RICHFUL ENGINEERING LTD v. PINE YEAR DEVELOPMENT LTD AND ANOTHER

HCA 2906/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2906 OF 2004

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J U D G M E N T

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1.  On 29 July 1998 the Defendant sub-contracted to the Plaintiff the performance of the works under a 3 year Maintenance Term Contract signed between the Kowloon – Canton Railway Corporation (“KCRC”) and Shui On Building Contractors (“Shui On”).  After taking into account various intervening sub-contractors, the Plaintiff agreed to receive as payment the sums certified by KCRC to Shui On less a deduction of 19%, 20% and 21% in years one, two and three respectively.

2.  The works comprised whatever maintenance works orders KCRC chose to issue during the 3 year term of the contract.  As usual in such term contracts, there were hundreds of such works orders, ranging from minor maintenance to quite large sums.

3.  Both parties accept that this sub-contract was terminated on 31 March 1999, but there is a dispute, to which I shall return, as to whether this determination of the contract was by mutual consent or not.

4.  As of 1 April 1999 the Plaintiff’s obligations under the sub-contract (with one major exception) were taken over by Hung Wai Engineering Ltd. (“Hung Wai”) albeit that in their sub-contract, deductions from KCRC certified payments were to be 16% for all three years.

5.  The major exception was Works Order No. 9069 issued on 11 February 1999 at an estimated value of some $4 Million which involved re – roofing to KCRC station at Hung Hom to cure and prevent water leakage through the roof and skylights.

6.  The following figures were eventually agreed between the parties.  The value of work done by the Plaintiff was $11,512,500.66 which after the 19% deduction comes to $9,325,125.53.  The Plaintiff received payment from the Defendant in the sum of $5,145,180 and a further $500,000 under the Chinese Agreement (which is dealt with below).  The Plaintiff further agreed that various deductions were properly made in the sum of $1,427,407.43 plus an insurance premium of $9,336.68.  The balance is the Plaintiff’s primary claim i.e. $2,242,901.72.

7.  Against this admitted sum, the Defendant made various counterclaims, viz.

(1)  $60,000 for “management fees” from December 1998 for 4 months at $15,000 per month, which the Defendant sought to charge, unilaterally, for supervising the Plaintiff’s work during the last 4 months before termination.

(2)  $200,000 paid in cash to Mr. Li, a director of the Plaintiff on 9 June 1999, who had apparent authority to receive it on behalf of the Plaintiff, but about which the Plaintiff company claims to be unaware; thus it was not brought into account.

(3)  Two sums of $96,000 and $273,500 allegedly paid to Hung Wai on the Plaintiff’s behalf, for various miscellaneous items during the period May – November 1999 relating to supervising and remedying or completing certain works orders.

(4)  Four sums apparently paid to Hung Wai or Wai Lam by the Defendant, relating to remedial works for leakage at the KCRC Hung Hom station roof as follows –

Invoice Date	Amount
14.1.2002	$268,000
4.5.2002	$20,000
22.9.2004	$87,000
22.9.2004	$73,000

(5)  $1,683,539.90 being the Defendant’s claim for loss of income, representing the difference between the 16% deduction paid to Hung Wai and the 19%–21% deductions that would have been made before paying the Plaintiff, if the Plaintiff’s sub – contract had not been terminated on 31 March 1999.

8.  Before dealing with these counterclaims, it is necessary to resolve two fundamental disputes between the parties.  Firstly, the circumstances surrounding the termination of the sub-contract and secondly, the effect of the Chinese Agreement, by which the parties agreed to compromise and settle their disputes in January 2003.

TERMINATION OF THE SUB – CONTRACT

9.  I heard two very different accounts as to the circumstances of the termination.

10.  The Defendant claimed that soon after the sub-contract was signed, various problems arose with the Plaintiff: it failed to manage their staff competently, workers were unreliable, work orders were repeatedly late and insufficient cash flow meant that the Defendant often had to pay the Plaintiff’s invoices direct.  A warning letter was issued on 8 December 1999 and eventually Mr. Miao of the Defendant met Mr. Lau of the Plaintiff on 30 March 1999 where Mr. Miao says he terminated the sub-contract for poor performance and Mr. Lau accepted it.

