Chim Kee Machinery Co Ltd v. Sne Engineering Co Ltd
Read the full judgment text of HCCW 308/2012 on BabelCite. This High Court CFI judgment was delivered on 23 May 2013.
1. SNE Engineering Co Ltd ( “the Company” ) was a subcontractor of Hsin Chong Construction Company Ltd to perform certain pile removal works under the MTR Express Rail Link Contract.
Cites 8 cases
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HCCW 308/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO 308 OF 2012 ______________________
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______________ DECISION ______________ Background 1.SNE Engineering Co Ltd (“the Company”) was a subcontractor of Hsin Chong Construction Company Ltd to perform certain pile removal works under the MTR Express Rail Link Contract. 2.For the purpose of the subcontract work, the Company had since September 2010 contracted with the Petitioner, Chim Kee Machinery Co Ltd, for the supply of various heavy machinery including Rotators, Crawler Cranes, Truck Cranes, Casings and Tools with or without operators and workers. 3.It was the practice of the Petitioner to render monthly statements of account to the Company. The statements were compiled from the invoices, and the invoices were in turn issued according to the Work Bill kept by the Petitioner. 4.There had been disputes between the Petitioner and the Company with regard to payment. On 3 April 2012 the Petitioner served a statutory demand on the Company to compel payment of $10,399,066, allegedly as outstanding hiring charges from 30 April 2011 to 29 February 2012. The Company in turn requested Hsin Chong to make payment to the Petitioner through the Company’s account. 5.In the meantime, further charges accrued for the months of March and April 2012. On 23 May 2012, the Company requested Hsin Chong to advance payments-on-account to enable the Company to pay for the March and April charges pending finalization of the actual accounts between the Company and the Petitioner. On the same day, an arrangement was agreed among the Petitioner, the Company and Hsin Chong whereby Hsin Chong had agreed to make payment on behalf of the Company to the Petitioner for an amount to be certified by the Company or for a reasonable amount to be assessed by Hsin Chong. 6.Subsequently on 13 June, the Company sent the Petitioner a cheque for $3,841,751 and also paid the Petitioner $3,758,249 through bank transfer. These two payments totalled $7.6 million. At the time of payment, the Company also sent two tables to the Petitioner, one of which listed a series of March invoices totalling $3,841,751 and the other listed a series of April invoices totalling $3,355,495. There was no explanation as to what the $7.6 million was meant to cover. But as one would see that the amount of the cheque corresponded with the table of March invoices, one could assume that the sum through bank transfer would be treated as payment-on- account for the April invoices. 7.The Petitioner did not accept that the March and April invoices had been fully discharged by the payment of $7.6 million. On 26 June, the Petitioner again demanded payment of the outstanding sums due for those two months. The Petitioner threatened to terminate its service after 3 July if the outstanding sums were not settled. 8.The Company responded on 28 June 2012, reiterating that the sums certified for March and April were already paid. The Company further asked the Petitioner to issue new rental agreements for the period starting 1 June. 9.The question of outstanding charges was not resolved. On 3 July, the Petitioner issued a letter to the Company accusing the latter of failing “to provide any commitment on repayment, compensation of damaged equipment and rental period of equipment” and indicated that the Petitioner had “no choice but to terminate [its] service at MTRC 802 job site immediately”. 10.It appears that since 3 July, Hsin Chong had started using workers other than the Company’s workers to operate the machinery and equipment. A meeting between the Company and the Petitioner was held at the site on 6 July at which Hsin Chong also attended as an observer. But as later correspondence shows, the parties even argued over whether they had actually reached any agreement at all for the Petitioner to resume work. There was also an allegation from the Company that the Petitioner had deliberately operated its machinery at a much slower rate which had adversely affected the progress of the Company’s work. 11.Eventually, on 11 July, the Company wrote to Hsin Chong to inform them of the Company’s acceptance of the Petitioner’s termination of service. The letter was copied to the Petitioner. 12.Disputes then ensued between the Company and the Petitioner regarding the removal of the machinery from the Site. The Company eventually obtained an injunction from the court on 24 July to require the Petitioner to remove its equipment. 13.In the meantime, the Petitioner issued its July statement of account (“the July Statement”). The July Statement (dated 5 July 2012) was made up to the end of June 2012 and the amount allegedly due from the Company was $9,192,474.50. This sum was apparently net of the March and April invoices which the Company had listed in the tables when the $7.6 million was paid. 14.Based on the July Statement the Petitioner issued and served another statutory demand on the Company on 1 August, demanding payment of the said sum of $9,192,474.50. 