Dates of Hearing : 22-24, and 29 May 2006
Date of Judgment : 7 July 2006
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J U D G M E N T
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Introduction
1. This action arose out of the refurbishment works carried out at the Sheraton Hotel, 20 Nathan Road, Kowloon in 1997 and 1998. The parties were subcontractors in a series of subcontracts in respect of some of the works. As between them, the 2nd defendant was the head subcontractor, the 1st defendant the 2nd defendant’s subcontractor, and the plaintiff the 1st defendant’s subcontractor.
2. Most of the background facts leading to this action are not in dispute. They are summarized below.
Tenders
3. On 13 December 1996, PY-ITC Construction Limited (“PY Construction”) was invited to tender for the main contract refurbishment works at the Sheraton Hotel.
4. On or about 6 January 1997, the plaintiff submitted to D&C Engineering (HK) Limited (“D&C”), another associated company of PY Construction, a cost breakdown for carrying out the main contract refurbishment works in the sum of HK$184,439,472.30.
5. On or about 8 January 1997, PY Construction submitted a tender to the employer, Consolidated Hotels Limited for the main contract refurbishment works in the sum of HK$190,036,624.
6. On or about 24 February 1997, the plaintiff submitted a revised tender summary for the refurbishment works in the sum of HK$181,558,371.
7. On or about 11 March 1997, PY Construction handed over the site to the plaintiff to commence works.
8. On or about 4 April 1997, the plaintiff submitted to PY Construction its consolidated tender submission for refurbishment works in the sum of HK$180,197,571.
The main contract
9. On 10 April 1997, the main contract for the refurbishment works at the Sheraton Hotel was awarded to PY Construction for a sum of HK$180,540,940. Subsequently PY Construction entered into a formal main contract with Consolidated Hotels Limited dated 23 February for that amount.
The subcontracts
10. In about early or mid April 1997, PY Construction subcontracted a portion of the main contract works (“the Works”) to the 2nd defendant.
11. By countersigned letter of award dated 23 April 1997 (“the Letter of Award”), the 2nd defendant subcontracted the Works to the 1st defendant for the contract sum of HK$43,820,571.
12. By countersigned letter dated 30 April 1997 (“the Subcontract”), the 1st defendant further subcontracted the Works to the plaintiff, also for the contract sum of HK$43,820,571. In other words, the 1st defendant would make no profit out of the whole subcontracting exercise.
The cheque exchange procedure
13. How the 1st defendant should pay the plaintiff was prescribed by Clause 3 of the Subcontract. It read :
“All monies and other consideration received by [the 1st defendant] from [the 2nd defendant] with respect to the captioned Contract shall be paid to [the plaintiff’s] account in the following procedure:
Upon receipt of the notice of payment from [the 2nd defendant], a cheque bearing the same amount in favour of [the plaintiff] shall be issued by [the 1st defendant] and deposit with [the 2nd defendant] in exchange for the payment from [the 2nd defendant] within three working days from the day of receipt of the notice of payment and [the plaintiff] shall collect the aforesaid cheque from [the 2nd defendant] accordingly.”
14. In reality, the 2nd defendant would pay the 1st defendant by cheque. Thus, a so-called “cheque exchange procedure” was envisaged under Clause 3 of the Subcontract whereby for a particular payment, the 1st defendant had to deposit with the 2nd defendant a cheque made in favour of the plaintiff for the same amount of and in exchange for the 2nd defendant’s cheque made payable to the 1st defendant. The plaintiff would then collect the 1st defendant’s cheque from the 2nd defendant.
Interim payments
15. Pursuant to the Letter of Award, the 2nd defendant made 12 interim payments to the 1st defendant totalling HK$34,842,966.34 between 9 May 1997 and 24 November 1998. The 1st defendant in turn made 12 interim payments to the plaintiff. The total amount of those 12 interim payments is HK$34,793,673.61 according to the plaintiff and HK$36,093,673.61 according to the 2nd defendant.
16. The difference of HK$1,300,000 (HK$36,093,673.61 – 34,793,673.61) arose out of a dispute over the interim payment made on 7 May 1997. It is common ground that the 1st defendant paid HK$2,000,000 to the plaintiff by cheque on that day. The 2nd defendant’s case is that the whole sum of HK$2,000,000 was the interim payment made under the Subcontract on that date. But the plaintiff alleges only HK$700,000 was. The balance of HK$1,300,000 was paid in connection with other projects.
17. By letters dated 19 July 1999 and 16 November 1999 (“the Letters of Authorization”), the 1st defendant authorized the 2nd defendant to make future payments due under the Letter of Award direct to the plaintiff. Thus, between 13 August 1999 and 19 January 2001, the 2nd defendant made three direct payments to the plaintiff in the total sum of HK$2,449,445.41 (“the Direct Payments”). Later the 1st defendant revoked the direct payment authorization by letter dated 8 August 2001 (“the Revocation Letter”).
