Onway Engineering Ltd v. Chinney Construction Co Ltd
Read the full judgment text of HCCT10/2002 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 9 November 2005 before Deputy High Court Judge Muttrie.
Construction law – Building maintenance subcontract – Licence borrowing arrangement whereby Chinney as main contractor sub-contracted to Shun Wing, a new company borrowing Chinney’s licence – Whether Onway sub-contracted directly with Chinney or Shun Wing – Tender documentation ambiguous; contemporaneous documents and conduct consistent with Onway contracting with Shun Wing – Ken Ng, Onway’s director, knew of licence borrowing arrangement when signing tender – Authority of C.K. Tsui, contract manager, limited to contracting on behalf of Shun Wing, not Chinney – Oral agreement to reduce management fee to 25% found but unenforceable for lack of consideration – Termination of Onway’s sub-contract lacked sufficient grounds, suggesting wrongful repudiation by Chinney – Quantum of damages considered assuming contract with Chinney: preferred evidence led to award for completed works less properly vouched contra-charges; no loss of profits awarded – Claims dismissed due to absence of contract between Chinney and Onway – Costs ordered to defendant to be taxed if not agreed.
Legal issues: Existence of licence borrowing agreement · Authority of C.K. Tsui to contract for Chinney · Existence of sub-contract between Chinney and Onway · Reduction of management fee to 25% · Wrongful repudiation of contract · Quantum of damages if sub-contract existed
Outcome: Onway's claims against Chinney dismissed; costs to defendant, to be taxed if not agreed.
Cites 3 cases
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HCCT10/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO.10 OF 2002 ---------------------
---------------------- Before : Deputy High Court Judge Muttrie in Court Dates of Hearing : 13th to 17th, 20th to 21st, 23rd June and 8th and 9th September Date of Judgment : 9th November 2005 ---------------------------- J U D G M E N T ---------------------------- 1. This is a building contract case. The defendant, Chinney, entered into a three-year term maintenance contract, No. TCK 011, with the Architectural Services Department ("ASD") of the Government on 29 March 2001. The contract was for alteration, maintenance and repair works to Government and other buildings in the Central, Peak and Mid-Levels districts on Hong Kong Island. The contract price was based on a schedule of rates published by the Government, subject to agreed percentage changes. 2. The plaintiff, Onway, on 31 March 2001 entered into a sub-contract to do all the building maintenance work under TCK 011. The sub-contract was terminated on 19 December 2001. 3. In a nutshell, Onway's case is that it sub-contracted all the building works under TCK 011 directly from Chinney for a fee of 29% of the agreed rates. This was later reduced by agreement to 25%. Chinney wrongfully repudiated the sub-contract. Onway claims for unpaid amounts for work done and for loss of profits. 4. Chinney's case, however is that Onway did not contract directly with it, but with its sub-contractor, Shun Wing Construction and Engineering Co. Ltd ("Shun Wing"). As appears from evidence, but not the pleadings, Chinney was approved for Government maintenance contracts, but Shun Wing, which was not so approved had been formed to "borrow the licence", or stand in for Chinney, and to undertake all the works under TCK 011 for a fee of 2% of the agreed rates. Onway's sub-contract was with Shun Wing, and Chinney is not liable. If, however there was such a contract as Onway claims, it was Onway that was in breach by failing to carry out its works properly and so Chinney was entitled to terminate the contract. 5. It is convenient to set out the personalities and companies involved here. Chinney's parent company was Chinney Investments Ltd, whose chairman was Wong Sai Wing. Chinney's own managing director was Chan Yuen Keung, Zuric ("Zuric Chan"). 6. Wong Sai Wing was also the chairman of Shun Cheong Holdings Ltd ("SCH") and George S.O. Kwok was its managing director. Zuric Chan became SCH's managing director on 16 July 2001. SCH had a subsidiary company, Shun Cheong Electrical Engineering Co. Ltd ("SCEE"). The SCH group employed a contract advisor and administrator named Tsui Chun Kong ("C.K. Tsui"). 7. Shun Wing was incorporated on 4 April 2001. Its shareholders were SCEE and one Howing Engineering Ltd. Shun Wing's directors were Patrick Y.F. Au, C.K. Tsui and Ng Yiu Wah. Ng Wan, who was Ng Yiu Wah's father, owned Howing and Gold Banner Construction and Development Ltd, and Ng Yiu Wah was also a director of these companies. 8. Onway's managing director was Ng Chun Hung, Ken ("Ken Ng"). Onway also had an assistant general manager, Ho Hon Loong ("Gary Ho"). In negotiations prior to entering into the sub-contract, Ken Ng dealt with C.K. Tsui. As well as being a director of Shun Wing and on the pay roll of SCH, C.K. Tsui was the contract manager of TCK 011. The contract 9. The contract with which this case is concerned came into being on 31 March 2001. There is no dispute that Ken Ng signed and delivered a pre-printed tender form, which had been drafted by C.K. Tsui, to C.K. Tsui, at a meeting at SCEE's offices at Flat 201, Premier Centre, 20 Cheung Shun Street, Lai Chi Kok. The form is not chopped with Onway's chop; Ken Ng said that he did not have it with him; but although there was some argument about whether Onway was a party to the contract, I can see no doubt that it was. C.K. Tsui accepted the tender orally; he says he did so at the meeting itself. Ken Ng says that the oral acceptance was made by telephone later. It does not matter; in any event, C.K. Tsui accepted the tender. The major question is, on whose behalf did he accept it? 10.The document reads (in translation): " Tender
11. In brief, Ken Ng's evidence is that his tender was an offer to Chinney, and it was accepted as such. He understood C.K. Tsui to represent Chinney. He knew nothing about Shun Wing or any other intermediate sub-contractor at that stage. He was with Gary Ho at this meeting. For his part Gary Ho says that C.K. Tsui said at the meeting that he represented Chinney, and Chinney's name was used in discussion of Clause 5, which Ng and Ho say was to be deleted, there being a cross through the number on their copy though the words were not deleted. C.K. Tsui however says that the offer was made to Shun Wing, whose position was known to Ken Ng from previous meetings, and he accepted it on Shun Wing's behalf. Issues 12. Counsel have agreed a list of the main issues which are as follows:
13. I will deal with these issues in turn, referring as necessary to the evidence and the law. But first there are, I think, two more basic issues to be addressed, namely whether or not there was a "licence borrowing agreement" between Chinney and Shun Wing, and if there was, whether Ken Ng knew about it when he signed the tender form. Chinney does not specifically plead such a licence borrowing agreement; it only pleads in paragraph 8 of the Re-Amended Defence that Onway was a sub-contractor to Shun Wing to whom Chinney had sub-contracted the works. But it seems to me that this issue is fundamental. If there was such an agreement, and if Ken Ng knew of it beforehand, it follows that Onway must have entered into a sub-contract with Shun Wing. Was there a Licence Borrowing Agreement? 14. According to C.K. Tsui, there is a common practice in the construction industry, particularly in the field of maintenance contracts, of "licence borrowing". This means that a contractor regarded as approved and qualified by the employer contracts with an employer for the works, but in reality a sub-contractor, who is not so regarded, but who has "borrowed the licence", submits the tender and does all the work under the contract. The employer pays the main contractor at rates agreed under the main contract, and the main contractor pays the sub-contractor, less a percentage which he deducts as a "management fee" and so makes a profit without doing any of the work. 15. This sounds dishonest. Certainly it appears to deceive the employer though no doubt there may be some tacit acceptance of the situation by the employer. I suggested to C.K. Tsui that it was a fraud. His answer was that
