Headwin Engineering Ltd v. United Soundfair Engineering Co Ltd

DCCJ 5034/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5034 OF 2006

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Coram: H H District Judge Marlene Ng in Court

Date of Hearing: 26^th and 27^th November 2007

Date of Handing Down Judgment: 9^th April 2008

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JUDGMENT

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I. Introduction

1.Gammon Construction Limited (“Gammon”) was the main contractor for the Deep Bay Link – Northern Section Project (“Project”).

2.Gammon provided inter alia the Particular Specifications for the Project (“PS”) issued by Ove Arup & Partners Hong Kong Limited (“Ove Arup”) and the Bill of Quantities for Steel Works at page BQ16/38 of the PS (“BQ16/38”) being columns A-B of the schedule to this Judgment (“Schedule”) to the Defendant to tender for the construction of minor buildings and structures of the Project. The tender works included inter alia (a) supply and installation of GMS structural steelworks (“Steelworks”), (b) design, supply and installation of the sun-control system (“Sun-control System Works”), and (c) design, supply and installation of windows and louvers (“Windows/Louvers Works”) for the Ha Tsuen Weightstation (“Weightstation”) (collectively, “Works”).

3.In/about February 2004, Gammon awarded the tender works (including the Works) to the Defendant (“USE Sub-contract”). The Steelworks were for a sum of HK$830,000.00 as stated in the Defendant’s priced BQ16/38 on “with quantities and subject to re-measurement” basis, and it formed the Defendant’s budget ceiling for further sub-contracting of the Steelworks (“Budget Ceiling”). The quantities, unit rates and amounts in such priced BQ16/38 included(a) rolled sections and hollow sections (ie steel material, see items 1-4 of the Schedule) and (b) galvanised coating and blast cleaning of steel (ie steelwork protection, see items 5 and 7 of the Schedule) for Gammon to select for use in the construction in due course.

4.By a contract dated 21^st October 2004 (“HEL Sub-contract”), Gammon sub-contracted to the Plaintiff the design and construction of metal cladding for the Weightstation (“Cladding Works”). Gammon also provided the PS to the Plaintiff for the purpose of (as I find in paragraph 25 below) the Cladding Works and not the Works.

5.In mid-February 2005, the Defendant was still sourcing a sub-contractor for the Sun-control System Works. Gammon offered to see if the Plaintiff would be interested.

6.On 14^th March 2005, the Plaintiff sent its quotation no.Q140305 (“Quotation”) to the Defendant on inter alia the following terms together with a priced BQ16/38 as per columns A and C of the Schedule (“Priced BQ”) :

“We are pleased to quote to you the following price for design, supply and installation:
1.0	Preliminary
		CAR Insurance and Employee Compensation	By MC
		Safety Scaffolding and Working Platform	By MC
		Testings and RSE endorsements	By MC
		Removal of Debris	By MC
2.0	Scope of Works
		Supply and installation of [the Steelworks] in [the Weightstation]
		Design and supply and installation of [the Sun-control System Works]
		Design and supply and installation of [the Windows/Louvers Works]
		FRP [fire resistant paint] paint on steelwork not included
3.0	Design, Supply and Installation to [the Weightstation] (Refer BQ attached)
		Bill No. 16/38	$827,000.00
4.0	Design, Supply and Installation of [the Sun-control System Works]		$450,000.00
5.0	Design, Supply and Installation of [the Windows/Louvers Works]		$260,000.00

Validity		30 days from the date of this quotation.
Payment	:	10% Deposit upon order confirmation.
		30% Upon design shop drawing approval or prior materials purchase
		30% Upon materials on site
		30% Progress payment against work done.
Delivery	:	To be determined
For and on behalf of [the Plaintiff] [signed] ____________________ Mr. K.C. Lam			Confirmed and Accepted by [the Defendant] ___________________________ Company Chop and Signature”

7.After 3 revisions to the Quotation, the Plaintiff sent its last revised quotation no.Q140305-R4 (“R4 Quotation”) to the Defendant on 18^th April 2005. The Defendant typed its amendments thereon (see below) and accepted the amended R4 Quotation by signing and faxing the same to the Plaintiff on 22^nd April 2005 (“Signed R4 Quotation”) as follows :

“We are pleased to quote to you the following price for design, supply and installation:
1.0	Preliminary
		CAR Insurance and Employee Compensation							By MC
		Safety Scaffolding and Working Platform							By MC Headwin
		Testings and RSE endorsements							By MC
		Removal of Debris							By MC Headwin
2.0	Scope of Works
		Supply and installation of [the Steelworks] in [the Weightstation]
		Design and supply and installation of [the Sun-control System Works]
		Design and supply and installation of [the Windows/Louvers Works]
		FRP paint on steelwork not included but include painting system as stated in general notes (Refer to Dwg. No. 23506/A/N/18/W/601)
3.0	Supply and Installation [the Steelworks] [the Weightstation] (As per Dwg. 23506/A/N/18/W/604) Sketch No. HY/2002/24-DAN/0179/SK14							Sum			$800,000.00
4.0	Design, Supply and Installation [the Sun-control System Works] – Movable Blade System (As per Dwg. 23506/A/N/14/W/060 Rev.) / Sketch No. HY/2002/24-DAN/0223/SK21
		External Operated					Sum			$400,000.00
5.0	Design, Supply and Installation [the Windows/Louvers Works] (As per Dwg. 23506/A/N/14/W/055 Rev.) Sketch No. HY/2002/24-DAN/0223/SK20						Sum			$250,000.00
	Lump Sum Total :									$1,450,000.00
Condition : The sub-contract is on a fixed price lump sum basis and not subjected to re-measurement
Validity			:	30 days from the date of this quotation.
Payment			:	10% Deposit upon order confirmation.
				30% Upon design shop drawing approval or prior materials purchase
				30% Upon materials on site
				30% Progress payment against work done.
Delivery			:	To be determined
For and on behalf of [the Plaintiff] [signed] _____________________ Mr. C.W. Kwok					Confirmed and Accepted by [the Defendant] [signed] [company chop] _____________________ Company Chop and Signature [stamp] – 22 APR 2005”

II.    Plaintiff’s claim

8.The Plaintiff claimed the Signed R4 Quotation was the written contract between the parties, and it would carry out the Works for a fixed price lump sum of HK$1,300,000.00 that was not subject to re-measurement. In the course of carrying out the Steelworks, Gammon gave instructions to lower the footing level of the steel columns, so additional steel material/fabrication were required to lengthen the steel columns (“Variation Works”) at the cost of HK$24,500.00 (“Variation Cost”).

9.In/about January 2006, the Plaintiff completed the Works and Variation Works. The Plaintiff claimed it was entitled to (a) the sum of HK$540,000.00 being the contract sum of HK$1,300,000.00 less 8 interim payments in a total sum of HK$760,000.00, and (b) the Variation Cost of HK$24,500.00.

III.  Defendant’s defence and counterclaim

10.The Defendant claimed the Quotation was on a “with quantities” basis. When the Defendant later supplied drawings nos.23506/A/N/18/W/601 and 23506/A/N/18/W/604 (“601 and 604 Drawings”) to the Plaintiff and requested for discount, the Plaintiff submitted revised quotations. In the revised quotations, the Steelworks were still on “with quantities” basis with pro-rata reduction of the unit rates and amounts for all items listed in the Priced BQ to fit the discounted offer by the Plaintiff (“Discount Basis”). The Plaintiff finally agreed to reduce its offer for the Works to HK$1,300,000.00 which was inclusive of the sum of HK$700,000.00 for the Steelworks on Discount Basis (see columns A and D of the Schedule).

11.The Defendant eventually awarded the Works to the Plaintiff. The contract comprised the following documents : (a) the Priced BQ, (b) the 601 and 604 Drawings, (c) the R4 Quotation which the Defendant amended, signed and returned by fax to the Plaintiff on/before 22^nd April 2005 (ie the Faxed R4 Quotation in paragraph 60 below), and (d) the PS (“Four Documents”). Mr Wu, counsel for the Defendant, confirmed that notwithstanding its pleadings the Defendant would not rely on any implied contractual terms. There was also no plea of or reliance on any oral contractual terms. 

12.Given the express written provisions of the Four Documents, and Gammon’s eventual cancellation of (a) rolled sections (items 1 and 3 of the Schedule), (b) galvanised coating and painting of rolled sections (part of items 5-6 of the Schedule), and (c) blast cleaning of steel (item 7 of the Schedule), the Defendant claimed the final sum for the Works payable to the Plaintiff should be reduced by a sum of HK$465,040.00 (see columns A and F of the Schedule).

13.Notwithstanding the Defendant’s pleadings, Mr Wu conceded the Plaintiff did carry out the Variation Works pursuant to Gammon’s instructions, and the quantum of cost for such works was HK$24,500.00. But he argued the Defendant was only liable to pay the Variation Cost if the contract between the parties was on Discount Basis and not on fixed price lump sum basis.

14.Again, notwithstanding the more extensive pleas in its pleadings, the Defendant eventually confined its counterclaim to loss and damages as a result of the Plaintiff’s failure to carry out the following outstanding works :

So the Defendant’s counterclaim after set-off was for the sum of HK$17,540.00 (ie HK$540,000.00 + HK$24,500.00 – HK$465,040.00 – HK$47,000.00 – HK$70,000.00).

IV.  Undisputed facts

15.Further to the undisputed matters referred to above, the parties do not dispute the following matters :

V.    Preliminary matters

16.In respect of the Remedial Painting Works, the Defendant did not plead any material facts as to (a) the defects of the Steelworks that led to such remedial works, and (b) the Plaintiff’s breach of contract that caused such defects. At the trial, Mr Wu gave oral voluntary particulars that the Remedial Painting Works were caused by the Plaintiff’s breach of the contractual requirement for “Painting F” in BQ16/38 (see item 6 of the Schedule), but confirmed the Defendant would not lead viva voce evidence from Mr Ho on (a) and (b) above.

17.In respect of forms of warranty, the Defendant did not plead any material facts as to the Plaintiff’s contractual obligation to provide forms of warranty for the Sun-control System and Windows/Louvers Works. At the trial, Mr Wu supplied oral voluntary particulars that such contractual obligation was found in (a) Clause 2 of the General Notes of part plan of drawing no.23508/A/N/18/W/061 (Rev.-) or sketch no. HY/2002/24-DAN/0233/SK09 (“General Notes”) that “all drawings are to be read in conjunction with all relevant …… specifications ……”, and (b) the provisions in the PS particularised in paragraphs 27, 28 and 30 below.

18.Further, Mr Wu conceded there was no discovered document or witness statement to show (a) the Defendant had rectified the Plaintiff’s failure to provide forms of warranty by submitting its own forms of warranty for the Sun-control System and Windows/Louvers Works to Gammon and/or the “Employer”, and/or (b) Gammon made deduction(s) from payments payable to the Defendant under the USE Sub-Contract for the Plaintiff’s aforesaid failure.

19.At first, the Defendant insisted (and the Plaintiff denied) that 5% of the contract sum was to be deducted/retained as retention money. However, even on the Defendant’s case, it was only entitled to retain such retention money over the one-year maintenance period which had long expired. Since the Contract was not back-to-back to the USE Sub-contract, Mr Ho agreed the retention money should have been released to the Plaintiff even though Gammon had not released the retention money under the USE Sub-contract to the Defendant. In the circumstances, the matter of the retention money is irrelevant except for assessing witness’ credibility.

VI.  Issues

20.Both Mr Liu, counsel for the Plaintiff, and Mr Wu agreed that the issues were as follows :

VII. Overview of the witnesses

21.The Plaintiff’s witnesses and former project managers, Mr Cheng (who was also a director of Easco Enterprises Limited (“Easco”)) and Mr Lam, left its employ in June and January 2007 respectively. Neither Mr Cheng nor Mr Lam worked in the civil engineering field prior to joining the Plaintiff in/about September 2000 and October 2003 respectively, but they were both involved in the Works. Mr Lam added he was involved in the Plaintiff’s 沙田石門天橋 project prior to the Project.

22.The Defendant’s director and sole witness, Mr Ho, was involved in the Project and had over 30 years’ civil engineering experience. He did not have design experience (except temporary work design on construction jobs), and only had limited experience in contract negotiations when he was previously employed by Gammon as site agent. He became more involved in contract negotiations after establishing the Defendant in 1988.

23.In assessing witness’ credibility, the court should consider the totality of the witness’ evidence against the documentary evidence, inferences based on inherent improbabilities and/or undisputed facts (see the principles set out by Chung J at paragraph 12 of Star Glory Investment Ltd v Kai Tua (H.K.) Technology Ltd & ors HCA3523/2002 (unreported, 13^th August 2005)).

24.On balance I prefer the evidence of Mr Cheng and Mr Lam, whose accounts were generally consistent with the factual matrix and contemporaneous documents, and who were unshaken in cross-examination on the core issues. The same could not be said for Mr Ho whose evidence was unsatisfactory and did not sit well with the documentary evidence. 

VIII.    PS

25.When Gammon invited the Plaintiff to tender for the Cladding Works, Mr Chan gave the Plaintiff a soft copy of the entire PS (which comprised the particular specifications for inter alia the Cladding Works and the Works). On balance, I prefer it was to enable the Plaintiff to tender for the Cladding Works, and on award of the HEL Sub-contract to carry out such works.

26.The following parts of Appendix P – Architectural Works Requirements of the PS (“Appendix P”) were included in the trial bundle (“PS Extracts”) :

27.The General Requirements referred to above provided inter alia as follows :

28.Clause P.6.6 of Appendix P (“Clause P.6.6”) provided inter alia that the “Contractor” shall provide a written warranty for the works in accordance with Appendix N stating fitness for purpose of all window and glazing components and guaranteeing all surfaces of the frames and fixings against distortion, deterioration by corrosion, oxidization, fading colour and the like for a period of not less than 10 years. The warranty period for the works shall apply from the end of the “Maintenance Period”.

29.It was agreed that the Steelworks were governed by the specifications in Section 18 of the PS (eg extract page P18/2 faxed to the Plaintiff on 26^th April 2005) and not by Section P.10 of Appendix P. But Section 18 of the PS was not disclosed in the present proceedings.

30.Clause P.16.12 of Appendix P (“Clause P.16.12”) provided inter alia that the “Contractor” shall submit a certificate of warranty in accordance with Appendix N for the entire Sun-control System Works for a period of 10 years and the warranty shall start at the end of the “Maintenance Period”.

31.Since (a) Ove Arup issued the PS to Gammon, and (b) Gammon provided the PS to the Plaintiff, the Defendant and presumably all of its other direct tenderers and/or sub-contractors, I find that (i) the reference to “Contractor” in the PS meant Gammon and (ii) Gammon was to procure its direct sub-contractors to provide the requisite forms of warranty on the basis of inter alia the PS.

IX.  Discussions leading to the Quotation

32.At a site meeting on 19^th February 2005 attended by Mr Andy Chan (“Mr Chan”) for Gammon and Mr Ho for the Defendant, Gammon required the Defendant to urgently source a sub-contractor for the Sun-control System Works and submit shop drawings no later than 29^th February 2005. Subsequently, Gammon checked to see if the Plaintiff was interested. The feedback was positive.

33.In/about late February 2005, Mr Chan introduced Mr Cheng and Mr Lam to Mr Ho at a meeting (“Meeting”). In my view, the witnesses’ evidence in this respect must be considered in the context of the parties’ bargaining positions. At that time, Gammon was putting pressure on the Defendant to urgently appoint a supplier for the Sun-control System Works and submit relevant shop drawings. Gammon was so anxious it took the initiative to introduce the Plaintiff to the Defendant as a potential sub-contractor. On the other hand, the Plaintiff was already Gammon’s sub-contractor for the Cladding Works with no evidence that it was looking for or under any pressure to take up further works of the Project. The above matters plainly showed the Plaintiff’s greater bargaining power for not taking up the Works unless they were worth its while.

34.In such context, I disagree that Mr Chan specifically arranged the Meeting for the parties to discuss the Works, and prefer the evidence that he introduced Mr Ho to Mr Cheng and Mr Lam at a progress meeting between the Plaintiff and Gammon, and that during the Meeting Mr Ho briefly explained the Defendant required a sub-contractor and invited the Plaintiff to submit a quotation. Since Gammon’s role was limited to ascertaining the Plaintiff’s interest in the Sun-control System Works but it would not be a party to any contract between the Defendant and its sub-contractor, there was no reason for Gammon to take steps beyond facilitating the initial liaison.

35.Mr Ho claimed that during the Meeting Mr Lam represented to him that :

On balance, I prefer Mr Lam’s evidence that he did not make any of these alleged representations.

36.Given Gammon’s limited role (see paragraph 34 above) and its provision of the PS to the Plaintiff prior to October 2004 (see paragraph 25 above), I disagree that Mr Chan would after 19^th February 2005 and before the Meeting pass a further set of the PS to the Plaintiff and admit such fact to Mr Ho at the Meeting. I also do not see any point for Mr Lam to represent to Mr Ho that he had received the PS Extracts when the extracts referred to in paragraph 26(c), (e) and (g) above were irrelevant to the Works.