18. The 2nd defendant agreed with the 1st defendant a final account dated 1 February 2002 for the amount of HK$43,992,254.55. The 2nd defendant then made two further payments to the 1st defendant totalling HK$3,500,220.26 (“the Disputed Sums”) : HK$2,500,000 on 6 February 2002 and HK$1,000,220.26 on 13 July 2002.
Commencing the present action
19. No final account was agreed between the plaintiff and the 1st defendant. On 10 October 2002, the plaintiff commenced the present action against the 1st defendant, claiming damages as its subcontractor.
The allegation of assignment
20. The plaintiff did not sue the 2nd defendant when this action was first commenced. On 24 December 2002, the plaintiff’s former solicitors, Messrs Norman M.K.Yeung & Co. (“NMKY”) wrote to the 2nd defendant alleging that the whole subcontracting exercise was artificial and claiming that the plaintiff was entitled to be paid by the 2nd defendant directly for the Works.
21. The 2nd defendant’s solicitors then asked NMKY to identify the legal basis upon which the claim against the 2nd defendant was put forward. By letter dated 11 March 2003, NMKY asserted that the Subcontract was in fact an assignment. By letter dated 7 April 2003, the 2nd defendant’s solicitors refuted that allegation.
The Garnishee Proceedings
22. The parties then engaged in the garnishee proceedings in HCA6903/2000 (“the Garnishee Proceedings”).
23. On 14 October 2003, a garnishee order to show cause was issued to the 2nd defendant by a judgment creditor of the 1st defendant in that action. The judgment creditor sought to garnishee the final account payment that the 2nd defendant was to pay the 1st defendant. By summons dated 13 November 2003, the plaintiff sought to intervene in the Garnishee Proceedings and claimed entitlement to the payment on the basis that the Subcontract was an assignment. The 1st defendant then paid into court the final account payment in the sum of HK$3,199,742.80.
24. On 2 April 2004, the master dismissed the plaintiff’s application to intervene. The payment into court by the 2nd defendant was then paid out to the judgment creditor on 21 April 2004.
Claming against the 2nd defendant
25. After it had applied to intervene in the Garnishee Proceedings, the plaintiff joined the 2nd defendant in these proceedings on 29 December 2003 on the basis that the Subcontract was an assignment.
26. By summons dated 2 July 2004, the 2nd defendant applied to strike out the plaintiff’s claim (“the Striking Out Application”). By summons dated 5 November 2004, the plaintiff sought to amend its Statement of Claim, alleging that in addition to the assignment, there was an oral agreement in relation to payment of funds for the works between the plaintiff and the 2nd defendant.
27. By order dated 17 November 2004, Reyes J struck out the plaintiff’s claim based on assignment but gave leave to the plaintiff to apply to amend the claim based on the alleged oral agreement.
28. Eventually on 22 April 2005, the plaintiff filed the latest version of its statement of claim, the Re-re-amended Statement of Claim (“RRASOC”). The plaintiff’s pleaded case against the 2nd defendant issummarized in paragraphs 29 to 32 below.
29. On or about 11 March 1997, the plaintiff and PY Construction and/or the 2nd defendant entered a contract (partly oral, partly in writing and partly by inference of conduct) (“the Contract”) whereby PY Construction and/or the 2nd defendant agree to award the sub-contract to carry out the Works to the plaintiff. But in or about mid-April 1997, the 2nd defendant proposed to the plaintiff to terminate the Contract and award the subcontract to carry out the Works to the 1st defendant for various commercial reasons. Eventually some time in mid-April 1997, the plaintiff and the 2nd defendant entered into an oral agreement (“the Oral Agreement”) that “in consideration of the plaintiff’s agreement to :
(a) the termination of the Contract with the 2nd defendant;
(b) the 2nd defendant’s award of the contract of carrying out the Works to the 1st defendant; and
(c) the 1st defendant subcontracting the carrying out of the Works to the plaintiff,
the 2nd defendant devised and agreed to the strict compliance with the following payment arrangements (“the Arrangement”) :
(i) once the 2nd defendant was ready to issue any payment to the 1st defendant, the 1st defendant would be informed by the 2nd defendant to issue a cheque bearing the same amount and made payable to the plaintiff and the relevant cheque would be put in custody of the 2nd defendant;
(ii) at all material times, it was the plaintiff but not the 1st defendant who submitted the applications for payment to the 2nd defendant;
(iii) upon presentment of the relevant application for payment by the plaintiff to the 2nd defendant after the Works had been carried out, the 2nd defendant would tender a cheque to the 1st defendant for payment; and
(iv) at the same time the 2nd defendant would also tender the 1st defendant’s cheque of the same amount to the plaintiff.[1]
30. Further, by an oral agreement made at the time of the Oral Agreement, the consideration for which was the plaintiff entering into the Oral Agreement, the 2nd defendant guaranteed that the plaintiff would receive all of the payments for carrying out of the Works (“the Collateral Guarantee”).[2]
31. The 12 interim payments by the 1st defendant to the plaintiff totalling HK$34,793,673.61 were made pursuant to the Arrangement and the Collateral Guarantee.[3]
32. The Oral Agreement was subsequently varied by another oral agreement made in or about July 1997 whereby PY Construction agreed to make future payments direct to the plaintiff (“the New Arrangement”).[4] The Direct Payments were then made to the plaintiff.[5] However, in breach of the “varied term of the Oral Agreement enunciated in the New Arrangement”[6] and the Collateral Guarantee[7], the 2nd defendant paid the Disputed Sums to the 1st defendant. The plaintiff therefore claims for damages represented by the Disputed Sums.
