Wenden Engineering Service Co. Ltd. v. Lee Shing Yue Construction Co. Ltd.

HCCT000090B/1999

HCCT90/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 90 OF 1999

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Coram: Ms Recorder G. Li, SC in Court

Dates of Hearing: 4 - 7 March 2002

Date of Handing Down Judgment: 18 April 2002

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J U D G M E N T

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1.In this action, the plaintiff as subcontractor claims to be contractually entitled to payment of a sum or sums from the defendant as Main Contractor under clause 2(c) of the Subcontract Agreement dated 31 August 1998 which the defendant has refused to pay.

Background

2.The defendant is a "Group C" contractor on the Government's list of approved building contractors. In January 1998, it was preparing to tender for five government term contracts for alterations, maintenance and repair of buildings for which the Architectural Services Department ("ASD") were responsible, the five different contracts relating to five different areas in Hong Kong.

3.In mid-January 1998, the defendant invited all specialist electrical contractors who were on the Government's list of approved electrical contractors, including the plaintiff, to submit tenders for the electrical works within the five contracts in accordance with their conditions. The contract documents of the term contracts included a Schedule of Rates for various works including electrical works issued by the ASD. It is the practice for tenderers to state in their tenders the discount which they offer off the rates for various types of work in the Schedule as it is accepted that economies of scale can be achieved with bulk purchase of materials and repetitive orders over the period of the term.

4.On 2 February 1998, the plaintiff wrote to the defendant confirming its willingness to carry out the work of electrical installation involved in all five contracts on terms to be mutually agreed.

5.On 6 February 1998, the defendant submitted its tender to ASD naming the plaintiff as its specialist subcontractor for the electrical works. The defendant's tender included a discount of 55% off the rates contained in the Schedule of Rates for electrical works. There is no evidence as to whether the defendant and the plaintiff had discussed the percentage discount to be given by the plaintiff off the Schedule of Rates before the defendant submitted its tender although the plaintiff maintains that in early February 1998, the plaintiff had already informed the defendant that it was prepared to carry out the electrical works at a 36% discount off the rates in the Schedule of Rates.

6.On 31 March 1998, the defendant was awarded the term contract TCG 003 for the Mainland East area for a term of three years. It is the plaintiff's evidence that on learning that the defendant had tendered on the basis of a 55% discount, the plaintiff informed the defendant in mid-March that the plaintiff could not perform the works at that price.

7.The issue of works order under TCG 003 covering electrical works commenced at the end of April 1998.

8.At tender stage and thereafter, another legal entity, City Top Engineering Limited ("City Top") appears to have been involved as subcontractor to the plaintiff for the whole of the contract works and its personnel were seconded to the plaintiff's contract management office. City Top's contract with the plaintiff was later terminated in mid-July 1998.

9.Discussions and correspondence took place between the plaintiff and the defendant (or, on the defendant's case, between the plaintiff and City Top) on the subcontract terms including the remuneration which the plaintiff was to receive. It is the plaintiff's case that throughout, the defendant acknowledged that the plaintiff would be making a loss on the subcontract works if remuneration was on the basis of a 55% discount off the rates in the Schedule. The plaintiff points to the correspondence and agreements which the plaintiff says were concluded with the defendant as evidence of this. The defendant denies having so acknowledged and denies the agreements.

10.It is common ground that the plaintiff started work without any agreement being reached on remuneration.

11.Ultimately, the plaintiff and the defendant entered into an agreement dated 31 August 1998 ("the Agreement"). Clause 2 of the Agreement is headed "Payment and Reimbursement" and provides as follows :

"(a) The Main Contractor shall pay the Sub-contractor all moneys received from the Principal for the Subcontract Works pursuant to the Main Contract.

(b) The parties acknowledge that the contract price of the Subcontract Works may be less than the actual cost of the Subcontract Works and that the Main Contractor shall compensate the Subcontractor for its loss in accordance with sub-clause (c) below.

(c) In the event that the total price of the Subcontract Works payable to the Subcontractor is less than the total cost of subcontract (as certified by the Main Contractor), the Main Contractor shall, in addition to paying the Subcontractor the certified contract price, pay to the Subcontractor only on a back to back basis within 7 days after receipt of the relevant amount from the Principal:-

(1) 5% of the total builder's works order value of the Main Contract certified by the Principal relating to the works order issued during the 1st Contractual Period; and

(2) 4% of the total builder's works order value of the Main Contract as certified by the Principal relating to the works order issued during the 2nd Contractual Period; and

(3) 3% of the total builder's works order value of the Main Contract issued by the Principal relating to the works order issued during the Remaining Period.

(d) The Main Contractor shall send copies of all payment certificates issued by the Principal from time to time as soon as practicable after the Main Contractor receives the same.

(e) All moneys payable to the Subcontractor by the Main Contractor under this Agreement shall, and shall only, be made on a 'back to back basis' by the Main Contractor in accordance with sub-clause (f) below.

(f) The Main Contractor shall inform the Subcontractor in writing (which may be in the form of payment certificates) on the 5th and 20th days of each calendar month during the continuance of this Agreement of the latest payments and disbursements certified by the Principal for the Subcontract Works and shall pay any amount payable to the Subcontractor within 7 days after receipt of the corresponding payments from the Principal."

12.From the 1st interim certificate dated 12 August 1998 to the 16th interim certificate dated 12 April 1999, the defendant certified and paid to the plaintiff the additional reimbursement calculated as 5% of the payment received by the defendant from ASD for the builders' works. On 22 June 1999, the plaintiff wrote to the defendant complaining that the 5% had not been paid since 1 April 1999. On 19 July 1999, the defendant responded that the defendant had exercised its discretion to make provisional payments on the representation by the plaintiff that it had suffered a loss due to the contract price being less than the actual costs of the subcontract works and that the contract price would not now be less than the total costs of the subcontract works as electrical ballast was being used to replace the conventional ballast for fluorescent light fittings. The defendant called for the plaintiff to provide its accounts of the subcontract within 14 days and offered a provisional payment in the meantime.

13.By letter dated 3 August 1999, the plaintiff sent the defendant a profit and loss account which showed a net loss on the subcontract for the 1st Contractual Period of approximately $12.5 million and demanded the release of the outstanding additional reimbursement. This was followed by a letter dated 20 August 1999 containing a threat by the defendant to suspend work unless the outstanding payment was made. On 23 August 1999, the defendant sent to the plaintiff a different profit and loss account for the 1st Contractual Period showing a net loss of approximately $9 million. This led the defendant to request further particulars of the account including a detailed itemised account and copies of all subcontract documents.

14.On 2 September 1999, the defendant wrote to the plaintiff denying that the defendant was entitled to any outstanding amount and pointing out that the defendant was entitled to request further particulars of the defendant's accounts without which the defendant was unable to assess whether the plaintiff was making a loss. The plaintiff had apparently slowed down or suspended works and the defendant by the same letter called on the plaintiff immediately to expedite the works. Finally, the defendant pointed out that the defendant had recently noted that the plaintiff had, in breach of clause 15(f)(4), subcontracted all the subcontract works to another subcontractor and reserved the defendant's rights.

15.Further correspondence ensued between the parties themselves and between their solicitors. By letter dated 23 September 1999, the defendant terminated the subcontract under clause 15(f) citing among other reasons the fact that the plaintiff had subcontracted all or a substantial part of the subcontract works.

16.After the plaintiff commenced proceedings, the parties came to certain terms reflected in the Consent Order dated 18 November 1999. The plaintiff's claim for reimbursement is pursued in accordance with the terms of the Consent Order for the period up to and including the 23 September 1999.

The issues

17.The plaintiff pleaded a number of agreements made between the plaintiff and the defendant preceding the Agreement which the defendant denied. However, counsel for the plaintiff, in his opening relies on them only for the purpose of supporting the plaintiff's interpretation of the Agreement and as part of the factual matrix.

18.On the 2nd day of hearing, the parties produced an Agreed List of Issues. The first issue is one of construction of the Agreement and more particularly, whether, according to the plaintiff's formulation, the defendant was under an obligation to pay reimbursement to the plaintiff on a back-to-back basis within seven days after receipt of the relevant amount from ASD without any need to prove loss or whether, according to the defendant's formulation, the defendant was under an obligation to pay reimbursement to the plaintiff without any need to prove loss and whether the terms as pleaded in paragraph 17 of the Defence were implied. The second issue is a matter of fact namely whether the plaintiff incurred a loss in this project and the third is the quantum of reimbursement if I were to find in favour of the plaintiff either on the first or second issue.

The evidence

19.Three witnesses gave evidence for the plaintiff; Mr Chan Kwok Wa who was the plaintiff's contract manager on this contract and who was also a director and shareholder of Yordland Engineering Limited ("Yordland"), the plaintiff's subcontractor, Mr Tam Kar Chuen who is a director of the plaintiff and Mr George Yip, a certified public accountant who has audited the plaintiff's project accounts for the purposes of establishing a loss. Two witnesses gave evidence for the defendant: Mr Thomas Lee, the managing director of the defendant and Mr Timothy Lee who became the defendant's administration manager in mid-July 1998.

20.The plaintiff objected to parts of the witness statement of Timothy Lee on the ground that the evidence sought to be led was irrelevant and inadmissible being evidence of the defendant's intentions in seeking the insertion of various provisions or words in the process of negotiating what became the Agreement and evidence of differences between earlier drafts and the Agreement itself. The objection is valid and I have therefore disregarded those parts of Mr Lee's statement which Mr Grossman SC identified.