37.I also find the alleged representations as regards the Plaintiff’s “rich experience” in Highway Department projects or structural steelworks projects unconvincing. Mr Ho claimed he did not ask Mr Cheng or Mr Lam for any job reference because he trusted the Plaintiff as introduced by Gammon. I am not persuaded by such explanation in light of (a) Gammon’s limited role (see paragraph 34 above), (b) the absence of prior business dealings between the parties, (c) Mr Ho’s experience of over 15 years as contract negotiator for the Defendant (see paragraph 22 above), and (d) his allegedly strong reliance on such representations to invite the Plaintiff to submit quotation for the Works and in due course to award the Contract to the Plaintiff. I prefer the Plaintiff’s case that Mr Ho did ask Mr Cheng and Mr Lam for job reference for Highway Department projects, and Mr Lam informed him the Plaintiff had just completed a footbridge roof cladding project for the Highway Department (see paragraph 21 above).

38.There is no dispute Mr Ho told Mr Cheng and Mr Lam at the Meeting that the Defendant was looking for a sub-contractor to design, supply and install the louvers only because the Defendant had already sub-contracted the windows works to another.

39.Mr Ho’s witness statements went on to say that (a) Mr Lam suggested a single sub-contractor should design, supply and install both the windows and louvers to avoid awkward coordination and work sequence problems, (b) Mr Ho accepted such observation and asked Mr Lam “to submit a quotation on supply and install both windows and louvers to [the Defendant]”, (c) Mr Lam expressed interest in the Steelworks (which the Defendant had not yet awarded to any sub-contractor) since the Plaintiff was Gammon’s sub-contractor for the Cladding Works, and (d) Mr Ho asked the Plaintiff for “a quotation for the whole of the Works”.

40.Interestingly, apart from the request for “a quotation for the whole of the Works”, there was strangely little mention in Mr Ho’s witness statements of the Sun-control System Works notwithstanding the urgency expressed by Gammon. But Mr Ho gave viva voce evidence that (a) “the whole of the Works” referred to the Windows/Louvers Works as well as Sun-control System Works, (b) Mr Lam told him these works would suffer interface problems if there were different sub-contractors and (c) he therefore asked Mr Lam to submit quotation for both works. Such evidence appeared to be different from Mr Ho’s witness statements referred to in the above paragraph. I find Mr Ho’s evidence unreliable.

41.I prefer Mr Cheng’s evidence that he told Mr Ho at the Meeting the Plaintiff would only be interested in taking up the whole of the Works. Mr Lam added there would be coordination and work sequence problems if different sub-contractors carried out the Works. Consequently, Mr Ho asked the Plaintiff for quotation for the Works. I find such evidence more probable in light of the factual matrix and the parties’ bargaining positions. I disagree that Mr Ho invited quotation for the Works because he was impressed with Mr Lam’s knowledge about the practice of the Highway Department (see paragraph 35(e) above) which was allegedly in line with the format of BQ16/38.

X.    Quotation, Priced BQ and R1 Quotation

42.On/about 5^th March 2005, the Defendant sent a fax to the Plaintiff requesting quotation for the Steelworks as per BQ16/38 attached. There is no dispute that at this stage the Defendant had not yet supplied the drawings for the Works to the Plaintiff, so the Plaintiff did not know the actual scope of the Works or whether all items listed in BQ16/38 would ultimately be carried out. So the Plaintiff submitted the Quotation (see paragraph 6 above) which included an offer of HK$827,000.00 for the Steelworks (ie close to the Budget Ceiling) based on the items, quantities, unit rates and amounts in the Priced BQ (see columns A and C of the Schedule).

43.For the Sun-control System and Windows/Louvers Works, there was no breakdown of the respective sums of HK$450,000.00 and HK$260,000.00 in the Quotation. At Mr Ho’s request, the Plaintiff provided a breakdown of such sums by way of revised quotation no.Q140305-R1 dated 19^th March 2005 (“R1 Quotation”) with changes to inter alia Clauses 3.0, 4.0 and 5.0 as follows :

“3.0	Design, Supply and Installation
	[the Steelworks]
	[the Weightstation] (Refer BQ attached)
	•   Bill No. 16/38		Sum	$827,000.00
4.0	Design, Supply and Installation	100m2	$4,500/m2	$450,000.00
	[the Sun-control System Works]
5.0	Design, Supply and Installation
	Windows	90m2	$2,650/m2	$238,500.00
	Louvers	10m2	$2,150/m2	$21,500.00
			Total	$1,537,000.00

XI.  R2 Quotation

“3.0	Supply and Installation				Sum		$800,000.00
	[the Steelworks]
	[the Weightstation]
4.0	Design, Supply and Installation
	[the Sun-control System Works]
		Moveable Blade Blade	20m2	$4,300/m2		$86,000.00
		Fixed Blade System	70m2	$3,200/m2		$224,000.00
5.0	Design, Supply and Installation
	Windows		90m2	$2,550/m2		$238,500.00
	Louvers		10m2	$2,000/m2		$21,500.00
	Lump Sum Total :					$1,539,500.00

The R2 Quotation (a) no longer mentioned “BQ” or “BQ16/38” but only “Sum $800,000.00” for the Steelworks, and (b) referred to “Lump Sum Total” of HK$1,539,000.00 for the Works.

45.I find on balance that Mr Cheng made clear to Mr Ho during negotiations that (a) any discount would be premised on the Plaintiff being awarded the whole of the Works, and (b) the Steelworks would be premised on fixed price lump sum upon evaluation of the then available drawings for the Works and no longer on the Priced BQ.

46.In my view, both parties should be aware from the then available drawings for the Steelworks that the listed items for (a) rolled sections, (b) galvanised coating and painting for rolled sections, and (c) sand blast cleaning of steel in BQ16/38 or the Priced BQ (ie items 1, 3, and 7 and part of items 5 and 6 of columns A and B of the Schedule) were not required. The 604 Drawing clearly showed that only hollow sections and not rolled sections were required. Clause 2 of the Notes for Structural Steel in the 601 Drawing provided inter alia that “[after] fabrication, the steelwork shall have its surfaces properly prepared and then hot-dip galvanised in according with BS EN 150 1461:1999. Details of galvanising vent / drain holes shall be submitted by the contractor for the approval of the Engineer”, ie the required protection was galvanised coating and not sand blast cleaning. In the circumstances, the available drawings rendered the options between rolled sections and hollow sections and between galvanised coating and blast cleaning of steel in the Priced BQ redundant.

47.Further, Clause 2 of the General Notes in the 601 Drawing, which provided that “[all] drawings are to be read in conjunction with all …… specifications ……”, captured the technical specifications and client requirements for the Works in the PS as part of the materials for the Plaintiff’s evaluation of the scope of the Works.

48.I therefore accept Mr Cheng’s evidence that upon studying the 601 and 604 Drawings as well as the technical specifications in the PS in relation to the Works, the Plaintiff was able to evaluate the actual scope of the Works and therefore offered HK$800,000.00 on fixed price lump sum basis for the Steelworks. I further accept that all of the Plaintiff’s subsequent revised quotations were premised on the drawings for the Works (with cross-references to the technical requirements in the PS) and not the Priced BQ. The Plaintiff also used its greater bargaining power to insist on being awarded all of the Works.

49.Although there was no express reference to the drawings in the R2 Quotation, Mr Cheng explained (and I accept) the parties understood the shift of contractual basis for the Steelworks over telephone discussions. I disagree with Mr Ho’s evidence that Mr Cheng told him the unit rates in the Priced BQ would be discounted on a pro-rata basis to fit the sum of HK$800,000.00 for the Steelworks. I prefer Mr Cheng’s evidence that whilst Mr Ho knew the Plaintiff insisted on fixed price lump sum basis for the Steelworks he was reluctant to accept such basis. After all, there was a real risk of the Defendant making a loss over the Steelworks by setting the fixed price lump sum of HK$800,000.00 (which was close to the Budget Ceiling) against the sum for the Steelworks under the USE Sub-contract on “with quantities and subject to re-measurement” basis.

50.Had the Plaintiff’s revised offer been on Discount Basis, it would have been easy for the Plaintiff to (a) attach the Priced BQ and specify the Discount Basis in the R2 Quotation or (b) prepare and attach a new priced BQ16/83 similar in form to columns A and D of the Schedule to fit the sum of HK$800,000.00. The express reference to “Lump Sum Total” and the removal of references to any attachment, “BQ” or “Bill No. 16/38” from the R2 Quotation plainly contradicted the Defendant’s contention.

51.Mr Wu doubted the shift of contractual basis for the Steelworks because the R1 and R2 Quotations (based on the Priced BQ and fixed price lump sum respectively) were both dated 19^th March 2005. But he did not canvass this matter in cross-examination of Mr Cheng or evidence-in-chief of Mr Ho.

52.Further, there is no dispute that the 601 and 604 Drawings were not available to the Plaintiff at the time of the Meeting (late February 2005) and/or the Quotation (mid-March 2005) for the Defendant admitted in its pleadings it “later” provided such drawings to the Plaintiff. I find on balance the Plaintiff issued the R1 Quotation to meet Mr Ho’s request for a breakdown of the sums for the Sun-control System and Windows/Louvers Works, but issued the R2 Quotation as a true revision based on the then available drawings to meet Mr Ho’s request for discount. Nothing sinister arose from the fact that the R1 and R2 Quotations were of the same date.

XII. R3 Quotation

53.Bearing in mind the Budget Ceiling, Mr Ho maintained the R2 Quotation was still expensive. There was also discussion concerning changes to the design of the Sun-control System Works. On 31^st March 2005, the Plaintiff submitted further revised quotation no.Q140305-R3 (“R3 Quotation”) with changes to inter alia Clauses 3.0, 4.0 and 5.0 as follows :

“3.0	Supply and Installation
	[the Steelworks]
	[the Weightstation]			Sum	$800,000.00
4.0	Design, Supply and Installation
	[the Sun-control System Works]– Movable Blade System
		External Operated			$400,000.00
5.0	Design, Supply and Installation
	[the Windows/Louvers Works]			Sum	$250,000.00
				Lump Sum Total :	$1,450,000.00”

The R3 Quotation maintained the offer of “Sum HK$800,000.00” for the Steelworks (with no reference to “BQ” or “BQ16/38”), but offered discounts for the Sun-control System and Windows/Louvers Works on fixed price lump sum basis (with removal of breakdown of quantities and unit rates). In my view, it was reasonably clear from the R3 Quotation (and I accept that Mr Ho knew) that the Plaintiff’s offer for the Works was fully premised on fixed price lump sum basis and no longer on “with quantities and subject to re-measurement” basis or Discount Basis.

54.On 6^th April 2005, Mr Ho faxed to the Plaintiff his handwritten notations on the R3 Quotation (“R3 Notations”) as follows :

55.Mr Ho claimed he did not agree to let the Plaintiff do all the Works and was only prepared to accept the offer of HK$1,450,000.00 in the R3 Quotation on the basis of the R3 Notations, ie the Steelworks and Windows/Louvers Works would be “provisional” (meaning the Defendant could choose whether to award such works to the Plaintiff) and the Sun-control System Works would be “subject to remeasurement”. Mr Ho further claimed that upon receipt of the R3 Notations, Mr Cheng telephoned to confirm his awareness of the above matters, but as Mr Cheng was keen to get the Steelworks, he gave further discount to the Defendant without any change from “lump sum with BQ” (ie Discount Basis) to fixed price lump sum for the Steelworks.

56.However, it was common ground that :

In the circumstances, the evidence fell short of elevating the R3 Notations to an agreement between the parties. Indeed, Mr Ho was constrained to admit the R3 Notations merely reflected his stance and/or counter-proposal.

57.Even so, I do not accept that Mr Ho counter-proposed Discount Basis for the Steelworks. Even on the Defendant’s case, Mr Ho did not trust the Plaintiff with oral negotiations, but took care to write and initial his counter-proposal by way of the R3 Notations. Yet, he could not satisfactorily explain why he did not specify the Discount Basis in the R3 Notations. In light of the above and the Plaintiff’s greater bargaining power (see paragraph 33 above), I prefer Mr Cheng’s evidence that ever since the R2 Quotation the Plaintiff’s offer in relation to the Steelworks was on fixed price lump sum basis, and that he rejected the Defendant’s counter-proposal in the R3 Notations.

XIII.    R4 Quotation

58.Subsequent negotiations resulted in the R4 Quotation dated 18^th April 2005. To avoid confusion, the Plaintiff identified the relevant drawings for the Works in the R4 Quotation, and further discounted the sum for the Steelworks to HK$700,000.00 (again with no reference to “BQ” or the Priced BQ), but maintained the sums for the Sun-control System and Windows/Louvers Works, thus reducing the “Lump Sum Total” for the Works to HK$1,300,000.00.

59.On/about 22^nd April 2005, Mr Ho faxed the Signed R4 Quotation to the Plaintiff after adding inter alia the corresponding sketch numbers to the identified drawings in the R4 Quotation, and an express condition that the “sub-contract is on a fixed price lump sum basis and not subject to re-measurement” (“Condition”). In the Signed R4 Quotation, the Steelworks and Windows/Louvers Works were no longer “provisional”, and the prescribed payment terms specified instalment payments against certain circumstances/events with no allowance for 5% retention money.

60.Mr Ho claimed that shortly thereafter on the same day he telephoned Mr Cheng to suggest allowing 5% retention money to which Mr Cheng did not object, so he typed the phrase “(5% Retention Money)” on the Signed R4 Quotation and faxed the same to the Plaintiff (“Faxed R4 Quotation”).

61.However, I prefer Mr Cheng’s evidence that this was a unilateral addition by the Defendant which was not discussed and/or agreed as alleged. First, the payment terms in the Signed R4 Quotation were not adjusted to cater for 5% retention money, so it was unclear when and how such retention money was to be deducted and released. Mr Ho’s suggestion that retention money was normally deducted from the final payment and released at the expiry of the maintenance period was not reflected in the Faxed R4 Quotation (let alone the Signed R4 Quotation). Secondly, none of the Defendant’s 8 interim payments made any deduction for retention money. Thirdly, the deduction of retention money of HK$40,618.00 mentioned for the first time in the Defendant’s purported final payment voucher dated 11^th March 2006 (“Voucher”) was quite different from the suggestion in Mr Ho’s witness statements that the retention money was HK$74,960.00 (ie HK$1,300,000.00 (lump sum total in the Signed R4 Quotation) – HK$465,040.00 (see paragraph 12 above) – HK$760,000.00 (total interim payments)). In my view, the aforesaid discrepancies illustrated the inherent unreliability of Mr Ho’s evidence. In any event, as explained in paragraph 19 above, the matter of retention money is immaterial except for assessing witnesses’ credibility.

62.Mr Ho accepted the sums for the Sun-control System and Windows/Louvers Works in the Signed R4 Quotation were on fixed price lump sum (and not “with quantities”) basis, but he claimed the contractual basis for the Steelworks remained on Discount Basis (but not “subject to re-measurement”).

63.On the other hand, Mr Cheng claimed all of the Works were on fixed price lump sum basis pursuant to the drawings/sketches identified in the Signed R4 Quotation that cross-referenced to the technical specifications in the PS, and it was only when the Plaintiff was satisfied with the Defendant’s acknowledgment of such contractual basis by the Signed R4 Quotation that the Plaintiff made submissions under the Contract for comment/approval (see paragraph 87 below).

64.I find it implausible (as alleged in Mr Ho’s witness statements) that after receipt of the R4 Quotation Mr Ho telephoned Mr Cheng who acknowledged the reduced sum of HK$700,000.00 for the Steelworks in the R4 Quotation was on Discount Basis based on the Priced BQ. It appeared strange that Mr Ho would take care to type his amendments to the R4 Quotation and fax them to the Plaintiff twice, and yet omit to expressly spell out the important Discount Basis for the Steelworks especially given his concern over the Budget Ceiling. I do not accept his excuse that he had already orally discussed the matter with Mr Cheng. After all, he claimed they had orally discussed other matters which he subsequently reduced into written amendments (eg the Condition).

65.In my view, the Signed R4 Quotation clearly showed that (a) the Plaintiff rejected the R3 Notations, (b) Mr Ho knew all along the Plaintiff no longer offered to carry out the Steelworks on the Priced BQ, and (c) the Plaintiff rejected any Discount Basis.

(a)  Contract document

66.I also find on balance that after a series of negotiations as reflected in various revised quotations from the Plaintiff, the Signed R4 Quotation (which superseded earlier discussions and quotations) was the Contract that referred to the identified drawings which in turn cross-referenced to the technical requirements for the Works in the PS. The Defendant knew and emphasised this by specifying the Condition and setting out the corresponding sketches for the identified drawings.

67.The above conclusion is consistent with Mr Liu’s reference to the “last shot principle”. In Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd [1979] 1 All ER 965, cited in McInnis, Hong Kong Construction Law (2007) para.[316] at p.II105, Lord Denning MR said at pp.968-969 as follows :

“…… in most cases when there is a ‘battle of forms’ there is a contract as soon as the last of the forms is sent and received without objection being taken to it … The difficulty is to decide which form, or which part of which form, is a term or condition of the contract. In some cases, the battle is won by the man who fires the last shot. He is the man who puts forward the latest terms and condition; and, if they are not objected to by the other party, he may be taken to have agreed to them …”

68.Mr Wu reminded that Lord Denning MR also referred to other scenarios, eg :

“…… In some cases, however, the battle is won by the man who gets the blow in first. If he offers to sell at a named price on the terms and conditions stated on the back and the buyer orders the good purporting to accept the offer on an order form with his own different conditions on the back, then, if the difference is so material that it would affect the price, the buyer ought not be allowed to take advantage of the difference unless he draws it specifically to the attention of the seller.”

69.However, the present case does not fall within the above scenario for it is not a case of the Plaintiff making the first blow by issuing the Quotation and/or R1 Quotation based on the Priced BQ, and the Defendant hitting back with something so materially different that the Defendant should not be allowed to rely on the same unless it was specifically brought to the Plaintiff’s attention. Instead, the present case is one where the Plaintiff continued to issue revised quotations, and I disagree that the Plaintiff failed to draw the Defendant’s attention to change of contractual basis.

70.Further, I cannot accept the Contract comprised the Four Documents. The Defendant did not plead any implied or oral term, but there was no express provision in the Signed R4 Quotation that incorporated the Priced BQ and/or the PS Extracts as part of the Contract. If it were agreed that the provisions in the PS beyond the technical specifications and/or client requirements for the Works were to be included as part of the Contract, I find it strange that the Defendant would have failed to specify so in its written amendments to the R4 Quotation. Instead, the R4 Quotation replaced the Priced BQ with identified drawings that cross-referenced to the technical requirements of the PS which together showed the actual scope of the Works.

71.Mr Ho argued that if the R4 Quotation were based on the drawings identified therein which showed only hollow sections (and not rolled sections) were required, he would not have agreed to the sum of HK$700,000.00 for the Steelworks. Given the original offer in the Quotation based on the Priced BQ was HK$827,000.00, removal of the rolled sections (items 1 and 3 of the Schedule) would reduce the sum in the Priced BQ to HK$475,000.00 (ie HK$827,000.00 – HK$216,000.00 – HK$136,000.00), so Mr Ho would not have accepted the Steelworks for a fixed price lump sum of HK$700,000.00 if it were not on Discount Basis.

72.I disagree. Given (a) the series of negotiations between the parties that resulted in 4 revised quotations, (b) the Plaintiff’s strong bargaining power, (c) the Quotation and R1 Quotation were issued without knowledge of the actual scope of the Works, (d) subsequent revised quotations were based on identified scope of the Works (ie the 601 and 604 Drawings with cross-references to the technical specifications of the PS), and (e) the firmness of the Plaintiff’s insistence on getting all the Works on fixed price lump sum basis, I find on balance that the Defendant succumbed and agreed to the Plaintiff’s offer of fixed price lump sum of HK$700,000.00 for the Steelworks.

(b)  Construction of the Contract

73.Once I have come to the conclusion that the Contract was the Signed R4 Quotation, the next issue is the interpretation of its provisions.

74.The applicable principles can be found in the now classic statement of Lord Hoffmann in Investors CompensationScheme Ltd v West Bromwich Building Society [1998] 1 WLR 896,  912-913 endorsed by Sir Ivor Richardson NPJ in Ying Ho Co Ltd & ors v Secretary for Justice (2004) 7 HKCFAR 333, 406-407, as follows :

“…… The principles may be summarised as follows :
(1)	Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2)	The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3)	The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4)	The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.
(5)	The “rule” that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:
	... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

75.In Bank of Credit and Commerce International SA v Ali & ors (No.1) [2002] 1 AC 251, 269, Lord Hoffmann went on to say as follows :

“The background is however very important.  I should in passing say that when, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913, I said that the admissible background included “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant.  I was merely saying that there is no conceptual limit to what can be regarded as background.  It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken.  But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: “we do not easily accept that people have made linguistic mistakes, particularly in formal documents”.  I was certainly not encouraging a trawl through “background” which could not have made a reasonable person think that the parties must have departed from conventional usage.”

76.I also agree with the observation of Sakhrani J in Hongkong Underground Engineering Limited v Wellcome Construction Company Limited (formerly known as Shun Hing Construction Co, Limited) HCA1834/2003 (unreported, 15^th August 2005) paras.29 and 40 that “[it] is common ground that evidence of the conduct of the parties after the making of the contract is admissible to show what the terms of the contract were but such evidence is not admissible to interpret a written agreement (para. 12-126, Vol 1 Chitty on Contracts 29^th Edn.)” and “[as] the contract was the written agreement ……, the parties subjective intentions and the subsequent conduct of the parties is not relevant and therefore inadmissible in construing the contract”.

77.I therefore approach the interpretation of the Contract not as a matter of semantics or dictionary meaning of words, but having regard to the circumstances surrounding their making and the practical objectives they intended to achieve. I also bear in mind that in arriving at a construction of the language of the Contract that would give the most commercial sense there was no conceptual limit as to what could be regarded as background save that previous negotiations of the parties and their declarations of subjective intent should be excluded.

78.Mr Wu argued that the Condition meant “with Bill of Quantities” but no re-measurement. It was merely to show that all of the Works were firmly awarded to the Plaintiff in contra-distinction to references to “provisional” and “subjected to remeasurement” in the R3 Notations, which “…… is exactly the difference between lump sum fixed price contract with BQ and Remeasurement Contract. For lump sum fixed price contract with BQ, [the Defendant] could not take back any work from [the Plaintiff] or else [the Plaintiff] could claim for loss of profit. However, in remeasurement contract, [the Plaintiff] could not complain even if [the Defendant] took back some works from the contract”.

79.I do not accept such interpretation. Even according to Mr Ho, “provisional” in the R3 Notations merely meant the Defendant could choose whether to award the relevant works to the Plaintiff (see paragraph 55 above), and “re-measurement” meant the listed items of work and quantities in the bill of quantities were approximate with the final contract sum determined by re-measurement and re-valuation. Plainly, “provisional” and “re-measurement” dealt with distinctly different matters. In my view, even if the Defendant chose to award certain works to the Plaintiff, the “provisional” label would not dictate whether such works would be on fixed price lump sum or “with quantities and subject to re-measurement” basis.

80.In my view, Discount Basis, which was based on pro-rata reduction of the unit rates of all items listed in the Priced BQ to fit the sum of HK$700,000.00 for the Steelworks in the Signed R4 Quotation, could only mean that the sum ultimately payable for the Steelworks depended on the final valuation and measurement of the items and quantities of work done against the adjusted unit rates. This is quite different from the Condition which meant the Plaintiff would be entitled to the fixed price lump sum of HK$1,300,000.00 when the Plaintiff substantially completed the identified Works as shown in the drawings/sketches in the Signed R4 Quotation with cross-reference to the technical specifications of the Works in the PS, and not subject to re-measurement of the completed Works.

81.Since it is common ground that the Contract was a written agreement and there was no express provision in the Contract for incorporating Discount Basis, such basis would have been inconsistent with the express terms of the Signed R4 Quotation with the Condition. In my view, such interpretation was not the Plaintiff’s subjective intention, but what would convey to a reasonable person having the background knowledge of the parties at the time of the Contract.

82.Although the court is not to look for legal or dictionary meanings, I am comforted by the fact that such conclusion is consistent with Keating on Construction Contracts 8^th ed (2006) para.4-002 at p.100, which was echoed as follows :

“In a lump sum contract, the contractor is required to carry out and complete the entirety of the identified works for a fixed sum agreed in advance, or, as is more usual, if there are changes in the scope of the named contract works, for “… such other sum as shall become payable … at the times and in the manner specified in the Conditions.” In the case of lump sum contracts, the proposed contract works will be of a known extent (that is, not at the development/design stage) and described in detail in a specification, Bill of Quantities or in drawings or in a combination of these. Where the specification or Bill of Quantities forms part of the contract, provided the work is sufficiently described, the contractor will be taken to have included for that work in his fixed price. Where work is not sufficiently described, and its existence is not reasonably to be inferred from the language of the contract, the contractor will be entitled to recover in addition to the fixed price. A lump sum contract may include responsibility for design and management.” (Chitty on Contracts 29^th ed (2004) Vol.II para.37-008 at pp.638-639)

“Under a lump sum contract, a contractor will receive payment of a fixed sum which has been agreed in advance upon completion of the whole contract works. Under this system, the design would be completed and the work would be quantified when a contractor submits its tender to the employer. The proposed contract work may be described in the Bill of Quantities or specification which forms part of the contract documents. This would have the benefit of ensuring uniformity and accuracy in the description of works. …… If the scope of work under a lump sum contract is varied, the contractor will be paid an extra sum according to the contractual provisions in the contract. In practice, the employer will usually pay more than the amount of the lump sum fixed in the contract to the contractor. This will happen if there are variations or a direct loss and expense claim due to the disturbance of regular progress of the works, or if there are fluctuations in the quoted rate.” (Chitty on Contracts Hong Kong Specific Contracts (2004) para.5-007 at p.366)

83.Although the above extracts from the learned texts referred to bill of quantity even for a fixed price lump sum contract, I note such bill of quantity was to describe the “identified works” or “contract of works of known extent” which “will be taken to have included for that work in [the contractor’s] fixed price”.

