CHOW KEE JAMES t/a TAPBO CIVIL ENGINEERING CO v. TRANSWAY CONSTRUCTION & ENGINEERING LTD t/a WO KEE CONSTRUCTION & ENGINEERING CO

HCCT 11/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 11 OF 2006

(Transferred from DCCJ No. 3565 of 2005 and HCA No. 1203 of 2005)

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J U D G M E N T

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1.  The plaintiff, Tapbo, is a construction company whose sole proprietor is authorised to tender for public works contracts.  Through Tapbo, he tendered to lay a line of waterpipes to run underneath Castle Peak Road, New Territories, and was successful.  This resulted in a contract with the Water Supplies Department (WSD) designated WSD Contract 13/WSD/01.  I shall call this the Main Contract.  It was dated 5 December 2001.  The contract sum was $7,171,000, subject to adjustment.

2.  Tapbo caused some preliminary work to be carried out, then sub-contracted the balance of the project to the defendant, Wo Kee.  This was recorded on a single page letter from Tapbo to Wo Kee, incorporating 9 schedules.  Wo Kee endorsed its acceptance on the letter.  The date of the letter, and thus of the subcontract, was 1 March 2002.  I shall call this the Subcontract.

3.  Details of the Subcontract will follow.  Suffice for the meantime to note that in schedule 2 headed “Basic Conditions and Specifications” it was recorded that the documents were to be “back-to-back” the contract documents in the Main Contract, but subject to departures therefrom set out in the remaining schedules.  The Subcontract sum was $6,653,709, subject also to adjustment. 

4.  Work proceeded.  But during the course of the project Tapbo received notice that certain employees of Wo Kee and of Wo Kee’s subcontractors had filed claims for wages not paid, and thus it became statutorily bound to meet what was owing out of the Subcontract price.  Having done so it looked to Wo Kee for reimbursement.  When that was not forthcoming it brought this action.

5.  The sum pleaded for being $282,250.74, Wo Kee does not challenge its obligation to meet this debt, together with further sums associated with the wages claims.  The dispute concerns its counterclaim, or set-off, for a far greater sum, which it claims to be owing as the balance of the Subcontract price as adjusted.

6.  Tapbo’s challenge to this was that it had suffered financial loss as a result of delays by Wo Kee and other breaches of the Subcontract.  Further, that it was owed money for materials and services supplied to Wo Kee and for more wages it was asked to pay, and attendant administration charges, to the extent that allowing for what had been paid Wo Kee was entitled to nothing more; indeed it had been overpaid.

7.  Following the filing of the action and through to mid-trial, the parties’ through their legal representatives were constantly negotiating to narrow their differences, and did achieve significant agreement.

8.  I shall come to the particular areas of dispute and in detail the amounts claimed and counterclaimed.  Suffice for the meantime to state that the issues broadly speaking fall into two areas; the first, an interpretation of the terms of the Subcontract; for instance, what is meant by back-to-back with the Main Contract?  The second, findings of fact from which to calculate what is due to Wo Kee under the Subcontract, how much Tapbo is entitled to set-off for materials and services supplied, and what went wrong, and who is responsible and liable.

9.  Before going into details it is apparent that difficulties that became insurmountable leading to this action stem from the circumstances whereby the parties primarily involved, namely WSD as employer/payer and Wo Kee as contractor/payee were not and are not now contractually joined, so that issues as they developed had to be dealt with through the middleman Tapbo.  And Tapbo’s role, apart from protecting its profit in the “sale on” of the lion’s share of the Main Contract, was a supervisory one.

10.  I come now to look at the essential terms of the two contracts, and how they came into being.

The Main Contract

11.  The primary documents are the following:

· The completed form of tender;

· The Government’s General Conditions of Contract for Civil Engineering Works;

· Special Conditions of Contract;

· The General Specification for Civil Engineering Works;

· Particular Specifications;

· Drawings;

· Standard Methods of Measurement for Civil Engineering Works;

· Preambles to the Bills of Quantities;

· Bills of Quantities.

The Tendering Process

12.  The standard procedure is that the tenderer receives the above documents for consideration.  The Bills of Quantities will spell out the work to be carried out.  In this tender it included a breakdown of the preliminary work, site clearance, watermains laying and dayworks.

13.  The employer, in this case the WSD, assesses the expected quantity of works to be undertaken in respect of each Bill.  It then falls to the tenderer to fix upon a rate it is prepared to charge for the performance of each Bill; the sum total of that plus a contingency fee becomes the tendered amount and, if accepted, the contract price.

14.  Thus it was that Tapbo submitted a total tender of $7,171,000 which was accepted and thus became the Main Contract Price.

15.  An important feature of the costing of a contract of this sort is that under the General Conditions it is agreed that the quantities set out in the Bills of Quantities are estimates only.  The actual amount of work carried out for each individual work description is established by an Engineer appointed by the employer; in this case the WSD. 

16.  Thus the final Main Contract Price may very well vary from the amount tendered and accepted, not because the rate has been changed, but because, as determined by the Engineer, the quantity has become an exact instead of approximate calculation. 

