YI FENG CONSULTANTS & ENGINEERING LTD. v. LAM LEE MING AND ANOTHER

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.22915 OF 1999

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JUDGMENT

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INTRODUCTION:

[1] This was a claim by a sub-sub contractor against its sub-sub-sub contractor for damages incurred for breach of contract. The sub-sub-sub-contractor counter-claimed for balance of contract sums.

[2] The Plaintiff sub-sub-contracted the electrical supply and installation part of the government's School Improvement Programme (the "Electrical Work") from Wenden Engineering Service Co. Ltd. ("Wenden"). The sub-sub contract was on a "back-to-back" and "pay-when-paid" basis.

[3] The Electrical Work was in turn sub-sub-sub-contracted by the Plaintiff to the Defendant (the "3rd Sub-contract"). The 3rd Sub-contract was an oral contract, based on a written quotation submitted by the Defendant.

[4] In the beginning, the Plaintiff paid the full amount of the Defendant's invoices within the agreed 60 days period; however, on or about June 1999, the Plaintiff refused to pay the Defendant's April 1999 invoice in full.

[5] On or about 13th June 1999, the Defendant's employees stopped all work due to arrear of wages.

[6] The Plaintiff terminated the 3rd Subcontract and evicted the Defendant from the site.

THE PLAINTIFF'S CASE:

[7] The Plaintiff alleged that it had been the parties' practice to conduct business on verbal basis only. The terms of their verbal agreement had always followed the terms of the Plaintiff's own contract. In this instance, "back-to-back" and "pay-when-paid".

[8] The Plaintiff knew that at the beginning of the Defendant's installation works, the measurable accumulation of works would be substantially less then the Defendant's actual expenditures. To alleviate the Defendant's financial difficulty, the Plaintiff decided to pay all of the Defendant's first 6 invoices as claimed, regardless of actual measurements.

[9] On or about March 1999, the Plaintiff started to receive complaints from its superior sub-contractors that the Defendant's work was defective, materials used did not comply with specifications and there were substantial delays.

[10] The Plaintiff therefore refused to pay the Defendant their April 1999 invoice, unless the Defendants remedied all of the non-complying materials and improved their work progress.

[11] In a meeting dated 11th June 1999, the parties agreed that the Plaintiff would pay the Defendant the sum of HK$100,000 on 14th June 1999. On 20th June 1999, when the remedial work were completed and work progress had substantially caught up to schedule, the Plaintiff would pay the Defendant another HK$50,000.

[12] On 13th June 1999, Mr. Lam Lee Ming ("Mr. Lam") of the Defendant instigated its employees to stop work and demanded the Plaintiff to pay their arrears of wages. In view of the Defendant's actions, the Plaintiff terminated the contract and demanded the Defendant's to vacate the site.

[13] The Defendant's employees and sub-contractor filed claims in the Labour Department and the Plaintiff paid a total sum of HK$381,246 in settlement of these claims.

[14] The Plaintiff also supplied materials to the Defendant totaling HK$14,200, which should be deducted from the contract sum due to the Defendant.

[15] In accordance with the measurement of the sub-contractor's quantitative surveyor, as of 23rd June 1999, the Defendant had completed 61% of the works equaling to HK$1,464,000.

[16] After deducting the HK$1,192,524 already paid to the Defendants, the HK$391,246.50 paid to employees and sub-contractors on behalf of the Defendant and HK$14,200 for materials supplied, there was an over payment of HK$133,970 from the Plaintiff to the Defendant. The Plaintiff waived part of the over payment and claimed against the Defendant the sum of HK$120,000.

THE DEFENDANT'S CASE:

[17] The Defendant alleged that the parties had an agreement that the Plaintiff would pay the contract fees as invoiced by the Defendant.

[18] Mr. Lam alleged that prior to commencement, the Plaintiff requested and obtained an item-by-item breakdown of the quotation (submitted as "Exhibit D1"). The parties agreed that the Defendant would be paid in accordance with Exhibit D1.

[19] The Defendant acknowledged that the Plaintiff had supplied material worth HK$14,200, paid its employees and sub-contractors the sum of HK$391,246.50 and agreed that these sums should be deducted from contract fees due to the Defendant, if any.

[20] However, the Defendant alleged that prior to cessation of work, the Defendant had completed 73% of the works specified in the 3rd Sub-contract. The total sum due to the Defendant was HK$1,752,000. After deducting HK$1,192,524 for sums already received, HK$14,200 for materials supplied and HK$391,246.50 for payments to its employees and sub-contractors, the Plaintiff still owed the Defendant the sum of HK$154,029.50.

[21] The Defendant therefore counter-claimed against the Plaintiff for the sum of HK$154,029.50.

THE ISSUES:

[22] The Plaintiff's claim was on 3 alternative basis: (1) Damages for breach of contract, (2) Set-off under the Employment Ordinance, and (3) Return of over payment.

DAMAGES FOR BREACH OF CONTRACT:

[23] The amended Statement of Claim stated:

[24] Irrespective of paragraph 11 of the amended Statement of Claim, none of the Plaintiff's evidence and none of its witnesses' testimonies had anything to do with damages it suffered as a result of the Defendant's breach. The Plaintiff's claim was conducted solely on return of over payment made to the Defendant.

[25] Accordingly, the Plaintiff's claim on this basis must fail.