84.This is a far cry from the Defendant’s contention that Gammon (and hence the Defendant) could withdraw items and/or quantities of work in BQ16/83 (eg rolled sections, galvanised coating and painting works for rolled sections, and sand blast cleaning of steel) and thereby reduce the contract sum. Such scenario was more consistent with a typical re-measurement contract where “[there] is typically a bill of quantities in which the quantities are estimated, the rates inserted being intended to form the basis for the re-measurement of work carried out ……” (see Chitty on Contracts para.37-010 at p.639) or “…… where there is no pre-agreed fixed sum for the whole contract works …… and the amount payable to the contractor is determined on completion by measuring the work done and valuing it according to contract rates set out in the bill of quantities or schedule of rates” (see Chitty on Contracts Hong Kong Specific Contracts para.5-009 at p.367).

85.Mr Ho referred to a quotation from the Plaintiff to the Defendant dated 12^th October 2005 for another Highway Department project (ie Tai Po Market Cover Walkway) which showed that the Plaintiff was well aware of the practice of the Highway Department that “all structural steel members were measured later as hollow section and rolled section so as to allow the Engineer to decide later what type of steel sections would be employed for the project”. In light of the admonition of Sakhrani J (see paragraph 76 above), such subsequent conduct would not assist in the construction of the Contract. In the event, such quotation, which expressly provided that the offer was “per BQ[page number]” with attached priced bills of quantities, was too far different from the Signed R4 Quotation to support any useful comparison.

86.Mr Wu next argued that “the contract basis was blurred so that there was a dispute”. I do not agree there was any ambiguity as to the meaning of the Condition that was inserted by the Defendant, but even if there were it is highly arguable that the court will, as Mr Liu suggested, construe such provision against the Defendant as the “proferens” (see Hanison Construction Company Limited v Diamond Term Limited HCA4723/2003, Reyes J (unreported, 20^th May 2004) and Hudson’s Building and Engineering Contracts 11^th ed (1995) para.1.224). But I find I am able to come to the above conclusions without relying on such principle.

XIV.    Submissions

87.On 22^nd April 2005, Mr Lam faxed to Mr Ho information and/or documents on the Steelworks (eg the identities of the material supplier and steelwork contractor, site welder certificates, painting system, etc) for the Defendant’s onward submission for approval.

88.On 26^th April 2005, Mr Ho sent a fax to Mr Lam/Mr Cheng enclosing inter alia page PS18/2 of the PS which specified the need for specialist contractor for the fabrication and erection of steelwork. The Plaintiff then informed Mr Ho that the specialist steelwork contractor was Eastwell Engineering Ltd. So on 11^th May 2005, the Defendant wrote to (a) inform Gammon it would sub-contract the Steelworks to the Plaintiff and deploy Eastwell Engineering Ltd as the Defendant’s sub-contractor for supply/installation of the Steelworks, and (b) submit the information and materials supplied by the Plaintiff for comment/approval.

89.On 7^th June 2005, the Defendant accepted the Plaintiff’s proposal for alternative sizes for the hollow sections and requested the Plaintiff to proceed with material order accordingly. On 14^th July 2005, Mr Lam sent a fax to Mr Ho with copy to Mr Chan enclosing inter alia a letter from the paint supplier that confirmed the etch primer, primer and undercoat would comply with the specifications and product data sheets for the painting system.

XV. Interim payments and substantial completion

90.During the construction of the Works, the relationship between the parties was quite good, and the Plaintiff did not express any grievance over the 7 interim payments in the total sum of HK$660,000.00 paid by the Defendant between 26^th May 2005 and 26^th January 2006. But the interim payment certificates did not show that the interim payments were certified on Discount Basis.

91.Apart from the disputed Remedial Painting Works, it is common ground that the Plaintiff substantially completed the Works and Variation Works in/about January 2006 pursuant to the 601 and 604 Drawings and Gammon’s instructions. Mr Liu submitted (and I agree) that “[in] an ordinary lump-sum contract the employer cannot refuse to pay the contractor merely because there are a few defects and omissions. If there is substantial completion he must pay the contract price subject to a deduction by way of set-off or counterclaim for the defects” (see Keating on Construction Contracts para.4-008 at p.104 and Chitty on Contracts para.37-009 at p.639). In the circumstances, I am satisfied that by January 2006 the Plaintiff was entitled to the fixed price lump sum of HK$1,300,000.00 under the Contract less interim payments received.

92.On 11^th March 2006, Mr Ho invited Mr Cheng to agree to the Voucher as follows :

Mr Ho prepared the “attached BQ” (see information in columns A and E of the Schedule) for the Voucher on the basis that the Defendant was not liable to pay for the rolled sections. This was the first time the Defendant purported to set out Discount Basis in writing.

93.On 20^th March 2006, the Defendant paid the 8^th interim payment of HK$100,000.00 thus bringing total interim payments to HK$760,000.00. On 30^th May 2006, the Plaintiff issued invoice no.HWI-200504-7 for the sum of HK$564,500.00 (see paragraph 9 above), but the Defendant refused to pay despite demands by the Plaintiff and/or its solicitors on 12^th June, 20^th July, 24^th August and 19^th September 2006.

XVI.    Gammon’s Addendum to USE Sub-contract

94.On 29^th June 2006, Mr Ho faxed to Mr Cheng a copy of an Addendum to Sub-contract dated 19^th June 2006 (“Addendum”) issued by Gammon and countersigned by the Defendant which adjusted the “scope of works and value of completed workdone” by the omissions in columns A and F of the Schedule and the additions as follows :

95.In my view, the adjustments in the Addendum to the quantities set out in BQ16/38 (whether by way of omissions or additions) were only relevant to the Steelworks under the USE Sub-contract on “with quantities and subject to re-measurement” basis, and had no effect on the Contract which was on “fixed price lump sum” and “not subject to re-measurement” basis. Since the Plaintiff had substantially completed the Works in accordance with the drawings specified in the Signed R4 Quotation, the technical requirements in the PS and Gammon’s instructions, it was entitled to fixed price lump sum of HK$1,300,000.00 under the Contract. I therefore find the Defendant was not entitled to deduct the sum of HK$465,040.00 (see paragraph 12 above) from the amount payable to the Plaintiff.

XVII.   Remedial Painting Works

96.On 19^th September 2006, Mr Ho wrote to Mr Cheng to remind the Plaintiff “to complete your outstanding works by end of September for site handover. 1) Painting to steel works. 2) Form of Warranties. ……” When Mr Ho received the demand letter from the Plaintiff’s solicitors, he instructed the Defendant’s solicitors that no further payment would be made to the Plaintiff because inter alia the Plaintiff’s outstanding works would cost the Defendant about HK$100,000.00. So on 5^th October 2006, the Defendant’s solicitors wrote to the Plaintiff’s solicitors claiming for loss and damages due to the Plaintiff’s failure to complete the alleged outstanding works. 

97.On 15^th November 2006, Mr Chan emailed Mr Ho detailing the outstanding works by the Plaintiff “under your sub-contract : 1. Remedial painting work for the structural steel frame …… 3. Form of warranty for the Aluminium windows, doors, Sun control louver, structural steel frame”. On the same day, Mr Ho wrote to Mr Cheng/Mr Lam (a) referring to “numerous requests to remind [the Plaintiff] to complete the outstanding works” being “[painting] to steelworks …… Forms of warranties ……”, (b) saying that if the outstanding works were not completed in the next 5 days the Defendant would engage another sub-contractor to do so and deduct all costs against the Plaintiff without further notice, and (c) enlosing inter alia a quotation from Tak Chun Co dated 27^th October 2006 for “repaint the metal surface in carport and covered walkway at [the Weightstation]” for a lump sum cost of HK$47,500.00 for the Plaintiff’s reference.

98.On 19^th November 2006, Mr Lam replied to deny liability for the alleged outstanding works, but in view of the parties’ good relationship he enclosed inter alia a quotation dated 18^th November 2006 from Easco for the same works as in the quotation from Tak Chun Co but at a more competitive price of HK$25,000.00 to help the Defendant minimise expenses.

