September, 2 October, 5 November, 5 December 2002 and 13 January 2003 respectively.

[7]     See the minutes of the meeting on 17 May 2002.

[8]     See the minutes of the meetings between April and July 2002.

[9]     The plaintiff had issued 4 warning letters to the defendant.  I will deal with them in Section C(4) below.

[10]    See the minutes of the meeting on 5 August 2002.

[11]    See the minutes of that meeting.

[12]    See the minutes of that meeting.

[13]    See the minutes of that meeting.

[14]    See the minutes of that meeting.

[15]    See the minutes of that meeting.

[16]    See the minutes of those meetings.

[17]    See the monthly return of wage rates for those months.

[18]    See section 43F(2)(b).  Though it is not invoked by the plaintiff, this provision would apparently enable him to deduct from the interim payments payabe to the defendant the wages that he had paid to the defendant’s employees in the different set of Labour Tribunal proceedings lodged by them in the course of the Sub-Contract.