16. The licence borrowing agreement is not unknown to the courts. Evidence of such arrangements was given before H.H. Judge Carlson in Atal Engineering Ltd v. Evergreen Engineering and Construction Co Ltd, DCCJ 10712/2001, and before me in Décor Floors Engineering Ltd v. Wing Hong Contractors Ltd & Ors, DCCJ 31/2003. A computer search of the cases will produce a few others in which pleadings or evidence referred to such an agreement but I do not need to list them. 17.This type of agreement was also known, albeit in rather general terms, to Ken Ng; he said that he knew the term, although circumstances differed in every case. He also said that he did not know the term in 2001, but given that he has 28 years in the construction industry, it is most unlikely that he would only have come to know of it since 2001. 18. The evidence that there was such an agreement comes from C.K. Tsui, Ng Yiu Wah and Zuric Chan. Onway cannot say that there was no such agreement though it can say and it does say, through Ken Ng, that it knew nothing of it. His evidence is that the role played by Shun Wing was never made clear to him. Onway's contract was with Chinney and there was never any novation agreement to bring in Shun Wing in the position of Chinney. The impression he was given, particularly by Shun Wing's representatives at the first and subsequent works meetings was that Shun Wing was a division or department of Chinney, responsible for the administration and management of the two term contracts, nos. TCK 011 and TCK 022, which had been awarded to Chinney. 19.The defence witnesses say that in November 2000 when the ASD invited tenders for eight maintenance term contracts, C.K. Tsui proposed to his chairman, George S.O. Kwok, that SCEE, which was an approved electrical contractor, should get into ASD maintenance term contract work. Kwok agreed, but since SCH and its subsidiaries were not approved maintenance contractors, they decided that they must borrow the licence of a contractor which was approved. Kwok thought of Chinney, so they approached Zuric Chan. It was agreed that a team consisting of SCH and an experienced builder, yet to be selected, would borrow Chinney's licence to submit tenders for the contracts and if one or more of the tenders was successful, the team would incorporate a new company to perform the works and enter into sub-contracts with Chinney. The works would be done on a back-to-back and pay-when-paid basis. Chinney would get a management fee of 2%. 20.SCH then looked around for a builder. The Ng family, which, as I have indicated, owned Howing and Gold Banner and which had done Government maintenance sub-contract work before, was selected. It was agreed that the Ng family would take up 49.9% and SCEE 50.1% of the interest in the team which would borrow Chinney's licence. Thereafter the team put forward the tenders to the ASD in the name of Chinney. 21.Ultimately Chinney was awarded the contracts TCK 022 and TCK 011, on 27 March 2001. A new company had to be formed. The Ng family decided to use, not Gold Banner but Howing as its shareholder; and the new company was to have the composite name "Shun Wing". 22. I will deal later with my view of the reliability of individual witnesses on specific matters, but will say at this point that senior counsel on each side has pointed out the defects in the oral evidence of the witnesses on the other. They are many. I cannot say that any of the witnesses impresses me as a model of truth or accuracy. Obviously their evidence has to be viewed in the light of the documents and the inherent probabilities in the case. 23. I turn to the documents. In any contract dispute the documents are very important. Mr Clayton SC, who appeared for Chinney, referred me to the opinion which Kaplan J expressed in Eu Asia Engineering Ltd v. Wing Hong Contractors Ltd, HCCT 16/1990 at paragraph 22:
24. With this view I respectfully agree. I would put it another way, namely that contemporaneous documents produced in the ordinary course of business are likely to show the true picture. Mr Scott SC, who appeared for Onway, also submitted that I should follow Kaplan J's approach although in his view the documents were insufficiently contemporaneous to support Chinney's case. 25. A document on which Onway relies as indicating that it was Chinney's sub-contractor is an undated agreement between one Wan Chung Construction Co. Ltd and Onway for the sale of equipment at the various depots to the latter when it took over the sites at the commencement of the main contract term. Wan Chung was a sub-contractor for the term maintenance agreement prior to TCK 011. Onway is described in the document as "Chinney's sub-contractor". Wan Chung apparently made the document. Ken Ng says that Onway's people, though not he himself, told Wan Chung's people that Onway was Chinney's sub-contractor. If this information had come from Chinney or some independent source it would be a different matter, but as it is I do not think this document helps very much. One would have to know whether the author was using "sub-contractor" to mean a direct sub-contractor, or a sub-contractor somewhere in the sub-contract chain. 26. The first in time of the other relevant documents is a written proposal for the works put forward on 27 November 2000 by Ng Yiu Wah at Gold Banner to C.K. Tsui at SCEE. This tends to support Chinney's case though it is argued that the document must be suspect because it proposes that "your company", i.e. SCEE holds the licence while Gold Banner carries out the works; whereas in fact SCEE never held the licence in the first place. 27. The specialist roofing and electrical contractors had to be specified in the main contract. In this connection three roofing contractors, Erawan Co. Ltd, Wo Loong Engineering and Construction Ltd and Kin Ching Besser Co. Ltd all confirmed in December 2000 or January 2001 that they would carry out specialist roofing works. Their letters are all addressed to Chinney, at its office address; and two of them are marked for the attention of C.K. Tsui. This suggests that these companies intended to contract with Chinney, as indeed was required by the Special Conditions of the main contract. Later agreements between Erawan and Chinney (in May 2001 and February 2001) were signed and chopped for Chinney by C.K. Tsui. 28. Much was made of the quite unsatisfactory evidence of Zuric Chan and C.K. Tsui on the latter's authority to contract on behalf of Chinney. They said that C.K. Tsui did not have authority to enter into any contract on its behalf; Chinney had sub-contracted the entire term contract to Shun Wing. According to Chan, at least initially, C.K. Tsui did not have authority even to negotiate. C.K. Tsui's evidence of his authority to use, and his use of the Chinney chop was inconsistent and indeed self-contradictory. However, Chinney was required to sub-contract directly to the specialist sub-contractors. They were named in one of the appendices to the Special Conditions of Tender. That sub-contract documents appear which show a direct sub-contract with a specialist sub-contractor is not inconsistent with the story of licence borrowing which in any event required a particular state of affairs to be shown in dealings between Chinney and the ASD. 29. Next we have the registration documents of Shun Wing. Application was made to register it, and fees paid for registration on 30 March 2001. It was incorporated on 4 April 2001. The shareholders were SCEE and Howing, in the proportions agreed. The directors were George Kwok, Patrick Au and C.K. Tsui from SCEE and Ng Yiu Wah and Luk Wan Tin from Howing. It is particularly to be noted that the name of Shun Wing and the identities of its shareholders and directors must have been decided on by the time the application was made. 30. There is a written subcontract agreement between Chinney and Shun Wing, dated 4 April 2001, signed by Zuric Chan for Chinney and C.K. Tsui and Ng Yiu Wah for Shun Wing. It recited the fact of an oral agreement for licence borrowing made in about November 2000 between "the promoter on behalf of the sub-contractor", the preparation of the tender by the (unnamed) promoter, and the award of the main contract. In effect it records what the witnesses say were the terms of the oral agreement for the sub-contract, with Shun Wing to be paid 98% of the payments to Chinney by Government within one month. There is an arbitration clause. 31. This document was clearly not made on 4 April 2001. That is what C.K. Tsui said in his witness statement. Zuric Chan said that he thought he had signed this document on 4 April 2001. But C.K. Tsui said that it came into being on 22 January 2003 when in Labour Tribunal proceedings which involved Chinney, Shun Wing, Onway and two other sub-contractors of Onway as defendants, the Presiding Officer called for sight of the sub-contract document. Ng Yiu Wah said much the same and that the contents of the document had been discussed by Shun Wing's Board of Directors at the time of the Labour Tribunal proceedings although no Board resolution has been produced. It was suggested to the witnesses that the document, which was false as to its date, had been made up for the purpose of this litigation but of course they denied that. 32. There is also a contract document between Chinney and SCEE as specialist electrical sub-contractor. This is dated 1 April 2001, though it bears the To Kwa Wan address which had not yet come into being (see below) and an e-mail address which likewise had not come into being at that date. Zuric Chan eventually had to admit that although he thought he signed it on 1 April, he could not have done so. C.K. Tsui, whose initials appear on the letter along with Chan's said that the date was put on for convenience; the letter was produced because the ASD required SCEE to submit a document, because under the main contract it was the specialist electrical sub-contractor. 33. Shun Wing's registered office address was and is the same as that of SCEE's office at Flat 201, Premier Centre, 20 Cheung Shun Street, Lai Chi Kok. From 21 May 2001, Shun Wing leased office premises at Room 1013, Harbour Centre Tower 1, 1 Hok Cheung Street, To Kwa Wan, from one Bangbo Properties Ltd. The office at that address bore the name "Chinney Construction Co. Ltd. (Maintenance Division)". According to C.K. Tsui, this was done for convenience in dealing with the ASD. 34. Correspondence in relation to the tenders and the setting up of the term contract went from the ASD to Chinney's head office at Hong Kong Spinners' Industrial Building, Castle Peak Road. However, later ASD correspondence such as defect notices were all addressed to Chinney at the To Kwa Wan office, for the attention of the contract manager, C.K. Tsui. 35. Periodic progress meetings were held in respect of the two contracts TCK 011 and TCK 022. The first such meeting was held on 10 April 2001. The minutes are produced and they bear to be minutes of an internal meeting between Shun Wing and its sub-contractors. There is no mention of Chinney, but Onway is listed as one of the sub-contractors. The minutes begin with "aims of the meeting" and it is there recorded that "to facilitate the operation of the work, Shun Wing (this company) would hold meetings with sub-contractors periodically". 