LAU SHUI CHING AND ANOTHER v. MAN PING NAM t/a MAN'S INVESTMENT COMPANY AND OTHERS

1986, No. A5261

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff sues the defendant under a construction contract. The defendant denies liability. The short point to be decided is whether the alleged novation of that construction constract said to have taken place on the 15th April 1986 has been proved. Appearing in the records of this Court are the 3rd and the 4th parties. This Court has never been referred to the proceedings or directions, if any, relating, to the 3rd party or the 4th party. To all intents and purposes, the instant proceedings are to be regarded as those between the plaintiff and the defendant alone.

2. The plaintiff is a partnership between one Mr Lau and one Madam Ho whose husband is Mr Wan. The 3rd party, Tin Ki Engineering and Construction Co. Ltd. (I shall call it "Tin Ki") became the main contractor of the 4th party, Korea Shipbuilding and Engineering Corporation. I shall call it the "Korea Company".

3. The Korea Company procured a Government Contract No. HY/84/28 for the construction of a certain Circular Highway in the New Territories. Under that Government Contract, Tin Ki sub-contracted certain Box Culvert works to the plaintiff on the 20th March 1986.

4. The Government Contract also involved site excavation. The plaintiff was apparently expected to be engaged also as the site excavation sub-contractor.

5. It is not unkown that in the New Territories the nuisance of soil dumping incident to site excavation invariably presents considerable problems. Villagers would sometimes have to be appeased, and in this particular case the distance of dumping areas for excavated soil from the construction site was a matter of great financial interest to Tin Ki as the main government contractor and the site excavation sub-contractor. The longer the distance from the site for dumping of soil the more expensive would transportation charges be. For securing suitable dumping areas good connections in the New Territories is certainly an asset.

6. It is common ground that because of his good local connections, the defendant in this case was approached by Tin Ki. The defendant is a respectable member of the New Territories Community in that locality and a headmaster of a school. The defendant is also a serving member in one of the District Boards of the New Territories.

7. Mr Tsang Nam was the moving force in Tin Ki. He singled out and approached the defendant with a view to securing his good services in respect to dumping areas for the excavation on the government construction site. The defendant was willing to co-operate and provide his services on terms. Through the intervention of Mr Tsang Nam, the plaintiff and the defendant were brought together. Although the plaintiff was expected to be the de facto excavation and dumping sub-contractor, the defendant entered into a contract bearing the date of 20th March 1986 with Tin Ki for such excavation and dumping. The defendant had no knowledge of or expertise in site excavation. Having entered into a contract with Tin Ki for excavation and transportation from the Government construction site of excavated earth, in turn the defendant entered into a sub-contract dated the 25th March with the plaintiff for the same undertaking. It goes without saying that a profit margin was left between the defendant's contract with Tin Ki and his sub-contract with the plaintiff. The defendant describes to this Court the small margin of profit to be expected but that is a matter which had little bearing on the dispute between the plaintiff and the defendant.

8. In the contract with Tin Ki for excavation and dumping, it was inter alia provided that a sum by way of compensation of $200,000 was to be paid by Tin Ki. Such $200,000 compensation was to become payable as to $100,000 on or before the 27th March 1986 with the remainder $100,000 to follow later. This $200,000 compensation was stipulated to be compensation in connection with the construction of an access road to dumping areas.

9. In the sub-contract between the defendant and the plaintiff,  it was provided that the defendant should furnish dumping areas for excavation within 2 kilometers of the Government construction site. As explained by the defendant in evidence, what was envisaged by these two contracts was that dumping areas very close to the Government construction site should be procured through the good services of the defendant so as to keep site formation expenses to a reasonable level, both in the main contract between the defendant and Tin Ki and the sub-contract between the defendant and the plaintiff.

10. The defendant came to know the plaintiff and Mr Tsang Nam of Tin Ki at virtually the time of this main contract and sub-contract. Mr Tsang Nam and the plaintiff had been acquaintances. At one time they had worked together in the past. They had been known to one and other for about 8 years by the time this contract and sub-contract were signed.