99.However, Mr Ho claimed that since the Plaintiff refused to carry out the Remedial Painting Works and the Defendant did not know Easco, the Defendant engaged Tak Chun Co to carry out such works. On 28^th July 2007, the Plaintiff paid the sum of HK$47,500.00 to Tak Chun Co.

100.There is no evidence of any complaint about the Steelworks when the Works were completed and handed over in/about January 2006, and no defect was identified in the interim payment certificates and/or the Voucher. I also note the Defendant did not discover in the present proceedings the alleged master list of defects (“Defect List”) which Mr Ho claimed Gammon provided to all sub-contractors and which identified inter alia the defects of the Works. I find on balance that the Plaintiff was not told of any alleged outstanding works until 19^th September 2006, ie long after the completion and hand over of the Works.

101.There is no evidence of the defect(s) of the Steelworks or how the Steelworks breached the “Painting F” requirements, which is sufficient to dismiss the Defendant’s claim for the Remedial Painting Works. During cross-examination of Mr Cheng and Mr Lam, Mr Wu explored whether the painting of the Steelworks were damaged by screw-fixing of the metal claddings to the steel frame, but Mr Cheng and Mr Lam denied such suggestion. Mr Lam added that the screws were hidden inside the steel posts and would not require Remedial Painting Works.

102.I therefore find the Defendant failed to prove that the Plaintiff was liable for the Remedial Painting Works or its cost, so it is unnecessary for me to consider whether the Defendant failed to mitigate loss by engaging Tak Chun Co and not Easco to carry out such works at lower cost.

XVIII.  Forms of  warranty

103.The Defendant claimed the Plaintiff should have provided forms of warranty for the Sun-control System and Windows/Louvers Works in favour of the “Employer” and/or Gammon. Was the Plaintiff obliged to do so?

104.Mr Ho argued that since the Plaintiff admitted it had a soft copy of the entire PS and had shown itself to be well familiar with the PS in the course of making submissions under the Contract, the Plaintiff should be well aware of the requirements for forms of warranty in Clause P.6.6 (see paragraph 28 above) and Clause P.16.12 (see paragraph 30 above) of Appendix P for the Windows/Louvers and Sun-control System Works respectively. He claimed the Plaintiff was in breach of contract by failing/refusing to provide such forms of warranty.

105.I have found that apart from the technical requirements in the PS which were incorporated as part of the Contract pursuant to cross-references identified in the drawings/sketches in the Signed R4 Quotation, the PS was not part of the Contract (see paragraph 70 above). So there was no contractual obligation on the part of the Plaintiff to provide the aforesaid forms of warranty. Knowledge of Clauses P.6.6 and P.16.12 and even Appendix N (ie the standard form of warranty – see paragraph 27(a) above) by the Plaintiff did not equate to binding contractual obligation on its part. However, the Defendant sought to make the Plaintiff liable by its subsequent conduct which allegedly acknowledged its obligation to provide forms of warranty. I note there was no plea of estoppel and/or acquiescence to support such contention.

106.In any event, I am not satisfied that the Plaintiff’s subsequent conduct was sufficient to support the Defendant’s contention. Mr Lam remembered he received the draft warranty as per Appendix N from Gammon. On 21^st July 2005, Mr Chan and/or Mr Stephen Lee of Gammon emailed Mr Lam and Mr Ho to chase for the warranty form. On the same day, Mr Lam replied by email to Mr Stephen Lee with copy to Mr Chan and Mr Ho attaching “the draft Warranty [“Draft Warranty”] covering our scope of works for this contract. Please note that [clause] 15.1 is not filled as we do not have any information of the employers contacts”.

107.The Draft Warranty (based on Appendix N) was as follows :

“APPENDIX N

DEED OF WARRANTY FOR ARCHITECTURAL WORKS

FORM OF SUB-CONTRACTOR’S WARRANTY

ARCHITECTURAL WORKS

OF

METAL CLADDINGS (PS.App P.2.26), AND

WINDOW AND GLAZING FOR BUILDINGS (PS App. P6.6), AND

STEEL WORKS (PS App. P10.5), AND

SUN SHADING BLADES (PS App P16.12)

THIS AGREEMENT is made the 20^th day of July 2005

BETWEEN

(1)  [The Plaintiff] whose registered office is at [stated address] (“the Sub-Contractor”); and

(2)  The Government of Hong Kong (“the Employer”).

WHEREAS

(A) By a contract no. HY/2002/24 Deep Bay Link – Northern Section (“the Contract”) made between the Employer and [Gammon] (“the Contractor”) the Contractor has agreed to execute and complete certain works as more particularly described in the Contract relating to the Architectural Works (the “Works”) upon the terms and conditions contained in the Contract.

……

(C)    By a contract dated 21^st October 2004 (“the Sub-contract”) made between the Contractor and the Sub-contractor, the Sub-contractor has agreed to design and construct the Architectural Works forming part of the Works.

(D) Pursuant to the terms of the Contract, the Contractor agreed to procure the provision of a warranty in the terms hereof by the Sub-contractor.

(E)  At the request of the Contractor, the Sub-contractor has agreed to provide this warranty.

NOW IT IS HEREBY AGREED AS FOLLOWS :

1.	All references in this Agreement to “the Architectural Works” shall be construed as (comprising the design, supply, laying and testing of architectural works on PS App P2.6, P6.6, P10.5, and P.16.12 and other preparation where necessary).
4.	Without prejudice to the generality of Clause 2 and 3 hereof, the Sub-contractor further warrants:-
	……
	(b)	that the Architectural Works shall be free of defects for a period of
		·   12 years for Metal Cladding (PS App. P2.6), and
		·   10 years for Window and Glazing for Buildings (PS App. P6.6), and
		·   12 months for Steelworks (PS App. P10.5), and
		·   10 years for Sun Shading Blades (PS App P16.12)
		from the date of completion in the said certificate of completion with respect to the Works issued pursuant to the provisions of the Contract;
	……
15.	All documents arising out of or in connection with this Agreement shall be served:-
	(1)	upon the Employer at (   ) marked for the attention of ( ); and
	(2)	upon the Sub-contractor, at [address stated], Hong Kong.
……”

108.Mr Lam confirmed that the draft form of warranty provided by Gammon already contained the references to the Works and Cladding Works in the heading and in Clauses 1 and 4. Mr Lam only filled out (a) the address of the Plaintiff in the preamble and Clause 15(2), and (b) the date of the HEL Sub-contract in recital (C).

109.Mr Lam was not fully familiar with the PS, so he made clear it was a draft. After issuing his email, he circulated a printed copy of the Draft Warranty to Mr Cheng to follow up.  Mr Cheng found the Draft Warranty erroneously covered the Works in addition to the Cladding Works, so he informed Gammon that the Plaintiff (as Gammon’s direct sub-contractor under the HEL Sub-Contract referred to in recital (C) of the Draft Warranty) would only give form of warranty for the Cladding Works. The Plaintiff finally issued form of warranty dated 29^th June 2006 limited to the Cladding Works.

110.First, I bear in mind that “Contractor” in Clauses P.6.6 and P.16.12 referred to Gammon (see paragraph 31 above), which is consistent with the definition of “Contractor” in recital (A) of the Draft Warranty. Secondly, it is evident from recital (D) in the Draft Warranty that the “Contractor” (ie Gammon) was to procure the provision of a warranty by the “Sub-contractor” pursuant to the “the terms of the Contract” (ie the contract between Gammon and the Employer referred to in recital (A) of the Draft Warranty). Since the “Sub-contractor” referred to the sub-contractor pursuant to the contract with the Contractor (ie Gammon) referred to in recital (C) of the Draft Warranty, it could only mean the Plaintiff in respect of Cladding Works and the Defendant in respect of the Works. Thirdly, the date of the “Sub-contract” in recital (C) of the Draft Warranty (ie 21^st October 2004) clearly referred to the HEL Sub-contract for the Cladding Works and not the USE Sub-contract or the Contract. Fourthly, the whole tenor of the Draft Warranty concerned warranty and undertaking by the “Sub-contractor” (defined to refer to Gammon’s direct sub-contractor) in favour of the “Employer”.

111.The above did not hang well with Gammon’s inclusion of the Works in the heading and in Clauses 1 and 4 of the Draft Warranty since the Defendant and not the Plaintiff was Gammon’s direct sub-contractor in respect of the Works. This added weight to the evidence of Mr Lam and Mr Cheng that the Draft Warranty was merely a draft which was not finalised and which contained erroneous references to the Works for which the Plaintiff was not contractually obliged to provide forms of warranty.