The 2nd defendant’s defence
33. On liability, the 2nd defendant denies in its Re-re-amended Defence the existence of the Oral Agreement, the New Arrangement and the Collateral Guarantee. Alternatively, it pleads that neither the Oral Agreement nor the Collateral Guarantee is supported by consideration.
34. On quantum, the 2nd defendant pleads that the plaintiff is not entitled to recover in full the Disputed Sums. The sum of HK$1,300,000 referred to in paragraph 16 above has to be taken into account, which would reduce the quantum to HK$2,200,220.06.
The trial
35. On 6 June 2004, the 1st defendant was ordered to be wound-up. On 10 August 2004, Reyes J directed that the proceedings against the 1st defendant be stayed. The trial before me therefore only concerns the plaintiff’s claims against the 2nd defendant.
36. The plaintiff called four witnesses : Mr Chu Yuen Fan, one of its directors (“Mr Chu”); Mr Chan Yiu Ming, a former director of the 1st defendant (“Mr Y.M. Chan”); Mr Lau Siu Fai, a former contracts manager of the 1st defendant (“Mr Lau”) and Mr Chu Kai Fan (“Mr K.F. Chu”), another director of the plaintiff. The plaintiff had filed a witness statement of Mr Lee Chun Wan (“Mr Lee”), a former project director of the 2nd defendant handling the Sheraton Hotel project at the material times. But having lost its contact with Mr Lee, the plaintiff has been unable to call him to give oral evidence.
37. The 2nd defendant also called four witnesses : Mr Chan Fung Chun, an administrator of the 2nd defendant; Mr Man Wai Ming, a director of the 2nd defendant; Mr Herbert Ho Ping Hing, a former commercial manager of the 2nd defendant (“Mr Ho”); and Mr Eric Chung Yiu Ming (“Mr Chung”), another director of the 2nd defendant.
Discussion
38. The following undisputed facts are quite special in cases of this kind. First, the arrangement whereby the 1st defendant became the 2nd defendant’s subcontractor was entirely for the 1st defendant’s benefit, namely, to boost its turnover for a future listing on the Hong Kong Stock Exchange. Second, the 1st defendant received no profit from its subcontract with the 2nd defendant because it subcontracted the Works to the plaintiff for the same price. Third, the interim payments were made up until November 1998 in general terms in accordance with the cheque exchange procedure described in Clause 3 of the Subcontract. Although Mr Lau and Mr Chung had however come across it before, the cheque exchange procedure was rather unusual.
39. Despite these special features, the legal position remains that the plaintiff was the subcontractor of the 1st defendant. It is the 1st defendant who is liable under the Subcontract to pay the plaintiff for the Works. When the plaintiff now seeks to claim directly against the 2nd defendant, the head subcontractor, it must prove on a balance of probabilities the existence of the Oral Agreement, the New Arrangement and the Collateral Guarantee as alleged.
(A) How the plaintiff’s claims were formulated
40. I first look at how the plaintiff had formulated their claim against the 2nd defendant, which is quite telling.
41. As noted, the plaintiff first asserted their rights against the 2nd defendant in the correspondence before action in April 2003 on the basis that the Subcontract was an assignment. That was repeated when the plaintiff sought to intervene in the Garnishee Proceedings in November 2003 and to join the 2nd defendant in these proceedings in December 2003. The plaintiff had thus far never asserted that there existed the Oral Agreement, the New Arrangement or the Collateral Guarantee under which the 2nd defendant was liable. The plaintiff so asserted for the first time in the proposed amendment to the Statement of Claim in November 2004, almost a year after the 2nd defendant had been joined in these proceedings.
42. I fail to see any credible reason why the plaintiff would have failed to rely on any of these oral agreements in the correspondence before action, the Garnishee Proceedings or in these proceedings before November 2004 and had taken so long to propound their claims in the present form, if those oral agreements, as now alleged, did exist at the outset of the parties’ dealings. Plainly, the plaintiff would have raised them long before on the many occasions when there were issues over payment to them had they any validity.
