HAPPY DYNASTY LTD. v. WAI KEE (ZENS) CONSTRUCTION & TRANSPORTATION CO. LTD. AND OTHERS

CACV 68/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

(On appeal from High Court Construction List No. 41 of 1995)

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J U D G M E N T

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Rogers, J.A. :

1. This is an appeal from a judgment of Yam, J. given on 22nd January 1998 whereby he ordered the 1st and 3rd Defendants to pay the Plaintiff the sum of HK$8,919,592.00 with interest and dismissed the counterclaims.

2. The Plaintiff's claim arises out of drilling and blasting work which it carried out for the construction of the Lantau Expressway for the Chek Lap Kok Airport. The major issue in this case was whether the Plaintiff was entitled to recover on a quantum meruit basis from both the 1st and 3rd Defendants in the Action or whether the Plaintiff only had recourse to such remedy as it had under contract with the 3rd Defendant.

3. The 1st Defendant is a contractor. In July 1992, in a meeting between representatives of the 1st Defendant and the Plaintiff, it was explained that the 1st Defendant was to be awarded the earthworks subcontract for the construction of a 6-kilometre section, known as the Tai Ho project, of the Lantau Expressway for the new Airport as a subcontractor to the Lantau Expressway Joint Venture ("LEJV"). It was said that the 1st Defendant would be entering into a joint venture in respect of that contract. The question was asked as to whether the Plaintiff would be interested in submitting a proposal for the drilling and blasting subcontract. Mr. Law, who was the key person of the Plaintiff company, indicated in the affirmative.

The letter of the 7th September 1992

4. As a result, the Plaintiff submitted a letter dated 7th September 1992 to the 1st Defendant. That letter offered to provide "Necessary drilling equipments, manpower, instrument/materials and other services to conduct D & B work for the removal and production of rock as directed by Wai Kee." There then followed further details of what the Plaintiff was offering to provide. The next part of the letter is headed "Drilling & Blasting Fee". Underneath that, it is said :

"(1) Bulk excavation : HK$12.69/M3

(2) Presplit : HK$85.00/sq. m.

(3) One off equipment mobilisation/demobilisation cost of HK$100,000."

5. Then, under Terms and Conditions, the first term and condition is stated as follows :

"The D & B offer is made on an assumption of 13 months work. It is our intention to speed up the progress to cut short the contract period whenever possible. Wai Kee shall provide necessary mucking and hauling equipment to clear the muck fast."

6. There were other terms and conditions including those that required Wai Kee to provide workmen's compensation insurance as well as staff and labour and public liability insurance coverage for the Plaintiff's on site staff.

7. The Judge below held that the letter of offer was orally accepted by Wai Kee at a meeting on 16th September 1992. The Judge also held that there was a revised programme dated 28th October 1992 showing the drilling and blasting works should start on 1st November 1992 and that the Plaintiff had already been mobilised and was ready to begin drilling at least by the 4th November. Whereas some of these dates were tentatively disputed on behalf of the 1st and 3rd Defendants, there was no dispute as to the fact that the Plaintiff did commence work, probably in November 1992 at the behest of the 1st Defendant. Again, whilst the finding that the 13 months period should then finish at the end of November 1993 was disputed on behalf of the Defendants, no other date was suggested as being the proper date for the expiry of the 13-month period and, in my view, the Judge's finding in this respect should not be interfered with.

8. There is no question, however, that it was in the contemplation of the parties that the 1st Defendant would itself be forming a joint venture with the 2nd Defendant to take over its own works under the joint venture contract. This eventually happened. The joint venture vehicle which the 1st Defendant formed took the form of the 3rd Defendant. By a subcontract dated 6th July 1993, the Plaintiff and the 3rd Defendant entered into a subcontract in relation to the same drilling and blasting works to which the letter of 7th September 1992 related.

The subcontract of the 6th July 1993

9. The subcontract of 6th July 1993 was a detailed, if in some respects somewhat obscure, document. It recited the fact that the 3rd Defendant had entered into a contract and that the Plaintiff was becoming a subcontractor thereunder. That aside however, it is clear that the Plaintiff undertook, under this subcontract, to perform the drilling and blasting work as per the contract which the 1st Defendant had entered into with the LEJV. That contract indeed was expressed to be one of the documents which formed part of the subcontract. Another document listed as forming part of the subcontract was the Plaintiff's letter of the 7th September to which reference has already been made. Interestingly, another document listed in the appendix to the subcontract of the 6th July was the "Schedule of Rates attached hereto". Neither of the parties however were able to state conclusively what that Schedule of Rates was; it seems that the most likely document it might have been was the "technical figures" and "price breakdown" attached to the letter of the 7th September.

10. The misimpression which might be cast by recital A which recited that the 3rd Defendant had entered the contract with the LEJV, was perhaps dispelled by condition (1) of the Special Conditions of Contract which defined the meaning of "the Contract" insofar as it was used in the subcontract as meaning the contract made between LEJV and the 1st Defendant. The appendix to the subcontract also makes clear that it is the 1st Defendant that had entered the contract with LEJV.

11. Clause 2 of the Special Conditions of Contract is of some importance in this case. It reads :-

"The sub-Contract(or) shall be deemed to have full knowledge of the provisions of the Contract (other than details of prices and rates) and the Company shall if so requested by the Sub-Contractor provide to the Sub-Contractor a true copy of the Contract (less such details) at the Sub-Contractor's expense. Unless the Subcontract provides otherwise the terms and conditions of the Contract shall where the context permits apply to the Sub-Contractor as of (if) the same were repeated herein, save that the Company shall have the rights and powers of the Employer and Engineer thereunder and the Sub-Contractor shall have the duties and obligations of the Company thereunder."

Effect of the Subcontract of 6th July 1993

12. In my view, the effect of the contract of 6th July 1993 was to constitute what is sometimes called a novation. Whatever contract was entered into in accordance with the oral agreement following the letter of 7th September 1992 seems to me to have been in the full knowledge that the 1st Defendant would be entering a joint venture in respect of the contract works which it was proposing to undertake with the LEJV. The contract between the 1st Defendant and the LEJV was entered into on 13th October 1992. The shareholder agreement between the 1st and 2nd Defendants constituting the 1st Defendant a 70% holder and the 2nd Defendant a 30% holder in the 3rd Defendant established the joint venture and was dated 18th March 1993. In the circumstances, it seems to me to be inescapable that the intent of the parties at the time was to replace the contract which had been entered into in September 1992 between the 1st Defendant and the Plaintiff with the formal subcontract entered into between the Plaintiff and the 3rd Defendant. As such, the original contract between the 1st Defendant and the Plaintiff seems to me to have been rescinded by necessary implication arising from the arrangement between the parties.

13. Mr. Thomas, S.C., who appeared on behalf of the Appellants, the 1st and 3rd Defendants, put it on the basis that there could not be two employers under a building contract. Without necessarily excluding some unusual possibilities, it appears to me inevitable in the present circumstances that the parties did not intend there to be two employers here. The fact that the 1st Defendant was not directly a party to the subcontract of the 6th July does not, in my view, alter the position. The 3rd Defendant was clearly a subsidiary of the 1st Defendant, was controlled by the same persons as controlled the 1st Defendant and operated from the same offices. In view of the previous dealings, the entering into this subcontract between the Plaintiff and the 3rd Defendant was an event which was awaited.

Whether a quantum meruit can be claimed under the Subcontract of 6th July 1993

14. There was no dispute between the parties that, albeit the progress of the works was already becoming delayed by July 1993, there were no current outstanding liabilities of any significance which the 1st Defendant had not discharged by the time the subcontract of 6th July 1993 was entered, or at the very least were not discharged soon thereafter.

15. It was the Plaintiff's primary case that the work period for the subcontract works had, by the time the work was completed, greatly overrun through no fault of the Plaintiff. It was said that the rates which had been proposed by the Plaintiff were for a maximum period of 13 months work and that because the work extended over a far greater period than 13 months, the rate of $12.69 per cubic metre no longer applied and the question which had to be considered was one of fair and reasonable remuneration to be determined on a quantum meruit basis.

16. Paragraph 17 of the Re-Re-Re-amended Statement of Claim and paragraph 1(iii) of the Further and Better Particulars of that document might have given the impression that it was the Plaintiff's case that the rate quoted in the letter of 7th September would, in those circumstances, not have applied to any period whether within the 13 months or after. However, as has been pointed out from the transcript of the proceedings below, it was clear to all the parties at least by approximately the middle of the trial that it was the Plaintiff's case that the rate of $12.69 per cubic metre would be applicable for the first 13 months but thereafter the Plaintiff would be entitled to be remunerated on a quantum meruit basis. At the appeal, Mr. Graham on behalf of the Plaintiff agreed with the formulation of that proposition which was put to him by the Court that it was an implied term that the rate was to be $12.69 per cubic metre for the first 13 months work, but if the work extended substantially longer then the Plaintiff was to be entitled to such rate for the work done thereafter as was fair and reasonable.

17. It is trite law that a term will only be implied into a contract between the parties if it is necessary to give business efficacy to the contract and that no term will be implied if the contract is effective without it.

18. Whatever was the contract between the Plaintiff and the 1st Defendant prior to 6th July 1993, it is clear that the Court has before it the contractual documents (with the only possible exception being the Schedule of Rates). Clause 2 of the Special Conditions of Contract which is set out above purports, in effect, to apply the terms and conditions of the main contract to the subcontract between the Plaintiff and the 3rd Defendant.