11. It is reasonably clear from start to finish that the defendant's participation was invited for the only reason that he could provide close-by dumping areas for the Government construction site. Both the main and sub-contracts was merely instrumental to leaving the defendant an acceptable profit margin for his good services to be rendered. It would not lie in the month of the plaintiff to suggest, being a long time friend and the Box Culvert sub-contractor of Mr Tsang Nam of Tin Ki, that he was not at all aware that the sub-contract was inherently tied to the subsistence of the main contract. That, however, is not a point directly in issue.

12. Came 27th March; no payment was received allegedly by the defendant. It is not suggested that the defendant has ever received any payment from Tin Ki. By Tin Ki's alleged failure to pay this $100,000 part compensation within the time stipulated under the main contract between the plaintiff and the defendant, arrangements that had allegedly been made by the defendant for the provision of dumping areas was said to be jeopardized. According to the defendant, one Mr Man Chung-wo also known as Chung Wo or Uncle Wo, had arranged for the use of the defendant dumping area's on an initial payment of compensation money for the construction of an access road and disturbance of neighbouring farmers and villagers.

13. Because of non-payment of this first half portion of the compensation, so the defendant tells this Court, a meeting was held on the 28th March 1986 in Lung To Restaurant, Sheung Shui between Mr Tsang Nam, Mr Lau of the plaintiff, the defendant and Man Chung-wo. According to the defendant, on account of the non-payment of the $100,000 compensation by Tin Ki, he requested to withdraw from both contracts. It was allegedly agreed between the Mr Lau of the plaintiff, the defendant and Mr Tsang of Tin Ki that the sub-contract between the plaintiff and the defendant was to be taken over by Tin Ki, effecting in reality what has been alleged as a novation. It is claimed that Mr Lau of the plaintiff categorically agreed. The defendant's assertion makes good sense : the defendant's main contract with Tin Ki and his sub-contract with the plaintiff were inter-dependent; it was unlikely that the plaintiff was unaware of the link relationship when Mr Lau readily acknowledges the limited role played by the defendant in securing nearby dumping areas; Mr Lau was an acquaintance of Mr Tsang of some standing and was apparently picked by Mr Tsang for introduction to the defendant for the excavation sub-contract; Mr Lau was himself the Box Culvert sub-contractor under the same Government contract; there is little serious argument raised as to the alleged termination of the defendant's main contract with Tin Ki, and the sub-contract with the plaintiff could not have stood alone, without the main contract. It was also agreed, so the defendant claims, that the main contract and sub-contract were to be returned by Mr Tsang Nam and Mr Lau of the plaintiff to the defendant respectively. Mr Tsang Nam allegedly intimated at the meeting that he would later draft a few words for the defendant. The defendant's impression was that there remained also fine details to be discussed between Ti Ki and the plaintiff. Hence, though the defendant then believed his withdrawing to be final and binding, the agreement reached was regarded as still being tentative requiring some final touches.

14. When the sub-contract was signed on the 25th March, husband of Mr Lau's partner, Mr Wan was present. He was not present on the 28th.

15. On the 15th April, according to the defendant, the agreement reached on the 28th March became concrete. Earlier at 11 a.m., the defendant pressed Mr Tsang for the return of the main contract at his site office, and that led to the lunch meeting again in the Lung to Restaurant. Mr Lau of the plaintiff specifically proclaimed that the matter would thereafter have nothing to do with Man's i.e. the defendant firm. On being asked for the return of the sub-contract, Mr Lau allegedly invited the defendant to page him as he had not brought it along to lunch. The defendant's case is : matter was thus finally settled novation had conclusively taken place.