36. The earlier of these minutes bear the heading "Shun Wing Construction and Engineering Co. Ltd". However later minutes, which appear in translation as "works meetings" rather than "progress meetings" are kept in the name of "Chinney Construction Co. Ltd. (Maintenance Division)". Minutes of quantity surveyors' progress meetings and site meetings show a similar change of name, from Shun Wing in the beginning to Chinney's "maintenance division". 37. A series of organisation charts was put forward to the ASD to show the personnel involved in the execution of the works under the main contract. All of these show, at the top of the organisational tree, C.K. Tsui as "contract manager" and various personnel below him. On the first of these charts, but not others, Ken Ng is shown as a sub-contractor. Otherwise all the personnel are simply shown by name as if belonging to the one organisation. The first chart has no heading but subsequent charts, from 7 May 2001 bear the heading "Chinney Construction Co. Ltd.". The address of the To Kwa Wan office of Shun Wing and "Chinney Maintenance" is shown at the top of the later charts. Business cards of various personnel involved in the works were issued showing them as belonging to "Chinney Construction Co. Ltd. (Maintenance Division)". These personnel included employees of Onway. Indeed cards for entry to the Marine Ferry Terminals were issued to Ken Ng and Gary Ho under the name of "Chinney". 38. Chinney took out employee's compensation with Chevalier Insurance Co. Ltd and contractors' all risks insurance with CGU International Insurance plc, from 1 April 2001. In the policy documents the name of employer or insured is shown as :
39. Indeed a letter from Onway to Shun Wing, written by Gary Ho, dated 20 August 2001, in which Onway requests copies of the insurance policies commences with the words (in translation) :
40. Only when C.K. Tsui was giving evidence did it come out that that the words "from your company" appear in the Chinese original, but not the English translation supplied. Gary Ho was not asked to explain the reason why he used these words, presumably because the significance of them was not seen at that stage. In any event there is no explanation to counter the obvious meaning of these words. 41. Onway applied to Shun Wing for all the payments made to it under the sub-contract and Shun Wing made those payments to Onway. I will return to this point later but will note at this point that although the payments show the 29% deduction for the management fee mentioned in the tender document, this is 29% of the rates payable by the Government to Chinney. The 2% deduction which is said to be due from Shun Wing to Chinney is not shown. 42. Shun Wing also applied to Chinney for payment. On 12 July 2001 C.K. Tsui wrote, as General Manager of Shun Wing, to Chinney, for the attention of Zuric Chan, requesting payment of an outstanding balance of interim payments due under TCK 011 and TCK 022 and amounting to $1,220,262.72. He sent a reminder on 16 July. This provoked a response on 19 July when Chinney wrote to Shun Wing referring to a request by Shun Wing on 16 July for borrowing $1 million "in connection with the services provided ... for the maintenance contracts" and enclosing a cheque for that figure. Shun Wing wrote back on 21 July to the effect that its request was not for a loan but for release of overdue payment under the sub-contract, and that it accepted the $1 million as a part payment. 43. Thereafter, the same practice continued. Shun Wing would ask for a specific figure. In some cases invoices are produced showing the 2% deduction. Chinney would then send a cheque for a reduced round figure, expressing it to be a loan. Overall, according to C.K. Tsui, Chinney is still owing Shun Wing some $30 million for the two maintenance contracts. 44. With regard to this "licence borrowing agreement", Onway's position is that it has been made up, in order to enable Chinney to escape liability by interposing Shun Wing which is a mere shell company with a capital of $1,000. Chinney's position is, of course, that it is being wrongly sued; Onway is going after it, rather than Shun Wing with which Onway contracted, because Chinney is good for damages but Shun Wing is not. There is, in fact, no documentary reference to any contract between Onway and Chinney before Onway's sub-contract was terminated. 45. Mr Scott argues that Zuric Chan and C.K. Tsui are unreliable, unimpressive and evasive. The documents on which they rely, in particular the sub-contract between Chinney and Shun Wing and the sub-contract with SCEE are obviously false, and have been made up for this litigation. It is also said that commercial commonsense dictates that Chinney's case, viewed objectively, is absurd. It is a massive "scam" devised by directors of subsidiaries of two listed companies to deceive the Government. The latter would never approve of such a scheme; otherwise why would it have compiled lists of approved contractors and specialist sub-contractors, and stipulated in the term contracts that only such approved persons could carry out work for the Government. In fact the term maintenance contract specifically prohibited sub-letting of the whole of the works. It was only allowed to sub-let part of the works, either on the basis of the provision by the sub-contractor of labour and material, or by the provision of labour on a piece-work basis. Chinney was new to Government maintenance work and would not risk its licence or risk having its contract terminated, as Government would be entitled to do under the main contract if it discovered such prohibited sub-letting, for a mere 2% of a contract expected to bring in $381 million over its three year term, i.e. less than $8 million. 46. I accept that it is difficult to see why Chinney would put itself at risk for a relatively small return; but then while it is often difficult to see what real advantage a person can hope to obtain when he commits a breach of contract or even a crime, nevertheless people still do these things. And if, as has been said, the ASD turned a blind eye to licence borrowing, notwithstanding the contractual prohibitions, there was no real risk. 47. In fact, the provisions of the term contract itself give the ASD some scope to turn a blind eye. As I understand it, the reference by C.K. Tsui, mentioned above, to the "same people" refers to the fact that the term contract places requirements on the main contractor to provide specified personnel, from the contract manager down, whose required qualifications are set out in the Performance and Facilities Specification section of the contract documents. The main contractor has to supply organisation charts to the ASD showing the names of the personnel and it has to satisfy the ASD that they have the required qualifications. This would suggest that so long as the ASD is satisfied with the personnel put forward as provided by the main contractor, it will be less concerned in practice with whether they are actually directly employed by the main contractor or whether they are employed by a licence borrower. 48. The witnesses on both sides are indeed suspect on various points which counsel have ably particularised in argument. It is certainly true that the sub-contract document between Chinney and Shun Wing came into being long after the dispute arose; and the makers of it, whether they made it for the Labour Tribunal or for this court, made it long after the date of the agreement which it purports to record. Indeed the same applies to the SCEE sub-contract. One gets the impression that all the witnesses would happily do business on the basis of oral agreements and then produce documents later as required. The work starts first, and the paperwork catches up later. Of course, on the criteria set out by Kaplan J, cited above, these later documents are suspect. 49. The difficulty is, however, that the company records show that Shun Wing was indeed jointly owned by SCEE and Howing, and had directors from both of them. The day-to-day working documents which I have referred to above, such as the minutes of meetings, demands for payment and payment records, which came into being after the term maintenance contract started but before the dispute arose in December 2001, all show that Shun Wing's officers and employees, from C.K. Tsui downwards, were holding themselves out to the ASD as being Chinney's people. Shun Wing passed itself off as a branch of Chinney. Shun Wing acted as if it were the principal sub-contractor to Chinney, in dealings with the other sub-contractors. It claimed money from Chinney, and it paid out money to Onway as if it were the principal sub-contractor. All the contemporaneous documents which came into being in the ordinary course of business, and before any dispute arose, are consistent with the existence of the licence borrowing agreement. Really the question arises, if Shun Wing was not borrowing the licence, what else could it be doing? 50. It was suggested that Shun Wing might have been some kind of administrator, administrating the contract on behalf of Chinney. According to both Ken Ng and Gary Ho, this was their understanding. I will return to their evidence later in dealing with the issue of Ken Ng's knowledge. However, the documents passing between Shun Wing and Chinney, referred to above, simply do not support this. 51. I am therefore driven to conclude that there was such a licence borrowing agreement between Chinney and Shun Wing Did Ken Ng know about the licence borrowing agreement when he made the tender? 