TIM LEE CONSTRUCTION ENGINEERING CO LTD v. KWONG WAH t/a SUPER KING ENGINEERING CO

CACV 120/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 120 OF 2012

(ON APPEAL FROM HCCT NO. 18 OF 2010)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Lam JA (giving the Reasons for Judgment of the Court):

1.  The Plaintiff was a sub-sub-contractor in respect of some maintenance works at housing estates under the management of The Link. The Defendant was the sub-contractor. The dispute between the parties is about some works orders issued by The Link which were sub-sub-contracted by the Defendant to the Plaintiff and the works done pursuant to the same. The case was tried before Recorder A Ho SC [“the Recorder”]. By a judgment of 20 April 2012 [“the Judgment”] as supplemented by his decision of 10 May 2012, the Recorder gave judgment in favour of the Plaintiff in the sum of $341,031.53 with interest from 27 July 2010 until date of judgment at 1% over the Hongkong Shanghai Banking Corporation’s best lending rate from time to time, thereafter at judgment rate until payment.

2.  This is an appeal by the Plaintiff against that judgment.  In a nutshell, the Plaintiff contended that the Recorder should also award damages in its favour in respect of some works orders for which the scope of works had been reduced or cancelled after orders had been issued.  The Plaintiff also complained about the refusal of the Recorder to award it interests from date of writ (17 September 2007 to 27 July 2010) and the costs for the counterclaim.

3.  Initially, the Plaintiff also appealed in respect of the costs of labour and granite tiles, see paras 1 to 3 of the grounds in the Notice of Appeal.  Mr Chong (appearing together with Ms Yip for the Plaintiff) abandoned this part of the appeal.

4.  After hearing the parties, we dismissed the appeal for reasons to be handed down later.  Here are our reasons.

5.  In respect of the giving instructions for works, the relevant facts are, as set out by the Recorder at paras 7 to 9,

“7.  Instructions for works were given by The Link to Wan Chung by way of works orders (“WOs”).  The WOs were passed down from Wan Chung to Super King, and on to Tim Lee.  The WOs thus became the instructions for works to the relevant sub‑contractors. It will be noted that the scope of works in the respective WOs was set out only in general terms and that only an estimated value of the works was given in the WOs.

8.  As will be seen later in the judgment, initially in August 2005, works under 3 WOs, namely, Nos 200501558‑001, 200501558‑002 and 20051557‑001 were sub‑let by Super King to Tim Lee.  The first two of these WOs related to fire safety improvement works at the Shun Lee Estate and the third related to similar works at the Oi Man Estate.  For convenience, these 3 WOs will be referred to as “the 1^st WO”, “the 2^nd WO” and “the 3^rd WO” respectively.

9.  Then, in about September or October 2005, further works were sublet to Tim Lee, namely, under WO Nos 200500478‑008 (at Shun Lee Commercial Centre) (“the 4^th WO”) and 200502138‑002 (at Oi Man Shopping Centre) (“the 5^th WO”).”

6.  There were other works orders for which there is no complaint regarding withdrawal or reduction of works.

The reduction in works under Works Orders 1,2 and 3

7.  The Recorder set out the complaints of the Plaintiff about Works Orders 1, 2 and 3 at paras 52 to 56,

“52.  Tim Lee alleged that there had been (i) a withdrawal of the entire 2^nd WO; and (ii) a “scaling‑down” of the scope of works under the 1^st and 3^rd WOs^5[[1]^]. Tim Lee’s complaint was that such withdrawal or reduction in the scope of works had deprived it of the opportunity to complete the works and earn the corresponding profits.

53.  The 2^nd WO involved the erection of fire compartment walls and installation of fire shutters and fire doors.  It is not disputed that on 10 October 2005, The Link had given instructions for the works to cease and the site to be re‑instated to its original design, apparently because of the residents’ opposition to the works at Shun Lee Estate.  There is also no dispute that the said instructions from The Link had been passed down the chain to Tim Lee.  Super King accepted that the works under the 2^nd WO had been “permanently deleted”^6[[2]]. Mr Chong’s evidence, which I accept, was that by the time the instruction was given, Tim Lee had already taken steps to perform the works, including entering into contracts with suppliers of materials, erecting scaffolds and undertaking parts of the works in question.

