WO HING ENGINEERING LTD. v. TYCO ENGINEERING & CONSTRUCTION (HONG KONG) LTD.

HCCT 40/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.40 OF 1999

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J U D G M E N T

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1. The subject matter of these proceedings is the electrical installation works in Phases 2A and 2B of the Olympic Station Development Site in Tai Kok Tsui, Kowloon. The employer, Harvest Sun Limited engaged Kumagai Gumi Hong Kong (now Hong Kong Construction Holdings) as the main contractor. The plaintiff in this action was awarded the electrical installation nominated sub-contract for a fixed lump sum price of $80 million. As often happens work started before the formal documentation. The works commenced in or around October 1998, whereas, the employer's letter of intent to Wo Hing Engineering Limited ("Wo Hing") was dated 9 November 1998. The letter of award to Wo Hing was sent on 18 January 1999. Wo Hing accepted it on 29 January 1999. The final contract documents were only received by Wo Hing in May 2000 by which time the involvement of Tyco Engineering & Construction (Hong Kong) Limited ("Tyco"), the defendant, had come to an end over a year earlier in April 1999.

2. Wo Hing sub-contracted their sub-contract to Tyco who thereby became the electrical installation sub-sub-contractor. In a nutshell, it is Wo Hing's case that Tyco stepped into their shoes. Tyco was to pay Wo Hing 3% of the contract price. Therefore, Wo Hing would get $2.4 million (3% of $80 million) and Tyco would carry out the contract. To make a profit, Tyco would have to complete the works for less than $77.6 million.

3. By way of background, the evidence shows, and I so find, that Tyco was very keen to get this contract. Tyco's parent company was a multi-national company. It was keen to get into the Hong Kong scene. Faxes and emails of congratulations were sent from the head office in Singapore to Tyco's Hong Kong management once they were on site.

4. The fundamental issue between the parties has arisen because of a lack of precision as to the actual terms and conditions of the agreement between them. In my judgment, this is a case where the court must grapple with what was said, what was written and what was done at the material time and determine thereby what the contract was. It is not realistic on the facts of this case to conclude that such was the lack of precision that there was no contract at all. In the course of pleadings, evidence and submissions, there has been a lengthy and detailed analysis of correspondence, faxes, minutes of meetings and other documents, contractual and otherwise. Tyco, in a nutshell, points to various correspondence to support their contention that, because matters of detail had not been agreed, the extent of the agreement between the parties was no more than a simple contract based on implied obligations. They concede that the court, in a case such as this, should strive to find that some sort of contract exists. They submit it can only be very limited as to its scope and effect. Wo Hing on the other hand submits that Tyco's performance under the contract points to a much more detailed agreement. As will be seen hereafter, I have come to the conclusion that the approach advanced by the plaintiff is the correct one on the issues of (i) What was the contract? and (ii) Did Tyco repudiate? Three findings on the evidence underlie these conclusions :

(a) Tyco moved onto the site and started to perform the contract in October 1998. It is a fundamentally weak starting point to move in and start work without signing the letter of intent and later try to negotiate favourable terms which would not have been agreed to at the time.

(b) By its very nature, the contract was one where Tyco was "taking over" Wo Hing's contract and liabilities thereunder. Had Wo Hing decided to carry out the contract works itself, it would have been aiming at a profit margin of at least 10% (as did Tyco). Instead to choose to hand over the whole job to Tyco and settle for a 3% fixed profit. Tyco was willing to pay 3% in return for getting the contract, upon which it still expected to make a commercial profit. Tyco's own witness, Mr Paul Maddocks, confirmed that it was his understanding that Wo Hing would get its 3% without having to lay out its own capital to fund the contract as it progressed.

(c) Tyco, took the view that, partly due to its international status, it would be able to source materials more cheaply, and still make a good profit on the $80 million contract price, after having paid Wo Hing its 3%. The Tyco staff in Hong Kong, particularly Mr Chris Melhuish and Mr Paul Maddocks, shared Wo Hing's understanding as to the fundamental nature of the agreement between the parties. Tyco's head office was in Singapore. There is abundant evidence of difficulties and disagreements between Tyco's own Hong Kong staff and their bosses in Singapore. This was not Wo Hing's problem. I am satisfied that the inescapable understanding at the commencement of the works, and as supported by the fact the Wo Hing was settling for a mere 3%, was that Tyco would fund the project and carry out the works on the same terms that Wo Hing would have done had they chosen not to sub-sub-contract them to Tyco. Had there been any financial or funding obligations on Wo Hing, it would not have and could not have agreed to a mere 3% fixed profit.

What was the agreement?

5. Tyco's starting point for its argument that very little was in fact agreed, is the fact that they never signed the letter of intent dated 23 October 1998. It is apparent that as time went on, they attempted to negotiate terms which were "less onerous" than the terms of the contract between Wo Hing and its employer. Not surprisingly, all such attempts were met with a brick wall response from Wo Hing because, once it had agreed the 3%, it would not and could not take on any risks, which it had passed on to Tyco.

6. Not surprisingly passages from the evidence and extracts from the exhibits go both ways. Taken in isolation, a meritorious case can be compiled for both sides. The court has had a difficult task in deciding where to place the greater weight on the conflicting evidence and documentation. What follows in a brief summary of those matters upon which the court has placed greater reliance. It is simply unhelpful to refer to every competing letter, fax, email, etc. All have been considered. The result is that the court finds that as at the time when Tyco commenced the works in late October or early November 1998, Tyco was bound to carry them out on, inter alia, the following terms :

(a) the contract price was $80 million (subject to later adjustments).

(b) 3% was payable to Wo Hing to be deducted from the monthly project valuations.

(c) Tyco's obligation under the agreement were the same as Wo Hing's obligation under its contract with Harvest Sun. The agreement between Wo Hing and Tyco depended on Wo Hing being awarded the contract by Harvest Sun.

(d) Tyco would fund the electrical installation works.

(e) Tyco would be paid by Wo Hing seven days after it received the progress payments and no earlier than 30 days after invoice.

7. It is undoubtedly fair to say that some matters, at the material time, needed further discussion. To that end, there was a meeting on 3 November 1998. This was necessary even though Mr Edwin Lee ("Mr Lee"), a director of the plaintiff, gave evidence that he regarded the situation prior to this meeting as "a done deal". Mr Lee impressed the court as an honourable and successful businessman. He honestly believed and understood it was "a done deal". He acknowledged, however, that further discussions were necessary but that they did not affect the understanding as to the fundamental principles which governed the agreement between the parties, namely those listed above.

8. The minutes of the 3 November meeting made express reference to $80 million being the "final price" and that the plaintiff's fee was 3%. It also minuted Tyco's agreement to authorize all expenditure and to being paid seven days after Wo Hing's receipt of payments. The date in each month upon which Wo Hing agreed to submit its invoices was not finalized.

9. As further evidence that the unsigned letter of intent formed the basis of the agreement, Wo Hing placed considerable reliance on Tyco's conduct thereafter. The letter of intent stated :

"We are pleased to award the above captioned works for a total price of HK$80,000,000.00 to you subject to the following conditions.

1) This Letter of Intent will only be valid after Wo Hing has been awarded the contract.

2) The contract sum of HK$80,000,000.00 will be subject to adjustments due to omissions/additions in accordance with the contract awarded to Wo Hing.

3) You are required to fulfill the requirements set out in Tyco's Facsimile Message ref. COM/0018P/004 dated 22 October 1998, as well as the terms and conditions of the sub-contract agreement."

10. The more important points in the 22 October fax were :

"1) A Fee of 3% payable to Wo Hing.

2) Fee to be deducted on a pro rata basis from the monthly Project valuation.

3) TYCO to be paid once the cheque from the client has been cleared and not later than five days.

4) TYCO to use the best purchasing options for equipment and materials from the combined efforts of both Wo Hing and TYCO.

5) TYCO to use the best options for Sub Contractor selection from the combined efforts of both Wo Hing and TYCO.

6) The start date for the project is 20th October 1998.

7) ....

8) Wo Hing to issue TYCO with a letter of intent by 23rd October 1998.

9) ....

10) Final price to be confirmed by 23rd October 1998.

....."

11. Evidence of the parties' conduct upon which the plaintiff relies can be summarized as follows :

(a) The testimony of Tyco's project manager, Mr Paul Maddocks when being cross-examined.

"Q : Is it correct that after this meeting after the 23rd when the letter of intent was issued, that is when Tyco went ahead and made its plans to take over the work as agreed?

A : Yes. We had already done some preparatory work but, yes, in effect, that is right.

Q : Does that reflect the reality of the situation that the issuing of the letter of intent was the trigger, so to speak, when you went ahead and began to perform the contract?

A : Yes.

Q : Presumably the work went ahead on the basis of the letter of intent incorporating the various matters set out in the letter ... of 22nd October?

A : Yes.

Q : Can I suggest this : it was agreed at that stage, and before the work commenced, and at all times while the work was being carried out by Tyco, it was pay-when-paid. Tyco was going to get paid after Wo Hing?

A : Yes."

(b) A letter of 6 November from Tyco which said :

"It would be in both of our interests if you could re-issue your letter of intent to us with the following amendments :

1. 'This letter of intent will only be valid after Wo Hing has been awarded the contract. If Wo Hing are not awarded the contract, TYCO will be reimbursed for all costs and commitments expended whilst cooperating with Wo Hing in this venture.'

2. 'If TYCO are not awarded the sub contract or are unable to avail themselves of the offer, TYCO will be reimbursed for all costs and commitments expended whilst cooperating with Wo Hing in this venture.'"

Both "amendments" contain "ifs". The contingencies did not arise. In any event, if Tyco wanted to propose serious and substantial "amendments" to the letter of intent, this is when it would have done so, but did not.

(c) Tyco's Hong Kong director, Mr Chris Melhuish, communicated to his own head office on 15 November 1998 in the following terms :

"Payment to Wo Hing will be as we get paid, our actual bid was for $80 million less 3% to Wo Hing making an order to us of HK$77.6 million with 2.5% bid margin ..."

and on 1 April 1999 :

"When Rob was up here last both Raymond and I discussed with him the need to provide funding for this project, Raymond confirmed that 10-15% of the contract value would be required. This funding would be used to pay suppliers, sub-contractors, management, deposits and L/C's. From time to time this number would rise and fall as payments came in.

He was asked to revise the forecast cashflow to reflect the L/C's, this was raised last week for consideration and hopefully approval. In the meantime Rob authorised Raymond and myself to release up to HK$600K to pay suppliers up to the end of March."

("Rob" was Mr R. Salek, from the Singapore head office)

and on 10 April 1999 :

" I had my meeting today at 9 am with Wo Hing, it was with Joey Yu, who is a director the company, in fact he act as the operations director.

We discussed initially the certification/payment issues, I wanted to get the whole thing clear so that both sides agreed on the payment timetable.

The application/certification/payment is as follows :

The sub contractor (Tyco) submits their application to the sub-contractor (Wo Hing) by the 20th of each month, Wo Hing in turn submit their application on 23rd of the same month. The main contractor (Kumagai) in turn submits their application by the last day of the month.

The P.Q.S./Architect then has one month to in which to issue the certification, the actual payment from the employer to the main contractor takes place 21 days later, the main contractor then has 14 days in which to pay the sub-contractor, who in turn in this case can take up to 7 days to pay us, although Wo Hing have agreed to pay on the same day as they get paid.

So, in practical terms the payment we were expecting against the Jan application would have been due on the 4th April. But as the certificate was 10 days late in being issued, then everything else was delayed by the same amount.

This schedule is in accordance with the standard form of building contract for Hong Kong 1968 edition where the sub-contractor is nominate, which is the case for Wo Hing."

The only part of this Tyco letter with which Wo Hing does not agree is the reference to being paid the "same day". In fact, the agreement was seven days later. Same day payments would, for practical reasons, be impossible.

(d) Tyco's lawyer in Singapore, Mr Thomas Ho, had written a lengthy letter, prior to 3 November 1998, which recorded Tyco's concerns about some of the more onerous terms (nonetheless "standard" in Hong Kong) in the contract. He, understandably would have preferred some to have been deleted or amended. The reality however was, and Tyco either did or should have appreciated this, that Wo Hing would only be able to change the terms of its contract with Tyco if it was able to change the same terms in its contract with Harvest Sun. The latter scenario would never have been entertained by Harvest Sun or even embarked on by Wo Hing.

12. In short, it is, in my judgment, acceptable logic to submit that if Tyco was anxious to make amendments, there must have been something to amend. Its anxiety stems from the tacit acknowledgement that without amendment it was bound by the terms which were back-to-back with the Wo Hing/Harvest Sun contract.

13. Tyco complained that the first written reference to the "back-to-back" nature of the agreement came several months after work began. The reason for this was not because it was an afterthought by Wo Hing but because it was the first time it had become necessary to state the existing arrangement.

(e) Labour sub-contracts. The labour-only sub-contracts were with two companies called (in short) "Professional" and "On Fat". They had started work slightly before Tyco came on site. They had been originally engaged by Wo Hing. As an example of Tyco simply stepping into the shoes of Wo Hing, it took over the labour-only contracts with Professional and On Fat and requested all their invoices be sent directly to Tyco for payment.

(f) Payments made. The defendant's case is that the nature of the agreement between the parties goes little further than a simple contract to carry out certain works based on implied terms including an implied term for reimbursement of cost plus a reasonable profit. Up until the time when things started to go seriously wrong (March/April 1999), the payments that were actually applied for and made were in accordance with Wo Hing's case, namely, back-to-back and pay-when-paid terms, and not on the basis of Tyco's "implied term" as to payment.

14. On 31 December 1998 and 1 February 1999, payment applications were made by Tyco to Wo Hing. The documents show that Tyco was paid Wo Hing's "certified amount" less "3% fee reduction". The application in March 1999 was commenced in the same way.

15. In conclusion on the "contract issue", it is fundamental to my findings as set out on page 6 (supra) as to the basic terms which formed the basis of this contract, that by agreeing to take 3% of the known contract price, Wo Hing would be exposing itself to no further financial risk. The day-to-day funding of the project was passed to Tyco. It simply makes no sense to think that for a 3% fee there would be any obligation on Wo Hing to pay Tyco's bills for labour and materials in advance. Neither could it have been seriously considered that Wo Hing would agree to re-write its contract with Tyco in terms "less onerous" than its own contract with the employer whilst leaving itself exposed to those unaltered and onerous terms. I am persuaded without difficulty, on the evidence, that the "back-to-back" and "pay-when-paid" nature of this contract inevitably flowed from the initial agreement between the parties in their Hong Kong context. The financial difficulties which emerged in early 1999 stem from the fact that Tyco's Hong Kong management was unable to persuade its Singapore bosses to release funds contrary to their own understanding and belief that it was necessary for them to do so to ensure smooth progress of the works. All the testimony in court on this issue goes one way. On at least one occasion, and motivated solely by a desire to keep the contract going, Wo Hing lent a substantial sum of money to Tyco in order to pay for labour. It was plainly a loan. Tyco quibbled about having to pay interest on it but cannot seriously contend that it evidences any obligation on Wo Hing to finance the project generally.

Repudiation

16. It is, first of all, necessary under this heading to consider the events of February to April 1999. Although the Hong Kong management of Tyco was doing its very best, the works were falling behind schedule because of the financing difficulties already referred to. The loan for labour (referred to above) was for $1.9 million and was made on 26 January 1999. Such a sum is well within the amount which both sides recognized should be available as working capital on a project such as this. Mr Edwin Lee for the plaintiff said that a contractor would have to satisfy the Government on Government projects that it had 15% of the contract price available. Similarly, figures of 10%-20% were quoted by Mr Paul Maddocks and Mr Chris Melhuish for the defendant. Tyco's reluctance to authorize payment of $1.9 million for labour payments and seeking a loan from Wo Hing instead marked the start of a situation which went from bad to worse. There is an abundance of correspondence, emails, faxes, etc. evidencing this. Most of it is between Tyco's Hong Kong staff and its head office. It is unnecessary to recite it herein. Sadly, the difficulty was not solved and the ultimate consequence was, due in my judgment to Tyco's intransigence, that Tyco's involvement in the project came to an end and Wo Hing stepped back into its own shoes.

17. Some of the more important communications which the court considers to be a fair reflection of the situation which actually existed at the time are as follows :

i) On 9 March 1999, Tyco's Mr Chris Melhuish emailed Singapore :

"We are now at the point where we have to place orders for major items of materials, in order that they will start the manufacturing process to meet our delivery requirements ..GEC are going to supply 90% of the cables .. Swire Engineering ... will supply the remaining 10%. Both companies require a 10% deposit .... before they will accept our order and meet delivery requirements ... my problem is that Raymond will not sign the cheques ... we have already delayed the process as long as we can under the guise of getting better discounts, checking the quantities etc .. this is a normal transaction in the course of contracting ... if you approve please instruct Raymond to sign the cheques today as the matter is quite urgent".

ii) On 15 March 1999, Wo Hing wrote to Tyco :

"despite your numerous guarantees, the materials delivery problem still remain unsolved. We have to remind you that we cannot afford to jeopardize site progress due to your internal problems of materials/equipment ordering. Should you fail to settle the procurement matters within this week, we shall have no alternative but to take over the job."

iii) The above letter prompted this "holding" reply :

"Regarding the orders for the Cable and the LV switchgear, Chris will discuss today with the Tyco Accountant. Also the Tyco M.D. is in Hong Kong on the 16th March 1999 and Chris will discusses this project and its financing with Lim, after those discussions have taken place Chris will be in a position to brief you on the situation".

iv) On 17 March 1999 (to Tyco) :