SET-OFF UNDER THE EMPLOYMENT ORDINANCE:

[26] As an alternative, the Plaintiff relied on section 43F and 43J of the Employment Ordinance, Cap. 57 (the "Ordinance") as deduction by way of set-off of monies the Plaintiff paid to the Defendant's employees and sub-contractors. The Statement of Claim stated:

[27] Section 43G of the Ordinance dealt with liabilities of main contractors and superior nominated sub-contractor to pay wages of employees of nominated sub-contractors. The parties were not superior nominated sub-contractors and nominated sub-contractor, section 43G had no application in this matter.

[28] Section 43F of the Ordinance dealt with recovery of sub-contractor's employee wages paid by principal contractor or superior sub-contractors. This section stated:

[29] Section 43C limited the liability of the superior sub-contractor as follows:

[30] The Plaintiff's evidence was that the payments were made to both employees and sub-contractors of the Defendant. No attempt was made to distinguish how long these wages had been owed and for what period they had been outstanding. In other words, there was no evidence that these payments were part of the amount capable of being set-off under section 43F of the Ordinance. However, the Defendant did not object to the deductions and I proceeded as if the Defendant had consented to the set-off, if any amount was due from the Plaintiff to the Defendant.

RETURN OF OVER PAYMENT:

[31] The Statement of Claim stated:

[32] The Defendant admitted that the payments of HK$391,246.50 and HK$14,200 should be deducted from the sums due from the Plaintiff. The sole disagreement of the parties was whether the works completed was 61%, as alleged by the Plaintiff or 73%, as alleged by the Defendant.

THE PLAINTIFF'S CLAIM:

[33] Cheung Wai Leung (Mr. Cheung") testified that the procedure of certifying invoices were as follows: The Plaintiff would sent its invoices to the sub-contractor Wenden, Wenden in turn would sent its own invoice to the main contractor, Fong Wing Shing Construction Co. Ltd. ("Fong"). Fong would amend Wenden's invoice based on a certificate of payment issued by the Architectural Services Department.

[34] The Architectural Services Department issued a monthly quantitative survey report based on both materials on site and percentage of installation work completed. The certificate of payment was based on this survey report. To prevent the main contractor from withholding payments due to subcontractors, the Architectural Services Department would send a copy of the certificate of payments to all sub-contractors.

[35] The Plaintiff prepared a chart, which was submitted as exhibit P1 ("Exhibit P1"), setting out all certified payment between Fong, Wenden, the Plaintiff and the Defendant, in support of its allegation that only 61 percent of the 3rd Sub-Contract works was completed by the Defendant; however, my reveal of the Architectural Services Department's Statement of Percentage of Work Done, dated 28th May 1999, revealed that the percentage certified was 79.45% completed. This was substantially higher than the 61.01% completion listed on Exhibit P1 as of 1st June 1999.

[36] Plaintiff's second witness Yip Hau Chung ("Mr. Yip") explained that not all of the Electrical Installation Works were sub-contracted to the Defendant. The supply and installation of a large electrical switch panel was not sub-contracted to the Defendants. Accordingly, not all of the amounts certificated by the Architectural Services Department were included in calculating the percentage of work completed by the Defendant.

[37] To further clarify the calculations stated on Exhibit P1, the Plaintiff requested to call Au Wai Mun ("Ms. Au"), one of the Plaintiff's accounting staffs, to testify. The Defendants did not object and I agreed to this request.

[38] Ms. Au testified that she was responsible for the calculations on Exhibit P1 and in fact there were 4 of these large electrical switch panels, each costing over HK$100,000, that the Plaintiff had to supply and install. Although the Defendant's contract never included the supply or installation works for these 4 panels, the Defendant was in fact required to install these 4 panels.

[39] The Architectural Services Department's survey included both completed labour work and materials on-site and these 4 panels had been delivered on site. Ms. Au estimated the value of these panels, deducted them and added a sum for the labour work that the Defendant put in to install these 4 panels to arrive at the figures on Exhibit P1.

[40] The facts surrounding the calculations on Exhibit P1, as disclosed by Ms. Au, clearly indicated that the figures on Exhibit P1 was nothing more then an estimate. Although it may be based on a survey by the Architectural Services Department, but there was no evidence that the value of these 4 very expensive electrical switch panels had been included in the Architectural Services Department's certificate of payment and there was no evidence that the labour costs of the installation by the Defendant had been properly included.

[41] The Architectural Services Department's certificate of payment was the only independent evidence as to the percentage of completion of the works. The Plaintiff had made deductions and additions to the percentage of completion stated on the certification of payments, but these deductions and additions were never specified nor justified. In effect, there was no evidence to support the Plaintiff's allegation that as of the day of cessation, the Defendant had only completed 61% of the works. Accordingly, I found that the calculations on Exhibit P1 could not be relied upon as the true percentage of works completed by the Defendants. The Plaintiff had failed to satisfy its burden of proof and its claim for return of over payment must be dismissed.

THE DEFENDANT'S COUNTER-CLAIM:

[42] The Defendant had supplied no evidence to support their allegation that 73% of the works had been completed before work ceased. Mr. Lam alleged that he calculated the 73% based on his own estimate of the percentage of completion on each item of work listed on Exhibit D1. No independent survey or measurement was done and no adjustment was made on possible defects, shortages and non-complying materials.

[43] The Defendant's evidence fell far short of those required to support their allegation that 73% of the sub-contracted work had been completed. Therefore, the Defendant's counter-claim must also be dismissed.

JUDGMENT: