Tam Kai Hung t/a Wah Hing Iron Works v. Winston Air-conditioning & Engineering (Hong Kong) Co Ltd
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DCCJ 5789/2004 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 5789 OF 2004 --------------------- BETWEEN
------------------- Coram : His Honour Judge Stanley Chan in Court Dates of Trial : 17th, 18th and 19th April 2007 Date of Handing Down of Judgment : 26th June 2007 ___________________ JUDGMENT ___________________ Background 1.The Plaintiff is and was at all material times carrying on the business of metal works and engineering in the name of Wah Hing Iron Works whilst the Defendant is and was a company incorporated in Hong Kong carrying on the business of air-conditioning and engineering. 2.The Plaintiff was one of the sub-sub-contractors of two projects in question, namely, the Ductwork and Equipment Installation of the air-conditioning and mechanical ventilation for the MLC Tower (‘the MLC Project’) and also a similar air-conditioning installation work for Tsueng Kwan O Lot 34 (‘the TKO Project’). The Defendant was the sub-contractor in these 2 projects in which E Man Construction Company Limited (‘E Man’) was the main contractor. 3.The Plaintiff has been providing engineering work services to the Defendant. Now the Plaintiff claims against the Defendant for 3 outstanding balances in an aggregate sum of HK$338,830 pursuant to 3 invoices for engineering charges and deposit. The invoices were issued by the Plaintiff to the Defendant on the following dates:
Sub-total: $513,830.00 minus amount paid to the Defendant: $175,000.00 Total: $338,830.00 4.It was alleged that in or around September 2003, the Plaintiff and the Defendant agreed that the Defendant should pay the Plaintiff a sum of $350,000 by way of 2 installments, each in the sum of $175,000 by 30 April 2004 and 31 May 2004 respectively in full and final settlement of the outstanding balance in the sum of $513,830. 5.On 22 May 2004, the Defendant gave a sum of $175,000 to the Plaintiff. It was alleged that subsequent to the first payment, the Defendant failed to settle the 2nd installment of $175,000. As such, the Plaintiff now claims against the Defendant for the sum of $338,830 being the outstanding balance due. The issues 6.The following issues are to be determined:
7.The first issue depends on the resolution of the other issues at stake, and needs to be answered in the whole context of the case. The Plaintiff’s case 8.The Plaintiff adopted his witness statement dated 7 July 2005 (pp.52 to 56 of the bundle) and gave evidence in court. The Plaintiff operated Wah Hing Iron Works in the business of metal and engineering work. Pursuant to a purchase order dated 12 June 1997 issued by the Defendant, the Plaintiff carried out the subcontract work of ductwork installation for commercial office development at No 248 Queen’s Road East (i.e. the MLC Project) which included the supply of labour and provision of all necessary materials to complete the ductwork and equipment installation of the whole mechanical ventilation and air-conditioning system of the project. The project has a total contract price of HK$4.2 million. The subcontract work undertaken by the Plaintiff was completed in late January 1999. It was alleged that a deposit of 10% of the contract sum (i.e. $420,000) remained unsettled when the subcontract was completed. The Defendant issued a cheque for $210,000 to settle part of the deposit. On 28 January 2000, the Plaintiff issued another invoice numbered 0750 to the Defendant which represented the remaining sum of the 10% deposit, viz. $210,000. 9.On 25 November 1999, the Defendant also subcontracted to the Plaintiff certain ductwork variation work at the site at Tseung Kwan O Lot 34, which was called the TKO project. The total contract price of this Purchase Order was $151,637.50. The work was completed and an invoice numbered 0745 was issued on 30 December 1999. It was claimed that this invoice was not fully settled and the Defendant only paid $50,000 to the Plaintiff. As such, for this Invoice no.0745, a sum of $101,637.50 remained not settled. 10.On 23 August 2000, the Defendant issued a Purchase Order for the ductwork installation work in relation to the TKO project. The total contract price was $363,830. The work was completed and Invoice no.0761 for the sum of $363,830 was issued on 8 November 2000. It was alleged that for this Invoice, the Defendant settled the sum partially and a total sum of $202,192.50 remained not settled. 