".... due to material delivery problem, both of our site staff and sub-contractors are very frustrated at the moment. Some labours of On Fat and Professional are idle on site. Despite your numerous guarantees you fail to resolve your internal problem. We are compelled to take immediate action to remedy the unfavourable situation. If we do not receive your favourable answer/solution at 3:30p.m. tomorrow, we will instruct G & C to make delivery of cable to site on 19th March 1999 then we will deduct all necessary costs from you next payment ..."

v) By 1 April 1999, it became apparent that Tyco's position would not change. They informed the labour sub-contractor ("Professional") that they would only be paid after Wo Hing had paid them. Funds to place letters of credit for advance purchase of materials was not forthcoming. Some suppliers had stopped making deliveries because they had not been paid for over three months.

vi) The supply of materials got worse during the next week. The frustration being experienced by Tyco's Hong Kong team because of the lack of funding from Singapore is plain from the documentary exhibits.

vii) A somewhat desperate "final shot" attempt to salvage the situation came from Mr Chris Melhuish on 8 April when he wrote to Wo Hing suggesting they, together, approach the main contractor to request a "large up front payment" to keep the project going. The note ends "it's only an idea". Mr Melhuish's motives were admirable but as Mr Lee for Wo Hing pointed out, for a contractor to go cap-in-hand to the main contractor would be commercial suicide for his firm. The "idea" nonetheless demonstrates that Tyco (Hong Kong) had come to the end of the line and could not continue in the existing situation.

18. This was the situation immediately prior to the determination of the contract on or about 13 April 1999. One of Tyco's main complaints is that at the time of termination the next monthly payment, in the sum of $3,221,370, was imminent. It submitted that had it been paid the immediate financial crisis would have been solved and the projected would have gathered steam. It said that Wo Hing deliberately withheld it and effectively contrived the situation which brought the contract to its end. I reject this contention. There is greater force in the plaintiff's submission that even if the latest interim payment had been paid to Tyco on or before 13 April (albeit, it was not actually due until 19 April) at best, the crisis would have abated for a short period. Assuming Tyco maintained its stance as to the responsibility of the financing of the project, the problem would not have been solved by the early payment of one monthly payment (which, in any event, Wo Hing did not receive until 12 April). Mr Graham, for the plaintiff, makes a number of points on this question, including the following, which I find to be a fair and accurate assessment of the situation. In answer to the question, what would have happened if the progress payment had been handed over early, he submitted :

(1) Tyco would have remained in repudiatory breach because of their refusal to make "up front" monies available which they admitted were necessary over the next few months for the project to go forward;

(2) the $3,221,370 would have disappeared down a "black hole" of debt. Professional and On Fat were threatening to sue for nearly $4.2 million, if not paid, within 7 days of 12th April;

(3) Professional and On Fat would have already stopped working altogether by 9th April (unless paid by Wo Hing);

(4) The site was almost completely out of materials and the past due accounts could not have been cleared;

(5) Tyco had no money to pay the deposits necessary to secure orders for the major plant and equipment; and

(6) Tyco was only due to get $1,719,810 (less 3%) on 27th May 1999 and no other funding was being made available by Tyco.

19. At trial there was a considerable volume of evidence and cross-examination thereon concerning the financial liabilities for labour and materials as at April 1999 and Tyco's cash flow forecasts. The purpose of this evidence being to see what might have happened if Wo Hing had made the progress payment to Tyco earlier. As already indicated, I have concluded that in the long term it would have made little, or no significant, difference. The real question is not, was Wo Hing being unreasonable in asking Tyco to leave the site on or about 13 April when a payment was due to Tyco on 19 April, but could Tyco have completed its sub-contract given the circumstances pertaining at the time? The answer to this question is "No". To recite further extracts from the evidence would be to labour the point. At the risk of oversimplifying an issue that generated many arch files of evidence and exhibits and several days in court, Tyco was in repudiatory breach by failing to finance the project on a day to day basis. Its continuing failure so to do was crippling progress. Wo Hing justifiably felt that if it were to provide funds for the project it was entitled to run it as well and then work towards a profit for itself over and above the 3% fee which had been agreed. It accepted Tyco's repudiation and requested it to leave the site on 13 April. It formally accepted the repudiation by letter on 19 April 1999.

20. The legal test of what conduct amounts to a repudiatory breach can be stated simply. Moreover, in this case, I find it can be applied simply as well. We need not look beyond the words of Devlin J in Universal Cargo Carriers v. Citori [1957] 2 QB 426 at 431, a breach "which goes to the root of the contract" or "frustrates the commercial purpose of the contract". Also, the observation of Lord Wright in Ross T. Smith & Co. Ltd v. T.D. Barley & Son [1940] 3 All ER 72, are precisely appropriate to Tyco's manifested intentions in our case :

"I do not say that it is necessary to show that the party alleged to have repudiated should have an actual intention not to fulfill the contract. He may intend in fact to fulfill it but may be determined to do so only in a manner substantially inconsistent with his obligations, and not in any other way ..."