52. Before 31 March 2001, Ken Ng was involved in two meetings, one at the Miramar Hotel in Tsimshatsui on 20 March, and one at the Harbour View Seafood Restaurant, in Tsimshatsui East, on 30 March. Ng Wan owned this restaurant. 53. According to Ken Ng, Onway was initially an electrical installation contractor but since 1997 it has also been engaged in building and construction. By the end of 2000, it was known that the Government would be putting maintenance work out to tender. Onway wanted to take part in this work as a sub-contractor. Ken Ng negotiated with one Chun Wo Construction Engineering Co. Ltd and Chinney, and he built up a team of employees ready to do the work. 54. According to Ken Ng's written statement, which he adopted, the meeting on 20 March 2001 was with representatives of Chinney and SCEE, which he knew to be related companies. C.K. Tsui was there, along with George S.O. Kwok and Patrick Au of SCEE, and some others. He was told that Chinney had tendered for eight contracts and hoped to get two of them. C.K. Tsui told him that if Chinney got two main contracts, it would sub-contract one of them to Onway, and if it got one, it would sub-contract part of the works under that contract to Onway. 55. In oral evidence Ken Ng said that he had arranged to meet the senior management of SCEE, and they mainly talked about electrical works. Later C.K. Tsui appeared. He said that he was the one who had submitted the tender for Chinney and either was or would be the contract manager (there is some difference between what was said in-chief and under cross-examination). Onway was interested in doing the construction work. They discussed that and Ken Ng agreed to send in a written proposal. 56. From cross-examination it appears that he went to this meeting to try to get a sub-contract of electrical works from SCEE. He denied knowing of any arrangement between Chinney and a sub-contracting team. He said that he had heard of licence borrowing agreements but they varied in nature, and at that time he did not actually know the term. I have dealt with this point above. 57. Ken Ng did put forward a proposal for the sub-contract, dated 23 March 2001. He addressed it to C.K. Tsui at SCEE. It refers to the "Contract ... under the ASD which has been tendered by and awarded to your company". Under cross-examination he said that when this document was submitted to SCEE it covered Onway's intention to sub-contract both the electrical and the construction works; but then he agreed that it related to the whole of the works. 58. C.K. Tsui says that before this meeting he had telephoned Ken Ng, whom he knew since 1998, and had told him that SCEE had teamed up with the Ng family to borrow Chinney's licence. (This Ken Ng denies.) He and other persons from SCEE met Ken Ng because the latter wanted to sub-contract from the team. He did not tell Ken Ng that he had submitted the tender for Chinney, because he had not; or that he was going to be contract manager because that was not yet decided. He did not, I think, depart significantly from his original stance under cross-examination. 59. Then there was the meeting on 30 March, at the seafood restaurant. Ken Ng says in his statement that at this meeting, C.K. Tsui told him that if Chinney got two contracts, he would probably be awarded the whole of one of them at 28% less than Chinney's tender. In oral evidence he said that C.K. Tsui confirmed that the tender was accepted and he would be Chinney's contract manager. There was no mention of Shun Wing or any other new company set up to be a sub-contractor to Chinney. Under cross-examination he maintained this but agreed that he had been told of the 3.6% uplift on the published rates, and he said that he was offered the sub-contract at 29% less than Chinney's rates. 60. Ng Yiu Wah was at that meeting. According to his oral evidence, it was a celebration dinner held by Gold Banner for the award of the tenders. C.K. Tsui reported that the company to be formed would be registered in the name of Shun Wing, because up till then, the partners of Gold Banner did not know what name was to be used. He and George Kwok had chosen the name. Ken Ng and Gary Ho were at the dinner; Ken expressed interest in doing part of the works and C.K. Tsui told him that he would have to sub-contract to Shun Wing. 61. There was nothing in Ng Yiu Wah's statement, which he adopted as evidence, about this latter point. He explained that his statement was just a brief description; earlier, counsel had asked him about what happened that day, and those were the things that made him have a strong recollection of this discussion. 62. Ng Yiu Wah said that Ken Ng brought with him a friend or an accountant whom he introduced as Gary Ho; but he could not identify Gary Ho in court. This is, perhaps, not so surprising, if Ho was there as he had apparently never met Ho before or since, but both Ho and Ken Ng say that he was not there. 63. There is, obviously, some difficulty with Ng Yiu Wah's evidence. He put in orally matters which were not, but should have been, in the witness statement, though, to be fair, he said in the statement that C.K. Tsui would give a full account of what happened at the meeting on 30 March 2001. There is also the question of Ho's presence. I suppose that if Ken Ng brought someone else with him to the dinner, there could be some confusion; and there is no specific denial that he did. 64. C.K. Tsui's evidence about the meeting on 30 March 2001 was that Ken Ng was told that if he wanted to contract, it would be with Shun Wing. The management fee percentages were discussed. He made no significant departure from this under cross-examination. 65. I can accept that this was a celebration dinner for the award of the two main contracts; it came on a Friday night, three days after the award had come through, when the work was to start, in practice if not strictly according to the contract, on the following Monday, i.e. 2 April. On my finding above, Shun Wing was to borrow the licence. Earlier the same day, the application had been made to register Shun Wing, so C.K. Tsui and Ng Yiu Wah must have known its name. It is very difficult to see why Shun Wing would not have been mentioned, and mentioned out loud, at the dinner as the company which was to borrow the licence; there would be no need to keep it secret from the Gold Banner/Howing personnel, indeed it would be something they would want to know. If there was any perceived need to keep this information from Ken Ng, that would be practically impossible at a dinner of this sort. 66. There is one other piece of evidence of what happened before 31 March 2001 which is relevant to this issue. Ng Yiu Wah says that Ken Ng met him and his father, and offered to sub-contract the whole works from the "team". C.K. Tsui says that Ng told him about this incident later. Ken Ng, however, denies that it happened. In the absence of any independent corroboration, I am disinclined to put much weight on the evidence of the defence witnesses, though I note that Ken Ng was said to have had with him an unidentified document containing his proposals, and of course such a document was sent to C.K. Tsui at SCEE. 67. That deals with what went before 31 March 2001 but it is also necessary to look, in connection with this issue, as well as with the issue of whether Onway entered into a sub-contract with Chinney, at the later documents. If their terms are consistent with a sub-contract between Onway and Shun Wing, they will not be consistent with lack of knowledge on the part of Ken Ng when he signed the tender. 68.I have already referred to the fact that Onway submitted all its payment applications to Shun Wing and not Chinney. Further, all payments were made to Onway by Shun Wing or occasionally Howing on its behalf. Onway issued receipts, not to Chinney but to Shun Wing. On occasion, at Onway's request, Shun Wing paid Onway's sub-contractors directly and the sub-contractors receipted Onway. 69. Ken Ng was cross-examined at length as to why the payments were made in this way. He said that Onway considered Shun Wing as a "sort of agent or accounting organisation". Onway submitted the invoices and if the money received was correct, that was all right; Onway did not care whom Chinney used to make the payments. But if the payments were not right, he would have asked Chinney. 70.This, however, was not entirely correct; it was pointed out to Ken Ng that although Onway had sent in the first invoice for $691,025.79, only $608,922.79 was paid. He did not take this up with Chinney; he said that that was a matter for Gary Ho. 71. No explanation was forthcoming from Gary Ho on this specific point. However, his evidence was that the invoices were submitted to Shun Wing, because Shun Wing's quantity surveying manager, Lawrence Chow, had told him to do so. He regarded Lawrence Chow as "representative of Chinney for accounting and quantity surveying matters". But there is, so far as I can see, no real explanation of why Ken Ng and Gary Ho should have thought that Shun Wing was an agent or administrator for Chinney. There is nothing to show that either Chinney or Shun Wing communicated this information to them in specific terms. 72. Another important document is a draft contract between Shun Wing and Onway. Shun Wing sent this to Onway on 3 May 2001. It shows Chinney as the main contractor, Shun Wing as the sub-contractor, and Onway as the sub-sub-contractor. On Ken Ng's instructions, Gary Ho re-drafted the contract. He sent it back by a facsimile to "Shun Wing/Chinney" dated 18 July 2001. However, the names and relationships of the parties were not changed in the second draft; Shun Wing remained the sub-contractor, and Onway the sub-sub-contractor. 