19. One of the terms and conditions of the main contract is clause 22 which reads as follows :-

"22. Disturbance to progress

(1) Subject to compliance by the Sub-contractor with its obligations under Clause 4 and Clause 23 and to the Sub-contractor having afforded the Contractor in sufficient time all information and assistance which the Contractor may reasonably have required in writing, the Contractor shall use all reasonable endeavours to secure from the Employer such financial compensation, if any, as may be claimable in accordance with the Contract in the event of material delay or disruption to the progress of the Sub-contract Works. On receiving any such financial compensation from the Employer, the Contractor shall in turn allow to the Sub-contractor such proportion thereof as may in all the circumstances be fair and reasonable."

20. Mr. Thomas argued strenuously that the Plaintiff is in the circumstances entitled to the benefit of this clause. There is, on the Appellants' case, provision in the subcontract itself to cater for circumstances where the works have been delayed through no fault of the Plaintiff and the Plaintiff has thus incurred substantial extra costs or has been caused to suffer a loss.

21. In my view, there is force in this argument. Since, on the face of the matter as will be referred to below, there is provision to cater for extra costs caused by delays, no such term as has been considered in the course of argument should be implied. Neither do I consider on the plain wording of the letter of the 7th September, in its context as part of the sub-contract of the 6th July can it be said that the contract rate of $12.69 per cubic metre clearly applied for 13 months only. What the letter of the 7th September says is that the rates had been worked out on the basis that the work would take 13 months. That, it seems to me, is perhaps an important ingredient, if not starting point, for an assessment of what might be fair and reasonable as compensation in accordance with clause 22(1) as applied by reason of Special condition (2).

The effect of the oral contract between the 1st Defendant and the Plaintiff

22. On the footing that the analysis above is correct, it follows that any contractual relationship based on the September agreement between the Plaintiff and the 1st Defendant ceased as of the 6th July 1993. It is immaterial, therefore, to consider whether if the letter of 7th September 1992 alone constituted the basis of the contractual arrangements, the Plaintiff's argument that it was, in the light of substantial delay after the 13-month period, entitled to remuneration on the basis of quantum meruit. There is perhaps a stronger case for arguing that it might have been. But even then, there would have been difficulties in its way. In the first place, for almost the entire period beyond the first 13 months of the work the Plaintiff requested the basic remuneration at the rate of $12.69 per cubic metre albeit asking for compensation in respect of the delays. In those circumstances, it seems to me impossible to suggest that the Plaintiff would be estopped from claiming such compensation but the real difficulty would lie, even on the bare wording of the letter, in construing it in such a way that would give rise to such a claim.

23. The correspondence, as I shall demonstrate, shows that the 1st and 3rd Defendants during the material time accepted in principle the Plaintiff's entitlement to compensation in respect of the delay and if there were any equity in the matter, it would be to prevent the Appellants denying the Plaintiff's entitlement to a share of the compensation received by the 1st and 3rd Defendants in respect of the delay.

The Correspondence

24. The bulk of the correspondence between the parties after the commencement of the works was between the Plaintiff and the 1st Defendant. In my view, little turns upon the fact that a great deal of the correspondence was not addressed directly to or from the 3rd Defendant since it seems agreed upon all accounts that the 1st Defendant was in a natural position to speak on behalf of the 3rd Defendant. It was a holding company of the 3rd Defendant, and, in view of the relationship between the 1st and 3rd Defendants, the Directors of the 1st Defendant felt themselves in a position to correspond on behalf of the 3rd Defendant, as indeed they expressed in the course of the correspondence. The correspondence, in my view, is illuminative. A number of things emerge from it :-

(1) From an early stage, the Plaintiff raised complaints that the delays, for which it considered it was not responsible since they were caused by the Defendants, the joint venture, the main contracting party and others, were causing substantially increased costs and caused consequent losses;

(2) The 1st and 3rd Defendants accepted that there were delays for which the Plaintiff was not responsible;

(3) The Plaintiff had put in calculations directed to showing what were its losses on the subcontract by reason of the delays;

(4) the 1st and 3rd Defendants were making claims against the LEJV which :

(i) took into account the effect of the delays to the Plaintiff; and

(ii) were directed to maximising the recovery.

(5) At a time when the initial 13-month period had just expired, and the period beyond that was commencing the 1st and 3rd Defendants expressed themselves satisfied that the Plaintiff had provided the Defendants with the relevant details for inclusion in the claim.

25. Almost before the work began, the Plaintiff was complaining in correspondence about delays. In the Plaintiff's letter of the 29th December 1992, there was already an indication that a claim for delay would be made. The initial delay seems to have been caused by the fact that LEJV's loading jetty would not be ready until March 1993. But, the correspondence can be taken up in the Plaintiff's letter to the 1st Defendant on 22nd April 1993. In that, the Plaintiff complained about the slow progress of the works which was causing, amongst other things, the machinery to be under-utilised. Nevertheless, the Plaintiff referred in that letter to prospective improved productivity from the next month onwards and the letter referred to a foreseeable profit of some HK$3.8 million. Attached to that letter was the Plaintiff's profit and loss account up to the end of March 1993 with the profit and loss projection up to the end of the contract which, at that stage, was said to be October that year.

26. The Plaintiff's letter of 23rd July 1993 shows that the projected completion date had, by then, been put back to March 1994. The Plaintiff was projecting a profit on the contract then of only HK$0.8 million with worse projections should the works be delayed further. In that letter, the Plaintiff asked "..... whether contractually it is possible for HDL (i.e. the Plaintiff) to claim LEJV through Wai Kee." The letter ends by stating that the Plaintiff would not wish to cause the 1st Defendant any financial loss and then asked the question :

"In case it is difficult to proceed, would you suggest any other alternative to deal with this situation. We are awaiting to hearing from you soon."

That letter enclosed the 2nd quarter profit and loss and the latest forecast balance sheets for the work in progress.

27. When the Plaintiff sent their 3rd quarter profit and loss and balance sheet for the Tai O project on 1st November 1993, they said :

"Certain suppliers have indicated their prices will be increased after the supply contract expires at end 93. Again, the additional work period heavily impacts to our overheads. We see our D & B cost in 1994 would be much higher than budget."

28. That letter was followed by a letter of 29th November 1993 addressed to the 3rd Defendant but care of the 1st Defendant. That starts off :

"We are formally writing to submit our claim of drill & blast work amounting Hong Kong Dollar $4,291,600 incurred due to the blasting work delay to June 94. The contractual duration as specified in our offer dated September 7, 1992 which forms part of our subcontract document, is due to expire on November 30, 1993. The rock blasted so far, in our estimate, represents only 63% of the original 1,560,000M3."

The letter goes on to explain that the impact on the costs of overheads, manpower, materials and inflation was such that the Plaintiff was compelled to ask for compensation. That letter included not only a copy of the quotation of 7th September 1992 but also a sheet headed "Statement of Claim - Summary Financial Implication". This was an itemised account apparently showing the budget which had been allowed for staff, shortfirers, drillers, operators, explosive plant, explosives and other costs and the actual costs, the difference coming to the figure which was quoted in the letter. The letter also included separate sheets showing more detailed costings.

29. The 1st Defendant replied to that letter on the 24th December that year. The second paragraph contained an admission that the contract works had been delayed due to delays in handover of sections of the work from the joint venture in particular the seawall and it carried on :

"As you are aware we are pursuing claims against the Engineer and LEJV in respect of these delays and will certainly include for your related costs as part of our claim for extension of time and associated costs. To this end you have already provided us with the relevant details for inclusion in our claim to the Engineer." (emphasis added)

30. The letter goes on to assure the Plaintiff that "we must do our utmost to maximise recovery" of the claims. The letter expresses appreciation for the Plaintiff's effort in this regard and says that the information provided by the Plaintiff will be included in the claims to the Engineer. The letter concludes that if the Appellants' claims for delay are successful and result in extensions of time being granted and/or costs being paid, the effect of such delays would be taken into account in the evaluation of the Plaintiff's work.

31. This letter is important. Not only was it an acknowledgement of the delay and the propriety of the Plaintiff's claim but it in no way suggested the Plaintiff's information was incomplete or lacking in necessary particulars. Importantly, it was not suggested that other or different information was required or that other records should be provided or kept.

32. On the 22nd January the following year, the Plaintiff wrote to the 1st Defendant acknowledging its letter of the 23rd December as being in response to the Plaintiff's letter of claim of the 29th November. The letter concluded with the sentence :

"However, we wish to maintain our right of claim for additional costs due to delays to our works to date."

33. On 25th April 1994, the Plaintiff again wrote to the 1st Defendant expressing its concerns over the delays, the Plaintiff had apparently recently heard that the work was to be delayed for another 2 months. The letter concluded by maintaining the Plaintiff's right to claim for additional costs for the further delay beyond June 1994.

34. On the 23rd May, the Plaintiff wrote to the 1st Defendant addressing the letter to Mr. William Zen and enclosing a copy of their financial report to the end of March 1994. The letter concluded that unless compensation for the delay could be resolved, the Plaintiff was apprehensive that it could not afford to bear the increased costs any further.

35. On 7th June 1994, the Plaintiff wrote to the 3rd Defendant, the address being the same as that of the 1st Defendant, and the letter was marked attention Mr. Derek Zen. That letter included a summary of the cost impact showing that the net costs increase had by then reached nearly HK$6.3 million. The extension was now said to be to October 1994 and it is quite clear from that letter also that the Plaintiff was seeking to be compensated for its losses.