11.  Mr. Lau, on the other hand, said that the work proceeded normally except for a few minor problems.  However in the first quarter of 1999, Mr. Miao tried to find fault wherever he could and withheld payments due.  He repeated urged Mr. Lau to surrender the sub-contract.  Eventually Mr. Lau succumbed to the economic pressure and reluctantly agreed.  The work was then promptly taken over by Hung Wai, which was run by the Plaintiff’s partner Mr. Li and Mr. Miao’s brother-in-law, who had been working for the Plaintiff.  The net result was that the same people largely ran Hung Wai, with the exception of Mr. Lau who was thus squeezed out.

12.  It was accepted by both sides that the letter of 8 December 1998 was the only written warning ever issued to the Plaintiff and that letter seems largely to have been precipitated by a meeting with KCRC on 1 December 1999.  The letter specifically threatened termination pursuant to clause 5(b) of the sub-contract, unless performance improved.  However, no such termination letter was ever issued.

13.  Instead the Defence pleaded that, by a letter dated 4 October 1999, the Defendant accepted the Plaintiff’s wrongful repudiation of the sub-contract which was thereby terminated with effect from 1 April 1999.  This letter did not make much sense, since Hung Wai had already taken over the sub-contract as from 1 April 1999.

14.  In fact the Plaintiff had already written to the Defendant by letter dated 31 March 1999 in these terms –

“Refer to meeting dated 30 March 1999, we are pleased to inform you that we agree to suspend and terminate the above mentioned contract from 1 April 1999.  Effect from 1 April 19999, the issued KCR building maintenance work order would be taken over by [the Defendant].”

15.  This letter was then followed by another dated the same date in identical terms save that the words “we agree to suspend and terminate” were replaced with “we agree to surrender”.  Neither of these letters is consistent with Mr. Miao’s version of termination by the Defendant or repudiation by the Plaintiff.

16.  Mr. Miao was unable to explain why two letters were issued.  Mr. Lau, however, said that the wording was changed at the request of Mr. Miao and he agreed.  He also agreed to add a list of all the works orders to be taken over by the Defendant, with the exception of the re – roofing order.  Mr. Miao never wrote back to disagree with either of these letters.

17.  In the end, I was left in no doubt but that the sub-contract was terminated by mutual consent; the remaining works (except re – roofing) were surrendered to the Defendant, who promptly sub-contracted the remainder of the contract to Hung Wai.

18.  There is no legal basis pleaded or proved to substantiate counterclaim (1) for management fees of $60,000, which is hence dismissed.

19.  Termination by mutual consent also disposes of counterclaim (5) for $1.68 odd Million for loss of income.  There is no suggestion that this was an agreed term of the surrender and in any event I was not satisfied that the 3% difference was the best that could be negotiated with Hung Wai.

THE CHINESE AGREEMENT

20.  By January 2001, the final account between the parties was almost agreed.  Even leaving aside the disputed items, which at that time related to counterclaims (1), (2) and (3) above, the sum outstanding but unpaid to the Plaintiff exceeded $2 Million.

21.  When no payment was forthcoming, correspondence ensued between the parties’ solicitors between January – November 2002 concerning the various claims and counterclaims, but without producing any result.

22.  Eventually the parties negotiated a settlement of their disputes between themselves and the terms were recorded in a document written in Chinese, dated 9 January 2003 and signed by both parties (the “Chinese Agreement”).

23.  In essence, the terms of the Chinese Agreement were as follows –

(1) The Plaintiff agreed to accept payment of a total sum of $1.5 Million in final settlement of all sums due under the sub – contract, payable by 4 instalments on certain fixed dates.

(2) The Plaintiff shall continue to perform its obligations under the sub – contract.  (At this time the only remaining obligation related to alleged defects in the re – roofing work).

(3) The Defendant agreed to carry out repair work to the KCRC roof at its own expense, without interference by the Plaintiff, but such works being confined to surface waterproofing works.

(4) In the event that KCRC are still dissatisfied with the work, then the Plaintiff shall execute repair works to KCRC’s satisfaction at the Plaintiff’s own expense.  If no complaints are received from KCRC during the succeeding raining season after repair work is completed, KCRC’s acceptance shall be deemed.

(5) In the event that further repair works are necessary, the date of any outstanding instalment payments by the Defendant shall be postponed until the work is accepted by KCRC.