112.Such interpretation is bolstered by the fact that (a) it was Gammon and not the Defendant that provided the draft form of warranty to the Plaintiff, and (b) the Defendant never informed the Plaintiff the expiry date of the “Maintenance Period” (ie the start date of the warranty) under Clauses P.6.6 and P.16.12. I also find it unlikely that Appendix N would require Gammon to procure a form of warranty for the “Employer” from a sub-sub-contractor (eg the Plaintiff for the Works) with whom it had no contractual relationship. It is more probable that Gammon was required to procure a form of warranty from its direct sub-contractor against whom it could contractually compel compliance. 

113.Further, it is common ground that Section P.10 of Appendix P had nothing to do with the Steelworks under the Contract (see paragraph 29 above). In the circumstances, the reference to 12 months’ warranty under Appendix P.10.5 of the PS for the Steelworks in the Draft Warranty is clearly erroneous. Still further, Mr Lam made clear in his email that the Draft Warranty was only a draft, and he left Clause 15(1) of the Draft Warranty blank because he did not have the relevant information. The eventual form of warranty that was issued by the Plaintiff was limited to the Cladding Works.

114.I am not satisfied (a) the Plaintiff was contractually obliged to provide any form of warranty to the “Employer” in respect of the Works, or (b) the above events suggested otherwise. Such obligation, if any, fell on the Defendant, so its costs for complying with such obligation could not be laid at the Plaintiff’s door.

115.In case I am wrong, I proceed to consider the matter of quantum. The Defendant obtained a quotation from Ken Wang Engineering (Asia) Company Limited (“Ken Wang”) dated 9^th November 2006 for the Sun-control System Works inter alia as follows :

“百葉窗保養報價
1.	一年檢查二次。每次收取  HK$3,500.00-
	包括: 26組窗較唧油、檢查較位是否脫落，檢查絞手是否損壞、檢查威也是否鬆脫。
2.	檢查後提供一份詳細報告。
3.	提供足夠安全措施。包括: 安全帽、安全帶、安全架、安全鞋。
4.	如果需要維修則另報價維修。
5.	提供簡單清潔服務。
6.	提供E-CALL服務09am-06pm，每次收取   HK$700-
7.	O&M MENU    HK$6,000.00”

Mr Ho accepted that apart from item 7 the above works mainly concerned inspection and maintenance of the Sun-control System Works.

116.On 15^th November 2006, Mr Ho faxed the above quotation to the Plaintiff and threatened to engage such sub-contractor unless the outstanding works were completed within the following 5 days. On 19^th November 2006, Mr Lam replied denying liability and enclosed a quotation from Easco dated 18^th November 2008 on exactly the same terms but quoting lower prices of HK$3,000.00, HK$500.00 and HK$5,000.00 for items 1, 6 and 7 above.

117.On 28^th July 2007, the Defendant paid HK$12,166.00 to Ken Wang pursuant to its invoice dated 18^th July 2007 in respect of repairs to the Sun-control System Works :

“事項 : 秤車站搞手維修
1.	第一次:5月16至29日    共8工 x@650   $5,200.00-
	運輸費、交通費及材料費   HK$1,196-
2.	第二次:6月26至7月29日   共6工 x@650    $3,900.-
	運輸費、交通費及材料費   HK$1,870-
	Total:$12,166”

118.The Defendant argued that since the Plaintiff failed to provide forms of warranty for the Sun-control System and Windows/ Louvers Works valid for 10 years, the Defendant would have to arrange for repairs to be done whenever Gammon found there were problems with such works. Thus the Defendant’s loss in respect of the Plaintiff’s failure to provide forms of warranty was an estimated sum for arranging annual maintenance and inspection of the Sun-control System Works for a period of 10 years. However, Mr Wu submitted that such loss should be calculated on the basis of Ken Wang’s invoice for repairs, ie HK$12,166.00 ÷ 2 years x 10 years = HK$60,000.00 (rounded off figure), and not on Ken Wang’s quotation for annual maintenance.

119.I agree with Mr Cheng that Clauses P.6.6 and P.16.12 were not concerned with maintenance services at all. Indeed, Mr Ho admitted under cross-examination that the scope of the warranty in Clause P.6.6 was quite different from periodic inspection/maintenance. Instead Clauses P.6.6 and P.16.12 were concerned with assuring the Employer that such works were fit for purpose and the components were free from defects (see paragraphs 28 and 30 above).

120.There is no evidence of (a) any express requirement in the PS for maintenance services, (b) any express contractual obligation that the Plaintiff was to provide inspection/maintenance services, or (c) when the “Maintenance Period” in Clauses P.6.6 and P.16.12 was to commence and/or expire. It is difficult to see how Ken Wang’s quotation/invoice for inspection, maintenance and/or repairs was relevant for assessment of loss and damages pertaining to any failure by the Plaintiff to submit forms of warranty. More importantly, there is no evidence that (i) the Defendant by itself submitted or procured another contractor to submit forms of warranty to the “Employer” to remedy the alleged breach or (ii) Gammon made any deduction from sums payable to the Defendant under the USE Sub-contract by reason of the failure to submit forms of warranty.

121.Mr Ho next said that when the Sun-control System Works were completed, repairs were done because the moveable blades were very stiff. He claimed this was raised in emails from the Defendant and/or Gammon to the Plaintiff and in the Defect List, which documents were not pleaded/disclosed. I am unable to place weight on such bare assertions, especially when Ken Wang’s invoice for repairs was in 2007 and not 2006.

122.By reason of the aforesaid analysis, the Defendant’s claim under this head fails. There is no need for me to consider whether the Defendant failed to mitigate loss by not considering Easco’s quotation and insisting on engaging the more expensive Ken Wang to repair the Sun-control System Works.

XIX.    Variation Cost

123.Mr Wu argued that if the Contract was on fixed price lump sum basis (as I have found), the Plaintiff was not entitled to the Variation Cost.

124.In my view, “fixed price lump sum basis” contemplated the Plaintiff would complete the whole of the identified Works for a lump sum price. Normally, “identified works” or “contract works of known extent” whether specified in the contract, specification or bill of quantity would not affect the fixed price, but if extra work that changed the scope of works beyond the identified works was carried out, the contractor might be able to recover further payment for such variation works. This is echoed in Cheng SC, Wong and Soo, Construction Law and Practice (2004) para.3.9 at pp.30-31 as follows (see also paragraph 82 above):

“Under [a lump sum fixed price] contract, a defined work is carried out for a price that has been agreed, or where the basis on which the agreed price will be subject to possible increases or decreases according to strict condition in the contract, such as variations ordered by the architect and fluctuations in accordance with the contract. In general, civil and building contracts adopt this type of contract.”

125.The issue is whether the Variation Works were extra works beyond the Works identified in the drawings specified in the Contract and the technical requirements in the PS.

126.The 604 Drawing required the steel columns to reach “150 MIN” (ie 150mm minimum being the thickness of the pavement) below pavement level of 28.6m to stand on the footing marked as “1000 x 1000 x 1500 DP MASS CONCRETE BLOCK (TYP.)”. In the course of submission of shop drawings based on the 604 Drawing for approval, Mr Chan informed the Plaintiff that the footing level had to be lowered to accommodate pipes and drains. Mr Chan gave a drawing to the Plaintiff showing alteration of the footing (ie mass concrete block) to new lowered levels reflected by the notation of “TOP + [number]” for each steel column. “TOP” referred to the top of the footing (ie mass concrete block), and the “[number]” varied from 28.222 to 27.150, which showed that the footing had been lowered. Extra steel material was required to fabricate and lengthen the steel columns to ensure they would reach the footing for support. For convenience, the Plaintiff adopted 500mm as the average extra length for each steel column. I am satisfied that such works were variation works for which the Plaintiff was entitled to extra payment. The Defendant did not dispute the quantum of HK$24,500.00.

XX. Conclusion

127.Mr Ho gave evidence that shortly before trial the Defendant and Gammon agreed on the sum for the Steelworks under the USE Sub-contract, which he believed (although he was unsure) would not exceed HK$230,000.00. If that were so, no doubt the Defendant made a bad deal in respect of the Steelworks, but that is not a reason for failing to comply with its contractual obligations vis-à-vis the Plaintiff.

128.The Plaintiff is entitled to judgment for the sum of HK$564,500.00 (ie the outstanding balance under the Contract in the sum of HK$540,000.00 and the Variation Cost in the sum of HK$24,500.00). The Defendant’s counterclaim is dismissed. There is no reason why costs should not follow event. I grant a costs order nisi that the Defendant do pay the Plaintiff costs of the action (including costs of the counterclaim and all reserved costs if any) to be taxed if not agreed. There will be certificate for counsel.

Representation:

Mr Liu Chin Yu instructed by Messrs Wong Poon Chan Law & Co for the Plaintiff.

Ms Bernard Wu instructed by Messrs Fung Wong Ng & Lam for the Defendant.

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