54.  In the meantime, Tim Lee continued with the works under the 1^st and 3^rd WOs.  Sometime in December 2005, Mr Kwong verbally asked Tim Lee also to suspend any works that had yet to be commenced under the 1^st and 3^rd WOs.  There is no dispute that the works, as reduced in scope, were eventually completed.  Tim Lee’s complaint was the loss of profits it could otherwise have earned.

55.  For this purpose, it will be remembered that the estimated value of the initial 3 WOs was stated to be $2.5 million, $4.5 million and $2.8 million respectively.  Subsequently, by 3 variation orders all dated 1 February 2007, their estimated value was respectively reduced to $560,000, $250,000 and $225,000.  It is Mr Chong’s evidence, which I accept, that by the time of the variation orders, the works under the respective WOs had already been completed.  The variation orders did not therefore relate to fresh work to be undertaken, but was a reflection of the reduction in the scope of the works under the original WOs.

56.  The difference in value of the respective WOs formed the basis of Tim Lee’s loss of profit claim.”

8.  Whilst accepting that withdrawal of works (either reduction in scope or removal of works) is capable of being a breach of the contract, the Recorder found that the Plaintiff had failed to discharge the burden of proof in establishing the extent of works withdrawn in respect of these 3 Works Orders. The reasons for such finding are at paras 62 to 65,

“62.  To begin with, the WOs contained only a general description of the works involved.  It must be envisaged that details of the works would be supplemented by further instructions, including drawings or instructions on site by the project surveyor, or otherwise.  Hence, for instance, the Notes in the WOs provided that the areas of works would be defined by drawings and to be clarified on site.

63.  Further, the scope of works, in terms of value, were given on the WOs as estimates only.  While the estimates may well give an indication of the scope of works expected to be carried out (in this connection, I made no finding whether such estimates were inflated), I do not consider Super King can be regarded as having warranted that the works to be carried out would necessarily be of the stated value.

64.  Therefore, in order to make good its allegation that Super King had wrongfully withdrawn any part of the works under the WOs, it would be incumbent upon Tim Lee to properly identify the works instructed which had allegedly been withdrawn or removed.  It is also incumbent upon Tim Lee to prove the elements of profit in respect of the works not‑performed.

65.  In the present case, Tim Lee’s claim was based solely on a comparison of the estimated values of the original WOs and those in the variation orders.  I do not consider that to be a satisfactory basis of establishing the extent of the works withdrawn.  In my view, the allegation of wrongful withdrawal has not been properly proved.”

9.  The Recorder also held that the Plaintiff had failed to prove the profit it would have earned on the alleged withdrawn works. The Recorder found that the methodology adopted by the Plaintiff to prove its profit margin was unsatisfactory, see paras 66 to 68 of the Judgment.

10.  The Recorder further held that the 2 sets of financial statements which the Plaintiff sought to rely upon should not be admitted as evidence due to late disclosure and lack of proper supporting documentation.

11.  Mr Chong submitted that the Recorder had found that the Defendant had breached the contract by withdrawing or reducing works from the Plaintiff at para 60 of the Judgment.  With respect, that plainly was not what the Recorder found. His Lordship only accepted in that paragraph that withdrawal or reduction of works were capable of being a breach of contract.

12.  Mr Chong then submitted that the Recorder found reduction in terms of the estimated values of the 3 Works Orders at para 55 of the Judgment.  That is correct.  Mr Chong then referred to para 53 of the Judgment where the Recorder found that the Plaintiff had taken steps to perform the works when the instruction to cancel Works Order 2 was issued.

13.  Counsel contended in light of these findings the Recorder erred in holding that the Plaintiff had not proved which part of works had been withdrawn and that damages had not been proved.  He submitted that one could proceed by using the differences in the estimated values as set out in para 55 of the Judgment as base figures and adopting the 7% reflected in the financial statements to work out the Plaintiff’s loss of profit stemming from such withdrawal of works.

14.  We cannot accept these submissions. It must be borne in mind that in a contract claim, the burden is on a plaintiff to prove damages.  A plaintiff who proved a breach but not damages (including the quantum) cannot get any substantial relief.  In Born Chief  Co v George Tsai [1996] 2 HKLR 188, Nazareth VP said at p.195,

“Proceeding to the matter of damages, it is plain from the evidence, that there was significant physical damage. But of the quantum of damages, there was a conspicuous lack of actual evidence. The plaintiff did not apply for a split trial and so in the ordinary way the trial would be expected to proceed from start to finish. Counsel for the defendants rightly submitted that in the absence of evidence establishing the quantum of damages, the appropriate award was one of nominal damages. Such a result would obviously mean that the significant damage that the evidence revealed would not be compensated and must have offended the judge’s sense of justice. But the good, efficient and increasingly, the affordable administration of justice requires that parties present their entire cases and cannot expect a second bite at the cherry simply because they failed to apply for a split trial or to produce their requisite evidence.”