36. In a letter signed by Mr. Derek Zen, the 1st Defendant replied to the Plaintiff on 16th June 1994, saying that serious delays had been experienced in respect of the contract programme and expressing the understanding that the Plaintiff's subcontract works had been affected. The letter stated, inter alia :

"The main delay to our contract work has been the late handover of the seawalls from the LEJV and this has resulted in consequential delays to our other activities, particularly the earthworks which includes your drilling and blasting works. We are pursuing claims for extensions of time and related costs accordingly, however our claim is part of the LEJV's major claim to the Engineer, which is based on a dispute regarding the dredging works. As previously discussed, we have included the consequent delays to your subcontract works as part of our claim to LEJV."

37. The next paragraph goes on to be optimistic that some resolution to the claim will be arrived at and that is followed by the statement :

"We will keep you informed of any further developments and in the event that our claims for delays are successful and result in extensions of time being granted and/or costs being awarded the effect of such delays on your part of the works will taken into account in the evaluation of your work."

38. There then follows a paragraph in which it is stated that the comparison of the budget and forecast actual costs was considered to be of little relevance because "Any additional payment relating to claims for delay will be evaluated following settlement of our claim with LEJV as described above."

39. Again, this letter makes no suggestion of any deficiency in the records kept or provided by the Plaintiff, even if it does presage the rough mode of assessment of the Plaintiff's claim which the Defendants later suggested.

40. Eleven days later on 27th June 1994, Mr. Ian Cheong ,who described himself as the Project Manager, again wrote on behalf of the 1st Defendant, saying :

"Should LEJV's claim against the Engineer be successful, an additional payment shall be made on the basis of delays to your works."

41. The Plaintiff replied on 25th July 1994 urging the Defendants to proceed with the claim as quickly as possible.

42. On 25th October 1994, the Plaintiff again wrote to the 3rd Defendant, care of the 1st Defendant and attention Mr. William Zen. The letter refers to the targeted contract completion date being further postponed this time to December 1994 and enclosing the profit and loss figures together with the balance sheet as at the 31st August. That letter asked for an advance of HK$1 million to the Plaintiff in respect of its claim.

43. That letter was replied to on the 28th October by Mr. Derek Zen writing on the 1st Defendant's note paper declining to make an advance saying :

"You will appreciate that we have given you the undertaking that in the event that our claims for delays are successful and result in extensions of time being granted and/or costs being awarded the effect of such delays on your part of the works will taken into account in the evaluation of your work."

44. On the 18th November, Mr. Derek Zen wrote, again, on the 1st Defendant's note paper, to the Plaintiff enclosing copies of the subcontract between the joint venture and the 1st Defendant, a copy of Volume 2 of the main contract and copies of the up-to-date contract programmes. This letter obviously followed oral discussions between the parties but the effect of those is unclear. Again, there was no suggestion that the materials provided by the Plaintiff to the 1st and 3rd Defendants were not adequate for them to make a claim in respect of the delays.

45. However, there was a subsequent exchange with a letter from the Plaintiff on the 12th December, again, asking for the advance and complaining of the delay which had, by then, extended to a period equal to, if not more than, the original contract period. On the 13th December, Mr. Derek Zen wrote to the Plaintiff on the 1st Defendant's note paper and, for the first time, gave some hint that the Plaintiff might consider the material provided by the Plaintiff might not be sufficient. It read :

"In your letter of 25 October 1994, your claim is on the basis of an optimistic losses on an extended period. With your information submitted, it cannot identify your actual expenses incurred or all such losses are solely due to the delays of this contract. We draw your attention to clauses 8.1, 8.2 and 8.3 of the conditions of sub-contract in respect of your liabilities of completion of your sub-contract works.

In your second paragraph, you have confused the position of your claim. Before seeking for assessing your financial claim submitted, you must have to submit us for the valid proof and substantiation of the delays caused for our perusal. (emphasis added)

In view of aforesaid, we cannot entertain your financial claim in this instance prior to your claim is justified as an authorized or valid extension of time."

46. This it will be noted was almost exactly a year after the 1st and 3rd Defendants had expressed themselves satisfied with what had been produced.

47. The Plaintiff wrote to the 1st and 3rd Defendants on the 3rd January 1995 enclosing particulars of their claim for delay up to the 30th November 1994 which, by then, totalled HK$6,215,900. There were detailed charts relating to the various aspects of the work and the delays were clearly put at the door of the joint venture and indeed the Defendants.

48. The correspondence by this stage was becoming more hostile and on the 16th January, Mr. Mak on behalf of the 1st Defendant wrote back indicating that he was replying on behalf of both the 1st and 3rd Defendants. In contrast to the earlier letters including, for example, the indication in the letter of 24th December 1993 that relevant details in relation to the delay claim had been provided by the Plaintiff and the statement in that letter and in the letter of 16th June 1994 indicating that the main delay was due to late handover of seawalls, this letter of the 16th January 1995 appears to suggest that some of the delays might have been caused by the Plaintiff and that the Plaintiff had not supplied sufficient details. The letter concludes :

"For your claim for extra expenses due to delays of the subcontract period, it shall be determined in accordance with Clauses 8.2 and 8.3 of the Conditions of Subcontract if an extension of time is granted related to your subcontract as under the Contract."

49. On the 28th February, the Plaintiff wrote to the 1st Defendant attention Mr. Mak enclosing further particulars of their claim including a number of charts and tables. The claim by this stage reached HK$7,412,700.

50. On the 8th March, the Plaintiff again wrote to the 1st Defendant attention Mr. Mak commencing :

"We refer to the meeting which took place on 28th February, 1995 with your Messrs. Mak and Yu to discuss the claim which we have made in connection with the above contract. At that meeting you asked us to defer discussions until the completion of the contract, which anticipated next month. You also indicated that you were going to incorporate our claim into the one you are making to LEJV as employer."

51. The Plaintiff made clear its position that it did not necessarily regard itself as bound by the limitations in the agreement with the 3rd Defendant but that it also had rights under the agreement with the 1st Defendant under the letter of the 7th September. There were some subsequent letters intervening but the 1st Defendant appears to have replied to the Plaintiff in the letter of the 25th April 1995 signed by Mr. Mak in which he said curiously :

"We write to reiterate that there is one and only one legal and binding contract, which was signed by both parties, between Wai Kee and Happy Dynasty Ltd. We believe all contractual matters should be dealt with according to the terms and clauses stipulated therein."

52. One can only assume that Mr. Mak must have been referring to the contract between the Plaintiff and the 3rd Defendant but the letter concludes inviting the Plaintiff to defer discussions, presumably to await the outcome of the 1st and 3rd Defendants' claims against the joint venture.

53. The basis of the judgment in the Court below was that the Plaintiff was entitled to a quantum meruit as against both the 1st and 3rd Defendants. For the reasons set out above, in my view, the claim against the 1st Defendant fails because the contract between the Plaintiff and the 1st Defendant was rescinded as part of the novation constituted by the contract between the Plaintiff and the 3rd Defendant. The claim in quantum meruit against the 3rd Defendant fails because, it seems to me, impossible to imply a term into the subcontract along the lines that would be necessary for the claim to be sustained.

Assessment of the quantum meruit

54. A specific attack was levelled by Mr. Thomas in respect of the way in which the quantum meruit was assessed. In view of the decision to which I have come, it would be unnecessary to examine this as it does not arise. However, as a matter of principle, it does not appear to me that the basis upon which the Judge below assessed the quantum meruit was necessarily in error.

55. The Appellants asserted that the quantum meruit should be assessed on the basis of the costs of carrying out the work plus an element for profit. That is, of course, one way of assessing a quantum meruit but, as was conceded in the course of argument by Mr. Thomas, is not the only way of assessing a quantum meruit. A quantum meruit is an assessment by the Court of what the work carried out was worth. In most cases, a Court would probably opt for assessing that on the basis of standard contract rates for carrying out the work. In this instance, there are no such standard rates which could be used. In broad terms, the Judge below assessed the quantum meruit on the basis of the additional costs of the items in the subcontract work which were affected by the prolongation of the time for carrying out the works. As a matter of calculation, this might not be unfair, as it preserved for the Plaintiff a profit element which was consistent with the profit element which had been built into the original contract. Since the drilling and blasting works of the subcontract appear to be so specialised that there is no standard rate for the work, it does not seem to me to be wrong in principle that the Plaintiff should be in a position to maintain a substantial profit element and I see no reason why the Plaintiff should be limited to a 12 1/2% profit return if it is carrying out such unusual and no doubt skilled tasks. Furthermore, starting with the letter of 7th September 1992, it seems that the Plaintiff has been open about its costing and profits and had throughout shown the Defendants exactly how its calculations were made.

The alternative claim

56. During the course of the trial, the Judge permitted a further amendment to the already re-re-re-amended Statement of Claim by the inclusion of 3 sub-paragraphs. Paragraph 22C), which was one of those paragraphs, has been included in the bundles but not as of yet apparently included in a formally drawn up further amended Statement of Claim. It reads as follows :-

"If (which is the contention of the 1st and 3rd Defendants but denied as the primary case of the Plaintiff) it be held the contractual arrangements between the Plaintiff and the 1st and/or 3rd Defendant were 'back to back' meaning that the rights or entitlement of the Plaintiff to obtain compensation or additional payment because their works had been delayed, disrupted or otherwise prolonged depended upon the 1st and/or 3rd Defendants being entitled to recover or recovering compensation or additional payment from LEJV for delay, disruption or prolongation, then the Plaintiff invokes and relies on the fact that the 1st and/or 3rd Defendant was so entitled and did recover from LEJV a sum of at least HK$20 million (and other valuable benefits and consideration) as compensation or additional payment for delay, disruption or prolongation of the works which included the Plaintiff's drilling and blasting works and the Plaintiff claims the sum of $9,670,362 or alternatively $7,661,101 together with interest upon such sums or such other sum as may be held appropriate from the 1st and/or 3rd Defendant by virtue of its right or entitlement arising from such 'back to back' arrangements."