17.  It would not be productive to summarize more than the bare essentials of the Main Contract.  Suffice for the meantime to highlight particular characteristics by bullet points:

· The commencement date for the work was fixed at 17 December 2001, with substantial completion by 270 days thereafter; that is 14 September 2002;

· in overall control was an Engineer appointed by the WSD whose duties included certifying interim bills for payment, approving or directing variations to the contract, correcting any errors or omissions in the Bills of Quantities, considering and, if appropriate, approving requests for extensions of time, and certifying substantial completion of the work at the appropriate time;

· sub-contract of the contract was prohibited; however, sub-contract of part of the work was permitted unless the proposed sub-contractor was expressly not approved;

· should any of the work be sub-contracted, the contractor was to remain liable for breaches or other acts of default by the sub-contractor;

· the contractor was required to appoint a Site Agent to be approved by the Engineer;

· there was incorporated a formula for calculating liquidating damages, should there be occasion to contra charge for these, at a daily rate.  The clause provided that the reverse charge was for liquidated damages for delay and was not to be construed as a penalty;

· third party insurance was compulsory;

· a maintenance period of 12 months from the date of substantial completion was provided for, during the course of which any outstanding work and maintenance had to be undertaken.

The Subcontract

18.  The letter of 1 March 2002 recording the offer and acceptance, I come to summarize the contents of the schedules; at least those material to the dispute.

Schedule 1

Headed “Subcontract Particulars” it recorded the extent of the work to be undertaken at a rate established in the Preambles to the Bills of Quantities and the Bills of Quantities settled between the parties.  It recorded the Subcontract sum.  It provided for the duration — 180 days from 4 March 2002; that it is, to 30 August 2002.  It recorded under the sub-heading “Extension of Time” back-to-back from Main Contract between WSD and Tapbo, and under the sub-heading “Liquidated Damages” back-to-back from schedule 2.  It provided for a maintenance period of 12 months.

Schedule 2

This recorded under the head “Basic Terms and Conditions” — all documents in this schedule to be back-to-back to the documents of the Main Contract, except that the contents of schedules 1 and 3 to 9 shall take precedence where there is a clash.

Schedule 3

This is a particularly significant schedule having regard to the areas of dispute; I propose thus to repeat its contents verbatim as follows:

“SCHEDULE 3  SPECIAL CONDITIONS OF CONTRACT

1.0	General
1.1	The Subcontract is established based on a principle of partnership.  The Main Contract is became a basic document for both Tapbo and Wo Kee in a back-to-back basis, except those contents supplemented/superseded by relevant contents in Schedule 1, 3, 4, 5, 6, 7, 8 & 9.  However Wo Kee must always execute the works diligently to ensure the working progress and quality.	Subcontract Principle
1.2	Arrear of wages is prohibited in this Subcontract, Wo Kee must ensure the avoidance of it and take necessary action to ensure the same avoidance on her Sub-subcontractor(s).  In case arrear case is happened, Tapbo shall only release the next interim payment to Wo Kee in a condition that all trades to workers had represented his confirmation to wage receipt.	Arrear of wages
1.3	Except those specified in the contents of Schedule 5, all other materials to be pre-approved by WSD and supplied by Wo Kee in full compliance to the Specifications for the execution of works.  Wo Kee must prepare relevant submission and schedule their delivery in full compliance to the works progress.	Materials
1.4	Services provided by Tapbo to Wo Kee free of charge: a. Supply of site temporary electricity & water supplies (except connection, fixing, maintenance, fueling and transportation). b. Supply of surveying & setting out services. c. Supply of TTA equipments as required on the approved TTA plans (except its fixing, installation and staging relocation). d. Supply of once-off underground utilities survey. e. Supply of once-off ICE services (second certification due to 1st failure to be back-charged at Wo Kee account).	Tapbo Attendance
2.0	Works
2.1-	Wo Kee must execute the works after full understanding on the construction information as implied by Schedule 4 by appropriate planning and method of construction so as to ensure the timely requirement of the Subcontract.	Works Progress
2.2	For the pipejacking works, Wo Kee is responsible for design (according to relevant Specification and drawings), method establishment, temporary works, execution, testing and commissioning until a satisfactory completion to WSD.  No claim shall be entitled for any matter due to improper works planning and execution.	Pipejacking
2.3	All design elements in the Subcontract, including temporary works, pipejacking works, method of construction etc are subjected to pre-approved by WSD.  Wo Kee must prepare relevant submission well in advance for WSD approval so as to ensure the working progress.	Design Elements
3.0	Commercial Issues
3.1	The relevant Site Instruction as issued by WSD shall be covered and endorsed by Tapbo’s Project Manager as a formal issuance of variation order to Wo Kee.  However, in the vicinity of time lag between such formal covering and the WSD’s 1st issue time, Wo Kee should schedule the works carefully to avoid non-recoverable abortive work and material.	Variation Order
3.2	For variation order to be valued based on the Main Contract’s BQ Price(s), the valuation of variation in the Subcontract to be back-to-back basing on the Main Contract certification.  However in case the variation order is to be valued based on new rate(s), the valuation of variation in the Subcontract to be back-to-back with a depreciation of 15%.	Valuation of Variation
3.3	In case an variation order is likely unable to be valued based on the existing BQ rates, or an establishment of star rate.  Wo Kee must prepare a daywork record sheet seeking both Tapbo and WSD endorsement for payment certification purpose.  However the final judgment on relevant certification shall follow Clause 3.2	Daywork Record
3.4	The concrete and rebar materials must be purchased via Tapbo based on the contra-charge rate scheduled on Schedule 8.  For all other materials or services to be purchased by Wo Kee via Tapbo (upon Wo Kee requisition), a 2.5% administration charge (or $150 minimum charge, whichever is larger) shall be imposed on Wo Kee account except the materials of ready-mixed concrete, rebar, pipwork and fitting, which shall be contra-charged according to Schedule 8 only.	Contra-charges
4.0	Statutory Compliance
4.1	Wo Kee must always comply with all relevant statutory requirements including those concerning site safety & health and labour employment etc and carry out necessary action to maintain an acceptable works environment for a safety execution of works.	General Compliance
4.2	In case monetary punishment(s) or charge(s) by the Government is imposed on Tapbo due to the negligence of Wo Kee (and her subcontractors and labour) in any aspects, the same amount together with a 15% increment for administration will be charged on Wo Kee account.	Statutory Punishment
4.3	In case Wo Kee (and her subcontractors and labour) unable to improve the safety performance after our verbal notice, Administration Charges shall be imposed to Wo Kee account according to Schedule 9.	Administration Charges
5.0	Particular Compliance
5.1	Wo Kee must always execute the works in full compliance to the Safety Plan, and its monthly revisions as scheduled on Schedule 6.	Safety Plan
5.2	Wo Kee must always execute the works in full compliance to the Waste Management Plan, and its monthly revisions.	Waste Management Plan
5.3	Wo Kee must always execute the works in full compliance to the Quality Manual and Project Quality Plan, and their revision(s) as schedule on Schedule 7.”	Quality Plans

Schedule 4

Under the head “Contract Drawings Specification and Construction Information” is reference to numerous drawings and site investigation reports, and under the sub-heading ‘Others’ — “Wo Kee is deem(ed) to (be) responsible for design (temporary works whole pipejacking works and method of construction) supplies (all materials except those to be supplied by WSD) execute, test inspect and commission the whole works in full compliance to the captioned in terms of their implied physical, technical, time and quality requirements.”

Schedule 5

This incorporates the Preambles and Bills of Quantities, broken down into preliminary activity and site and works management and supervision, classified unmeasurable, and the excavation and pipelaying and assorted works which were subject to remeasurement.

Schedule 6 and 7

The contents of these are not significant to the dispute.

Schedule 8

Under the head “Schedule of Contra-Charges” are listed the charge out rates for materials which had to be bought from Tapbo under clause 3.4 schedule 3, for which no administration charge was to be incurred.

Schedule 9

The contents of this schedule are not relevant either.

The Cast

19.  Those who played a particular role during the history of events include the following:

Peter Yeung.  He was an employee of Tapbo under the title of project manager and a sometime appointed Site Agent, as approved, on the site.

Jason Poon.  Also an employee of Tapbo, he was designated project manager, whose role was to act as a co-ordinator between WSD and Wo Kee, and be answerable to Lam Shiu Ming.

Lam Shiu Ming.  He is a director of Great Bill Limited, a company associated with Tapbo and responsible for administration and the management of Tapbo.  He did not have direct involvement in the project, but Jason Poon was required to report to him.  He had the capacity and authority to produce documents of contract, correspondence and other documents in the custody of Tapbo.

Danny Lam.  He is a director of Wo Kee and supervised Wo Kee during the course of the project.

Tony Fung.  He is a QS by profession and was employed by Wo Kee during the period September 2002 to April 2003.

Alfred Lau.  He is an office administrator employed by Wo Kee, and was responsible for correspondence relating to the project and other administrative duties.

20.  Of the above, all but Peter Yeung and Jason Poon made witness statements and gave evidence.  Messrs Yeung and Poon have since left the employ of Tapbo and were not available to participate.

The Work was Substantially Carried Out

21.  WSD’s Engineer certified substantial completion on 12 February 2003, some time after the scheduled due date.  By this time the parties were in significant dispute over claims for moneys said to be due to Wo Kee on the one hand and contra charges claimed by Tapbo on the other.  Wo Kee was ordered off site and Tapbo undertook the remainder of the work outstanding.

22.  So, there remained to be resolved what was owing, and by whom, to whom.

23.  What was agreed, up to midway through the trial, was that Wo Kee was entitled to charge, subject to any counter charges and additional charges, for work carried out, the sum of $4,342,465.83, made up as follows:

Work done	5,696,795.46
Missing items (additional work)	1,130,222.14
Variation orders (nos. 1 and 2)	80,228.40
Direct expense	27,373.52
	6,934,619.52
Less paid on account	2,592,153.69
Total :	$4,342,465.83
	============

24.  I come now to deal with those matters in dispute.

The Disputed Amounts

25.  Against the agreed sum of $4,342,465.83 Tapbo claims the right to withhold $4,302,882.58 made up as follows:

Materials supplied	1,816,255.57		(Wo Kee concedesas to 1,426,919.30,  leaving in dispute	389,336.27)
Additional Services	1,933,147.50		(Wo Kee concedes as to 636,720.95, leaving in dispute	1,296,426.55)
Liquidated damages - 136 days @ 4,019 per day	546,584.00		(Wo Kee makes no concession, leaving in dispute	546,584.00)
Materials not returned	6,895.51		(Wo Kee makes no concession, leaving in dispute	6,895.51)
	-----------------			-----------------
Totals claimed	$4,302,882.58		of which in dispute	$2,239,242.33
	============			============

26. Wo Kee for its part claims the following for additional work:

Material left on site	29,441.60
Work carried out under variation order no. 3	688,044.21
Prolongation costs	665,238.91
	--------------
Totalling	1,382,724.72 ==========	Tapbo disputes all of this.

26.  I come next to analyze those of the above claims and counterclaims which remain in contention.

Materials Supplied by Tapbo

27.  In respect of this series of charges, $1,426,919.30 is agreed.  The remaining items in dispute totalling $389,336.27, now follow.

28.  Industrial diesel oil — $131,912.15.

It is not disputed that this was utilized in generators of Tapbo to supply electricity to the site.

It is contended by Wo Kee that to charge for the cost of the fuel to provide electricity is to be in breach of paragraph 1.4(a) of schedule 3 which records that the supply of temporary electricity to the site was to be free of charge.  But that fails to recognize the exception, being the cost of fuel, specifically set out in 1.4(a).  Whether or not this took Wo Kee by surprise, on an ordinary meaning of the sub-paragraph, Tapbo is entitled to be reimbursed this amount in full.

29.  Traffic signs — $7,660, TTA Materials — $29,374.45 Miscellaneous — $3,685.80.

Wo Kee claims protection from this cost under 1.4(c) of schedule 3, the signs being an integral part of the TTA equipment as required on the approved TTA plans.  The response from Tapbo is that it does not dispute that it was not able to pass on the cost of TTA equipment on the TTA plans as originally approved.  But this was the cost of signage on a revised 3-stage TTA plan.

It is not disputed this was approved by 25 April 2002.  What is disputed is by whom it was applied for.  But Wo Kee contends that even if (which is denied) it initiated the request the Subcontract did not permit a charge.

It seems to me and I so find that the revised TTA plan was required to accommodate Tapbo’s decision to revise the original programme from 5 stages to 3.  The signs supplied fell within the category of TTA equipment provided free of charge.  The charge of $3,685.50 was for material used during the implementation of TTA.

Thus, there should be no charge for these items.

30.  Steel H-beams and Sheet Piles — $67,506.50.

Wo Kee relies on a letter written on behalf of Tapbo to Wo Kee of 3 March 2003 by Jason Poon, the onsite employee of Tapbo. 

It is pertinent to note that this equipment was in effect borrowed by Wo Kee and that it was made available free of charge in order to speed up the pipe jacking works.  Direct evidence on the point came from Danny Lam who said Jason Poon promised this and support for this is found in the letter itself.  It seems that this equipment ‘disappeared’ from site after use; but there is nothing to suggest that Wo Kee took it without authority.

I accept the explanation of Wo Kee; there shall be no remuneration under this head.

31.  Miscellaneous — $5,750, Gully and Channel Gratings, valve pit cover — $1,830.

These minor amounts were said to be for items acquired after the Subcontract had been terminated.  I accept this to be so; the charge is disallowed.

32.  Asphalt — $141,617.37.

Wo Kee’s complaint about this item is that at least part of it is for work carried out after 17 April 2003, by which time the Subcontract had been terminated.  There was no breakdown, and no evidence to show when, how and for what purpose the charge was incurred.  If, as was suggested, it was used for reinstatement of the road pavement after the outstanding pipe laying had been completed, then this would have been included in the contract rates for this remaining work.  Tapbo should have been paid for this and should not be entitled to further recompense.

I am not satisfied that Tapbo has made out this charge; I disallow it.

Materials Supplied

33.  With one of these claims made out in the sum of $131,912.15, this, together with the amount already agreed of $1,426,919.30 now totals $1,558,831.45.

Additional Services Provided by Tapbo

34.  $636,720.95 is agreed.  The remaining items in dispute coming in all to $1,296,426.55, now follow.

35.  TTA traffic consultancy — $12,330.

The argument against this charge is that it falls into the same category as TTA services to be provided by Tapbo free of charge under paragraph 1.4(c) of schedule 3.

I agree; this charge is disallowed.

36.  Penalty Charge for Damaging an Existing Water Main — $177,974.90.

This is a particularly contentious item.

It is not disputed that there was damage to an existing water pipe, during the excavation process, on four separate occasions between 24 August 2002 and 3 January 2003.  Liability by Wo Kee is denied.  But its primary case is that Tapbo should have reported the matter to its insurer, made a claim and been reimbursed the cost of making good the damage.  It contends that Tapbo chose not to; Danny Lam attested that the reason was to avoid having to pay an enhanced premium for future cover.  But there was no corroboration of this allegation.

It was further its case that the Site Agent, then Peter Yeung of Tapbo, in reporting the incident attached no fault to Wo Kee.  In fact, the water pipe was old and in a fragile condition and there was no fault by Wo Kee.

Mr S M Lam for Tapbo gave evidence on the point.  He claimed the damage was by reason of the negligence of Wo Kee.  Of the damage caused on 24 August he stated in his witness statement:

“At all material times, before and during excavation, the Defendant failed to protect the water main; the Defendant failed to survey and identify the water main, the Defendant applied heavy excavation machine when it was prohibited by the WSD and/or the Plaintiff in the circumstances, i.e., the depth of the said water main was only 1.2m below the surface of the carriageway that covered the said water main.  As a result of the negligence of the Defendant, the said water main burst and required replacement which was confirmed by WSD.”

And he gave similar evidence in respect of each of the remaining three incidents.

Danny Lam in response said that Wo Kee had taken all necessary steps, including an underground utility survey, and the damage was not due to its negligence.