21. The "commercial basis" and "root" of the contract was that Wo Hing would be relieved of financial risk by accepting only a 3% fee. Both sides were aware of this. This could not be achieved without Tyco providing the necessary funding. Logic demands that if the contract was not on a back-to-back and pay-when-paid basis, Wo Hing would be burdened with the very financial and other legal obligations it had intended to pass to Tyco for an agreed fee. Tyco in return got the advantage of making a commercial profit out of the electrical installations.

22. It is finally interesting to note that as part of Mr Pennicott's submissions in relation to quantum he makes the point that from April 1999 "Wo Hing made a conscious decision to alter the contractual matrix and assume the risk". There are two corollaries. Firstly, the state of affairs they elected to inherit was that created by Tyco. [In reality it was an obvious decision to make by Wo Hing. To attempt to find a new sub-contractor to come in afresh and carry on the works on the same "3% fee" terms would have been difficult, time consuming and very likely would have created more problems than it solved.] Secondly, Mr Pennicott's submission implies that there was a risk to be assumed and that prior to April 1999 Wo Hing did not have that risk. There is only one other party who could have been burdened with the risk beforehand, Tyco. The risk being referred to is the risk of not making a profit because, inter alia, the financing and funding of the project might not go as planned.

Quantum

23. The court's conclusions and findings in relation to the contractual terms and the question of repudiation mark the high water mark in the case as far as Wo Hing is concerned. The court's decisions on matters of quantum are by no means as favourable.

24. Before addressing the quantum issues, it should be said that apart from the considerable assistance, the court has received throughout from Mr P. Graham, for the plaintiff and Mr I. Pennicott, for the defendant and their respective instructing solicitors, the court has also, on quantum matters, had the benefit of evidence from two experts, Mr S. Tennant for Tyco and Mr C. Pritchard for Wo Hing. Apart from their individual written reports and oral testimony which were both helpful and very professional, they have both taken considerable time to try and agree facts and figures thereby narrowing and crystallizing the issues the court has to resolve.

Methodology

25. The parties' have fundamentally different views as to the correct method of assessing damages. Both legal submissions suggest the opposing parties approach is flawed or misconceived or both.

26. I make the following observations and findings :

(a) The court has found that Tyco was in repudiatory breach of contract in April 1999. That was about one-third of the way through the projected length of the contract.

(b) At that time, Tyco had expended sums for which it has not been repaid. Later progress payments for work done by it were retained by and utilized by Wo Hing.

(c) At the time of breach, Wo Hing had a choice. Either it could try and engage another sub-contractor and continue to take the 3% fee or it could carry out the remainder of the works itself. It chose the latter. The choice was entirely its. Tyco had no input as to which would be the better option. Having opted to carry out the works, Wo Hing thereby accepted the financial burden which, prior to breach, had been Tyco's and from then on worked towards the completion of the works intending to make a commercial profit.

(d) Bearing in mind it came back on site in April 1999 as a result of Tyco's breach, it is entitled to take the benefit of any notional profits accrued up to then. In other words, the whole contract figures should form the basis of the quantum assessment. I do not agree that "a line should have been drawn in the sand as at 13 April 1999" as suggested by Mr Pennicott. Wo Hing chose to take on all work done up to then, good or bad, and worked towards a commercial profit. In all the tortured circumstances of this case, a reasonable profit for it to expect would be 10%.

(e) I accept Mr Pennicott's submission that the court has sufficient evidence to make a final determination as to quantum in this judgment. Most of the original contract works have been completed. Variations and/or additional works are still being carried out. The court's direction was that there be a trial on liability and quantum. The situation is not as contended by Mr Graham, that the court will have to make numerous guesses as to future costs. I am satisfied that the task of placing Wo Hing, as the innocent party, in a fair financial position, it having elected to carry out the works itself, is achievable.

(f) Considerable time and efforts, with great attention to detail, has been spent by both experts and lawyers. Where figures have ultimately been agreed, I need make no comment on the arguments and hard work which preceded the agreement. Where under any particular heading, the experts are not particularly far apart, I consider it proper and sensible to take a figure somewhere in the middle ground although not necessarily the median figure. Naturally, where there is substantial dispute on the figures, more careful consideration is required.