43. In my judgment, the way the plaintiff had formulated their claim against the 2nd defendant casts considerable doubt on its veracity.
(B) Mr Chu’s evidence
44. I next look at Mr Chu’s evidence, on which the plaintiff heavily relies. In his first witness statement filed on 5 December 2005, which was adopted as his evidence in chief, Mr Chu had this to say :
“7. In or around mid April 1997, [Mr Lee] on behalf of the 2nd Defendant proposed to me to terminate the Contract and award the carrying out of the Works to the 1st Defendant for commercial reasons particularized as follows :-
Particulars
(a) in or about mid April 1997, at the office of [Mr Lee] at Paul Y Centre, [Mr Lee] on behalf of the 2nd Defendant proposed to me on behalf of the Plaintiff that in order to assist the listing of the 1st Defendant in the Stock Exchange of Hong Kong and to improve the cash flow picture of 1st Defendant, the 2nd Defendant was to award the contract to carrying out the Works to the 1st Defendant (‘the Proposal’);
(b) I objected to the Proposal and informed [Mr Lee] that the Plaintiff would in the circumstances cease to carry out the Works immediately;
(c) [Mr Lee] then reminded me that in order to keep a good working relationship with the 2nd Defendant, the Plaintiff should seriously consider the Proposal and he further asked me under what circumstances would the Plaintiff agree to continue carrying out the Works;
(d) I demanded from [Mr Lee] that the 2nd Defendant should guarantee that the Plaintiff would receive the payments in respect of the Works from the 2nd Defendant and arrangements had to be made to make sure that the Plaintiff would receive the aforesaid payments from the 2nd Defendant through the 1st Defendant if the Plaintiff were to continue carrying out the Works;
(e) [Mr Lee] made a promise to me that the said arrangements would be made.
8. In or about mid April 1997, 1 or 2 days after the said meeting with [Mr Lee] as stated in the preceding paragraph, I met Mr Alfred Siu (‘Mr Siu’), a director of the 1st Defendant at [Mr Siu’s] office at 3rd Floor, Malaysia Building, Wan Chai, Hong Kong. In the said meeting, [Mr Siu] on behalf of the 1st Defendant promised and agreed to the following terms and conditions with me on behalf of the Plaintiff that :
(a) the 1st Defendant would sub-contract the Works to the Plaintiff;
(b) the 1st Defendant would not be making any profits nor would the 1st Defendant charge the Plaintiff any markup costs;
(c) all the Works would be carried out by the Plaintiff and the 1st Defendant would not take part in carrying out the Works at all; and
(d) the 1st Defendant would pay the Plaintiff a sum of HK$700,000.00 as an advanced payment of the Works and a sum of HK$1,300,000.00 being the outstanding accounts owing from the 1st Defendant to the Plaintiff in respect of other projects.
9. 1 or 2 days after the said meeting with [Mr Siu] as stated in the preceding paragraph, I met [Mr Lee] at the Site and [Mr Lee] on behalf of the 2nd Defendant entered into an oral agreement with me on behalf of the Plaintiff (‘the Oral Agreement’) that in consideration of the Plaintiff’s agreement to :
(a) the termination of the Contract with the 2nd Defendant;
(b) the 2nd Defendant’s award of the contract of carrying out of the Works to the 1st Defendant; and
(c) the 1st Defendant sub-contracting the carrying out of the Works to the Plaintiff;
the 2nd Defendant devised and agreed to the strict compliance with the following payment arrangements (‘the Arrangement’) :-
Particulars
(i) upon presentment of the relevant application for payment by the Plaintiff to the 2nd Defendant after the relevant part of the Works that had been completed, the 2nd Defendant would certify the amount of payment and inform OLS to issue a cheque bearing the certified amount and made payable to the Plaintiff (‘the said cheque’) and the 1st Defendant would deliver the said cheque to the 2nd Defendant’s office at Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong and the said cheque would be put in custody of the 2nd Defendant;
(ii) at all material times, it would be the Plaintiff but not the 1st Defendant who submitted the applications for payment to the 2nd Defendant;
(iii) upon receipt of the said cheque, the 2nd Defendant would then tender a cheque for the certified amount to the 1st Defendant for payment and also notify the Plaintiff to collect the said cheque issued by the 1st Defendant at its office;
(iv) the Plaintiff would then send its representative to the 2nd Defendant’s office to collect the said cheque issued by the 1st Defendant (the said cheque would be dated 1 or 2 days after the 2nd Defendant’s cheque so that there would be sufficient time for the 1st Defendant to clear the cheque from the 2nd Defendant);
10. At the time of the Oral Agreement at the Site, in consideration of the Plaintiff entering into the Oral Agreement, [Mr Lee] on behalf of the 2nd Defendant orally gave a collateral guarantee to the Plaintiff to guarantee that the Plaintiff would receive all of the payments for the carrying out of the Works (‘the Collateral Guarantee’).”