16. The defendant maintains that he had subsequently attempted but failed to locate Mr Lau of the plaintiff, seven, eight times through his pager. The defendant had not tried to visit the construction site where Mr Lau was likely to be working. He gives his reasons which are less than satisfactory. For whatever oversight, careless or unjustified, in taking no other steps in locating Mr Lau, the fact remains that the defendant did not net in touch with him for the return of the sub-contract.

17. Neither the main contract with Tin Ki-nor the sub-contract with the plaintiff was returned to the defendant. In the meantime in about April, Tin Ki wrote to the defendant by a letter of the 24th confirming, in essence, the novation agreed to on the 15th April. There are alleged and apparent inaccuracies in this letter of the 24th April 1986 from Tin Ki to the defendant but the confirmation therein is consistent with the alleged novation as effected on the 28th March and subsequently concluded on the 15th April.

18. It is perhaps necessary to set out the letter in extenso, which refers to the Government contract and the main contract with Tin Ki described therein as "sub-contract of unsuitable materials". It reads as follows :

"Dear Sir

EDD Contract HY/84/28

Sub-Contract of unsuitable materials

Further to the meeting on date 15/4/86 at Lok Ma Chau Site Office between your Mr P.N. Man and our Mr N. Tsang, the caption (sic) sub-contract was willfully (sic) agreed between both parties to be determined (sic) due to (sic) Man's Investment Company was unable to provide a dump site distance within 2km from the working site as originally proposed. An immediate effect will be taken (sic) subject to :

(1) The Man's Investment company will withdraw from all site activities and handover all labours, materials and also the sub-contract Messer. (sic) Ho Tat Construction Company to Tin Ki's direct control.

(2) Tin Ki shall identify (sic) all losses & damages at (sic) the event that the sub-contractor Messer. (sic) Ho Tat Construction Company takes any legal action against Man's Investment Company in respect of the caption (sic) sub-contract works."

19. It made no mention of Lung To Retaurant. It left out the plaintiff. Causation was given as the alleged consequence of the defendant's inability to provide nearby dumping areas instead of Tin Ki's alleged failure to pay $100,000. The take over was confirmed with an idmenity clause against all loss and damages caused by the defendant in whatever role he had played in the past. I would so construe this letter of the 24th April. This interpretation is decidedly more preferable to the one sought to be placed upon it by Counsel for the plaintiff. Mr Wong suggests that the letter served as no more than a mere confirmation of some private agreement between Tin Ki and the defendant, reached elsewhere and unconnected with the plaintiff or his sub-contract with the defendant. The "take over" and "direct control" stated in this letter would certainly affect the plaintiff and could hardly have been implemented without the plaintiff's consent. "Direct control" presupposes the departure of the defendant from the scene with no further liabilities. I do not accept that the idemnity clause was one against claims made by the plaintiff under a continuing sub-contract with the defendant, which no long subsisted.

20. The basis for Mr Wong's suggested interpretation does not enjoy the support of business efficacy. It would make no business sense to withdraw from the main contract with Tin Ki without also terminating the sub-contract with the plaintiff. If in fact, the defendant had hoped that Tin Ki would be able to fulfill the main contract, there would have been no incentive for he, the defendant, to get rid of the main contract as between Tin Ki and himself without due notification to the plaintiff. The defendant would have then been left with no hope of profit but remained fully committed to the sub-contract : the plaintiff would then have been paid by Tin Ki direct, and without the main contract the defendant would have been unable to take advantage of any profit margin. If indeed the defendant had expected Tin Ki to fold, there would have been all the more reason for the defendant to put an end also to his sub-contract with the plaintiff. Other possibilities have been broached, but they are remote and are certainly not convincing enough to persuade me to adopt the interpretation put forward by Counsel for the plaintiff on the contents of this letter from Tin Ki to the defendant bearing the date, the 24th April.

21. After the letter from the Tin Ki, according to the defendant, he did not find it necessary to press for the return of the main and the sub-contracts.