15.  In substance, what the Recorder found was that though there might be a substantial reduction in the scope of works, the extent of reduction could not be proved by comparing the estimated values.  This is a finding perfectly open to the Recorder given his findings at paras 62 and 63 which Mr Chong did not even begin to challenge (and these are primarily finding of facts which can only be challenged on appeal if they are plainly wrong, see Ting Kwok Keung v Tam Dick Yuen [2002] 5 HKCFAR 336).

16.  As submitted by Mr Clayton SC (appearing with Mr Yan for the Defendant) at para 3.4(1) of his written submissions, there are problems with reliance being placed on the estimated values,

“3.4. Tim Lee made no attempt to identify or value the works which withdrawn, either at all or in terms of what Tim Lee was entitled to be paid with regard thereto. The problems with reliance on the EVs are:

(1)     the evidence was they were not reliable assessments even of Wan Chung’s entitlement in respect of the value of the work to be performed. The value of the WOs was to be assessed by measurement on completion – paragraph 1.3 above.  Mr Chong of Tim Lee himself in his witness statement^8[[3]] said the EV was a very rough estimation of the value of the works ordered.  Mr Kwong said the EV was not fixed or final in nature.9[[4]^]  The documents demonstrate that there can be very large differences between the EV and final assessment.  For the 1st WO (No.200501558-001), for example, the original EV was HK$2.5m^10[[5]] and the revised EV in the varied WO after the works were complete^11[[6]] was HK$250,000.^12[[7]]  However, the agreed final value assessed by the quantity surveyor under the main contract with Wan Chung was HK$100,181.79.^13[[8]]  So even the EV put into the varied WO after the works were complete was about 250% of the actual value of the works.”

17.  Therefore the Recorder acted properly in requiring more precise proof of the reduction. As to that, unfortunately, the Plaintiff had nothing to offer.

18.  As regards the 7 % profit margin, the Recorder held that the financial statements were inadmissible due to late disclosure.  Mr Chong contended that the holding was wrong because the financial statements had been audited by independent auditors and filed with the Inland Revenue Department.  As such, he contended that there was no prejudice to the Defendant to admit those statements.  Mr Clayton did not accept that there was no prejudice arising from the late disclosure.  At para 3.7 of his written submissions in this appeal, counsel referred to the non-disclosure of documentations relating to consultancy fees and the distortion such consultancy fees might produce on the profit margin.  This was the point picked up by the Recorder at para 67 of the Judgment.

19.  The decision to exclude the financial statements was a case management decision which this court would not disturb unless it is clearly wrong, see厦門新景地集團有限公司v Eton Properties HCMP 13 of 2012, 14 Feb 2012, para 9.  Mr Chong accepted that the Recorder did exercise case management discretion in excluding such evidence.  Counsel referred to the lack of prejudice on the part of the Defendant and other matters set out in his written submissions to challenge that exercise of discretion.  However, he had not been able advance a submission by reference to one of the recognised grounds for challenging discretion set out at para 9 of Eton Properties.

20.  In the present circumstances, we are not satisfied that Mr Chong had made out a case for interfering with this decision of the Recorder.  On the contrary, it seems to us to be a correct decision.  Given the submission of Mr Clayton on consultancy fee documentation, had the Recorder granted leave to the Plaintiff to use the financial statements, he would have to grant an adjournment to enable the Defendant to obtain the supporting documentation by way of discovery and that would disrupt the trial.  It is also relevant to note that Mr Chong did not give any explanation on behalf of the Plaintiff as regards the late disclosure.

21.  Without the financial statements, the Main Contractor’s bills (which the Recorder also addressed at para 70 of the Judgment) cannot prove anything.  Mr Chong’s reliance on these documents to show that a profit margin of 7% is a reasonable one is neither here nor there.