73. Ken Ng says that he was seriously concerned with some of the terms proposed, and refused to accept them; and also with the fact that Chinney was seeking to substitute Shun Wing for itself as the contracting party with Onway. Gary Ho also says that Ken Ng was displeased for this reason. Ken Ng says that he instructed Gary Ho to "try to cross out as many things as possible in the contract, so that it would not be acceptable" and Gary Ho says that he was told to "handle the drafting with caution". But there is simply no explanation for either of them as to why exception was not taken to the most obvious difference, on their case, between this draft and the tender document, i.e. naming Shun Wing as the sub-contractor and Onway as the sub-sub-contractor. 74. On 4 August 2001 Ken Ng wrote a letter from Onway to Shun Wing for the attention of C.K. Tsui, suggesting a cut in the management fee payable by Onway to 22%. He says, but this is denied, that he delivered it to C.K. Tsui. In any event the letter is not addressed to Chinney; and it refers to "your company and the licence holder". Ken Ng under cross-examination denied that the "licence holder" was Chinney and "your company" was Shun Wing and referred to confusion about the capacity of C.K. Tsui and the idea of Shun Wing as an agent; but overall he could not credibly explain why these terms were used or why he was asking "your company" - on the face of the letter, Shun Wing - to consider his suggestion for reducing the fee payable to Chinney. 75. On 20 August, Gary Ho wrote to Shun Wing, for the attention of C.K. Tsui, seeking photocopies of insurance policies. I have set out the terms of the policies above; they show Chinney as the main contractor and Shun Wing as the principal sub-contractor. I have also set out the terms of the letter. The first line reads "Our company has accepted the aforesaid maintenance construction contract from your company". There is no explanation for the use of these terms. In fact this was not put to Gary Ho, perhaps because in the English translation in the bundle, the words "from your company" are omitted, and they only came to light when the court interpreter translated the sentence, during C.K. Tsui's cross-examination. Nevertheless the meaning of the words is obvious and difficult to gainsay no matter what explanation might have been offered. 76. Then on 20 November 2001 Onway, which was, according to an income statement sent to Shun Wing on 19 November, running at a loss, wrote to Shun Wing with a proposal that Onway, Chinney and Shun Wing set up a new company to carry out the works under TCK 011. Again this letter appears to indicate that Onway knew it had sub-contracted to Shun Wing. The proposal is that the new company be set up in replacement of Onway "which originally entered into a sub-contract with Shun Wing." There is also a suggestion that the new company "continue to pay Shun Wing" 25% as management fee. By this time, according to Ken Ng, such reduction had been agreed as between Onway and Chinney. It is also proposed that Shun Wing pay directly to Onway the project sum for old works orders and the current terms and conditions continue to be applied. 77. Ken Ng was of course cross-examined on this. He said that, although he had signed the letter, the reference of Onway's having entered into a sub-contract with Shun Wing was a mistake made by the drafter of the letter, who was confused about the relationship. In any event C.K. Tsui had suggested that this proposal be put forward and had written out a sort of diagram of the mechanics of the arrangement. (This C.K. Tsui denied; he said it was not his writing.) 78. Whether or not C.K. Tsui wrote the handwritten document referred to, that does not deal with the relationships of the companies. Onway's letter does, in terms. It consists of two pages, in Chinese. Ken Ng put his signature to it. That he did not know or did not check what he was signing seems most unlikely. 79. On the basis of the evidence of what happened before Ken Ng signed the tender form, as well as of documents which came into being both before and after, it seems to me to be inescapable that Ken Ng must have known, before he signed the tender, of the licence borrowing agreement. It also seems to me inescapable that he must, by the evening of 30 April 2001 have known that a company called Shun Wing was to be the licence borrower. His evidence that Shun Wing was later somehow interposed as some kind of agent simply does not hold water. Did C.K. Tsui have Chinney's authority, actual or apparent to enter into a sub-contract with Onway on behalf of Chinney? 80. Chinney's pleaded case in paragraph 8 of the Re-re-amended Defence is that C.K. Tsui never had any authority to, nor did he enter into any sub-contract with Onway on Chinney's behalf; and that Onway was a sub-contractor of Shun Wing. 81. There is ample evidence that C.K. Tsui did have Chinney's authority for some purposes, such as dealing with the specialist sub-contractors such as Erawan. His denials of such authority, which I have mentioned above, do not make sense and are not credible. Further, he did have general authority as contract manager under the term contract to "deploy and re-deploy" sub-contractors. And Zuric Chan ultimately agreed that he had authority to negotiate contracts for the supply of labour and materials on Chinney's behalf for TCK 011. 82. However, C.K. Tsui obviously wore several hats. That he had Chinney's authority for some purposes does not necessarily mean that he had it for all purposes, or that he had actual authority to sub-contract directly between Chinney and Onway, or that he had some kind of choice as to whether to sub-contract between Chinney and Onway or between Chinney and Shun Wing. 83. On my finding that there was a licence borrowing agreement and Shun Wing was to borrow the licence, C.K. Tsui cannot have had Chinney's authority to sub-contract directly between Chinney and Onway. His authority was to enter into a sub-contract with Onway on behalf of Shun Wing. The latter was not yet registered so his authority came from its promoters. As to apparent authority to sub-contract on Chinney's behalf with Onway there seems to be no pleading of any representation made by Chinney that C.K. Tsui had that authority. On the evidence he no doubt had authority to do various things as Chinney's contract manager but as I have indicated that would not necessarily mean that he had it for all purposes. In any event, apparent authority would be irrelevant if Ken Ng knew of the existence of Shun Wing as licence borrower, as I have found he did. Did Chinney did enter into such a sub-contract with Onway? 84. The tender document does not properly identify the tenderer. It does not show Onway's name or its company chop. There is a conflict as to whether Ken Ng made it clear to C.K. Tsui that he was submitting the tender on behalf of Onway. Ng says that he did; C.K. Tsui says that Ng did not specify which of his companies he would use, and in any event he did not care which company was to be used. 85. I do not doubt that Ken Ng put forward the tender on behalf of Onway. No other company has ever been in contemplation and he obviously was not going to undertake any sub-contract personally. 86.The identification of the party to whom the tender is addressed is also unclear. C.K. Tsui drafted the tender document in mid-March, when it was known that a new company would borrow the licence, but not what that company would be called. It is addressed to "Chinney (or the nominated company) (hereinafter called "the Company")". On the face of it, the tender allows for the possibility that the tenderer is tendering to Chinney. But Chinney is the main contractor and in other clauses, particularly the payment clause, the document differentiates between "the Company" and the main contractor. 87. Of course, since both Ken Ng and C.K. Tsui knew by 31 March 2001 that there was a licence borrower and it would be called Shun Wing, it would have made sense for C.K. Tsui to put that name in, and make the identity of the employer clear. His explanation that he had only known the new name for some days, whereas the form had been in use for weeks, seems rather strange but then he also says that it was something that everyone knew. 88. It would equally have made sense for Ken Ng to put Onway's name on the tender document. As far as he was concerned, that was also something that everyone knew. But neither of them did the obvious thing. This accords with my impression, mentioned above, that all concerned would happily do business on the basis of oral agreements and then produce documents later as required. So I do not see that C.K. Tsui is to be disbelieved because he did not name Shun Wing. 89. The evidence of the witnesses has to be seen in the light of what had gone before and what came after. I refer particularly, in respect of the latter, to the draft sub-contract which Ken Ng gave to Gary Ho to re-draft. If there was a contract with Chinney, any sensible person faced with a new draft contract with Shun Wing would have queried that, but no one did and there is no sensible explanation for it. Where there is a conflict between Tsui on the one hand and Ken Ng and Gary Ho on the other as to whether Shun Wing was mentioned on 31 March 2001, I prefer the evidence of C.K. Tsui. 90. Insofar as the tender document needs to be interpreted, the process of interpretation was described by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896 at 912 in these words:
91. On my finding the parties both knew that there was a nominated company borrowing the licence, i.e. Shun Wing. A reasonable person having this background knowledge would in my view take this tender to be an offer to contract with the nominated company. 92. Mr Scott argues that the fact that Shun Wing was not yet incorporated on 31 March 2001 means that this was a pre-incorporation contract subject to section 32A(1)(b) of the Companies Ordinance. The section only bites where the contract purports to have been made on behalf of a company not yet formed. See Cosmic Insurance Co. Inc v. Khoo [1981] New L.J. 281, a case which deals with an equivalent provision in Singapore company statute law. Only if the contract is so made may the company ratify the contract after its incorporation. 93. It is argued that the document does not purport to record a contract on behalf of Shun Wing and further that there is no evidence, in the form of any document that Shun Wing did ratify it. Therefore there can be no contract between Onway and Shun Wing, but there must be a contract between Onway and Chinney. 94. The contract was in any event partly oral and partly written. I am satisfied that what was intended was a contract between Onway and Shun Wing and, on the basis of all the evidence set out above as to what happened thereafter, that Shun Wing ratified it by conduct. 95. If I am wrong and Shun Wing never ratified - and I think that is pretty academic, given the conduct of Shun Wing I have detailed above - I do not see that this would mean that there must have been a contract between Onway and Chinney. On the evidence I have accepted, Chinney was never intended as a possible contracting party with Onway. The remaining issues 96. These all deal with the situation where Chinney is found to have entered into a sub-contract with Onway, which on my finding it did not. However I will deal with them briefly, in case I am elsewhere found to be wrong. The terms of the agreement 97.The third of the agreed issues deals with these. 98. Paragraph 9 of the Amended Statement of Claim pleads the express terms of sub-contract contained in the tender document. Obviously those terms apply in any contract between Onway and "the Company" and they would apply between Onway and Chinney if the contract were between them. This is not in dispute save as to the words in paragraph 5; Chinney says that "applied payment" should be referred to rather than "contract sum" in the pleaded Clause 5. 99. There was some dispute as to whether Clause 5 should apply in any event; Ken Ng said that C.K. Tsui agreed that it should come out, which is why the number is deleted on his copy. This is in fact contrary to Onway's pleadings and Ken Ng's witness statement, and I do not accept it. 100. Paragraph 10 of the Amended Statement of Claim pleads that the agreement required Chinney to sub-contract the whole of the works. Chinney accepts that this would be so if the agreement were between them, save that Onway had no right to carry out the specialist work; that had to be given to specialist roofing and electrical contractors. This must be right, because the specialist contractors had to be nominated in the main contract. 101. Paragraph 11 : Chinney again accepts that this would apply if the contract were between Onway and Chinney, save that the word "collaborate" in paragraph 11(ii) should be excluded. I accept that also. 102. In paragraph 8 of the Re-Amended Defence Chinney pleads that if there was a contract it contained an implied term that Onway would proceed with its works regularly and with due diligence. I do not think there is any specific denial of this. Obviously if there was a contract this term should be implied; if the mythical "officious bystander" asked the parties whether that is what was intended they could not sensibly deny it. Reduction of the management fee 103. The fourth agreed issue deals with Onway's alleged oral agreement to reduce the management fee to 25%; was there any consideration for such agreement, and was it conditional on Onway's proceeding with its works with due diligence? Onway pleads that there was such an agreement, made in mid-August between Ken Ng and C.K. Tsui at a site meeting; Chinney simply denies it. 104. There is now no dispute that there was an agreement to reduce the management fee. Ken Ng wrote to Shun Wing on 4 August asking for a reduction to 20% or 22%. On 19 November 2001, Onway sent to Chinney, for the attention of C.K. Tsui an internal financial report which showed Onway to have made a loss of about $4.5 million on the project up to October 2001. Ken Ng, incidentally, says that this did not reflect the true position. C.K. Tsui says that he never received the letter of 4 August, but he agrees that such a deduction was agreed orally with effect from 1 October 2001, on condition that the plaintiff continued duly and diligently to perform the works. In fact the deduction appears in the payment statements issued by Shun Wing, starting with that covering the period from 15 to 30 September 2001. 105. There is no doubt that a reduction was agreed but there is no evidence of any consideration for it. In that case it would not be enforceable. Whether the reduction was conditional on Onway's proceeding with its works with due diligence is therefore irrelevant. However if there was already an implied condition that Onway should do so, it is difficult to see how that condition could be added. Wrongful repudiation 106. The next issue is, if there was a sub-contract between Chinney and Onway, whether Chinney or Onway wrongfully repudiated it. Each party pleads that the other wrongfully repudiated the contract. Onway pleads that at a meeting on 19 December 2001, Chinney without prior warning wrongfully demanded that Onway surrender all its work sites. Chinney pleads that, if there was a sub-contract between them, despite repeated warnings from Shun Wing, Onway failed to carry out its work in accordance with the requirements of the main contract, resulting in Chinney receiving numerous warning letters and non-compliance notices from ASD. Further or alternatively by failing to improve performance despite repeated warnings, Onway evinced a subjective intention not to be bound by, or an objective inability properly to perform the sub-contract. Chinney was entitled to accept Onway's wrongful repudiation which it did by Shun Wing's letter of 8 January 2002. 107. On 19 December 2001, Ken Ng was called to a meeting with C.K. Tsui and other directors and staff of Shun Wing. He says that he was told that Zuric Chan would also attend, a matter denied by C.K. Tsui and Zuric Chan, and in any event Zuric Chan did not attend. 108. It is not in dispute that Ken Ng was told that Shun Wing's management committee had decided that it would withhold all new ASD works orders and no new ones would be given to Onway, which would have to surrender all its sites to Shun Wing. The minutes of the meeting show this, and that Shun Wing wanted to take over any new works orders, but that Onway should continue the existing works orders up to 31 December 2001. The minutes do not, however, show any reason given for the demand. Ken Ng's evidence is that Onway had never received any written complaint about its work. Only at the meeting did C.K. Tsui say that he was not satisfied with Onway's performance. 109. It is further not in dispute that Ng Wan, along with some "heavily built men" burst into the meeting and caused mayhem, slapping around both Ken Ng and C.K. Tsui. According to C.K. Tsui the complaint was that he had just authorised an advance of $3 million to Onway, and Ng Wan thought that he had colluded with Ken Ng over this. Ken Ng says that Ng Wan's "heavies" took him out of the room and told him that Onway must carry on the works until "they" could take over the various sites. 110. That Ng Wan, who was not involved save as a shareholder of a shareholder of Shun Wing should have got involved does, it seems to me, furnish another indication that there was a licence borrowing agreement. If Shun Wing had been a mere agent or administrator it is difficult to see why Ng Wan would have taken this course. But that is by the way. 111. It is suggested that the reason for take-over of the works from Onway was this. In October 2001 the Chief Executive had announced that more money was to be allocated in 2002/2003 for minor improvement works. After Onway had been removed, the works were sub-contracted to another sub-contractor, Interene Construction Ltd. Interene Development Ltd paid for the purchase of Onway's tools and equipment on site. Zuric Chan, who signed the cheque for this payment, used to be a shareholder and director of Interene Development Ltd; his wife was still a shareholder and director and he was still a signatory of its bank account. So there was a plot to remove Onway, and substitute Interene to take advantage of the expected increase in Government maintenance work. 112. The involvement of Ng Wan and his "heavies" tends to raise suspicion although if his complaint related to some idea of collusion, it may be that he was not part of any plot that there might have been. 113. Of course Zuric Chan denied these suggestions and so did C.K. Tsui, who claimed that he did not even know, or could not remember that he knew about the new Government policy; a rather unlikely claim. However I do not need to decide, for the purpose of deciding these issues, whether or not these suggestions are true. 114. From the documents there seems to be no real substance in the averments that Onway failed to carry out its work in accordance with the requirements of the main contract or with due diligence. According to Onway's own records, it received 205 non-compliance notices in respect of its works between May and December 2001. This was a very small percentage of the total works. Even C.K. Tsui agrees that it was "not much". In fact as Mr Scott points out, the frequency of the warning notices decreased towards the end of the period. 