WING HING ENGINEERING INVESTMENT LTD v. FORIC LTD t/a CITY ENGINEERING CO AND ANOTHER

HCA 2287/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2287 OF 2005

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J U D G M E N T

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Introduction

1.  In this action, the plaintiff claims damages against the 1^st defendant for breach of contract, being a sub-contract to carry out electrical works at the Students’ Residence Hall at Flora Ho Sports Centre of the Hong Kong University. The plaintiff says the 1^st defendant repudiated the contract when the workers went on strike on 15 March 2005 and the 1^st defendant failed to terminate the strike and mobilize the workers to resume work after a 24-hour notice.

2.  The 2^nd defendant is a director and shareholder of the 1^st defendant and is sued on a guarantee he made in favour of the plaintiff to be responsible for the payment of any loss and damage suffered by the plaintiff as a result of the 1^st defendant’s failure to perform the contract. The 1^st defendant counterclaims against the plaintiff for the sum of $409,284.44 comprising mainly of “additional works”, i.e. works outside the scope of the original contract said to have been carried out on site pursuant to the instructions of the plaintiff, in the sum of $429,270, less a sum of $71,439.49 already paid.

3.  The contract sum for the sub-contract works was $3,000,000. The 1^st defendant sub-contracted the whole of the works to Lau Kam Ming (“Mr Lau”) at the price of $2,100,000. Mr Lau had previously worked as a foreman in several construction projects undertaken by the 1^st defendant. Prior to this sub-contract, he had had no experience in undertaking work as a sub-contractor himself. At the behest of the 1st defendant, Mr Lau took out a business registration. He adopted the business name of Wing Lee Construction Company (“Wing Lee”). The defendants commenced third party proceedings naming Wing Lee as the 1^st third party and Lau Kam Ming as the 2^nd third party. But since Wing Lee is an unincorporated concern, this is in fact unnecessary, as Mr Lau and Wing Lee are one and the same in law. For convenience, I shall refer to the third parties simply as “Mr Lau”. The defendants’ averment in the third party proceedings is that if the 1^st defendant is liable for breach of contract to the plaintiff, that breach was solely caused by Mr Lau’s failure to carry out the sub-contract. Mr Lau is also sued on a guarantee he made in favour of the 1st defendant similar to the one that the 2^nd defendant gave to the plaintiff. Mr Lau had originally pleaded a counterclaim against the defendants quantified at $986,352 in respect of “additional works” which were not works under the original contract. On the second day of the trial, counsel for Mr Lau informed the Court that he will not be pursuing the counterclaim having regard to the financial capability of the defendants.

4.  The defendants were previously represented by solicitors and counsel. Shortly before the trial, the solicitors for the defendants ceased to act and the defendants were unrepresented at the trial. I gave leave to the 2^nd defendant, (“Mr Chung”), to represent the 1^st defendant. Their interests in these proceedings are the same.

5.  Both the contract between the plaintiff and the 1^st defendant, and the sub-contract between the 1^st defendant and Mr Lau were recorded in writing. As one would expect, the sub-contract contained terms which mirrored those in the contract.

6.  Clause 3.2 of the contract between the plaintiff and the 1^st defendant provided that monthly progress payment would be made and arranged according to the payment schedule in Appendix 1; the plaintiff agreed to review and settle the 1^st defendant’s monthly progress payment within 14 days from the date of progress confirmation by plaintiff’s representative. In the sub-contract, there is a corresponding provision, namely clause C2, which stipulated that monthly progress payment would be made and arranged according to the payment schedule in Appendix 1 (a document which mirrored the Appendix 1 in the contract between the plaintiff and the 1^st defendant save that the amounts for items of work were varied). The 1^st defendant agreed to review and settle Mr Lau’s monthly progress payment within 21 days from the date of progress confirmation by 1^st defendant’s representative. Both the contract and the sub-contract contained a clause which required payment to be made to all site staff within 3 days of receipt of payment.

7.  There is no dispute that Mr Lau started work on the site some time before April 2004. Between April and November 2004, Mr Lau submitted payment applications to the 1^st defendant, who in turn made corresponding payment applications to the plaintiff.

8.  The evidence, which I accept, shows that difficulties were encountered some time in about November 2004. There was grumblings from workers that they were not receiving their wages. In December 2004, there was a meeting held at the plaintiff’s office at which Mr Chung, acting on behalf of the 1^st defendant, agreed to the plaintiff paying the 8^th and 9^th interim payments directly to Mr Lau. This agreement was recorded in a letter dated 26 January 2005 signed by all three parties, i.e. Mr Tang on behalf of the plaintiff, Mr Chung and Mr Lau. On 13 December 2004, the plaintiff paid a sum of $206,000 to Mr Lau used for the payment of wages of the workers, in respect of which the 1^st defendant signed for its receipt. On 28 January 2005, another payment of $203,550 was made for the payment of wages, for which the 1^st defendant gave its receipt.

9.  On or about 12 March 2005, Mr Lau wrote to the 1^st defendant (for Mr Chung’s attention) in which Mr Lau stated that he would cease to continue with the sub-contract as from 12 March 2005 because the 1^st defendant had no money to pay his wages. There is no dispute that the workers went on strike on 15 March 2005. It is also not disputed that the cause for the strike was because the workers were not getting paid. Nor is there any dispute that the plaintiff issued a warning letter to the 1^st defendant on 15 March 2005 in which the 1^st defendant was given 24 hours to resolve the strike. The workers did not resume their work on 16 March 2005 and the plaintiff issued another letter on that day to the 1^st defendant to record the latter’s agreement to the termination of the contract. The reasons stated in the letter for the termination were:

“1.  You are unable to demonstrate that your Company is capable in managing this project.

2.  Your Company did always hold payments of your workers.

3.  Having checked the captioned Site this morning by our Mr C S Lai, it is confirmed that none of your workers was working (i.e. all your workers were still on strike.)”

The plaintiff’s claim against the defendants

10.  The 1^st defendant was under a contractual obligation to proceed the work with due diligence. A failure to do so, which was persisted in after the giving of reasonable notice, would prima facie constitute a repudiatory breach of the sub-contract. The plaintiff cannot be expected to wait indefinitely until the labour problem which occurred could be resolved.

11.  In the Defence and Counterclaim filed on behalf of the defendants, the only plea which could be read as any defence to the claim is paragraph 12, which reads:

“On or about 19April 2004, the 1^st Third Party commenced the Works pursuant to the Sub-contract. Due to the delay caused by the principal contractor, the 1^st Third Party was unable to carry out the Works in accordance with the agreed schedules.”

12.  There were, however, no particulars supplied to support the plea that the “principal contractor”, whatever that means, has been guilty of delay. This defence was not pursued at the trial.

13.  At an early stage of these proceedings, Mr Chung also suggested that it was because the plaintiff failed to make payment, that the workers refused to carry out the works. There was however no evidence to support this contention, and it was expressly abandoned by Mr Chung during the trial.

14.  Mr Chung had earlier filed a witness statement in which he asserted that some time around 28 February 2008, he had a discussion with a Mr Tang (who was the deputy project manager employed by the plaintiff), and that on that occasion, he and Mr Tang agreed that the work completed was of a value of $2,341,626; and that deducting the amount paid, which was $2,290,172.07, Mr Tang, on behalf of the plaintiff, agreed to pay the 1^st defendant $51,543.93. He claimed that the handwriting on the document at bundle 2B page 754 was Mr Tang’s. This is a document copied from Appendix 1 of the contract which set out the items of work and the amounts for each item. Thedocument contains handwritten notations of percentages and figures against the printed amounts. The figures in handwriting add up to 2,341,626. In the witness statement, Mr Chung further claimed that it was then agreed that the contract between the plaintiff and the 1^st defendant was thereby mutually agreed to be terminated. He stated in the witness statement that he duly informed Mr Lau of the termination, and that Mr Lau did not object to this arrangement. According to Mr Chung, he had, prior to this meeting, issued a payment application (the 10^th) for $161,706.93.

15.  These assertions were hotly disputed by the plaintiff. Mr Tang denied that the handwriting on the document relied on by Mr Chung was his, and also denied that he even saw Mr Chung on 28 February 2005.

16.  It is worth noting that in the Defence and Counterclaim, the defendants only averred in paragraph 13 that as at 28 February 2005, the plaintiff and the 1^st defendant agreed upon the percentages of works set out in the document at 2B page 754. There was then no averment that the parties agreed to terminate the contract. Since this case of mutual termination has not been pleaded, it is strictly not open to the defendants to rely on this defence. I would in any event have rejected it, as I am not satisfied on the balance of probabilities that whatever happened on 28 February 2005 was a mutual termination. The document at 2B page 754 does not purport to record any consensual agreement to terminate. When the defendants were sued and had to give instructions to prepare a Defence, there was then no suggestion that he could not possibly have any further liability because of a mutual agreement to terminate the contract. Also, had there been a termination, Mr Chung would have certainly told Mr Lau about it. I accept Mr Lau’s evidence that he was never informed. If he was told, it would not have been necessary for him to write the letter of 12 March 2005.

17.  In my judgment, the plaintiff has established that the 1^st defendant was guilty of a repudiatory breach of the agreement, and that it was entitled to and did accept the repudiation on 16 March 2005. The 1^st defendant is therefore liable to pay such damages as the plaintiff may be able to prove it has sustained by reason of the breach of the agreement. The 2^nd defendant is liable on the guarantee for the payment of any loss and damage suffered by the plaintiff as a result of the 1^st defendant’s failure to perform the contract.

Claim by the defendants against Mr Lau

18.  Before I turn to consider quantum, it will be convenient to consider the position as between the defendants and Mr Lau. As I indicated above, the defendants’ contention was that if the 1^st defendant was in breach of its agreement with the plaintiff, that was because Mr Lau was in breach of his contract with the 1^st defendant. Mr Lau’s contention, however, was that he was entitled to and did terminate the contract he had with the 1^st defendant by letter dated 12 March 2005 because the 1^st defendant failed to honour his obligation to make payment to Mr Lau’s workers.

19.  Mr Chung denied that he failed to make payment to Mr Lau or his workers. He pointed to the fact that at the meeting in December 2004 at the plaintiff’s office, the plaintiff agreed to pay Mr Lau directly, and the fact that Mr Lau had been so paid. It is, however, evident from the contents of the letter of 26 January 2005 that this arrangement was intended to cover only payments no. 8 and 9. It did not relieve the 1^st defendant of its obligation to pay Mr Lau. Mr Chung further denied that he received any payment application from Mr Lau during the period between January and March 2005. He said Mr Lau would only give him some figures on a piece of paper, that he would talk to him mostly on the telephone or went to see him at the entrance of his apartment. He said Mr Lau only asked him whether he could help in paying wages, but did not make any payment application. Mr Lau maintained, however, that he did submit payment applications to the 1^st defendant. He said those were handwritten, and only later typed up by his daughter. He was unable, however, to produce the original.

20.  On this conflict of evidence between Mr Chung and Mr Lau, I prefer the evidence of Mr Lau and find that Mr Lau did ask Mr Chung for payment of wages for work done. In my judgment, the precise form in which Mr Lau asked for payment did not matter. The requests might not have been made with any degree of formality, but I have little doubt that Mr Chung would have appreciated that Mr Lau did perform work and required to be paid. There are 3 main reasons for my so finding. First, I find Mr Lau to be an honest and reliable witness. Secondly, the letter dated 12 March 2005 written by Mr Lau referred to the 1^st defendant’s inability to pay wages to his workers. This suggests that Mr Lau did ask Mr Chung for payment, and that the response from Mr Chung to such request was not that Mr Lau had not carried out any work to justify his asking for payment, but that Mr Chung did not have the ability to pay. Thirdly, I consider it not insignificant that on the evidence, which I accept, the 1^st defendant submitted a 10^th interim payment application which he dated 28 February 2005 by fax to the plaintiff only on 16 March 2005, i.e. on the very same day when the plaintiff terminated the contract with the 1^st defendant by reason of the 1^st defendant’s breach. To my mind, this points rather strongly to the fact that the 1^st defendant must have earlier received a payment application from Mr Lau and only belatedly submitted one to the plaintiff. 

21.  In the circumstances, I am not satisfied that Mr Lau was in breach of his contract with the 1^st defendant. I dismiss the third party claim by the defendants.

Counterclaim by 1^st defendant against the plaintiff

22.  The 1^st defendant counterclaims against the plaintiff for the sum of $409,288.44. As indicated in paragraph 2 above, this comprises mainly of the value of additional work. The additional work has been itemized in paragraph 15 of the Defence and Counterclaim. The total amount claimed was $429,270. The 1^st defendant gave credit of $71,439.49 being partial payment received on 28 January 2005; thus claiming a balance of $357,830.51. The items in paragraph 15 of the Defence and Counterclaim correspond to those set out in a document under the 1^st defendant’s letterhead and dated 30 December 2004 head “V.O.” (meaning Variation Order). There are two versions of this document in the bundle. Both contained manuscript writing, but the copy produced by the defendants has on it a figure of $219,270, which is absent on the one produced by the plaintiff. In his witness statement, Mr Chung stated that after he issued the V.O. to the plaintiff, Mr Lai contacted him and went through the V.O. with him. His version then was that Mr Lai said that part of the additional work had not been completed, and the plaintiff would only pay a sum of HK$71,439.49.  This was the payment which the 1^st defendant acknowledged it received. In the witness box, however, Mr Chung claimed that Mr Lai certified $219,270 some time in January or late December.

23.  In addition, the 1^st defendant claims a sum of $51,453.93 as outstanding payment for work within the scope of the contract. This is the figure written in manuscript in the document at bundle 2B page 754 referred to in paragraph 14 above. According to Mr Chung, Mr Tang agreed on behalf of the plaintiff to pay this outstanding amount of $51,453.93 and the words and figures were in Mr Tang’s handwriting. As noted in paragraph 15 above, Mr Tang denied this.

24.  Mr Chung’s credibility has been impugned in other respects. I find I am unable to rely on his evidence on these two matters in his counterclaim when they are cogently disputed by the plaintiff.