57. The pleaded Defence to the alternative claim is also contained in separate sheets which were apparently treated as forming part of the pleadings, although not incorporated as part of a new formal document. That pleading admits that if there was an agreement in September 1992 between the Plaintiff and the 1st Defendant, then it was an express or implied term of the agreement that the Plaintiff had such rights as the 1st Defendant had under its contract. Clearly, there was no express term to that effect and hence it is the Appellants' case that it was an implied term.

58. It was also the Appellants' case as pleaded in the same document that the Plaintiff had rights pursuant to the agreement of the 6th July 1993 to payment from the 3rd Defendant in respect of loss and expense that was recoverable under circumstances that would give rise to a right to payment to the LEJV under clause 68 of its contract with the Employer. Those circumstances relate to loss occasioned by progress of the Works having been materially affected by, inter alia, delay which was "caused by any person or company ..... in executing work directly connected with but not forming part of the works .....".

59. There can be no doubt that those conditions were satisfied because that was the basis on which the 1st Defendant itself recovered the sum of $20 million referred to in the pleadings. The very fact of that payment, it seems to me, established that the Appellants were entitled to compensation by reason of clause 22(1) of their sub-contract and clause 68 of the LEJV contract with the Employer. Furthermore, although it was only necessary on the basis of the Judge's reasoning for him to find that the delay was not caused by the Plaintiff, he in fact found the causes of the delay and listed them at pages 11 and 12 of his Judgment. These all fall within the range which would bring the Plaintiff within clauses 22(1) and clause 68.

60. Mr. Thomas took 2 points as to why the Plaintiff was not entitled to recover under this heading.

61. The major point taken was that there was no repudiation by the Appellants of the Plaintiff's claim. It was argued on behalf of the Appellants that the Plaintiff was not entitled to make that claim now but had to negotiate with the Appellants first and, failing any proper offer by the Appellants, it would then be in a position to make a claim. This seems to me to be unacceptable.

62. The payment of $20 million in question was apparently made within a few weeks of the commencement of these proceedings in late 1995. The payment was made to the 1st Defendant who passed the whole amount to the 3rd Defendant. As the Judge found in his judgment "that was not made known to the Plaintiff until during the trial."

63. Mr. Thomas attempted to suggest that that might not be so and when pressed by the Court as to what evidence could be pointed to to show that the payment had been revealed earlier, attention was directed to a number of passages in the transcript of Days 25 and 26 of the trial. But these, neither singly, nor in combination, showed that the Judge's finding in this respect was wrong. Indeed, it appears to have been the basis upon which the parties proceeded in the Court below that this payment was only revealed in discovery given at a late stage of the trial.

64. What is clear from the passages in the evidence which were drawn to our attention is that the figure of HK$20 million was arrived at between the Defendants and the LEJV on a very broad basis with scarcely any discussion or negotiation at all. Far from the Appellants using the Plaintiff's figures or calculations or requiring them for the purposes of their negotiation with the LEJV, it would appear that the figure was arrived at on a very rough and ready basis and with realistically no negotiation at all. According to Mr. Hodge, who was called on behalf of the Appellants, the discussions took about half an hour.

65. In view of the Plaintiff's many protestations in the correspondence to which I have referred that they would assess the Plaintiff's claim once their claim had been settled, it seems to me that it must be difficult for the Appellants to deny that the Plaintiff is entitled now to seek a "fair and reasonable" proportion of that sum. As was shown by the correspondence the Defendants were asserting that when their claim with the LEJV was settled, they would ensure that the Plaintiff would receive proper compensation. This, they never did. Instead, as the Judge found, they remained silent about the $20 million. The entitlement to compensation under clause 22(1) is not dependent upon a failure to negotiate.

66. It was said on behalf of the Appellants that they had not repudiated their obligation and hence a cause of action had not arisen. However, as the passages in the transcript, to which our attention had been drawn for the purposes of trying to show that the $20 million payment had been disclosed, demonstrate the Appellants were offering the Plaintiff in the region of $1-2 million and the Plaintiff considers that sum comes nowhere near to meeting its just entitlement. In my view, there is clearly sufficient lis between the parties that it cannot be said that there is no right to litigate.