(6) Excepting only any postponed payment under the last clause, if the Defendant fails to pay any instalment by its due date, the Plaintiff shall be entitled to claim for the sums due beyond the $1.5 Million agreed.

(7) If the Plaintiff fails to carry out the repair work in accordance with this agreement, the Plaintiff shall indemnify the Defendant for all loss and damage occasioned by such failure and the Defendant shall be released from the obligation to make payment to the Plaintiff pursuant to this agreement.

24.  At this point, a brief chronology of the re – roofing works is necessary.

11.2.1999	Re – roofing works order issued
4.1.2000	KCRC issued certificate of practical completion for re – roofing work
19.7.2000	KCRC issue defects rectification list showing leakage along or near the expansion joint on the roof
22.1.2001	KCRC letter complains of leaks in some areas
16.2.2001	Plaintiff’s letter records a flooding test was carried out, witnessed by KCRC with no sign of water penetration
9.3.2001	KCRC letter asks for rectification in four locations where water penetration is observed
June 2001	Gutters are installed in areas below the roof to catch leaks and minimise inconvenience
25.9.2001	KCRC letter suggesting to focus on the skylight locations
12.11.2001	Warning letter from Defendant that rectification works will be effected and backcharged to the Plaintiff
14.1.2002	Invoice for $268,000 from Hung Wai for roof leakage works (part of counterclaim (4))
10.4.2002	KCRC letter complaining of renewed leakage
25.4.2002	Invoice for $20,000 from Hung Wai to replace gutters (part of counterclaim (4))
25.11.2002	KCRC letter seeking long – term remedial solution
9.1.2003	Chinese Agreement signed
14.1.2003	Defendant pays 1st instalment of $500,000
9.5.2003	Defendant completes its remedial works as per the Chinese Agreement
13.5.2003	KCRC letter advises water leakage continues.
14.5.2003	Date for payment of 2nd instalment of $400,000, if conditions met. No payment made.
10.6.2003	Defendant requests remedial proposals from Plaintiff, failing which Defendant will engage another contractor to carry out such work. Plaintiff does no further work.
10.10.2003	Plaintiff submits expert report from Mr. Wong Him Sun opining that leakage problems are structural, whereby shear stress cracks are caused in substantial wind load conditions.
28.4.2004	KCRC letter disputes leakage is caused by typhoon conditions.
14.6.2004	Revised report issued by Mr. Wong with similar conclusions.
13.8.2004	KCRC letter reporting water leaking from one skylight on the roof.
22.9.2004	Invoice for $87,000 from Wai Lam Decoration Engineering Co. for repairs to water leakage on the roof.
22.9.2004	2nd Invoice for $73,000 from Wai Lam for Decoration Engineering Co. for roof leakage repairs.
22.12.2004	Writ served.
19.6.2006	KCRC letter complains of water dripping in one area.

25.  From this uncontested material I reach the following conclusions –

(1) That the Defendant fulfilled its obligations under the Chinese Agreement by paying the first instalment of $500,000 and by carrying out its own repair works to the roof between March to May 2003 (albeit unsuccessfully).

(2) That the Defendant’s obligation to pay the second and following instalments was postponed because notice of dissatisfaction was received from KCRC the day before the second instalment was due on 14 May 2003.

(3) That the Plaintiff failed to carry out any further repair works itself, whereby it became liable to indemnify the Defendant for any work carried out to rectify the situation (subject only to the expert conflict referred to below).

26.  I then had to consider the meaning of the final clause of the Chinese Agreement which provided –

“Should [the Plaintiff] fail to carry out the repair work in accordance with this agreement, [the Plaintiff] shall indemnify [the Defendant] for all losses and damages incidental to and occasioned by such failure, [the Defendant] shall at the same time be released from the obligation to make payment to [the Plaintiff] pursuant to this agreement.”

27.  At first blush, this clause might be construed to mean that if the Plaintiff fails to carry out repairs, then the Defendant is released completely from making any further payments.

28.  On reflection however, I am convinced this is not the correct construction to reflect the presumed common intention of the parties and to give it business efficacy.  The clause immediately goes on to provide an indemnity for the Defendant in the event of the Plaintiff’s failure.  If the remaining defects could be rectified quickly for a small sum, albeit by someone other than the Plaintiff, can the parties really have intended that the Plaintiff would thereby forfeit the balance for all time?