Quantum

25.  Miss Tjia for the plaintiff set out a summary of damages in her Closing Submissions. The amount claimed was HK$1,807,393.81. This was calculated as follows:

(1)	Interim payments already made to the 1st defendant	HK$2,290,358.56
	Less: payment for additional works (V.O.)	(HK$71,253.00)
		HK$2,219,105.56
(2)	Payment of wages made to the workers on behalf of the 1st defendant	HK$311,662.00
(3)	Labour Tribunal dispute payment made to the workers on behalf of the 1st defendant	HK$33,973.34
(4)	Costs of subcontracting out part of the works after the 1st defendant’s repudiation	HK$585,272.00
(5)	Payment of wages incurred after the 1st defendant’s repudiation	HK$963,663.51
(6)	MPF contributions	HK$48,183.18
(7)	Costs of small fixing materials, tools, and Safety equipments	HK$25,367.20
	SubTotal:	HK$4,187,226.79
(8)	Plus: Administrative costs (being 15% on Top of the extra costs incurred by the Plainiff	HK$628,084.02
	Total costs incurred:	HK$4,815,310.81
	Less: the Contract sum	(HK$3,000,000.00)
	Less: Refund of Retention money	(HK$7,917.00)
	TOTAL LOSS:	HK$1,807,393.81

26.  It can be seen that the main elements of this claim are (a) the cost of subcontracting out part of the works after the 1^st defendant’s repudiation, being HK$585,272, (b) payment of wages incurred after the 1^st defendant’s repudiation, being HK$963,663.51; and (c) administrative costs (being 15% on top of the extra costs incurred by the plaintiff, in the sum of HK$628,084.01.

27.  All these items are under serious challenge by Mr Chung, and also by Mr Ng on behalf of Mr Lau. Because many of the challenges were made only after the plaintiff closed its case, I gave leave to the plaintiff to recall Mr Wong Shui Hing, one of the plaintiff’s directors.

28.  The main challenge on the plaintiff’s claim on quantum can be summarized as follows.

29.  First, it was pointed out that many of the items claimed were actually outside the scope of the contract. Mr Wong was unable to assist the Court on this. Secondly, Mr Chung contended that by March 2005, most of the work under the original scope of the contract had been completed and it was extraordinary that the plaintiff spent so much additional cost merely to complete the outstanding work.

30.  As to the first point, the evidence does show that the original scope of work had been substantially expanded. It would appear that when the plaintiff carried out its exercise on computing its quantum, no consideration was given to severing those which related to the original scope of the contract with the 1^st defendant and those items which fell outside it. In the circumstances, I am unable to place reliance on the figures affirmed to in a very general way by the plaintiff.

31.  The second point also has some force. Mr Chung was able to demonstrate that many of the workers used by the plaintiff to do what it contended to be remedial work were workers previously hired by Mr Lau. There should not have been the need, as the plaintiff contends, of duplication caused as a result of the abandonment of the work.

32.  I am also not satisfied that the evidence in this case justifies a claim of what is called “administrative costs” of 15% of top of the extra costs incurred. There is included in this 15% a profit element, which is inappropriate on any claim for damages for breach of contract which should be based on additional cost (see Hudson’s Building and Engineering Contracts, 11^th ed., paragraphs 8-190 to 8-191). There is probably included in this 15% an element of additional site overheads incurred as a result of taking over the contract. This element would, in my view, be recoverable as damages. However, there has been no attempt to give any realistic estimate on this. I refuse to accept a blanket claim of 15%.

33.  In the event, the plaintiff has failed to satisfy me on the balance of probabilities that it has suffered loss in the amount claimed. It is trite that a plaintiff has the burden of proving his case. To justify an award of substantial damages, he must satisfy the court both as to the fact of damage and as to its amount. However, the mere fact that assessment may be difficult is not a reason for depriving the plaintiff of its right to damages. The court must do the best it can. Thus, if I am able to come to a figure which I can properly hold on the balance of probabilities to have been suffered by the plaintiff, I should at least award such a figure to the plaintiff as damages.  In particular, if it is possible to determine on the evidence that it is more likely than not that the amount the plaintiff incurred in taking over the work after 16 March 2005 exceeded the difference between the contract sum ($3,000,000) and what the plaintiff had already paid the 1^st defendant ($2,219,105.56) by a particular amount, I would be prepared to award that amount to the plaintiff.  Regrettably, I cannot, on the evidence before me.

Orders

34.  For these reasons, whilst I find in favour of the plaintiff on liability, I can only award nominal damages to the plaintiff, in the sum of $1,000. I dismiss the counterclaim. I also dismiss the third party claim. I make an order nisi that the plaintiff shall have its costs of the claim and counterclaim against the defendants; and an order nisi that the third parties shall have their costs of the proceedings against the defendants.