67. It was then said that the Appellants have never been given proper quantification of the figures for delay and disruption nor had they had access to the records relating to under-utilisation of the equipment. As I have pointed out, that is difficult to make out, since in December 1993 and after, at a time when additional records could have been started to be kept and provided, the Appellants were expressing themselves satisfied as to the material provided to them for the purposes of making a claim. This assertion is even more surprising in view of the broad brush approach which the Appellants took with the LEJV when it came to agreeing the figure of $20 million. In any event, the failure to provide such records might go as to the quantum recoverable, namely the assessment of what is fair and reasonable, but it does not go as to the entitlement to recover something.

68. In those circumstances, it seems to me that the Plaintiff is entitled to be allowed by the 1st and 3rd Defendants such proportion of the HK$20 million as may, in all the circumstances, be fair and reasonable.

69. There was no dispute that the Plaintiff was entitled to the sums of $1,148,412.00, $3,000.00 and $411,180.00 listed under heads (1) to (3) inclusive on page 24 of the Judgment.

70. In my view, in so far as the Judgment below was based on Quantum Meruit, that is the element of $7,357,000.00, it should be set aside. However, the Plaintiff seems to me to be entitled to have a sum assessed namely such proportion of the $20 million as may, in all the circumstances, be fair and reasonable.

71. What proportion of that sum would be fair and reasonable is not for this Court to suggest. However, it seems to me that when the assessment is made, one of the factors that can be taken into account is that the Judge has found after hearing many days of evidence that the extra costs involved of the work occasioned by the delay extending the time of the works from 13 months to 31 months, less 3.5 months costs, was $7,357,173.00. Furthermore, the circumstances in which the Appellants negotiated with the LEJV concluding an agreement as to the $20 million in about half an hour without any detailed consideration of the figures is another matter which, in my view, may be taken into consideration, particularly since it may be relevant to consider whether the sum of $20 million reflects whether any proper consideration was given as to the Plaintiffs' rights.

72. I would therefore propose that this Court should Order an inquiry to be made as to what proportion of the $20 million as may, in all the circumstances, be fair and reasonable, and that there be an order for payment by the 3rd Defendant of such sum as is so found.

Leong, J.A. :

73. For the reasons given by Rogers, J.A. I agree that the 1st defendant's appeal should be allowed. I also agree to the orders proposed to be made in respect of the 3rd defendant in this appeal.

Godfrey, J.A. :

74. I agree with Rogers, J.A. that the plaintiff's claim against the 1st defendant fails because, after 6 July 1993, the plaintiff must be taken as having accepted the 3rd defendant in the place of the 1st defendant as the party liable to remunerate the plaintiff for the work done by the plaintiff under the arrangements it had made with the 1st defendant in September 1992. We must, therefore, allow the 1st defendant's appeal.

75. I also agree with Rogers, J.A. that we cannot imply into the contract between the plaintiff and the 3rd defendant a term having the effect for which the plaintiff contended, i.e. a term that the rate for the work was to be $12.69 per cubic metre for the first 13 months work only and was thereafter (if the work took substantially longer than 13 months) to be such rate as would be fair and reasonable. If the officious bystander had put it to the parties' representatives on 6 July 1993 that that was their intention, I do not think for one moment that they would both have suppressed him with a testy "Oh, of course"! They would, perhaps, have thanked him for his intervention and gone on to negotiate between themselves what was to be the rate for the work, or a suitable formula for its re-calculation, if the common assumption on which they were proceeding, that the work would take, or take about, 13 months, was falsified by subsequent events. But to treat the uncertain and imprecise term which the plaintiff says the court should imply into the contract as one which both parties would unhesitatingly have accepted as going without saying is quite impossible.

76. And the fact is that the contract between the parties did provide, in express terms, for the way in which the plaintiff was to be compensated in the event which happened, i.e., "material delay or disruption" to the progress of the contract beyond the 13-month period. The relevant provision is clause 22(1), to which Rogers, J.A. has referred. Under clause 22(1), it is the duty of the 3rd defendant to allow the plaintiff, out of the sum of $20 m which has been received by the 3rd defendant by way of compensation, "such proportion thereof as may in all the circumstances be fair and reasonable." As Rogers, J.A. has remarked, what proportion of that sum of $20 m would, in fact, be fair and reasonable is not for this court to suggest; but I have little doubt it will be substantial.

77. For these reasons, I agree with Rogers, J.A. that we should order an Inquiry as to what proportion of the $20 m it is, in all the circumstances, fair and reasonable for the 3rd defendant to allow the plaintiff; and an order that the 3rd defendant do pay to the plaintiff the sum certified under the Inquiry to be due from the 3rd defendant to the plaintiff.

78. Save as aforesaid, I would make no order on the 3rd defendant's appeal, other than to set aside the order made against the 3rd defendant below. The appeal may, if necessary, be restored to the list on the application of any party for argument as to what order we should make as to costs.