15.However, what was due for the months of March and April was still unresolved. The parties disagreed over whether the $7.6 million payment was meant for settling the March and April invoices or whether part of that sum should be treated as payment-on-account and to be set off against the invoiced amount for the month of May. 16.In the meantime, further charges for the month of July had accrued. As will be seen later, these charges were strongly contested by the Company. The Petitioner issued another statement of account made up to end of July 2012 (“the August Statement”). The outstanding amount had by then accumulated to $12,501,781 according to the Petitioner. 17.On 23 August 2012, the Petitioner presented a winding up petition against the Company based on the alleged indebtedness of $12,501,781 (“the Petitioning Debt”). 18.On the other side of the dispute, the Company had issued proceedings (HCA 1466/2012) against both Hsin Chong and the Petitioner for infringement of the Company’s patent. For such infringement, the Company claimed damages or an account of profits among other reliefs sought. 19.Further, by another action (HCA 2025/2012) the Company sued the Petitioner, first, for overpayment of the hire charges for the period from September 2010 to April 2012; secondly, for damages for loss occasioned by the Petitioner’s slow operation of its plants and equipment since 7 July to 12 July 2012, which was provisionally assessed at $4,627,339.20; and thirdly, for damages and loss of profits allegedly arising from Hsin Chong’s withdrawal of subcontract-works from the Company as a result of the Petitioner’s termination of its service on 3 July 2012, which was provisionally assessed at $10,821,213. 20.The Company now seeks to strike out, or alternatively, to stay the Petition on the following grounds:
21.The Company’s contention, primarily, is that its cross‑claims in HCA 2025/2012 alone would have exceeded the Petitioning Debt. The second and third aspects of that claim amounted to $15,448,552.20 (see §19 above). In addition, the Company had a substantial claim in damages in the patent action (HCA 1466/2012). 22.In addition the Company also challenges the sums allegedly due under the July and August Statements. The company’s case is that out of the sum $9,192,474.50 mentioned in the July Statement, $1,529,942 is disputed. And as for the further sum of $3,309,306.50 allegedly accrued in July, only $249,744.92 is admitted and the Company disputes the balance of $3,059,561.58 for that month. The Company acknowledges that these deductions, even if upheld, would not have completely extinguished the Petitioning Debt. Legal Principles 23.The relevant legal principles are not in dispute. I would respectfully adopt the following principles set out in two cases decided by Kwan J (as she then was). In Re Hong Kong Construction (Works) Ltd, HCCW 670 of 2002, the learned judge said, at §6:
In Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487 the learned judge said, at pp 491 - 492:
Deductions 24.I propose to deal with the deductions first. 25.The Petitioner issued various invoices to the Company in respect of the charges for work and hire. As noted earlier, the invoices were prepared according to the Work Bills kept by the Petitioner. The Petitioner claimed that the Company was bound by these Work Bills as they had been signed by the Company’s foreman at the site. 26.The Company contended however that the Work Bills were merely a record that the individual workers had finished work for the day. The foreman’s signature was not meant to be a certification for payment. According to the Company, when the invoiced amounts were checked against the site entrance records kept by Hsin Chong’s Palm Print Machines (which recorded the time when each worker entered and exited the site every day), it was revealed that the work-hours were overstated in the invoices. 27.Two different figures had been put forward by the Company as being the overstated amounts to be deducted from the invoices, namely $1,529,942 and $1,455,226.50. The former figure was wholly unsubstantiated and I would therefore not consider the same. The latter figure was set out in a summary which was prepared by the Company’s quantity surveyor upon checking the Palm Print Records. However, as pointed out by Mr Wong (counsel for the Petitioner), a section in that summary relating to the April invoices totalling $381,757 was not in fact the subject of the Petitioner’s claim in the August Statement. Any deduction, therefore, could only amount to $1,073,469.50 at the most. 28.Noting the absence of any particular provision in the contractual documents which would render the Work Bills or invoices conclusive records, I think it is at least open to the Company to rely on the Palm Print Records to challenge the invoiced amounts despite the signatures of its foreman on the Work Bills. I am satisfied that there is a bona fide dispute relating to the pre‑July invoices. 