22.  As a fall-back position, Mr Chong asked the court to assess the damages as best as it can to do justice to the Plaintiff. We do not find that option to be viable. As observed by Nazareth VP in Born Chief a plaintiff is expected to present its entire case before the court.  He cannot expect the judge (or the Court of Appeal for that matter) to engage in a speculative exercise to fill in gaps in terms of proof of damages when he did not prepare the necessary evidence for trial.

Works Order 5

23.  In respect of this Order, the Recorder found that the ceiling works and part of the toilet improvement works had been wrongfully removed from the Plaintiff by the Defendant.  However, he found that the Plaintiff had failed to prove the quantum of its loss of profit because it adopted the same unreliable methodology as in the case of Works Order 1 to 3.

24.  For the reasons already given, the Recorder was correct in so holding.

Interest

25.  The Recorder deprived the Plaintiff of interest on the judgment sum from date of writ to 27 July 2010 on the ground that the Plaintiff had completely revamped its pleadings on that date and the case as pleaded before that amendment was not clear.

26.  The award of pre-judgment interest is a matter of discretion for the trial judge.  An appellate court would not interfere with the exercise of such discretion unless one of the established grounds for interfering with the primary exercise of discretion can be shown, see Hong Kong Civil Procedure 2013 paras 6/L/9; 59/0/54.

27.  Mr Chong submitted that in principle interest should run from the moment the cause of action accrued and, absent unwarrantable delay in the institution of legal proceedings, there should not be any departure from that.  He cited para 15-078 of McGregor on Damages 18^th Edn.

28.  Whilst we accept the starting point is that interest should run from date of writ, we do not think the exercise of discretion is fettered by limiting it to cases where there is unjustified delay in the commencement of proceedings.  We are of the view that it is in line with the spirit of the CJR and the underlying objectives in Order 1A Rule 1 for the court to exercise such discretion with reference to how the case has been pleaded at different stages of the action. Under Order 1A Rule 2(1)(a), the court shall seek to give effect to the underlying objectives when exercising any of its power and that, in our view, can include the power to award pre-judgment interest.  Proper and clear formulation of one’s claims in pleadings is an important element in the furtherance of the underlying objectives.  The Recorder was correct in law in taking account of the changes in the formulation of the Plaintiff’s claim at different stages in the exercise of his discretion on awarding interest.

29.  Mr Chong submitted that the amendments in July 2010 did not materially affect any obligation of the Defendant and no new causes of action had been added.

30.  With respect, we do not agree. The judgment awarded by the Recorder in favour of the Plaintiff is made up of three components,

(a)	Costs of redundant materials under Works Order 5	$101,467.29
(b)	Arrears under Works Orders 1, 3, 4 and 6	$169,546.28
(c)	Arrears under Works Order 5	$70,017.96

31.  We cannot find any claim for (a) in the pleadings prior to the 2010 amendments.  Though there was a general plea for arrears at the original para 12 of the Statement of Claim, the Recorder was correct in saying that the paragraph did not clearly set out how the figures in the breakdown of those claims were arrived at in the manner as per the Re-amended Statement of Claim.

32.  In the circumstances, we are not prepared to say that the Recorder erred in fact or law in the exercise of his discretion.  Nor do we think his exercise of discretion was outside the generous range of reasonable differences on how interest should be awarded in such circumstances. Thus, we cannot interfere with the Recorder’s decision.

Costs on the counterclaim

33.  The Defendant abandoned the counterclaim at the court below. The Recorder gave the costs of the action to the Plaintiff, see para 151 of the Judgment and the formal sealed judgment.

34.  Costs of the action include costs of the counterclaim.

35.  This order nisi was varied by an order for costs on 28 August 2012. Paragraph 1(1) of that order made it crystal clear that the Recorder included costs of the counterclaim in the costs of the action.

36.  The actual variations in the order of 28 August 2010 have no bearing on the issues before us.

37.  We do not understand why the Plaintiff deemed it necessary to appeal in this respect when the Recorder’s order for costs on the counterclaim was in its favour. When Mr Chong was asked about this in the course of hearing, apart from saying that it was not clear whether costs of the action included costs of the counterclaim, he could not advance further submissions. The alleged uncertainty as to the scope of the expression “costs of the action” is manifestly a false point, especially in light of the terms of the order of 28 August 2010. In the end, Mr Chong accepted he could not pursue this ground of appeal.

Disposition

38.  For these reasons the appeal was dismissed with costs.