(g) The one figure about which the experts wholly disagree is the projected external costs between 31 August 2000 and completion. Mr Pritchard for Wo Hing calculates them to be $10,579,918, Mr Tennant for Tyco says a proper amount under this heading is zero. The other headings are either agreed or nearly agreed. My decision on those figures is as follows :

		$
(i)	Costs to 31 August 2000
	External	72,230,354.00	(agreed)
	Internal	5,200,000.00
(ii)	Projected costs to completion
	External	See below
	Internal	175,000.00
		77,605,354.00
(iii)	Less credit variation	3,800,000.00	(agreed)
		74,205,354.00
(iv)	Add labour	1,150,000.00	(agreed)
		75,355,354.00 ==========

(h) The original contract price was $80 million. A 10% profit (see (d) above) would have been $8 million. I emphasize the selection of 10% as a profit element is only the court's non-expert assessment. It is intended to reflect on the one hand, the fact that Wo Hing is entitled to more than the straightforward 3% fee it would have collected had there been no breach but slightly less than a contractor might aim for had it been in charge of the project ab initio. Also taken into account is the fact that the final figures include some progress payments paid to Tyco before it left the site and purchases made by them. The basis of the court's approach to quantum is to assess what a 10% profit on the whole project would be and ensure Wo Hing gets it. The court assumes Wo Hing carried out the works as diligently and as expeditiously as reasonably possible. Any final profit in excess of 10% would be refunded to Tyco as part payment of the monies due to it when it left the site. Wo Hing had the benefit of that money and used it. If the final profit is 10% or less it implies that those funds were necessary to achieve the profit that was in fact made.

(i) The danger is this methodology is that an innocent party who chooses to take over the works might not proceed with the works diligently knowing that if they made a loss through their own fault, the party in breach and long gone from the site would ultimately pay for it. The party in breach would have no means of monitoring the diligence of the innocent party once it had left the site. In this case, I am satisfied that such a danger does not arise. There has been no suggestion that Wo Hing's performance has been seriously lacking and there is no evidence or allegations of delay or poor workmanship on its part from other contractors which will materially affect its profit if any. It is a method which suits the particular facts and circumstances of this case.

27. The question therefore now is - have Wo Hing made a profit?

28. The figures quoted supra at (g) are the most recent figures provided by both experts which are either agreed or determined by the court, except the one substantial area of disagreement. That item is the projected external costs. The competing submissions as to whether the figures should be $10.6 million or $0 are briefly as follows :

29. Mr Pennicott, for Tyco, describes it as "the crucial area of dispute between the parties". He points out that without this item it is clear that Wo Hing has made no loss. The question then becomes, how much profit has it made? Wo Hing in estimating its projected external costs has simply equated them with its outstanding purchase orders. Mr Tennant's evidence pointed out that as an indicator of expenditure, purchase orders would provide a useful guide in the early stages of a contract but as it nears its completion, as in our case, it ceases to be reliable. Mr Pritchard, for Wo Hing, considered that the purchase orders "were a sound basis to estimate the balance of costs that have yet to be incurred".

30. Mr Pennicott points to an additional factor which, he submits, further dilutes Wo Hing's argument. Included in the estimate of $10.6 million is a figure of $4 million, on paper due to Professional for labour. The evidence shows, and I accept, that this figure will not be paid. The starting point, even on Wo Hing's approach is therefore $6.6 million (approximately). Mr Pennicott submits that, whatever the court's findings as between themselves and Wo Hing, Tyco should be granted declaratory relief in the form of an indemnity against any future claims that may be made by On Fat or Professional against Tyco. I do not think that a specific order in those terms is appropriate as part of the judgment in these proceedings. However it is appropriate to state that the sum which the court has calculated that Tyco should pay to Wo Hing is intended to extinguish all Tyco's liabilities in respect of this contract.

31. Reliance, by Mr Pennicott, is finally placed on the most recent available documents. Towards the end of the trial a "Cost control monitors report" was disclosed which contained a summary of the position as at 31 August 2000. These figures are :

External costs :	$72,254,496.00
Site overheads :	$2,020,537.00
	$74,275,033.00

To this, Mr Pennicott suggests of a figure of $2 million is added (reasonably) for head office costs :

	$74,275,033.00
	$2,000,000.00
	$76,275,033.00

The value of work done certified to date is $83,100,000.00.

32. The most accurate figure available therefore for the profit made at this, near completion point in time, subject to the "projected costs" issue, is (approximately) $6.8 million. The equivalent figure from paragraph (g) supra was $75.35 million (a profit of $7.65 million). The difference between the figure (admittedly contrived in part by the court's findings) at (g) and the figure in (j) shows a slightly decreasing profit.