The parties are caught by the provisions of the Main Contract, by virtue of the back-to-back ties with that contract.  Under clause 22(1) and (2) of the General Conditions of Contract it is stated:

“22.  (1)     The Contractor shall, except if and so far as the Contract otherwise provides, indemnify and keep indemnified the Employer against all losses and claims for injury or damage to any person or property whatsoever, other than surface or other damage to land or crops on the Site, which may prise out of or in consequence of the execution of the Works and against all claims, demands, proceedings, damages, costs, charges and expenses whatsoever in respect thereof or in relation thereto.

(2)    The Contractor shall make good or at the option of the Employer shall pay to the Employer the cost of making good any damage, loss or injury which may occur to any property of the Employer and shall recompense the Employer in respect of any damage, loss or injury which may occur to any agent or employee of the Employer by or arising out of or in consequence of the execution of the Works or in the carrying out of the Contract.

Provided that:

(a)      the Contractor’s liability to indemnify or recompense the Employer under sub-clauses (1) and (2) of the Clause shall, subject to sub-clause (3) of this Clause, be reduced proportionately to the extent that the act or neglect of the Engineer or the Employer, their respective agents or employees shall have contributed to the damage, loss or injury; …”

The remainder of the clause (including sub-clause (3) is not relevant to the circumstances of these incidents.

There is nothing to suggest that in anyway WSD or its Engineer caused or contributed to the damage.

As I find from the evidence, Wo Kee, using Danny Lam, “shadow wrote” the reports of the incidents and would hardly have made any admissions of liability.

Tapbo through Jason Poon wrote this to Wo Kee reverting to the first three incidents:

“1. If the so-called aged water pipe is serving in a bad condition, you are responsible for making adequate record and reporting for WSD onward action.  However appeal after damage is seemed contradict and paradoxical.

2. The concerned pipes and the case of recent damage were all happened during your operation of backhoe, we do think it is avoidable if your operator(s) maintain careful manner.  Therefore we opine that those cases were happened as certain kind of negligence.

However we advise herewith you must aware the site condition and make record in advance to any unfavorite happened; i.e. taking photo or formal joint inspection with WSD for any unfavorite site condition, it may assist you to be free from further responsibility.

Should you insist to make further appeal, please substantiate your statements with adequate solid record for our consideration.”

Danny Lam from the witness box nailed the coffin down when he admitted that Wo Kee did not know the exact location of the water pipe.  And, that it was damaged on four separate occasions, tells its own story.

Finally, clearly Tapbo was under no contractual or other obligation to report the incidents to its insurance company; in any event, this would have done no more than transfer the claim from insured to insurer.

This charge is allowed in full.

37.  Settlement Monitoring — $11,875.

Wo Kee complains that this falls into the category of surveying undertaken by the plaintiff free of charge, under paragraph 1.4(b) of schedule 3.

The counter to this is that it was not surveying for which the charge was rendered, but a separate service altogether, being monitoring during construction, under clauses 26.10 to 26.12 of the Particulars Specifications in the Main Contract.  This was thus outside the range of services provided free of charge.  I agree.

This charge is allowed.

38.  Provision of ICE Services — $61,650.

This is another disputed charge which turns on a construction point.  Wo Kee contends that this service falls into the category of a free of charge service under paragraph 1.4(e) of schedule 3 — and I repeat the provision — “supply of once-off ICE services (second certification due to 1^st failure to be back-charged at Wo Kee account)”.

The services of an ICE were called upon a number of times through the course of the works.  It is the contention of Wo Kee that this was to be free to Wo Kee provided that a second visit was not required for which it would have to pay.

This may have been intended by Wo Kee in the negotiating process but it is, in my view, not possible to attribute that to an ordinary interpretation of the words.  “Once-off” is clear enough as to what is meant.

I find this charge to be made out.

39.  Extension of Insurance — $190,639.08

I shall revert to this topic.

40.  Provision of Site Agent — $398,606.52.

The presence of a Site Agent as a superintendent engaged by the contractor is set out in the GCC at clause 17, thus:

“17. (1)    The Contractor shall give or provide all necessary superintendence during the execution of the Works and as long thereafter as the Engineer may consider necessary for the proper fulfilment of the Contractor’s obligations under the Contract.

(2)     The Contractor shall ensure that he is at all times represented on the Site by a competent and authorized English-speaking agent who shall be deemed to be approved by the Engineer provided such agent is not expressly disapproved by the Engineer in writing within 14 days from the serving of a notice in writing upon the Engineer by the Contractor of the appointment of such agent.  Such agent shall be constantly on the Site and shall give his whole time to the superintendence of the Works.

(3)     The Engineer shall have the power to withdraw his approval of the authorized agent at any time.  If such approval shall be withdrawn the Contractor shall, after receiving notice in writing of such withdrawal, remove the agent from the Site forthwith and shall not thereafter employ him again on the Site in any capacity and shall replace him by another competent English-speaking agent approved by the Engineer.

(4)     Such authorized agent shall receive on behalf of the Contractor directions and instructions from the Engineer and the Engineer’s Representative.”

Tapbo’s assertion is that its obligation to appoint a Site Agent under the Main Contract passed to Wo Kee because of the back-to-back provisions of the Subcontract.

Wo Kee’s response is that it was under no contractual obligation to provide the Site Agent.