115. There is no evidence of any other formal complaints by the ASD, though we do have C.K. Tsui referring to warnings by the ASD in his letter of 23 November from Shun Wing to Chinney, seeking payment. There is certainly no evidence that ASD was considering termination of the main contract, as it was entitled to do for Chinney's failure to proceed with the works with due diligence, or for its being persistently in breach of its obligations. 116. There is documentary evidence that Onway was operating at a loss; this is to be seen in its own income statement for the period to 31 October 2001; although Ken Ng said that this was not true. There is also documentary evidence that Shun Wing paid directly to Onway's sub-contractors. It is argued that this all came about because Chinney was starving Shun Wing, and hence Onway of cash payments; Ken Ng's evidence was that Onway was always paid late and was chasing payment already due to it. That may be so but whether or not Onway was in financial difficulties is not the point; the point is whether or not it carried out the works properly and in time. 117. So far as I can see there is little or nothing to support Chinney's allegations against Onway. The sudden decision to dismiss Onway, without any written warnings, the involvement of Ng Wan and his "heavies", and the hidden though obviously still existing involvement of Zuric Chan in the company that took over the works all raise suspicion that there was some other motive for getting rid of Onway. I am not therefore satisfied that Onway was in wrongful repudiation of its sub-contract, whoever the other party was. It would follow that if there was a contract between Onway and Chinney which, on my finding, there was not, it would be Chinney that was in wrongful repudiation of it. Quantum 118. The agreed issues here are, what loss and damage if any is Onway entitled to recover from Chinney, and, if there was a sub-contract between Onway and Chinney, what was the amount due and unpaid thereunder. 119. On my finding, there was no sub-contract, therefore Onway is not entitled to recover anything from Chinney; it will have to look to Shun Wing, and of course, as is well known, Shun Wing has no resources. It is therefore necessary to look at the quantum as if there were a sub-contract between Onway and Chinney; in other words, if I am wrong, what is Onway's claim against Chinney worth? 120. The parties have called two experts, Mr Charlton for Onway and Mr Battersby for Chinney. Their reports are lengthy; each has produced his own with supplements, and there is also a series of four joint reports. The figures have been subject to some variation. The last of the joint reports was produced on the first day of the adjourned hearing, which dealt with quantum. In final submissions Mr Clayton said that his expert's figures for contra-charges given in that report fell to be reduced by $68,284.00; and Mr Scott suggested that a further joint report be produced. 121. Since I am looking at the quantum as if there were a sub-contract between Onway and Chinney, I do not propose to attempt to make findings of exact figures but rather to look at the issues concerned and decide whose evidence is to be preferred. However, I will set out the final figures according to the parties and their experts. 122. In brief, the final figure which Onway through counsel puts on its claim is $30,904,064.00. This is calculated from a figure outstanding for works orders and minor works orders of $64,768,564.00 plus loss of profit of $15,604,864.00, less a figure for management fee and contra charges of $49,487,364.00. It takes into account a figure for contra-charges agreed by the experts in their 4th joint report. In fact there are two sets of figures agreed there, the lower one based on Mr Charlton's non-acceptance of Onway's liability for some of the charges, and I assume that this is the figure which Onway says is to be included. 123.Chinney puts the figure outstanding for works orders and minor works orders at $52,976,471.97. From this falls to be deducted the management fee at 29% (because the reduction would be unenforceable) of $15,363,612.00, contra-charges in respect of reimbursement of advance payments of $25,607,676.93 (being the higher figure agreed in the 4th joint report), interest thereon of $297,586.81, insurance premium of $688,694.14 and payments made to Onway for works of $10,351,612.87. Mr Battersby does not allow any figure for loss of profit. The final figure therefore as given by Mr Battersby in the 3rd joint report is $667,724.47 but as I have indicated there was a last-minute modification of the contra-charges figure which would increase this final figure by $68,284.00. 124. There are four issues, namely percentage completion of the works orders and minor works orders; whether some disputed works orders were done by Onway; contra charges and loss of profit. Percentage completion 125. According to Gary Ho, Onway's foremen would provide an estimated percentage of work done for each works order every two weeks to Onway's other assistant general manager, Mr Leung Fat, so that progress reports could be compiled and used by Onway to report progress at site meetings and for the purpose of making interim payment applications. Computer software was used to compile the progress reports. Chinney would rely on them to seek payment from the ASD. A final progress report was printed out on 25 February 2002 to reflect the work progress of Onway as at 4 January 2002. 126. Gary Ho said that the progress reports were accurate. He had complained orally to the ASD about inaccuracies in payment and about slow payment, but there were no written complaints. Under cross-examination he insisted that the percentage of work done as shown in the ASD pay lists was less than the true situation, because the ASD were more cautious and would reduce the percentage of work done. He did not claim that the ASD assessments were inaccurate, but that they were cautious. 127. Mr Clayton highlighted, in cross-examination of Gary Ho, a number of discrepancies between the progress report figures for specific works orders as at 4 January 2002 and the pay list figures for the same orders as at dates between 22 January and 13 March 2002. In one such case, the pay list showed 60% completion whereas the figure in the pay list was 15% of the estimated value of the job. Usually the difference was about 30% or 40% between Onway's completion figure, and the percentage of the estimated value of the job actually paid out by the ASD. The explanation for the first of these discrepancies was that the completion figure included a lot of material already paid for and left on site. As to the other figures, the explanation was generally that the ASD was slow in paying and tended to under-estimate. 128. C.K. Tsui's evidence was that Onway's progress reports were not reliable, and he advocated a different method of assessing the work progress based on ASD's pay lists. He said that the progress of a particular job could be ascertained from the pay list which reflected the progress of work done seven days before the date of the pay list. He said that it would be inappropriate to use Onway's progress reports because the extent of progress submitted by sub-contractors was usually exaggerated. He also suggested that some works were not properly performed, and ASD would not accept them. But he was not in a position to say whether the progress reports were an accurate record of the progress of the works which they recorded. He did not inspect the sites himself. He did not personally find out what stage of progress the orders had reached by the time of the hand-over from Onway in January 2002. 129. While C.K. Tsui says that sub-contractors usually over-estimate, it is difficult to see how much over-estimating there could be, given that the Maintenance Surveyor is involved at the measurement stage before the interim claim is submitted. See Mr Charlton's explanation of the mechanics of the system in his first report. While the plaintiff's evidence is that the ASD would tend to under-estimate, again it is difficult to see how much scope there would be for under-estimation. The two might well cancel each other out in the normal scheme of things. 130. Mr Charlton has calculated the value of works performed using the final progress report print-out dated 25 February 2002. He accepted that it contained some 15 works orders for which a claim was no longer to be made because Onway had not done the work. He also accepted that the document was not a progress report submitted to the ASD for payment, but rather a document produced for the purposes of the claim. 131.Mr Battersby has used the figures from the ASD pay lists, and applied a complicated formula of interpolation and extrapolation to arrive at an estimate of the figure of works outstanding but not paid for when Onway's sub-contract was terminated. Mr Battersby had not, it appears, seen Onway's print-out when he wrote his first report. He insisted that he would not pay any regard to it. Only if he could check it from source documents and previous report, and relate them to applications for payment, and look at ASD payments, would he get some feel for whether it was over-reporting or more or less accurate. He agreed that the ASD pay lists system was not designed to cover the situation where, as here, the sub-contractor's contract is terminated before the end of the main contract. 