33. The result of Mr Pennicott's submission is that the court is persuaded that the final figures will be favourable to Wo Hing. As the court is minded to guarantee them a fair profit, it must make a value judgment. The present projected profit (following Mr Pennicott's analysis) is as described above. It seems also that that present projected profit is likely to be further eroded because of some future projected costs. The figures quoted above point to the fact that the further erosion will be relatively small but not $nil, as proposed by Mr Tennant. In order to achieve a final and fair determination which will put Wo Hing in the position it would have been had they been in charge from the outset (the position they elected to try and achieve in April 1999). I consider a figure of $1.5 million should be included in the equation for "future projected costs". The final figure is therefore $76,855,354. Taking the latest certified work done figure of $83,100,000, the profit is $6,244,646. This profit has been achieved utilizing the monies due to Tyco in April 1999. Even so, it is short of a 10% profit to which Wo Hing is entitled having chosen to resume the financial burden which should have been Tyco's had it not repudiated. A 10% profit would be $8,310,000. There is a difference of $2,065,354 - which I consider (subject to the following section of this judgment) is a fair reflection of Wo Hing's claim against Tyco. Applying the submissions adopted by the court to the evidence and most recent figures, as I have found them to be, it is intended to put Wo Hing in the position it would reasonably have expected to be had it carried out the entire works. It is a deliberately "broad brush" approach. It directly accords with neither methodology advanced by the parties. This is not entirely surprising given the oceanic gulf between the parties on their final assessments. In approximate figures, Mr Graham claims (including "loss of business" with which I deal in the next section) the sum of $25 million in the event of succeeding on liability. Mr Pennicott, even if he loses on liability, contends Tyco should nonetheless be paid about $6 million as it is the "net winner". The court's approach, in a nutshell, is that Wo Hing, having stepped back into its own shoes (which it was right to do and Tyco cannot be heard to complain about that decision) has made a profit which is nearly as much as it would have done had it been the contractor ab initio.

34. The question which initiates the final section of this judgment is - has it lost anything else for which it should be compensated?

Loss of business

35. Again the parties are poles apart on both principle and quantum under this heading. Wo Hing simply says it is entitled to $12 million because if it hadn't been engaged in this contract it could have been engaged in another $80 million contract and would have expected to make 15% profit. Mr Pennicott submits the claim has a nil value and suggests it should never have been pursued. He relies on the fact that Wo Hing's own expert report does not deal with the issue. Tyco's expert, Mr Tennant, did deal with it but was not cross-examined on it and one view of the plaintiff's own evidence from Mr Lee and Mr Lam did not support it.

36. In view of the court's approach hitherto, this issue can be speedily disposed of. As part of the exercise in evaluating Wo Hing's claim, the court has already stated that its "profit" on this project should be 10%. The reasons for selecting 10% have already been given. By engaging its resources on this project, what has it lost? It has lost the opportunity of receiving its risk free 3% fee from Tyco, had Tyco not repudiated. Put simply, Wo Hing was expecting $2.4 million for passing on the project to Tyco. It has not received this fee as a result of the repudiation. It should be added to the figure already calculated. The combined sum reflects the plaintiff's total loss. The $2.4 million should be reduced by the fees deducted up to the last payment to Tyco (certificate number 5). That sum is $113,940.

37. The total sum to be paid by the defendant to the plaintiff in respect of these proceedings is $5,069,102.

38. That sum is made up as follows :

		$	$
(i)	Shortfall in reasonable profit on Olympic Towers		2,065,354.00
(ii)	Net value of 3% fee	2,400,000.00
		113,940.00
		2,286,060.00
			2,286,060.00
			4,351,414.00
(iii)	The agreed claim for seconded staff (both parties agree that this is a separate and valid claim whatever the court's findings on the main issues may be)		717,688.00
			5,069,102.00

Interest and costs

39. The question of interest in the light of this judgment is not easy. The repudiation was in April 1999. However, the "cost" of the repudiation has not emerged until very recently. It has been a gradual process. As the court has endeavoured to calculate what Wo Hing should have made out of the completed project and has compensated it for the shortfall in profit and loss of 3% fee, I think the appropriate time from which interest should run, in respect of (i) and (ii) above, is soon after the original completion date.

40. I give judgment for the plaintiff :

(i) In the sum of $4,351,414 plus interest from 1 April 2000 at prime + 1%.

(ii) In the sum of $717,688 plus interest from 24 April 1999 at prime + 1%.

41. The question of costs may require further argument. Wo Hing has won on liability but its case and submissions on quantum have met with limited success. My costs order nisi is that the defendant shall pay 75% of the plaintiff's costs.