Historically, the circumstances surrounding the engagement of a Site Agent during the course of the Main Contract was as follows:

· WSD by letter of 15 December 2001 sought from Tapbo the name of the proposed Site Agent;

· Chan Kwai Sing came to be appointed and was approved.  (Mr K S Chan was an employee of the subcontractor engaged by Tapbo to undertake the preliminary work prior to the advent of Wo Kee);

· On 6 March 2002 Tapbo applied to have Mr K S Chan replaced by Chan Ping Hon.  Mr P H Chan was then an employee of Wo Kee.  His appointment was approved by WSD on 18 March 2002;

· According to a site organisation chart submitted by Tapbo to WSD on 13 June 2002, the Site Agent by then had became Ben Li Lai Pun, another employee of Wo Kee;

· Ben Li having left the employee of Wo Kee, and not having been replaced as Site Agent, Tapbo wrote the following letter of 19 August 2002 to Wo Kee, directed to Danny Lam, over the signatures of Jason Poon and Peter Yeung:

“Subject : Absence of Site Agent

Dear Mr Lam,

In response to the un-informed absence of Mr Ben Li, Site Agent of 13WSD/01 from 15 Aug 2002 and the subsequent complaint from WSD on 15 Aug 2002 about the caption matter, we have immediately delegate our APM Mr Peter Yeung to act as Site Agent on behalf.

We shall reimburse such expenses by direct contra-charge from your interim payment at HKD50,000/month accordingly.

By the way, we are further depressed that your Mr Ben Li have already resigned from your company.  In order to smoothen the transition and to ensure proper works management, we would prolongate the aforesaid engagement and arrangement until the end of the project.

Best regards,

Jason Poon/Peter Yeung”

· By even date approval of WSD was sought for Mr Yeung’s appointment; that came to be approved by WSD on 24 August 2002;

· By letter of 6 September 2002 Danny Lam responded on behalf of Wo Kee thus:

“Nomination of Sub-Agent

Referring to your memo dated 19^th August 2002, the action of immediately replacement of Site Agent by your APM Peter Yeung of WSD Contract — Ngau Tam Mei Treatment Works — Mainlaying along Castle Peak Road near Au Tau Roundabout, Contract No. 13/WSD/01.

We would like to point out that we have already employed Mr Tony F S Fung as our full time Sub-Agent for this contract effective 2^nd September 2002.  We believe that Mr Tony Fung — Sub-Agent, Mr Alfred Lau — Office Manager, and me together to assist Mr Peter Yeung — Deputy Project Manager.  We can smoothen and manage the works well.

According to our increase of management force, we hope you can cancel the charge of HK$50,000.00 per month.”

It is pertinent to note that although it recorded an enhanced management team on site Wo Kee did not propose an alternative Site Agent to Mr Yeung.  Indeed, he was referred to as Deputy Project Manager.  This it did not address the contractual obligation in the Main Contract that there had to be a Site Agent.

Thereafter, as an incontrovertible fact, Peter Yeung remained as Site Agent until completion of all the Subcontract works.

Although there was some evidence to question whether Mr Yeung thereafter properly fulfilled his duties on site, which he was not called to rebut (he having subsequently left the employ of Tapbo and no longer traceable) there was no complaint raised by WSD about that; certainly nothing was produced.

As I find, applying the back-to-back provisions, Wo Kee was contractually bound to appoint a Site Agent and was aware of Tapbo stepping into the breach when it failed to do so and the financial consequences of that.  Yet it took no steps to replace Mr Yeung with an appropriately qualified person from its own workforce.  Mr Tony Fung was not engaged for the purpose and his name was not put forward as a candidate for approval by WSD.

From an originally significantly larger claim Tapbo’s existing claim is not challenged as to quantum.

I find its entitlement to this charge made out.

41.  Outstanding Works — $443,351.05 (During closing addresses this was reduced by $1,179.36 to $442,171.69).

This represents the sum total of three accounts paid by Tapbo to alternative subcontractors following the termination of the Subcontract.

It is Wo Kee’s case that the Subcontract was wrongfully terminated on the grounds of slow progress and that it should not be liable for any of Tapbo’s costs following 17 April 2003.

The picture painted by Tapbo is a different one, and there is a series of letters which support its cause.  The first is of 18 February 2003 complaining of delays totalling nearly half a year, giving final notice to complete ten separate items of work, and directing that Wo Kee vacate the site by 25 March 2003.

This was followed by a letter of 26 March and another of 4 April and yet another of 7 April complaining of poor progress.  A letter of 8 April extended the deadline to 21 April, save for the construction of a deep washout chamber and associated works, which Tapbo required to be undertaken by its workforce.

It is also apparent from the correspondence that WSD was pressing Tapbo to complete and complained of lack of activity on site.

I am satisfied that Tapbo has established breach by Wo Kee and an entitlement to the amount claimed for.

Liquidated Damages — $546,584

42.  This claim derives from the chronic delay in the time taken to complete the work and achieve a certificate of substantial completion.  WSD charged Tapbo, applying the daily rate as calculated, by using the formula set out in the Main Contract.  This came to $4,019 per day.  Tapbo applying the ‘back-to-back’ provision of schedule 1 claims from Wo Kee $4,019 x 136, being the number of days in default, which comes to $546,584.

Wo Kee defends the claim on a number of grounds, as follows:

(a) Liquidated damages that are not calculated as a genuine pre-estimate of damage suffered amount to a penalty and are unenforceable.  In this case the manner in which the damages are calculated categorizes the amount claimed as extravagant and unconscionable, and therefore a penalty;

(b) Wo Kee was not responsible for the delays.  Tapbo was tardy in getting construction underway during the first three months of the Main Contract, most of which was before Wo Kee became involved;

(c) Wo Kee had no knowledge of how the liquidated damages were calculated;

(d) the back-to-back provision is not applicable, because the dates of completion under the Main Contract and Subcontract are different, the rates in the Bills of Quantities are different, there was no specified daily rate in the Subcontract which could not be the same as that calculable in the Main Contract, and Wo Kee had no access to what these rates were.