22. The events that followed were : nearby areas of 3 - 5 minutes' driving distance were procured; excavation and dumping were done; the plaintiff submitted invoices to Tin Ki direct with unit transportation rate increased after a direct negotiation and agreement with Tin Ki. Invoices are at pages 13, 14, 15, 19, 20, 21, 22, 27 & 28 of the Agreed Bundle of documents. The plaintiff concedes that none of these invoices was c.c. to the defendant nor was the defendant ever consulted on these invoices submitted to Tin Ki. The plaintiff requested and obtained direct from Tin Ki an increase of transportion charges. The suggested increase was 139.34% as made in the plaintiff's letter it p.17 of the Agreed Bundle dated 12th May 1986. At page 18 of the Agreed Bundle, by a letter dated the 20th May 1986, the plaintiff confirmed the agreed increase to Tin Ki. Later, by document 22 in the Agreed Bundle, a bill dated the 30th May 1986, the plaintiff charged the increased rate. Again none of the negotiation, confirmation and submission of bill was c.c. the defendant nor was the defendant ever consulted. Apart from the plaintiff's allegation, which the defendant denies, that Man Chung Wo, uncle Wo, who was initially meant to be the defendant's representative on site, continued to be present at the site presumably including the dumping areas "occasionally", the evidence is that the defendant left the scene completely.

23. Documents, acts and conduct of the parties are all consistent with the alleged novation. According to Mr Man Mei-shan, new dumping areas were provided. Mr Man Chung-wo denies any connection with these dumping areas or Man Mei-shan/Man Chiu Tai. He also denies being on the site after the meeting of the 15th April.

24. The defendant's defence is founded solely on this concluded agreement for novation on the 15th April. The plaintiff claims in his evidence that his partner's husband, Mr Wan Chan-hung, was present although he has also, said he is not very sure whether he was. As a matter of fact, the presence of Wan Chan-hung at this metting of 15th April was specifically made an issue in pleading by a late amendment at this trial. Mr Lau of the plaintiff denies that there was any novation. He himself is quite evasive as to what precisely transpired. He says he is not aware of this meeting of the 28th March. Then he says he does not remember it. He does not remember also that the defendant questioned Tsang Nam "whether Tin Ki could pay that $100,000 or not". His answer is not that he did not overhear it as he has once claimed that he did not pay attention to the conversation between the defendant and Mr Tsang and was at one time out to the lavatory. This answer of not remembering is somewhat strange. He also claims that in fact he knew nothing about the $100,000 until he is referred to this letter of the 24th April from Tin Ki in court.

25. According to Mr Lau of the plaintiff, the meeting of the 15th April was convened for the purpose of discussing the problems arising from the dumping areas. It was also for discussing how the excavated quantity was to be calculated. It was there decided, so Mr Lau claims, that Mr Tsang Nam of Tin Ki was deputized as a representative of the defendant to check quantity and to certify the checked quantity for payment under the sub-contract.

26. I am told that Mr Wan Chan-hung has been in Court from time to time. For reasons best known to Mr Lau and Mr Wan, despite the late amendment Mr Wan has not come forward to give evidence. In the result, the Court is left with the evasive answers of Mr Lau. Mr Nan Chung Wo supports the defendant's version. Mr Man Mei Shan corroborates what was said at the meeting in the Sheung Shui Jockey Club on the 9th July.

27. Mr Lau's evasive answers for the 15th April meeting, the confirmatory letter from Tin Ki, the invoices submitted, the request for the increase in charges and the subsequent acts and conduct of the parties all point in one direction, that is, there was a novation of the sub-contract agreed between the plaintiff and the defendant and Tin Ki.

28. If in fact, no novation had been agreed, the alleged sites representation of Mr Tsang for the limited purpose of verifying and certifying quantity would hardly explain why the plaintiff submitted bills exclusively to Tin Ki and negotiated for and confirmed the increased transportation charges without any consultation with or notification to the defendant.