21.In addition, the relevant agreements, other documents and contemporaneous correspondence between the parties are in evidence.

Factual Matrix of the Agreement

22.The letters of 12 June 1998, 13 June 1998 and 20 June 1998 sent by the defendant to the plaintiff make it plain that as at those dates, no agreement had been reached as to the terms and conditions of the subcontract. However, it is equally plain that the plaintiff was looking to be remunerated on the basis of a discount of 36% off the rates in the Schedule of Rates and that the plaintiff was asserting that the tendered rate of a discount of 55% was not sufficient to cover the expense of the electrical installation works.

23.Insofar as it is necessary to make any finding on the pleaded 1st oral agreement said to have been made between the plaintiff and the defendant in mid-March 1998 and Mr Chan's evidence about it, I find that no such agreement was made. The tenor of the letters in June 1998, one of them written by Mr Chan himself is totally inconsistent with the existence of such an agreement.

24.The letter of 4 July 1998 from the plaintiff to the defendant and apparently signed by the defendant as indicating agreement to the terms and conditions in it has not been pleaded by the plaintiff as constituting any agreement between them. According to Mr Chan's evidence, it was signed by Mr K.C. Wong of City Top on behalf of the defendant but the fact that it was immediately followed up by the fax of 8 July 1998 from Mr Chan to the defendant for the attention of Mr Thomas Lee enclosing a revised draft for comment shows that the plaintiff did not regard the defendant as having agreed to anything.

25.Looking at the correspondence passing between the plaintiff and the defendant after City Top had fallen out of the picture, I find that there was an agreement on the part of the defendant to pay for the electrical works covered by the works orders which were issued prior to 14 July 1998 as listed in the enclosure to the defendant's letter dated 5 August 1998 on the basis of 36% off the rates in the Schedule and to negotiate further on remuneration for any other works. The plaintiff continued to maintain that a discount of 55% off the rates would not be sufficient to cover the expenses of electrical installation.

26.On 5 August 1998, the plaintiff faxed a letter to the defendant referring to a discussion on that day and saying "...[we] would like to record an agreement has been reached as attached." A contract signed by Mr K.C. Tam for the plaintiff was enclosed and the defendant's signature on it was requested. This document provided for the defendant to pay to the plaintiff all monies received from ASD for the subcontract works, that is the electrical works, and in addition, to compensate the plaintiff's loss on the subcontract works by paying in addition 5% of the total builders' works order value issued by ASD during the 1st Contractual Period under the Main Contract being 1 April 1998 to 31 March 1999, 4% of the total builders' works order value issued by the ASD during the 2nd Contractual Period being 1 April 1999 to 31 March 2000 and 3% of the total builders' works order value issued by ASD during the 3rd Contractual Period being 1 April 2000 to 31 March 2001.

27.There is a conflict of evidence between Mr K.W. Chan and Mr Thomas Lee as to whether the parties reached an oral agreement during this discussion. In any event, the defendant did not sign the contract. Various further drafts were exchanged and eventually the Agreement dated 31 August 1998 was signed by both parties. It is not necessary for me to decide whether any agreement was reached on 5 August 1998 as the Agreement was clearly intended to supersede all prior discussions and any prior agreements.

28.The plaintiff invites me to draw from the evidence that by the time of the Agreement, the parties had agreed or acknowledged that the plaintiff would inevitably suffer a loss if the remuneration for the subcontract works were on the basis of a discount of 55% off the rates in the Schedule of Rates. However, it seems to me that the plaintiff is in effect asking me to ignore the express words in clauses 2(b) and (c) of the Agreement which are inconsistent with any such agreement or acknowledgment. The parties have expressed their intentions in the Agreement and unless there is any ambiguity in the Agreement, I am not entitled to consider such evidence.

29.The only assistance I can properly draw from the draft agreement enclosed with the letter of 5 August 1998 is in the meaning of the words "the 1st Contractual Period", "the 2nd Contractual Period" and "the 3rd Contractual Period" which are not defined in the Agreement. There is no dispute that these refer back to the Main Contract between the defendant and the ASD and that they are the periods set out in the draft agreement enclosed with that letter.

Clause 2 of the Agreement

30.Mr Grossman SC for the plaintiff points to the existence of inconsistencies in clause 2 and of difficulties in interpreting what he characterises as a badly drafted provision. In particular, he points to the acknowledgment by the parties contained in clause 2(b) which he argues makes it clear that whether or not there is a loss, the Main Contractor shall compensate the Subcontractor for its loss and that is stated in mandatory terms.

31.Next, he points to clause 2(c). Clause 2(c) does not make sense because it appears to impose as a condition for entitlement to the additional reimbursement that there is a loss and what is more a loss which can only be determined at the end of the subcontract after certification. Yet the Main Contractor is required to pay the Subcontractor on a back-to-back basis within seven days after receipt of the relevant amount from the Principal (ASD) during the course of the subcontract the relevant percentages of the value of the total builders' works orders as certified by ASD. The only way of reconciling these apparently inconsistent requirements, counsel says, is to look at what the parties intended and about which there was no issue, namely that the defendant could not make a profit on a discount of 55% off the Schedule of rates and had to be paid the specified percentages. The plaintiff relies on the fact that the defendant did pay these percentages on a back-to-back basis including in the early interim certificates 5% of the builder's works value certified and paid by ASD in accordance with that interpretation until the defendant later changed its mind.

32.Reference was made to clauses 2(d), (e), (f) and (g) as supporting the Main Contractor's obligation to pay the Subcontractor the percentages of total builders' works value as certified by ASD on a back-to-back basis when payment was made by ASD.

33.Another difficulty with clause 2(c) are the words "as certified by the Main Contractor". To what do they apply; the total price of the Subcontract Works, the total cost of the Subcontract Works or a loss? Mr Grossman SC submits that it makes no business or commercial sense to place the matter of certification in the hands of the Main Contractor and take it completely out of the hands of the Subcontractor although he accepts that the Main Contractor is entitled to look at the Subcontractor's accounts. In any event, he says, there is no pleaded issue that certification by the Main Contractor was a precondition to payment.

34.The plaintiff's case therefore is in essence that clauses 2(b) and (c) should be construed as meaning that the parties accept that the plaintiff will suffer a loss and that the percentages are payable as the subcontract proceeds and when the defendant receives from ASD payment for the builders works without the necessity of going into the question of whether the plaintiff has in fact suffered a loss.

35.In my judgment, there is no inconsistency if clauses 2(b) and (c) are read together. By these clauses, the parties acknowledge that the contract price of the Subcontract Works may be less than the actual cost of the works and the Subcontractor is to be compensated for its loss in the event that there is a loss. The manner of ascertaining the existence of loss, the quantum of compensation and the mode of payment are all governed by clause 2(c). Although it is mandatory for the Main Contractor to compensate the Subcontractor for its loss, the obligation to compensate the Subcontractor for its loss is only an obligation to compensate it in accordance with sub-clause (c).

36.Even if it is accepted that the clause is badly drafted, there are a number of problems with the plaintiff's interpretation. Clause 2(b) contains an express acknowledgment by the parties that the contract price may be less than the actual cost not that the contract price is less. Thus, it is impossible to construe these words as meaning that the parties agree that the plaintiff is bound to make a loss. The fact that there may or may not ultimately be a loss is reinforced by the opening words of clause 2(c) "In the event that the total price of the Subcontract Works payable to the Subcontractor is less than the total cost of subcontract".

37.It is not possible to read the sub-clause as though the opening words were not there nor to read it as though it provided "In any event, the Main Contractor shall, in addition to paying the Subcontractor the certified contract price, pay...".

38.As to the requirement for certification by the Main Contractor in clause 2(c), Mr Grossman SC accepts that the Main Contractor was entitled to look at the plaintiff's accounts but what would be the purpose of showing those accounts to the Main Contractor if it were not part of the process of getting the Main Contractor to certify that the total price of the Subcontract works payable to the plaintiff was less than the total cost of the works? In my judgment, what the Main Contractor has to certify is "the event" namely that the total price of the Subcontract works payable to the Subcontractor is less than the total cost of the Subcontract works. It will readily be implied that the Main Contractor must act reasonably in the matter of certification and that the Main Contractor will take all steps necessary to enable the certificate to be issued.

39.The Main Contractor would be expected to know what the total price of the Subcontract works payable to the Subcontractor is. The Main Contractor will also know what subcontract works have been carried out and what materials have been supplied and installed as part of carrying out the subcontract works. Indeed, in making applications to ASD for interim payments, the Main Contractor will have had to make its own assessment of what work has been done and materials installed. What the Subcontractor would be expected to provide to the Main Contractor to enable the Main Contractor to certify whether the costs exceed the price would be his labour costs, costs of materials and any management and head office costs involved in carrying out the subcontract works. Thus, in the process of certifying, the Main Contractor is not simply the passive recipient of information.

40.As to the other sub-clauses in clause 2 reinforcing the obligation to make the additional payments in any event on a back-to-back basis, Ms Cheng SC argues that sub-clauses (a), (d), (e) and (f) are to be read together and that (b) and (c) go together. I accept that her construction is correct. Sub-clause (f) provides for the Main Contractor to provide information to the subcontractor twice a month "of the latest payment and disbursements certified by the Principal for the Subcontract Works" (emphasis added). The Subcontract Works are defined in clause 1 as being "all the electrical installation works specified in the Main Contract". Sub-clause (a) also refers to "all monies received from the Principal for the Subcontract Works pursuant to the Main Contract". Builders' works are part of the Main Contract Works and any certification by the Principal of their value is for the Main Contract Works and not for the Subcontract Works.

41.However, even without reference to sub-clauses (e) and (f), there is a back-to-back payment obligation in sub-clause (c) to which effect must be given.

42.Ms Cheng SC submitted that the obligation to pay the additional reimbursement under clause 2(c), assuming that loss had been shown, arose within seven days of receipt of the relevant amount and that the relevant amount referred to the last certified payment of the works order issued during the relevant contractual period. Thus assuming 100 works orders were issued during the 1st Contractual Period, the obligation to pay would arise when the value of the last of those works orders had been finally certified and this could be before the Final Account stage. However, it was also her submission that loss could not be ascertained until the total price of the Subcontract works was known and that could only be at the Final Account stage when the final sum due in respect of the Subcontract works was certified.

43.Although she sought to explain how her submission on the entitlement to additional reimbursement on the ascertainment of loss and on the obligation to pay back-to-back could be reconciled, it is obvious that the defendant must be arguing either that no obligation to pay any additional reimbursement arose until loss was ascertained at the Final Account stage or that payment could and should be made before any loss was ascertained but no earlier than the final certification of the total value of the builders' works comprised in the works orders issued in each contractual period.

44.The former argument would make the insertion of the obligation to pay back-to-back meaningless since no payment would ever be made until the price of the subcontract works was finally certified and then only if the total price of the subcontract works was less than the actual cost of those works. The latter argument implies an acceptance of the possibility that payment of the additional reimbursement would have to be made before it was known whether there was indeed a loss and this in turn implies an acceptance that in event of there being no loss, the plaintiff would have to repay any additional reimbursement received.

45.Mr Grossman SC referred me to the case of Cheong Chi Kin and Cheong Chi Wah t/a Jason Engineering Co. v. Hon Seng Engineering Ltd, HCCT100 of 1998, an unreported decision of Findlay J solely for the purpose of inviting me to note the fact that contracts in the construction industry are mostly designed to ensure a cash flow from the employer down the contractual chain to the smallest subcontractor.

46.Having regard to what had preceded this Agreement, it seems to me that the obligation on the Main Contractor to pay the Subcontractor on a back-to-back basis the additional reimbursement was intended to alleviate the Subcontractor's potential cashflow problems which would have been acute if, as the Subcontractor had been asserting, it would be making a loss on the rates agreed between the Main Contractor and the ASD. As I see it, the parties intended that the plaintiff should be paid the relevant percentage of the builders' works value as and when the defendant itself received payment from the ASD. Both parties carried the risk that if the plaintiff suffered no loss when the total price of the subcontract works was ascertained and compared with the total cost, it would have to repay the amounts received as additional reimbursement under clause 2(c). For the defendant, the risk of overpaying the plaintiff by quite substantial amounts was counterbalanced by alleviating the risk of having the subcontractor collapse through mounting losses as the works proceeded.

47.Whether the defendant had an obligation to pay the plaintiff the additional reimbursement as the subcontract works proceeded is in any case now an academic question because the Agreement has been terminated.

Whether the defendant can argue that the claim is premature

48.The defendant has sought to argue that because the total price of the subcontract works cannot be and has not yet been ascertained and the assessment of whether the plaintiff has suffered a loss cannot be made, the plaintiff's claim is premature. Mr Grossman SC objects that it has nowhere been pleaded by the defendant that the plaintiff's claim is premature and, more importantly, the defendant has never sought the dismissal or stay of the proceedings on that ground.

49.While some of the implied terms pleaded in paragraph 17 of the Defence are apparently intended as absolute defences to the plaintiff's claim such as that alleged in paragraph 17(d), others such as paragraph 17(e) could have been intended to suggest that the plaintiff's claim was premature. In paragraph 26 of the Defence, the defendant denies the plaintiff's entitlement to the reimbursement and avers that the conditions set out in paragraph 15 of the Defence have not been complied with by the plaintiff. This may have been intended as a reference to paragraph 17 of the Defence. However, in the last sentence of this paragraph the defendant pleads "As such, the Plaintiff is not entitled to claim reimbursement against the Defendant". This would be read and understood as meaning that the plaintiff was not entitled to the reimbursement not that the claim for reimbursement was premature.

50.The existence (or non-existence) of the implied terms features as one of the agreed issues between the parties as does the fact of whether the plaintiff incurred a loss. The latter issue is clearly inconsistent with a position that a loss cannot be established unless the total contract price of the subcontract works is ascertained after Final Account. In any event, Ms Cheng SC now does not rely on any of the implied terms save the one pleaded in paragraph 17(a) of the Defence to the effect that the plaintiff is only entitled to claim reimbursement on condition that the plaintiff did not subcontract a substantial part of the works to another subcontractor.

51.However, I do not consider that the defendant is in any way precluded from making the argument that the total price of the subcontract works payable to the subcontractor can only be ascertained after the Final Account and that that stage has not yet been reached.

When can loss be ascertained

52.I accept that the total price of the subcontract works payable to the subcontractor cannot normally be ascertained until the Final Account. It has not been suggested by the plaintiff that the payments made under clause 2(a) are not subject to adjustment at Final Account stage and only then can the total price of the subcontract works payable to the subcontractor be finally ascertained. Even where the subcontract is terminated, clauses 15(d) and (e) contemplate payment on an interim basis continuing while the Main Contract continues with the Main Contractor having the right to set off such payments against amounts payable to the subcontractor. Indeed, paragraph 8 of the Schedule to the Consent Order contemplates the same process of adjustment. Thus, the amounts payable to the subcontractor and therefore the total contract price cannot be ascertained until the Final Account stage.

53.However, the fact of loss can be ascertained before the Final Account stage in certain circumstances. If the subcontractor has entered into a sub-subcontracting arrangement whereby he is bound to be expending more than he is to receive by way of payment under clause 2(a) of the Agreement, then loss is a certainty. Provided that the subcontractor can show that he has contracted on such terms, the total price of the subcontract works is bound to be less than the total cost of the subcontract. If, for example, the subcontractor had already sub-subcontracted the works to various independent contractors on the basis that they were to be paid a discount of 40% off the rates in the Schedule, then loss would be inevitable and it would scarcely be necessary to wait for the Final Account stage.

The implied term

54.This leads to the issue of whether there is an implied term as pleaded in paragraph 17(a) of the Defence as referred to above. Clause 15(f) provides that the Main Contractor shall be entitled to immediately terminate the Agreement upon the happening of various events including the subcontracting of a substantial part of the subcontract works to other contractors. Clause 17(a) of the Agreement provides that save as provided in sub-clause (b), the Subcontractor is not entitled to assign or sub-contract any of its rights or obligations under the Agreement. Sub-clause (b) provides that the Subcontractor shall be entitled to engage the services of independent contractors to assist with its obligations with the prior written approval of the Main Contractor subject to certain conditions.

55.It is by no means unusual to find such a provision in building contracts or a provision which expressly prohibits such subcontracting.

56.In the case of this particular subcontract, the presence of such a provision can be readily appreciated against the requirement that tenderers for term contracts themselves are required to obtain tenders for specialist works from contractors on the ASD's approved list of specialist contractors. The ASD's insistence on the use of specialist contractors could be by-passed if those specialist contractors could then subcontract the whole or substantial parts of the works to others who were not on the list. Having regard to the provisions of clause 17 of the Agreement, it is clear that the purpose of the provision prohibiting subcontracting save with the prior written approval of the Main Contractor is to ensure satisfactory performance and control over the subcontract works.

57.However, the term which the defendant argues should be implied is one that disentitles the plaintiff to any additional reimbursement if it subcontracts a substantial part of the works to a subcontractor. In my judgment, there is no warrant for such an implied term. Mr Thomas Lee in giving evidence sought to say that the provision in clause 15(f) was somehow related to the provision for additional reimbursement to prevent the plaintiff from subcontracting at a loss. At best, this is evidence of subjective intention and not admissible. The Agreement entitles the Main Contractor to terminate the contract immediately and of course, the Main Contractor can recover damages for the breach of the subcontract should the Subcontractor sub-subcontract the whole or substantial parts of the subcontract works. But there is nothing to suggest that the prohibition on subcontracting the whole or a substantial part of the subcontract works is for the purpose of preventing the kind of arrangement which the plaintiff entered into with Yordland.

Whether the total price is less than the total cost

58.There is no dispute that in fact, the plaintiff did subcontract the whole of the subcontract works to Yordland by a purchase order dated 8 September 1998 upon terms that Yordland would be paid a price equal to 45% of the Schedule of Rates for Electrical Works in return for which Yordland would supply the plaintiff with all labour, tools, equipment and sundry materials to complete the subcontract works save for the materials listed in clause 10. These consisted of virtually all the materials likely to be required to carry out the contemplated works orders. The plaintiff was also to provide direct project management and supervisory staff including the payment of any staff seconded by Yordland and sundry expenses such as transportation, stationery, messing and entertainment. The terms of this contract ensured that the plaintiff would suffer a loss since Yordland were to receive effectively all that the plaintiff would receive from the defendant under clause 2(a) of the Agreement and in addition, the plaintiff would have to pay the cost of materials, management and sundry other expenses.

59.While it seems to me that the defendant might have had some case for arguing that this type of loss was not the kind of loss contemplated by the parties as being within clauses 2(b) and (c) of the Agreement or that such costs were outside the words "the actual cost of the Subcontract Works" and "the total cost of the subcontract", this is not how the case has been put so that Mr Grossman SC had not had an opportunity of addressing me on it. More importantly, no facts or matters relied upon by the defendant in support of such a case have been pleaded. Nor has it been pleaded that the arrangement between the plaintiff and Yordland was a fraud on the plaintiff or that it was a sham arrangement. This is not a mere matter of procedure since the plaintiff must be entitled to know what case it has to meet and any suggestion that the loss has been deliberately procured so as to entitle the plaintiff to receive the additional reimbursement should have been pleaded.

60.Ms Cheng SC did cross-examine Mr Chan Kwok Wah about the issue of the purchase order to Yordland. He was asked whether the plaintiff invited tenders for the sub-subcontract works and also whether the purchase order was entered into with a view to obtaining the additional reimbursement. To both questions, he replied "No". His earlier evidence was that at the outset, it was orally agreed between Yordland and the plaintiff that Yordland was to be the plaintiff's sub-contractor on the basis that the rates for the work would be at a discount of 36% off the rates in the Schedule, namely the basis originally quoted by the plaintiff to the defendant with the plaintiff receiving 4% for the management. This was before the plaintiff was aware that the defendant's tender to ASD was on the basis of a 55% discount off the rates in the Schedule of Rates. I accept Mr Chan's evidence.

61.When the plaintiff was asked by the defendant to commence works without any agreement as to terms, Yordland proceeded to carry out the works. It was therefore perfectly understandable that the plaintiff did not go out to tender when eventually terms were agreed between the plaintiff and the defendant in August 1998. In fact, according to Mr Chan, the plaintiff and Yordland re-negotiated the oral agreement in July 1998 after it became known to the plaintiff that the defendant had agreed a 55% discount off the rates with ASD.

62.It is the plaintiff's case that loss is inevitable as a result of the Purchase Order between Yordland and the plaintiff, that is that the total price of the Subcontract works payable to the Subcontractor will be less than the total cost of subcontract. This is admitted by the defendant. In opening submissions, counsel for the defendant accept that upon perusing the terms of the Purchase Order, one can immediately appreciate that the the plaintiff would suffer a loss in this project as clause 13 stipulates that the plaintiff would pay Yordland what the plaintiff would receive from the defendant and the plaintiff would also supply most if not all the equipment and materials or pay the costs of the equipment and materials incurred by Yordland on the plaintiff's behalf.

63.Although the parties have agreed that the issue is whether the plaintiff incurred a loss and have assumed that the burden lies upon the plaintiff to show that there is a loss, I consider that the true issue ought to have been whether on the material presented by the plaintiff, the defendant was entitled to refuse to issue the certificate. Although reference is made in the defendant's submissions to the Court certifying a loss, under clause 2(c), it is not the Court's role to certify loss nor is there any provision for the Court to have the powers of an arbitrator to open up and review a certificate.

64.In my judgment, the defendant is not entitled to refuse to issue the certificate having regard to the contents of the purchase order between the plaintiff and Yordland and having regard to the plaintiff's evidence including the certified statements made by George Yip in respect of the contract price received and receivable and the contract cost paid and payable as at 31 December 1999 and as at 31 December 2000 for the subcontract works and the steps taken by Mr Yip in order to make those certified statements.

65.Even if it is for the Court to determine whether the plaintiff has suffered a loss, as the parties have agreed, it seems to me that the plaintiff has proved its loss for the same reasons that I consider the defendant is not entitled to refuse to issue a certificate. Once it is accepted that the plaintiff is under an obligation to its subcontractor, Yordland to pay over what is received from the defendant under clause 2(a) of the Agreement and either to supply materials for the works or reimburse Yordland for the materials, it will have been shown that the total cost of the subcontract is more than the total price of the subcontract works payable to the plaintiff. All that would remain to be done is for the plaintiff to show that it had paid Yordland what it had received from the defendant and either that it had supplied materials to Yordland or reimbursed Yordland for materials supplied. The exact amount of the latter reimbursement would be immaterial since any payment over and above what had been received from the defendant would be sufficient to establish the loss.

66.The plaintiff has shown this to my satisfaction both through the evidence of Mr Chan and Mr Tam and through the evidence of Mr Yip whose evidence I accept.

67.The defendant submits that I should reject the evidence of Mr Yip because he is giving opinion evidence and has relied upon facts which are not before the Court and which should have been proved by factual witnesses. It is said that the defendant has been deprived of the opportunity of satisfying itself as to the veracity and accuracy of what Mr Yip did. In my judgment, this submission is misconceived because the defendant has had the opportunity of satisfying itself as to the veracity and accuracy of what the plaintiff's costs were during the course of the subcontract works and afterwards, since seeing Mr Yip's certified statements.

68.From the correspondence between the parties' solicitors, it appears that the matter of discovery was not pursued by the defendant's solicitors after the plaintiff's solicitors inquired by letter dated 28 February 2001 what specific supporting documents the defendant required to see until shortly before the hearing. On the 1st day of the hearing, the parties sought an adjournment to enable the parties' accountants to meet and, in particular, for Mr Yip to attend with all the documents required and any other documents sought to answer questions and to show how he had come to his figures in the certified statements. This meeting took place in the afternoon of the 1st day of the hearing. Of course, Mr Yip has also been subject to cross-examination. It is therefore not right for the defendant to say that it has had no opportunity to satisfy itself as to the veracity and accuracy of what Mr Yip did.

69.The defendant has raised a number of matters in an attempt to show that the accounts and figures relied upon by the plaintiff are wrong or unreliable.

70.As to the pre-contract costs, the Agreement superseded all prior arrangements so that the plaintiff was to be paid for work done prior to the Agreement according to its terms. It has not been suggested otherwise. Yordland was carrying out the subcontract works for the plaintiff from the start and the terms of the purchase order superseded the prior oral agreement between Yordland and the plaintiff. It is therefore perfectly right and proper for Yordland to have been reimbursed by the plaintiff under the terms of the purchase order for works done under TCG 003 prior to the issue of the purchase order and these costs were therefore properly taken into account in calculating the "total cost of subcontract".

71.As to the other matters raised by the defendant, I accept the plaintiff's submissions. Much of the criticism of Mr Yip and his reliance upon what he was told is simply misconceived. All audited accounts are prepared on the basis of information compiled by others. The accountant or auditor having gone through supporting vouchers, invoices and other documents may raise queries. If he is satisfied with the answer, the accounts may be presented without any specific qualification as to the matters queried. In a forensic context, the fact that the accountant or auditor may be satisfied with the answer does not preclude anyone else establishing that the accounts are wrong. However, there is at least an evidential burden on the person who challenges the accounts to show in what respect the accounts are wrong. This the defendant has not done.

72.The facts show that Mr Yip did not blindly accept what the plaintiff submitted to him. In his supplemental witness statement (as corrected in his evidence-in-chief) noted that materials costs up to 31 December 2000 were overstated and that it had an effect on the net loss suffered by the plaintiff as shown in the 1999 Certified Statement and the 2000 Certified Statement. The defendant did not suggest to Mr Yip that he had not made an adequate allowance for the overstatement of materials costs.

73.Even if I were to accept that the invoices for water heaters listed in Appendix II to the defendant's submissions were wrongly included, that only reduces the net total loss by $44,240.00.

74.In the context of this case, the plaintiff is not required to prove the amount of loss but the fact of a loss, the amount of which is irrelevant. This the plaintiff has done.

Quantum

75.It appears that the total value of the builders' works orders issued as at 23 September 1999, the date of the termination of the Agreement, is not yet finalised as between the defendant and ASD. Mr Timothy Lee for the defendant has given evidence of the interim position as at 26 November 2001 that being the most up-to-date position at the time of his witness statement. According to his calculation, the plaintiff would be entitled to reimbursement of $14,320,353.00 based upon those interim figures. According to him, only a very small portion of the works orders had been finalised. However, it also appears from his evidence that the defendant has done nothing to get the figures finally certified.

76.The figures are interim in another sense in that not all the builders' works orders have been included in the calculation because not all of the builders works order had been completed as at 26 November 2001. This is also Mr Timothy Lee's evidence according to his witness statement. He also says that some of the works orders were cancelled so that even if issued, no payment will be received by the defendant in respect of them.

77.The plaintiff is prepared to accept the figures given by Mr Lee on the basis that the balance should be determined by a Master at a later stage. The defendant's submission is that this would require constant application to the Master each time the ASD revises the figures. That is not what is being proposed by the plaintiff and there is in any case on the defendant's own evidence no suggestion that ASD is going to be constantly revising the figures. All that appears to be outstanding is a Final Account.

Order

78.In the circumstances, the plaintiff is entitled to judgment in the sum of $14,320,353.00 with the balance due to be assessed by a Master on the basis that the plaintiff is entitled to be paid 5% of the total builders' works order value of the Main Contract certified by ASD for the works orders issued during the 1st Contractual Period and 4% of the same for the works orders issued during the 2nd Contractual Period up to and including 23 September 1999, being the date of termination. As the amounts have to be those certified by ASD, this will automatically exclude works orders which were issued but subsequently cancelled and in respect of which no builders works were carried out. If necessary, I will hear the parties on the precise terms of the order.

79.The plaintiff is entitled to the costs of the claim for reimbursement.

Representation:

Mr Grossman, SC leading Mr A. Chan, instructed by Messrs Siao, Wen & Leung, for the Plaintiff

Ms T. Cheng, SC leading Mr R. Leung, instructed by Messrs Robin Bridge & John Liu, for the Defendant