Dealing with these points in turn; first, as to whether the liquidated damages amounted to a penalty.  Prima facie, the words may be supposed to mean what they say.  The parties to the Main Contract agreed to a formula to establish a daily rate.  And as was said by Dickson J in the Canadian case, Elsey v J G Collins Insurance Agencies Ltd (1978) 83 DLR (3d) 1 at p. 15:

“The power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum.  It has no place where there is no oppression.”

Whether a sum stipulated is a penalty or not is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged at the time of the making of the contract; see Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd [1915] AC 79.

It was stated that to assist in the task of construction there are various tests which may in a given case be helpful or even conclusive, as follows:

“(a):  ‘It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.’

(b):  ‘It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. …’

(c):  ‘There is a presumption (but no more) that it is a penalty when ‘a single sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damages’’”

But on the other hand:

“(d):  ‘It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility.  On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.’”

Turning to this case, which is of course a public works contract, it is, I think, not possible to regard a formula which throws up a daily rate of a little more than $4,000 in a contract worth several millions of dollars as extravagant and unconscionable, as per paragraph (a).  Paragraph (b) is not applicable; nor is paragraph (c), for this is not payment of a single sum.

In my view, and I so find, the liquidated damages, as agreed, was a meeting of the minds of the parties to achieve a genuine pre-estimate of loss to be suffered per diem.

Secondly, as I find, Wo Kee was responsible for the delay.  Whatever Tapbo had achieved or not prior to the arrival on the scene of Wo Kee had no bearing or relevance.  The history from the time Wo Kee came to the project as revealed by correspondence and evidence adduced points the finger squarely at Wo Kee.

Thirdly, if Wo Kee had no knowledge of how the rate was calculated, then it was because it chose not to explore the detail.  It signed the Subcontract with knowledge of the existence of a liquidated damages clause.  It was entitled to look into this.

Fourthly, it would be difficult to show that the back-to-back provision had no application in the Subcontract when it was specifically referred to as being applicable in schedule 1.  That the dates of completion of the two contracts are different does not affect things.  It was the daily rate that was to be applied.  That the rates in the Bills of Quantities are different with no specified daily rate in the Subcontract are matters that Wo Kee could have negotiated to change, if it was thought to be unfair.  If it did not know the rates in the Main Contract it was because it chose not to enquire.

A compelling feature of a back-to-back provision in a contract is that it requires careful examination of documents stated to be binding on the parties outside the contract itself.

I am satisfied the claim for liquidated damages in the sum of $546,584 has been made out.

Additional Services Provided by Tapbo

43.  I return to this category to deal with the remaining matter; Extension of Insurance — $190,639.08. 

This stems from Wo Kee’s delay in completing the Subcontract.  With that liability established it follows that this charge is a valid one also.

44.  I can now total up the amount Tapbo is entitled to for services provided.  This comes to $1,282,917.19.  Adding this to the agreed sum of $636,720.95, the total is $1,919,638.14.

Non-Returned Materials — $6,895.51

45.  Tapbo claims this amount for pipe materials which were to be returned to WSD and were not and were thus charged for with 20% on-cost added.  Whilst the existence and value of this material is not disputed it was submitted on behalf of Wo Kee that it was not allowed to take the material and did not.

In the circumstances I am not satisfied that this claim has been made out and decline it.

Wo Kee’s Materials Left on Site — $29,441.60

46.  It was Mr Fung’s evidence that when Wo Kee was required to leave the site in April 2003 it left behind eight items of materials valued at this amount.  These were identified and recorded in interim payment certificates which were produced.

I am prepared to accept this as adequate evidence to establish the charge, and allow it.

Variation Order No. 3 — $688,044.21

47.  This is the third of three variation orders applied for by Wo Kee.  The first two at $80,228.40 have been agreed.

VO3 stemmed from a directive from the Engineer pursuant to section 60 of the GCC which gave him power to vary any part of the works necessary for the completion of the works.  It arose because of the need to revise the profile of the pipeline at a designated position, known as CH.2 + 85.  This was because there were existing utility pipes and services along the intended path of the water pipes being laid.  A decision having been made that these were not to be diverted, the direction required a deepening of the required excavation beneath these existing services.

The order from WSD came forward on 29 November 2002.

Under the Main Contract, the charging for work carried out under a directive issuing under section 60 is determine by section 61, which I record in full:

“61. (1)    The Engineer shall determine the sum which in his opinion shall be added to or deducted from the Contract Sum as a result of an order given by the Engineer under Clause 60 in accordance with the following principles:

(a)   Any item of work omitted shall be valued at the rate set out in the Contract for such work.

(b)   Any work carried out which is the same as or similar in character to and executed under the same or similar conditions and circumstances to any item of work priced in the Contract shall be valued at the rate set out in the Contract for such item of work.

(c)   Any work carried out which is not the same as or similar in character to or is not executed under the same or similar conditions or circumstances to any item of work priced in the Contract shall be valued at a rate based on the rates in the Contract so far as may be reasonable, failing which, at a rate agreed between the Engineer and the Contractor.