45. Contrast the above with what Mr Chu had deposed to in his affirmations filed in the Garnishee Proceedings on 12 November 2003 (“the 12/11/03 Affirmation”) and the Striking Out Application on 9 August 2004 (“the 9/8/04 Affirmation”).
46. In the 12/11/03 Affirmation, Mr Chu alleged that the Subcontract was an assignment. He made no mention of the Oral Agreement or the Collateral Guarantee at all. He did not refer to any meeting that he had with Mr Lee in which Mr Lee proposed the Arrangement to him or that the parties entered into the Oral Agreement. The cheque exchange procedure was proposed by Mr Siu, then chief executive and director of the 1st defendant, and not by Mr Lee. It was Mr Chu who asked the 1st defendant to authorize the 2nd defendant to make the Direct Payments to the plaintiff. But he did not mention the New Arrangement at all.
47. In the 9/8/04 Affirmation, Mr Chu gave a different version. He said that in early April 1997, Mr Lee told him that the subcontract would be awarded to the 1st defendant. At a meeting in or about mid-April 1997, Mr Lee proposed the Arrangement to him and the Oral Agreement was entered into by Mr Lee on behalf of the 2nd defendant and him on behalf of the plaintiff. Subsequent to that meeting, Mr Chu had another meeting with Mr Siu who assured him that the Arrangement would be carried out by the 1st defendant. Mr Chu made no mention of the Collateral Guarantee or the New Arrangement when he referred to the events giving rise to the Direct Payments.
48. Naturally, Mr Chu was cross-examined on the different stories in his affirmations and witness statement. He repeatedly said that the plaintiff’s then solicitors had been told about all the oral agreements. Plainly, he is suggesting that for some reasons unknown to him or due to the fault of the plaintiff’s legal advisers, the claims were not advanced reliant on those agreements. I am unable to accept this explanation. No reasonably competent lawyers would have failed to mention those oral agreements and place reliance on them had they been told of the name by their client. Mr Chu was obviously making it up as he went along in order to explain away the glaring inconsistencies in his evidence.
49. Mr Chu was also cross-examined on the inconsistencies in his evidence about the sequence of meetings that he had with Mr Siu and Mr Lee which gave rise to the Oral Agreement. Mr Chu gave poor and unsatisfactory explanations. He said in the 9/8/04 Affirmation, he mentioned that the second meeting that he had was with Mr Lee because Mr Siu was not present. He then said that he had two meetings with each of Mr Lee and Mr Siu. When further pressed about the second meeting with Mr Siu, which he had never mentioned before, he retracted and said that he was confused. In the end, he stuck to the version in his witness statement. He then said that Mr Lee told him at the second meeting that he had come up with the Arrangement with Mr Siu. At the meeting he had with Mr Siu, he regarded what Mr Siu said about the Arrangement as a repetition of what Mr Lee had said in the second meeting.
50. On the New Arrangement, Mr Chu had this to say in his witness statement :
“17. In or about July 1999, owing to the change in the shareholdings and control of the 1st Defendant, at my request, the 1st and 2nd Defendants agreed to vary the terms of the Arrangement to ensure the Plaintiff’s receipt of the outstanding payment in consideration of the Plaintiff’s consent to discharge the 1st and 2nd Defendants’ obligation from making the balance payments to the Plaintiff pursuant to the Arrangement. In that, the 2nd Defendant agreed to make direct payments to the Plaintiff commencing from August 1999 (‘the New Arrangement’).
Particulars
(a) in or about July 1999, at the office of [Mr Ho] at Paul Y. Centre, I on behalf of the Plaintiff, [Mr. Y.M. Chan] on behalf of the 1st Defendant and [Mr Ho] on behalf of the 2nd Defendant agreed that the terms of the Arrangement be varied and the 2nd Defendant was to make direct payment to the Plaintiff commencing from August 1999;
(b) by a letter dated 19 July 1999 from the 1st Defendant to the 2nd Defendant, the 1st Defendant authorized the 2nd Defendant to make payments to the Plaintiff of any sums that might be payable by the 2nd Defendant to the 1st Defendant in relation to ‘the Refurbishment of Sheraton Hotel project’, i.e. the Works. …
18. By a letter dated 16 November 1999 from the 1st Defendant to the 2nd Defendant, the 1st Defendant confirmed that the New Arrangement would be continued until its further notice …”
51. Mr Chu’s evidence does not sit well with the documentary evidence. The Letters of Authorization contained no reference to the New Arrangement. The Letter dated 19 July 1999 stated that 1st defendant authorized direct payment in order to simplify the payment process. But the 1st defendant expressly reserved the right to revoke the authorization by giving three days’ notice. The Letter dated 16 November 1999 reiterated that the 1st defendant agreed to the direct payment until further notice. The 1st defendant’s right to revoke direct payment, which it did exercise by virtue of the Revocation Letter, was wholly inconsistent with the New Arrangement. Further, in the receipts for direct payment for payment No.13 (undated) and No.14 (dated 29 December 1999) signed by Mr Chu, the plaintiff made no reference to the New Arrangement either. It went on to state :
“We are the sub-contractors to [the 1st defendant] for the above Sub-contract. The payment is now paid direct to us upon our requests to [the 1st defendant] in order to simplify the payment process and release our cash flow problems. We have reached agreement with [the 1st defendant] for such arrangement.”