11.The Plaintiff claimed that by virtue of a verbal agreement which was made in or about September 2003, the Defendant agreed to settle the outstanding debt by paying a sum of $350,000 in two instalments. The first instalment for the sum of $175,000 was eventually made on 22 May 2004. However, the Defendant failed to pay the second instalment. As such, the Plaintiff is now claiming a total sum of $338,830 from the Defendant. The Defence’s case 12.The Defendant argued that in fact the Defendant was entitled to set off the retention money of $210,000 by the insurance coverage of $69,619 for the MLC project and the variation of work, together with the payment of $134,938 to Prime Profit. The payment to Prime Profit was caused by the failure on the part of the Plaintiff to provide construction materials in carrying out the work for the MLC project. A sum of $708,966 had already deducted from the Plaintiff’s contract sum. The Defendant also claimed that they could make a claim of liquidated damages for the delay in completing the project. The Defendant further argued that the Plaintiff could not claim further payments in respect of the Invoices no. 0745 and 0761 because the TKO project was paid on remeasurement basis, that is, payment was made in accordance with what had been measured and approved by the Defendant. Accordingly, for Invoice no.0761, only $145,532 was approved and for Invoice no.0745, only $50,000 was approved. 13.The Defendant called Ms Tsang Wai Shan, the Manageress of the Defendant company to give evidence. She adopted her witness statement at pp.58 to 64 of the bundle. It is the Defence’s case that the Plaintiff needed to pay 1.5% insurance for both contracts and the variation work done for these 2 projects as the Plaintiff failed to provide sufficient insurance coverage for their workers in the projects. The Defendant also claimed that they had paid $134,938 to Prime Profit for the purchase of materials on behalf of the Plaintiff when the works were carried out. Further the Defendant also claimed that the sum of $210,000 was the Retention Money under the MLC Project. As such, the Defendant should be allowed to deduct the said sum of money for the payment of insurance coverage for the Plaintiff’s workers on the site and also for the purchase of materials from Prime Profit. 14.The Defendant also claimed that in relation to the charges for the TKO Project under the Invoices no. 0745 and 0761, the work done should be re-measured before payment as the TKO contract was a Lump-sum Re-measurement Contract. There was a delay on the part of the Plaintiff in rectifying the defects in these two Projects. Such a failure would entitle the Defendant to claim liquidated damages in accordance with the sub-sub-contracts. Analysis of Evidence (I) 1.5% Insurance sum 15.As regards the MLC contract, the Plaintiff claimed that he had fulfilled his obligation by taking out insurance coverage for 2 employees as shown at p.321 of the bundle. The policy was taken out from the Pacific Insurance Company Limited for the period from 1 August 1998 to 8 August 1998. The receipt was issued 20 days after the expiry of the policy as the date of receipt was 28 August 1998. This insurance policy did not mention anything about the MLC Project but clearly it was far from sufficient to cover the insurance of those people working on behalf of the Plaintiff on the site. The Plaintiff testified that he usually employed about 10 odd people to work there. Not only the number of employees so covered was not sufficient, the period of time was also not sufficient as it covered only 8 days in August. 16.Under clause 4.3 of the MLC sub-sub-contract (p.121 in the bundle), it is stated that “the Sub-contractor shall maintain an employee’s compensation insurance policy for his own employees. Sub-contractors and temporary labours insurance to transportation and lifting equipment to be the responsible by the Sub-contractor.” I find that the Plaintiff failed to fulfill his obligation under the sub-sub-contract and one of the options for the Defendant to provide insurance coverage was by means of adopting the method of taking the 1.5 % of the contract price as was adopted between the main contractor, E Man, and the Defendant. There was no express term in the sub-contract to suggest that the Plaintiff had to pay 1.5% of the contract sum for insurance. Nor was there an express term incorporating the terms of the main contract into the sub-contract between the Plaintiff and the Defendant. 