132.It is suggested that Mr Battersby's insistence that Onway's print-out, which he had never seen, should be disregarded was unfair and unbalanced and I have to say that this was rather the impression given by his answers on this point under cross-examination, which did not give a very good impression. 133. Mr Charlton regards Mr Battersby's method as inappropriate, because it assumes a straight-line continuation of maintenance work day by day on any particular job. The percentage obtained is where the straight line straddles the termination date. But, he says, this is unlikely to be accurate especially where, for instance, payments were made as late as September 2003; work would not continue up to that date. Only if there was no contemporaneous valuation of the work available should this method be used. Further, he said, the fact that the ASD was still paying out much later suggested that the original payments made were inaccurate. To some extent Mr Battersby accepts that the estimate may be inaccurate but he says that they are likely to have been correct because there was no evidence of complaints from the contractor that they were not. If payment was not made to the satisfaction of the claimant there would definitely have been complaints. 134.This is answered to some extent by Gary Ho who says that he did complain orally. Primarily his complaints were about lateness. In the situation where the assessments were predominantly interim assessments, that would be the main cause of complaint; accuracy could be left to the final assessment. 135. The use of Onway's own print-out figures has the benefit of being simple; it shows a picture as at the date of termination. The method of calculating backwards from the ASD pay lists is also an attempt to get a picture at the date of termination. However, it is extremely cumbersome and complicated and must necessarily be an estimate, as it does indeed make an assumption that the work proceeded on any job from 0% to 100% completion in a straight line. Some of the final payments were made long after termination and this would increase the unreliability of the estimate. So starting from the print-out is preferable if the print-out is accurate. Of course it is for Onway to prove on the balance of probabilities that it is accurate. 136.There are some 15 jobs in the print-out which, it is admitted, were not done by Onway. This appears from the evidence of C.K. Tsui and from Mr Charlton's first report; he was so instructed after meeting Mr Battersby. They are taken into account. I do not necessarily see that an error of 15 works orders out of a total of 1,298 is particularly significant taken on its own. 137. The difficulty with the print-out is that is not a progress report submitted to the ASD for payment. It was produced after the termination. It is not a document produced in the ordinary course of business. Earlier estimates were, and they were used by Shun Wing to put forward claims to the ASD so they must have been accepted as accurate. But this is a document prepared after the event, for the purposes of claim. Given that Onway knew, since 19 December 2001, that it was to cease work, it would have had the opportunity to over-estimate by changing the figures already in the system. While there is no actual evidence of any such action, the opportunity would be there. 138. Onway is, it seems, quite capable of putting forward figures which it later admits to be untrue. I refer particularly to the internal financial report sent to C.K. Tsui on 19 November 2001. I deal with this in more detail below, in connection with loss of profits. In the light of this fact, it seems to me that the figures derived from Onway's print-out must be regarded as suspect. I am therefore driven back to the complicated calculations from the pay lists. I think that they, and the figures Mr Battersby produces from them are to be preferred. 139. If liability had been established, then, I would have awarded for the outstanding sum due at termination a sum based on the figures arrived at by Mr Battersby. Disputed works orders 140.Some of these are dealt with above. Others are concerned in the calculation of the contra-charges. Mr Charlton was not prepared to accept them because the vouchers did not bear to have been signed by a representative of Onway. It is for Chinney to prove the contra-charges. I will come back to this below under that heading. Loss of profits 141. Onway relies on an income statement for TCK 011 in its management accounts for the year from 1 April 2001 to 20 March 2002. The accounts were prepared by an accounting firm. They show a net profit margin of 9.08%. Mr Charlton has adopted this figure in arriving at his estimate. He says that this is reasonable because the income statements for two other maintenance contracts (1022/EM/99 and 1040/EM/2000) held by Onway for the period from 1 April 1999 to 31 March 2002 show a net profit of 11.36%. 142. Mr Battersby refers to Onway's income statement for April to October 2001; the one sent to C.K. Tsui on 19 November 2001. This shows a loss of 15.8058% on the sub-contract for that period. He also refers to Onway's statements of accounts for the period 1 April 1999 to 31 March 2002, which include the income statements for the two other maintenance contracts and he says that Onway showed a loss for this period on contracts other than the two maintenance contracts referred to, i.e. including TCK 011, of over $15 million. Under cross-examination he said that he believed Onway to have been making a small profit over the three years of 1¨C2%. 143. Onway's position is that the income statement for April to October 2001 does not show the true picture. Ken Ng said in cross-examination that it was not true. Then he said that it was prepared in a hurry and did not fully reflect the truth. It was suggested to him that if it was true it would seriously damage his loss of profits claim; and his answer to that was that he had not considered this, because that was not Onway's purpose when the document was issued. Gary Ho under cross-examination, when asked if Onway was making a loss on TCK 011 said that he could not say so, from looking at the document. 144.It is argued that if Onway had not been making a profit, it would have been happy to see the termination of its sub-contract. Mr Battersby accepted this. No doubt it makes sense. What profit is, however, another matter. Gary Ho was referred to figures, provided by him in an earlier affirmation, in respect of other contracts which showed profit margins of between 1.47 and 2.33%. Mr Battersby said that a large contractor should make 1¨C2%, and that some sub-contractors were profitable and some not but overall he did not think that the 9% was likely. 145.The onus is on Onway to prove its loss of profits. Its main support for the loss of profits claim is the income statement to 31 March 2002. This is an unaudited document, based on figures which Onway sent to its accountant. But Onway is quite capable of putting forward false figures, for that is exactly what it did, on Ken Ng's own admission, in the income statement for April to October 2001. I therefore have the gravest misgivings about the reliability of the income statement to 31 March 2002. I therefore prefer the figures put forward by Mr Battersby and am not satisfied that Onway has made out its loss of profits claim. Contra-charges 146. According to the experts' 4th joint report, a figure of $25,607,676.93 is agreed subject to Mr Charlton's expressed proviso in his 1st supplementary report that all contra-charges should be supported by a document chopped with the plaintiff's chop and signed by one of its representatives. If the charges not so supported are taken out the figure goes down to $21,839,435.98. Interest figures on these two alternative figures are also agreed. 147. It is for Chinney to prove the contra-charges. Gary Ho says that the supporting documents should bear Onway's round rubber stamp and be signed by himself, Ken Ng or Leung Fat. There is nothing to contradict this evidence. 148. Many of the contra-charge items were created after 19 December 2001. Many of them do not show actual payment or are accounting entries. It seems to me that it must be accepted that where the charges are not properly vouched for, they should not be allowed. I will accordingly take the lower figure agreed by the experts and the corresponding interest figure as correct. Conclusion 149. I am satisfied that there was a licence-borrowing agreement between Chinney and Shun Wing and that Ken Ng knew of this when he made the tender. I am satisfied that Shun Wing was the direct sub-contractor, and Onway the sub-sub-contractor. So Chinney can have no liability to Onway. 150. If I had found there was a direct sub-contract between Onway and Chinney, I would have given judgment in favour of Onway for a sum in respect of the completed works orders and minor works orders, minus the contra-charges, on the lines set out above; but not including any figure for loss of profit. 151. As it is, Onway's claims against Chinney must be and are dismissed, with costs to the defendant, to be taxed if not agreed. I said that I would hear counsel on costs if need be, but in view of the outcome there is no need for it. However, because the judgment is to be handed down, and in case any question of costs remains unsettled I make the costs order nisi.
Mr John Scott, SC, Leading Mr Paul H.M. Leung,instructed by Messrs Rowdget W. Young & Co., for the Plaintiff Mr Peter Clayton, SC, instructed by Messrs Wong & Fok, for the Defendant Appeal dismissed: see CACV402/2005 dated 30 March 2007 |
Cases cited in this judgment