Those receipts do not support the plaintiff’s case on the New Arrangement at all.
52. Mr Chu’s oral testimony under cross-examination did not advance the plaintiff’s case on the New Arrangement a bit. It was put to him that he did have a meeting with Mr Ho but no oral agreement as alleged by him was reached. The following questions and answers ensued :
“Q. I suggest to you that there wasn’t, Mr Chu.
A. In the meetings amongst me, YM Chan and Mr Herbert Ho, Mr Herbert Ho principally speaking would not object to it. He required YM Chan to write a letter to Paul Y and then he would take the -- he would show that particular letter to the legal department of his company.
Q. What he said to you was that he wasn’t authorized to make such an agreement and therefore he wanted a letter from [the 1st defendant], confirming what the arrangement was to be; that’s correct, isn’t it?
A. I agree.
Q. There was no agreement reached at that meeting, was there?
A. Herbert Ho at that time did not object to it, so I took it that there was no objection at least from him.
Q. He told you that he didn’t have authority to agree to it, didn’t he, so he couldn’t agree?
A. Well, because Hebert was the second executive that I saw from Paul Y, and I believe that he would make such an arrangement for me.”
In re-examination, Mr Chu reiterated the point that Mr Ho did not object to the arrangement and agreed to it.
53. Plainly, even from Mr Chu’s own evidence, Mr Ho had not reached any oral agreement in terms of the New Arrangement with him at the meeting. The fact that Mr Ho had no objection, even if Mr Chu’s evidence on this point were to be accepted, is neither here nor there. For Mr Ho did not have such authority and had to confirm the matter with the legal department of his company. He could not have made any agreement if he did not have such authority to begin with. The best Mr Chu can say is that he assumed that Mr Ho could make the arrangement for the plaintiff. But that can hardly amount to an oral agreement as alleged.
54. In re-examination, Mr Chu asserted for the first time in his evidence that there was a specific discussion and agreement between him, Mr Y.M. Chan and Mr Ho at the meeting in July 1999 thus :
“The agreement was if, in future, there was no direct payment, then we would be going back to the cheque exchange agreement. This was made very clear amongst the three of us and also Hebert agreed to that.”
This assertion is not pleaded. It is also contrary to the plea in the RRASOC that the consideration for the New Arrangement was the discharge of the Oral Agreement. It is neither mentioned in Mr Chu’s witness statements nor Mr Y.M. Chan’s evidence. Mr Y.M. Chan was not even asked about it in his oral testimony. This assertion is obviously untrue. And it demonstrates Mr Chu’s propensity quite vividly. He could and was willing to make things up in order to bolster the plaintiff’s claim against the 2nd defendant.
55. Mr Chu’s evidence on the following matters also demonstrates that he is an unsatisfactory witness.
56. First, in the 11/12/03 Affirmation, Mr Chu said he was surprised to learn that by letter dated 7 April 2003, the plaintiff’s solicitors told him that the Disputed Sums were paid to the 1st defendant without his knowledge or consent. Undoubtedly, he tried to convey the impression that the plaintiff first learnt of the revocation of authorization for direct payment and the payment of the Disputed Sums by the letter of 7 April 2003. However, back in February 2002, Mr Chu had already learnt of the revocation of the authorization for direct payment. For in his witness statement, he said that in or about February 2002, Mr Ho had told him over the phone that the 1st defendant had already revoked the authorization for direct payment to the plaintiff. And in or about April 2002, Mr Ho told him over the phone that the 2nd defendant had already paid HK$2,500,000 to the 1st defendant in February 2002.
57. Second, when Mr Chu learnt of the payment of HK$2,500,000 by the 2nd defendant to the 1st defendant in February 2002, he did nothing, although he alleged what the 2nd defendant had done was in breach of the Oral Agreement and the Oral Guarantee. He said he believed that the 1st defendant would release the same sum to the plaintiff and he did not issue any immediate demand to the 2nd defendant in order to keep a good working relationship with the 2nd defendant. I am unable to accept this explanation. According to Mr Chu, the New Arrangement was there to ensure that the plaintiff would be properly and promptly paid by the 2nd defendant. When the 2nd defendant acted in flagrant breach thereof by making the payment of HK$2,500,000 and indicating that it would continue to do so in respect of further payments, the plaintiff should have written to the 2nd defendant, putting in on record that the 2nd defendant was in breach and demanding the 2nd defendant to rectify their breach.