29. In addition, by a summary of charges given by Ti Ki, the works for the Box Culvert and excavation, transportion of soil from the Government construction site were lumped up together at p.40 of the Agreed Bundle of documents. The summary cannot be a matter of great significance; but it is another step taken consistent with the novation alleged by the defendant in this case.

30. Mr Wong, Counsel for the plaintiff, suggests that in view of the defendant's inactivity, it would not be unreasonable for the plaintiff to assume that all negotiations in respect to these other matters under the sub-contract were to be conducted exclusively with or through Tin Ki. I do not accept this as tenable. At the very least, the defendant should have been told. Such speculated explanation of counsel is also unsupported by anything said for or on behalf of the plaintiff in this trial. Mr Lau himself uttered not a word in this direction.

31. Mr Wong also drew my attention to no less than six possible versions of the alleged novation. Counsel's criticism has some substance. The case of the defendant could have been more consistently documented or presented. But these versions do not, in the light of the other strong indicators in this case, have the effect of deflecting me from reaching a conclusion in favour of the defendant. My attention has also been drawn to discrepencies between the evidence of the defendant and evidence of Man Chung-wo and Man Mei-shan, particularly in relation to the alleged representative capacity of Man Chung-wo for owners of other dumping areas and the relationship between the four personalities, the defendant, Man Chung-wo, Man Mei-shan and Man Chiu-tai. I also find the defendant's failure to report to the Business Registration Department and the absence of any attempt to draft some document evidencing the novation for the signature of the plaintiff and Tin Ki as matters of little importance.

32. It is suggested that these four men have a close-knit relation. Except for Man Chiu-tai who has not come to give evidence, the other three men are accused to have conspired in fabricating a case against the plaintiff. For the reasons I have given, I regard these descrepancies drawn to my attention as merely peripheral. They do not affect the central issue for my determination.

33. I should further add that despite his explanation in re-examination, Mr Lau was driven to agree under cross-examination that the alleged deputizing of Mr Tsang Nam on behalf of the defendant on the construction site for checking and certifying quantity was an extraordinary arrangement culminating in a main contractor, whilst paying his sub-contractor, ending up in himself supervising the works of the sub-sub-contractor, in another words doing work he had paid the defendant to do.

34. According to the defendant, there was a meeting for tea between Mr Lau of the plaintiff, Mr Tsang Nam, the defendant and the two men, Man Mei-shan and Man Chiu-tai in the Royal Hong Kong Jockey Club at Sheung Shui on the 9th July 1986. The tea meeting followed an earlier meeting with the workers at the Lok Ma Chau Site Office in the presence of the police and Labour Department. At the tea meeting, admittedly Mr Tsang Nam accused Mr Lau, in vulgar abuse, "of drawing the defendant into the picture". Mr Lau explains that he had no idea what the reason behind the accusation was. But Mr Lau has never testified as to what his own response, if any, was. In fact, there had been no novation, Mr Lau would have been expected to refute such groundless accusation and retaliate with at least as robust language. The conduct of Mr Lau could not be that of a man unaware of the total shift of contract obligations.

35. It is also admitted that at the tea meeting the defendant demanded the return of the original contract. Mr Lau maintains that the plaintiff never agreed to any novation and he did not agree to return the sub-contract to the defendant. Mr Lau also denies his alleged explanation to Mr Tsang Nam for demanding payment from the defendant through solicitors that "I do so just to account for my company".

36. Much capital was sought to be made of the fact that whilst the plaintiff through solicitors demanded payment from the defendant on the 7th June 1986 at p.34 of the Agreed Bundle, there was no reply from the defendant until about 3 months later in document p.37. Late as it was, the reply from the defendant was consistent with his assertion.

37. Throughout the entire proceedings, tried as I have, I have not been able to find anything substantially favourable to the plaintiff against the defendant or anything inherently inconsistent with the alleged novation. Without hesitation, I prefer the main events as given by the defendant as supported by his witnesses. The claims against the defendant by the plaintiff therefore fail, and the action against the defendant must therefore be dismissed with costs to the defendant.