Provided that if the nature or extent of any variation ordered in accordance with Clause 60 relative to the nature or extent of the Works or any part thereof shall be such that in the opinion of the Engineer any rate contained in the Contract for any item of work is by reason of such variation rendered unreasonable or inapplicable then a new rate shall be agreed between the Engineer and the Contractor for that item, using the Contract rates as the basis for determination.

(2)     In the event of the Engineer and the Contractor failing to reach agreement on any rate under the provisions of sub-clause (1) of this Clause, the Engineer shall fix such rate as shall in his opinion be reasonable and notify the Contractor accordingly.”

As to how these charges translate to the Subcontract, one refers back to schedule 3 and therein paragraphs 3.2 and 3.3.  From these it is apparent that Wo Kee was required to submit a daywork record sheet to both Tapbo and WSD for approval of its rate for carrying out the work and the overall charge.  However, as in the Main Contract, the final arbiter is the Engineer.

Wo Kee duly carried out the work.  Then it applied to Tapbo for payment.  Its total claim was for $1,351,274.47, less a deduction of $259,935.25 for work done in accordance with certain of the BQs and already certified by WSD.  Thus the charge was for $1,091,339.22.

It is not disputed that in submitting this claim Wo Kee was effectively employing a rate in excess of the contract rate; this upon the basis that in order to negotiate around the existing services excavation by hand had to be undertaken.

But WSD rejected this proposition.

By letter of 1 March 2004 it responded to Tapbo:

“Please note that the works carried out under the subject Variation Order (VO) are of the same as or similar in character to and executed under the same or similar conditions and circumstances to the items prised in the contract.  Pursuant to clause 61(1)b of the General Conditions of Contract, the rates of the items under this VO should be valued and are paid at relevant contract rates.”

This was passed on to Wo Kee in a letter of 18 March 2004 which concluded with the following paragraph:

“It is stipulated in the sub-contract schedule 3 clause 3.2 and 3.3 that the valuation of variation in the sub-contract is to be back-to-back with a depreciation of 15% of the final judgment by WSD.  If you disagree the engineer’s assessment on the variation items, you have to substantiate all the information to this office to support your claim and explain why the relevant contract rate wouldn’t be applied to this item.”

It appears this was not responded to; nor was there a response to a letter in similar vein sent on 8 May 2004.

And there the matter appears to have been left; at least on paper.

At the trial, those representing Wo Kee reiterated why it was that a new rate above the Subcontract rate was justified.  But no steps were apparently taken to persuade the man whose decision mattered under the contract; the Engineer.

It was argued that a reasonable price should be awarded based on quantum meruit.  But that does not work.  Quantum meruit cannot arise where there is an agreed sum or an agreed formula from which to arrive at an agreed sum.

In this case, Wo Kee had a contractual right to confer and to try to persuade the Engineer to go above the contract rate.  No attempt was made to do so.  The Engineer’s word on the topic remains final.

Is there anything due at all on the VO3?  The answer to that is not clear.  No attempt seems to have been made to resubmit a claim using approved rates.  It was not explained to me as to why the original claim had become $688,044.21.  And there was a conflict, from the bar table, as to whether Wo Kee had already been paid the sum of $259,935.25.

In the absence of anything definitive, I have to disallow this claim in total.

Wo Kee’s Claim for Prolongation Costs — $665,238.91

48.  This derives from Wo Kee’s claim that the Subcontract was not completed on time and the resultant delay put it to extra expense which totalled this figure.

Mr Yip sumitted for Tapbo that the assertion is defeated by a pleadings point; that the delay is not blamed on Tapbo.  And there was no or no adequate evidence to attach responsibility to Tapbo either.

I was referred to the case of Toptech Company Limited v Tse Wang Cheung Peter trading as Deluxe Design and Contracting Company (unreported) 1998 CT 17 where Findlay J, in dealing with the defendant’s claim for prolongation costs, said:

“The defendant has made very little if any attempt in his pleading or his evidence to ascribe any particular delay to any particular breach by the plaintiff.  This is necessary because, without this pleading or evidence, it is impossible to ascertain if any particular breach caused delay that was crucial; that is, that the breach alleged alone caused the delay, and not that some other factor would have resulted in delay in any event.”

I agree that a claim under this head has not been made out, and reject it also.

Conclusion

To the agreed Subcontract sum of		4,342,465.83
I add for materials left on site		29,441.60
		---------------
To get		4,371,907.43
From which I subtract
Materials supplied	1,558,831.45
Services provided	1,919,638.14
Liquidated damages	546,584.00
	----------------	4,025,053.59
		---------------
Total due by Tapbo to Wo Kee		346,853.84
		==========

49.  There shall be judgment in favour of Tapbo for the amount claimed of $282,250.74, set-off against judgment in favour of Wo Kee in the sum of $629,104.58, to leave a net balance due to Wo Kee of $346,853.84.

Costs

50.  These are nisi.

51.  The lion’s share of the disputed issues were resolved in favour of Tapbo; accordingly, I order 3/4 of Tapbo’s costs to be met by Wo Kee.

Liberty to Apply

52.  There is liberty to apply if my mathematics do not measure up.

Counsel

53.  I wish to record my thanks to counsel for both sides, Mr K Yee for the plaintiff and Mr C Y Liu for the defendant, for the extraordinary amount of time and effort they put into their respective roles.  The detailed submissions, both opening and closing, accompanied by aide memoire charts were of considerable assistance to me.