29.  The answer is surely not.  I am satisfied that, in its context, this clause only operates to release the Defendant temporarily from making payment until the repair work is concluded to KCRC’s satisfaction.  Thereupon, the Defendant is obliged to pay.  This accords with the whole tenor of this “home made” agreement, whereby the parties agreed to compromise all their disputes with one another into a payment of $1.5 Million by the Defendant to the Plaintiff, so long as the roof leakage problem could be tackled in one way or another to KCRC’s satisfaction.

30.  After the final repair works were completed in September 2003, there is no suggestion of any further complaints by KCRC regarding leakage to the roof before the end of the following rainy season.  Clause 3 then operates to deem KCRC’s acceptance, at which point the Defendant becomes obliged to pay the balance of $1 Million, less any sums due under the indemnity.

THE EXPERT EVIDENCE

31.  It remains only to consider the conflict in the expert evidence, as to the cause of the leakage problems to the roof.

32.  Mr. Wong produced the 2 reports referred to above and gave evidence.  His view, essentially, was that there was a structural problem with this asymmetrical building.  He found that columns were only installed on one side of the expansion joint.  After analysis of the structure, he concluded that the visible cracks were caused by substantial lateral movement on the two sides of the expansion joint induced during high wind load conditions equivalent to Typhoon No. 8 strength or above.

33.  Mr. Philip So gave evidence for the Defendant.  Without performing any calculations of his own, he opined that the design was a conventional one and wind loadings for a comparatively low building of 8m height, as in this case, should not be very high.  He accepted Mr. Wong’s calculation of 1 – 3 mm over an 8m interval but thought that the expansion joint could accommodate this level of movement without distress.

34.  The position was further complicated by the fact that KCRC apparently did some repair work to the building after Mr. Wong took his photos, but no one knows what exactly was done.

35.  I was impressed by the careful and detailed calculations performed by Mr. Wong but noted his concession that wind loadings would not cause any real distress until wind speeds equivalent to Typhoon No. 8 or above occurred.

36.  I was helpfully provided with Hong Kong Observatory statistics which showed such typhoon conditions only occurred on these dates –

26 September 1999

5 – 6 July 2001

25 July 2001

11 September 2002

23 – 24 July 2003

2 September 2004

37.  I noted from the Chronology set out above that after practical completion was certified in January 2000, the next No. 8 typhoon conditions did not occur until July 2001, yet there were complaints of leakage by KCRC in July 2000, and January and March of 2001.

38.  I also noted that the areas of leakage as shown on attached plans involved not just the expansion joint, but also the skylights and other areas.

39.  In the end, I was not convinced that there was sufficient correlation either as to time or location for me to conclude that the leakage to the roof owed its origin to the structural problems described by Mr. Wong.  I could only conclude, therefore, that it was more likely than not an installation or maintenance issue, despite the lack of any direct evidence of faulty work, apart from the various water leaks, which undoubtedly occurred.

CONCLUSION

40.  Accordingly, I find that the various claims and counterclaims of the parties which pre – existed the Chinese Agreement signed on 9 January 2003 were settled by a compromise whose terms were set out in the Chinese Agreement.

41.  In itself, that finding disposes of the Plaintiff’s original claims as well as all the counterclaims of the Defendant listed above, except the last two items in counterclaim (4).

42.  As for those two items, totalling $160,000, I accept from the invoices and receipts that the work was done and paid for in response to KCRC complaints of leakage – see chronology above.  It is also clear that the Plaintiff was warned by letter dated 10 June 2003 that if it did not do the work itself, the Defendant reserved the right to employ others to do so.

43.  The result is that I find for the Plaintiff in the sum of $1 Million being the balance due under the Chinese Agreement, less the counterclaims referred to in the last paragraph i.e. $160,000 producing a judgment sum in the Plaintiff’s favour of $840,000.

44.  I order interest thereon at the rate of prime plus 1% from the date of the writ until judgment and thereafter at the judgment rate.

45.  Since the Plaintiff is the overall net winner, I make a costs order nisi of the action, including all claims and counterclaims, in favour of the Plaintiff.