58. Third, as noted in paragraph 16 above, the parties disputed if the sum of HK$1,300,000 was paid in connection with the Sheraton Hotel project or some other projects. It is Mr Chu’s evidence in paragraph 14 of his supplemental witness statement filed on 20 April 2006 that the said sum was paid in connection with three other projects under which the plaintiff had carried out work for the 1st defendant. But his evidence is inconsistent with the documentary evidence. In the without prejudice correspondence between the plaintiff and the 1st defendant attached to the plaintiff’s letter dated 30 April 2002, the said sum of HK$1,300,000 was expressly described as the deposit for the Sheraton Hotel project. As noted, it is the 2nd defendant’s case that the said sum of HK$1,300,000 was included in the cheque of HK$2,000,000 dated 3 May 1997. Mr Chu signed a receipt dated 5 May 1997 for that cheque. And it was clearly stated in that receipt that the cheque was deposit payment for the Sheraton Hotel project. Under cross-examination, Mr Chu tried to refute what was contained in the documentary evidence. I will not detail them here. Suffice it to say that having carefully considered his evidence, I find his explanation disingenuous.
59. Fourth, it is Mr Chu’s evidence that upon the request of Mr Alfred Siu of the 1st defendant, the plaintiff issued an invoice of HK$1,338,350 for a project known as the Hing Tung Estate project, where in fact the same amount was expenditure incurred in three other projects. This shows that Mr Chu was not averse to producing false documents when he considered that was in the plaintiff’s best interests.
60. For the above reasons, I find Mr Chu a poor and unreliable witness. I reject his evidence on the Oral Agreement, the New Arrangement and the Collateral Guarantee in its entirety. I also reject his evidence that the plaintiff and PY Construction and/or the 2nd defendant had entered into the contract as alleged : see paragraph 29 above.
(C) Mr Y.M. Chan’s evidence
61. I now come to the evidence of Mr Y.M. Chan.
62. Mr Y.M. Chan did not attend any of the meetings where the Oral Agreement or the Collateral Guarantee was allegedly agreed. However, he did say that Mr Chu that hold him that he wanted the 2nd defendant to guarantee that the plaintiff would received payment and that led to Mr Siu and Mr Lee devising the cheque exchange procedure, which Mr Chu was agreeable to and was then incorporated into the Subcontract. As I have already Mr Chu’s evidence in this respect, I am not going to attach any weight to Mr Y.M. Chan’s evidence either.
63. As to the New Arrangement, Mr Y.M. Chan said in paragraph 17 of his witness statement filed on 6 December 2005 that Mr Ho, Mr Chu and he himself had agreed to the direct payment arrangement at the meeting in July 1999. Under cross-examination, Mr Y.M. Chan said Mr Ho had agreed to the arrangement at the meeting. His evidence is only to be contradicted by the Letters of Authorization (signed by Mr Y.M. Chan on behalf of the 1st defendant), which made no mention of the new Arrangement and reserved the 1st defendant’s right to revoke direct payment. I reject Mr Y.M. Chan’s evidence.
64. Mr Y.M. Chan said in his supplemental witness statement filed on 18 April 2006 that the payment of HK$1,300,000 was in connection with some projects other than the Sheraton Hotel project. In his oral testimony, he said he relied partly on documents to support his evidence. He was then referred to the relevant documentary evidence in cross-examination, which contradicted his evidence. In the end, he said that his recollection came from some documents about the project he had kept personally some nine years after the events. I am unable to accept Mr Y.M. Chan’s explanation, which in my view, was made up by him when he went along.
65. I do not find Mr Y.M. Chan a credible or reliable witness and I reject his evidence.
(D) The evidence of Mr Lau and Mr K.F. Chu
66. I next turn to the evidence of Mr Lau and Mr K.F. Chu. Both of them dealt with the payment under the cheque exchange procedure. Their evidence does not assist the plaintiff’s case on the Oral Agreement, the New Arrangement or the Collateral Guarantee at all.
(E) Evidence of the 2nd defendant
67. I finally come to the evidence of the 2nd defendant’s witnesses.
68. None of the four witnesses called by the 2nd defendant were involved at the time when the Oral Agreement or the Collateral Agreement were purportedly made. But they all said that in their dealings or discussions with Mr Chu about the plaintiff’s complaints that it was not being paid by the 1st defendant, Mr Chu had not mentioned those oral agreements at all. Had they, as alleged by the plaintiff, been so informed between February and April 2002 that the plaintiff had asserted rights against the 2nd defendant under those oral agreements, I do not think the 2nd defendant would simply pay the Disputed Sums to the 1st defendant. It would have delayed payment and made enquiries.