17.It is established that “an agreement by a sub-contractor to carry out work in accordance with the terms of the main contract does not necessarily incorporate all the relevant terms of the main contract into the sub-contract”: Halsbury’s Laws of Hong Kong Vol.3 Building and Construction para.65.147. No objection, at least nothing in the trial bundle, was ever raised by the Plaintiff before the litigation was prepared. We have evidence to suggest that even for this 1.5% contract price, the amount would not be substantially larger than taking out a separate insurance policy for some 10 odd employees. As the Plaintiff failed to pay for sufficient insurance coverage for its employees at the material time, I find it reasonable for the Defendant to adopt the 1.5% formula to cover the insurance during the period of the contract and variations of works. 18.The application of the 1.5% formula is also applicable to the TKO project and the related variation orders (pp.92 to 93 and 99 to 100 in the bundle) as the Plaintiff failed to provide sufficient insurance coverage for its workers. Hence, for the insurance sum at the rate of 1.5% on the actual sum of the sub-sub-contract works for MLC project, it amounted to $69,619 as specified in para 3A(6) of the Amended Defence and Counterclaim. As regards the insurance sum for the TKO project, it should be $29,267.30 as stated in para.3D(6) of the Amended Defence and Counterclaim. The sum of money for the insurance coverage relating to the MLC Project, that is $69,619 can be deducted from the retention money. The other sum of $29,267.30 relating to the TKO project can be counterclaimed by the Defendant. (II) Payments to Prime Profit 19.Pursuant to the sub-sub-contract of the MLC project, the Plaintiff was liable to pay for the materials and labour provided by his suppliers and his sub-contractors. It was alleged that the Defendant paid a total of $843,904 to Prime Profit which provided materials for the construction of ventilation duct from 8/F to 39/F of the MLC project as shown in the purchase order no. HK/P-6739 dated 1 December 1997 (p.127 and 226 in the bundle). The Plaintiff claimed that a total of $708,966 had already been deducted from the Plaintiff’s contract sum. According to the document titled “Payment history of subcontractor Wah Hing” which was prepared by the Defendant (p.227 in the bundle) on 31 July 1998, a total sum of $708,966 was paid to the sub-contractor Prime Profit. As such, there was a difference of $134,938. The Plaintiff claimed that his company, instead of Prime Profit, had to provide the work materials to complete the work at a later stage. The Defendant denied this allegation. The issue relating to the payment to Prime Profit was raised by the Defendant under para 3B(3) and (5) and 3C(2) in their Amended Defence and Counterclaim. From the documents such as the payment history (at p.227 of the bundle) and the payment under Invoice no. 0761 (p.312 of the bundle), it is clear that the Defendant did maintain certain prudent accounting procedures in settling payments. Nonetheless, there is no proof of the payments to Prime Profit as suggested by the Defendant. Ms Tsang Wai-shan (DW1) said that she did not provide the payment record to Prime Profit to her solicitors as she thought that it was not necessary. The Defendant’s lawyers must have certain input in the preparation of the trial bundle. The fact that the said payment records, if they were ever in existence, were not included in the trial bundle must suggest that Ms Tsang’s view was accepted. The question remains open as to what happened to the remaining sum of $134,938. But it is clear that the Defendant, being the one who raised this issue, has failed to prove that the Defendant had settled the total sum of $843,904 to Prime Profit on behalf of the Plaintiff. A sum of $708,966 had already been deducted from the Plaintiff’s contract sum. In the circumstances, in my judgment, the Defendant cannot prove that it is entitled to claim the balance of $134,938 from the Plaintiff or to deduct the said sum of money from the retention money of $210,000. (III) Retention Money or Refundable Deposit 20.There is a dispute as to the nature of the 5% contract sum totalled $210,000. The Plaintiff claimed that it was a refundable deposit. In accordance with clause 1.4.4 of the MLC sub-sub-contract (p.118 in the bundle), 5% contract sum balance payment will be paid upon completion of works which was subject to the certified acceptance by the client. The Plaintiff, when cross examined, agreed that this sum was to be used to set off against any other sums of money that might be due to the Defendant and against other sums for rectifying defective works. The Plaintiff alleged that as there was no other sums of money that the Defendant was entitled to, this sum of $210,000 should be returned to the Plaintiff. This sum was shown in the Invoice no. 0750 dated 28 January 2000 (p.278 in the bundle). The document was in the letterhead of Wah Hing Iron Works signed by the Plaintiff and stamped with Wah Hing’s company chop. The Chinese words ‘按 金’ (deposit) was clearly shown thereon. But what was the purpose of this deposit? The Plaintiff under cross-examination and when referred to clauses 1.4.5, agreed that the 5% final payment was called ‘retention money’ in the trade, and the money was detained for payment for defective work or for setting off. The Plaintiff was told to complete the work by January 1999 and a reminder dated 3 March 1999 relating to the defect list was sent to the Plaintiff. In the circumstances, I accept that the money of $210,000 was kept by the Defendant as the retention money and not as a refundable deposit. The Defendant was entitled to deduct money from the said sum of $210,000 for those remedial work relating to the defect list and/or the insurance payment if the sum could be justified. 21.The Plaintiff submitted that the Defendant is not entitled to deduct the sum of the insurance amount, namely, $69,619, and the materials that it paid to Prime Profit in the sum of $134,938 from this retention money. As stated in the previous paragraphs, I would allow $69,619 be deducted from this sum but not the amount allegedly paid to Prime Profit. (IV) Re-measurement of the work done regarding TKO project 22.Clause 1.3.4 of the sub-sub-contract for the TKO project (p.138 in the bundle) is in the following terms:-
23.In fact, at clause 1.1 of this sub-sub-contract, it states clearly that the contract was a lump-sum remeasurement sub-contract between the Plaintiff and the Defendant. Based on the re-measurement contract, the Plaintiff was required to provide the work first, then the work on site needed to be approved by the Defendant with the amount agreed between the parties. The Defendant would then issue the purchase order to the Plaintiff for the variations of work done. Then, the Plaintiff would issue invoices for the amount agreed. 24.Invoice no.0745 (at p.95 of the bundle) dated 30 December 1999, which was prepared by the Plaintiff with the company chop thereon, shows the figure of $151,637.50. It also stated that the first payment of $50,000 was received on 20 May 2000. The invoice does not show that the sum of $50,000 was an approved sum. For some reasons unknown, the Defendant could not provide their copy of Invoice no.0745. Unlike Invoice no. 0745, Invoice no.0761 (at p.102 of the bundle) which was dated 8 November 2000 contains more information as to the history of the approved sum. Invoice no.0761 shows the figure of $363,830. The sum of $145,532 was approved and a sum of $161,637.50 was paid. DW1 Ms Tsang said that it was the practice of her company to put the stamp chop showing the history and calculation of the approved sum like what was shown in Invoice no.0761. No reason was provided as to why the Defendant’s copy of Invoice no.0745 was not included in the trial bundle. In the circumstances, the Plaintiff now argues that for Invoice no.745, only $50,000 was paid and the Defendant still owes the Plaintiff a sum of $101,637.50. As regards Invoice no.761, a sum of $161,637.50 was paid and hence the Defendant still owes the Plaintiff a sum of $202,192.50. 25.It is to be noted that the contract was a lump-sum fixed price sub-contract for the supply and installation of the mechanical ventilation and air-conditioning system: clause 1.1 of the condition of sub-contract (at p.118 of the bundle). In Halsbury’s Laws of Hong Kong Vol. 3 (2003 Re-issue): Building and Construction, Preliminary Considerations at [65.008] Types of contract, it was stated:
26.In my judgment, I accept what was described by the Plaintiff as to how re-measurement of work was conducted and paid for. Payments were given to the Plaintiff relating to the work done as described in Invoices no.0745 and 0761. The Defendant did not deny that the Plaintiff had completed those work so described in these invoices. Accordingly, it is my judgment that the Plaintiff is entitled to the outstanding sums of money for Invoices no.0745 and 0761, namely, $101,637.50 and $202,192.50 respectively. (V) Liquidated Damages 27.The Defendant argued that delay was caused by the Plaintiff and the former is entitled to claim for a sum of $508,200 being the liquidated damages for the period of February to May 1999 under the MLC project: para.14 of the Amended Defence and Counterclaim. 28.Denning LJ in Hoenig v Isaacs [1952] All ER 176 at 180-H held that:-
29.Lists of defects (at pp. 143, 147 to 181, 183 to 191) provided by the Defendant covered not just the areas of work done by the Plaintiff but also by other sub-contractors. It is not difficult to find that the bulk of the defects was rather minor and trivial. For instance, the handles and certain pipes or boxes were found rusty. The Plaintiff said he had rectified the defects promptly. The Defendant disagreed and said that the rectification work was done by the Maintenance Department of the company. It was alleged that there was a delay from March to May 1999. The Defendant however failed to produce any job lists or records to show that the rectification work was done by their Maintenance Department. 30.It is my judgment, the defects so listed in the documents were minor ones and should not be taken a condition precedent to the payment of the contract sum. There is no clear evidence to suggest that it was the delay of rectifying these defects by the Plaintiff that caused the delay in completing the whole project. Even if there was a delay on the part of Plaintiff to rectify the defects, it would be too far fetched to suggest that the completion of work was thereby delayed. Defects of minor nature were also found for the TKO Project. Again, I find that delay, if any, in rectifying these minor defects could not be taken as the trigger point to invoke the liquidated damages clause. Accordingly, I reject the claim that the Defendant is entitled to claim the liquidated damages against the Plaintiff under both the MLC and TKO sub-contracts. Conclusion (I) Invoice no. 0750 for the sum of $210,000 31.I find that this sum is a retention money and the amount should be reduced by the 1.5% insurance sum that the Plaintiff was required to contribute, that is $63,000 (being the 1.5% of the contract sum of $4.2 million) plus the insurance for the variation work for $6,619 (1.5% x $441,269). Hence, the Plaintiff is entitled to receive $140,381 from the Defendant relating to Invoice 0750. (II) Invoices no.0745 for the outstanding sum of $101,637.50 and No.0761 for $202,192.50 - totalled $303,830. 32.This sum should be reduced by the contribution that the Plaintiff was required to pay for joining the insurance scheme for the TKO project, that is, $19,287.57 (being 1.5% of the contract sum of $1,285,838) plus the insurance for the variation works in the sum of $9,979.73 (1.5% x $665,315.50) totalled $29,267.30. Hence, the Plaintiff is entitled to receive $274,562.70. 33.In the circumstances, the Plaintiff is entitled to receive $414,943.70. As the Defendant has given $175,000 to the Plaintiff, the net sum should be $239,943.70. Order 34.There will be judgment for the Plaintiff against the Defendant for the sum of $239,943.70. This sum is the net sum after setting off the Defendant’s counterclaim against the Plaintiff to the extent of the insurance coverage in the total sum of $98,886.30 for the projects and variations of works, and the payment of $175,000. The Plaintiff is to have interest on the sum of $239,943.70 from 4 November 2004 (the date of Writ of Summons) at the judgment rate to the date of judgment and thereafter at judgment rate until payment. Costs 35.In view of the amount assessed and the partial success of the Defendant’s counterclaim, there will be a cost order nisi that the Defendant pays three quarters of the costs of the action to the Plaintiff, to be taxed if not agreed, with certificate for counsel.
Representation: Ms. Anna Ho instructed by Messrs. Jal N. Karbhari & Co. for the Plaintiff. Mr. Raymond Fong instructed by Messrs. Kelvin Cheung & Co. for the Defendant. |