69. In paragraphs 5 to 9 of his witness statement filed on 5 December 2005, Mr Ho dealt with the meeting at which the plaintiff said the New Arrangement was agreed thus :
“5. I refer to paragraph 20 of the Re-Re-Amended Statement of Claim (‘RRASOC’). I don’t agree with the suggested version of the events presented in that paragraph. My recollection is that the meeting in July 1999 (I do not recall the exact date of the meeting) was called by Prosperity. Mr YM Chan represented Prosperity at the meeting and Mr Benny Chu represented Brilliant. In the meeting, YM Chan requested that Paul Y. Interior make future payments direct to Brilliant rather than to Prosperity. I was told that the reason for this was that payment arrangements between Prosperity and Brilliant could be simplified.
6. I did not agree to the request for direct payment at the meeting as I did not have the authority to do so. This required approval from senior management. I asked YM Chan to make a formal request in writing for payments to be made direct to Brilliant. Prosperity sent a letter dated 19 July 1999 to Paul Y. Interior detailing its request, which was copied to Brilliant. The letter also states that the authority is revocable on 3 days’ notice. This direct payment procedure was confirmed by a subsequent letter from Prosperity dated 16 November 1999, again copied to Brilliant. Copies of these letters are contained in Annex 1 to my statement. I sought approval from the Paul Y. group’s legal department and from senior management to agree to Prosperity’s request. Approval was granted. I can’t recall if I spoke to representatives from either Prosperity or Brilliant to notify them of this. Subsequent payments were issued in accordance with their request.
7. At the time of the meeting in July 1999 I was not aware of any change of shareholding in Prosperity. Nor at the time of the meeting was I aware of any oral agreements or collateral guarantee that Brilliant now claims existed. There was no discussion of these suggested agreements during the course of the meeting, nor any variation to them or discharge of them. I was not aware that Brilliant contended that these agreements existed until I was asked to look at the RRASOC that has been filed in these proceedings in relation to allegations that involved me in April 2005. I understand this was for preparation of the defence.
8. It was always my understanding that the direct payment authorization issued by Prosperity to Paul Y. Interior represented only a change to the payment mechanism under the contract between Paul Y. Interior and Prosperity. I did not have at that time or at any time thereafter general authority to vary contractual arrangements between Paul Y. Interior and other parites and nor did I suggest to Mr Benny Chu that I had such authority. Any variation of a contract to which Paul Y. Interior was a party required my discussion with and approval of senior management. If there had been any suggestion in the July 1999 meeting that the direct payment arrangement in some way varied a contract between Paul Y. Interior and Brilliant, then I would have wanted and know what contract was being suggested, as I was not aware of any such contract, and then raised the matter with Paul Y. Interior’s senior management. This didn’t happen as the matter wasn’t raised.
9. After I had received approval from Paul Y. Interior’s senior management to make payment direct to Brilliant, I authorised the payments described in paragraph 21 of the RRASOC. Those payments were issued to Brilliant only as a result of the direct payment authorisation. In order to ensure that the reason for the direct payments to Brilliant was properly documented (and in consultation with the Paul Y. group’s legal department) I required Benny Chu to sign receipts acknowledging receipt of interim payments 13 and 14. The receipts say, in part:
‘We [Brilliant] are the sub-contractor to OLS International Ltd. for the above Sub-contract. The payment is now paid direct to us upon our requests to OLS in order to simplify the payment process and release our cash flow problems. We have reached agreement with OLS for such arrangement.’
This statement in the receipts reflects my understanding of the rationale for the direct payments. The reference to Paul Y. ITC Construction in the receipt was a mistake and it should have referred to Paul Y. Interior …”
Mr Ho’s evidence is cogent and consistent with the documentary evidence.
70. All in all, I find that all the witnesses of the 2nd defendant credible and reliable. They were not shaken under cross-examination. I accept their evidence in their entirety.
Conclusion
71. For the above reasons, I find that the plaintiff has failed miserably in discharging the burden of proofing the Oral Agreement, the New Arrangement and the Collateral Guarantee. Its claim against the 2nd defendant must fail. In the circumstances, the question whether the Oral Agreement and the Collateral Guarantee were supported by consideration and the issue on quantum do not arise.
72. I will dismiss the plaintiff’s claim against the 2nd defendant with costs, to be taxed if not agreed.
| |
( J. Poon )
Deputy High Court Judge |
Mr Hylas Chung, instructed by Messrs Gary Lau & Partners, for the Plaintiff
Mr Peter Clayton, SC, instructed by Messrs Mallesons Stephen Jaques, for the 2nd Defendant
[1] Paragraph 11 of RRASOC.
[2] Paragraph 12 of RRASOC.
[3] Paragraph 19 of RRASOC.
[4] Paragraph 20 of RRASOC.
[5] Paragraph 21 of RRASOC.
[6] Paragraph 24 of RRASOC.
[7] Paragraph 22 of RRASOC.