29.Turning next to the invoiced amount for the month of July. The Petitioner claimed the sum of $3,309,306.50, primarily on the basis of clause 2 of the General Conditions of Hire which, according to the Petitioner, would enable it continue to charge for the hire in full until the machinery and tools were returned to the Petitioner’s store again, despite its termination of service on 3 July. 30.The Company on the other hand was prepared only to admit $249,744.92 for the July month after checking the daily site records. According to the Company, because the Petitioner had only performed its service at a much reduced rate, the Petitioner was entitled to only a fraction of each day’s hire for the period between 7 and 12 July. Thereafter, no further charges accrued because even on the Petitioner’s own case, the parties had ceased to be in any contractual relationship with each other. 31.The Petitioner, on the other hand, put the blame on the Company for failing to provide a demobilization schedule. The Petitioner was thus prevented from removing its machinery from the site and the Company had therefore no basis for any deductions against the charges incurred in July. 32.In my view, the Petitioner’s claim in respect of the July invoices is clearly subject to serious legal as well as factual dispute. Even assuming (without deciding) that the terms of the General Conditions of Hire were incorporated as part of the contract between the parties, there must be a question whether the terms would continue to be applicable after 11 July when the Company had indicated to Hsin Chong (and copied to the Petitioner) that the Petitioner’s termination of service was accepted by the Company. If clause 2 of the General Conditions were held not to be applicable, the basis of the Petitioner’s claim, if any, would be wholly different. 33.Further, it is far from clear on the evidence that the Company was wholly to blame for “the detention” of the machinery and equipment. On the contrary, I cannot overlook the fact that the Company had to apply for an injunction to compel the Petitioner to remove the machinery from the site. 34.Further still, the factual basis relating to the deduction for the alleged reduced rate of service also requires investigation. 35.Clearly these are factual issues which need to be resolved before any view can be taken as to the Petitioner’s entitlement to the amounts set out in the July invoices. 36.Accordingly, I am likewise satisfied that there are bona fide disputes in respect of the claim based on the July invoices. 37.However, the aggregate amount of the deductions for the pre‑July as well as the July invoices is still insufficient to extinguish the Petitioning Debt. It is therefore necessary to consider the Company’s cross-claims for the purpose of the present application. Company’s Cross-Claims 38.I have already alluded to two main aspects of the Company’s cross-claims, that is, the loss allegedly caused by the Petitioner’s deliberate slow-operation of its plants and equipment from 7 to 12 July 2012 (provisionally assessed at $4,627,339.20); and the loss of profits by reason of Hsin Chong’s withdrawal of subcontract-works as a result of the Petitioner’s termination of its service on 3 July 2012 (provisionally assessed at $10,821,213). 39.In respect of the Company’s cross-claims, the Petitioner first argued that both such claims were premised on the Petitioner’s termination being shown to be wrongful. The Petitioner maintained that there were still outstanding invoices for the months of March and April, not to mention the overdue invoices issued in May. Accordingly it was well entitled to terminate its service on 3 July for default of payment. There was thus no basis on which the Company could rely for its cross-claims. 40.The Petitioner, however, did not seriously dispute the proposition that whether non-payment would amount to a repudiation of the contract must depend on the facts of the case. As the judgment of the Court of Appeal made clear in Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309, at §§16 & 23, the Court must examine the circumstances to see if the default in payment would show an intention not to be bound by the agreement. 41.In the present case, as remarked earlier, the question of the outstanding charges for the months of March and April was still not resolved as at 3 July. The parties were still disagreeing as to whether the earlier payment of $7.6 million was sufficient to fully discharge the certified invoices for those two months: see the exchange of letters between the parties on 26 and 28 June. The question of the May invoices was not specifically raised in the correspondence at the time. 42.In my view the circumstances were not so clear as to enable me to determine summarily at this stage that any non-payment on the Company’s part had indeed amounted to an intention to repudiate the agreement. The Company at least had an arguable case that the Petitioner was not justified in terminating its service on the basis of outstanding payments as of 3 July. 43.The Petitioner next argued that the Company’s cross‑claims were not properly substantiated. 44.The first aspect of the cross-claim had allegedly arisen because the Petitioner’s slow-operation had caused some of the other sub-sub-contractors to experience delays on site. The Company had set out in some detail the dates, the locations and the number of days where the Cranes and Rotators were lying idle as a result. The Company also claimed loss for additional hiring and depreciation of other plants and equipment; labour and maintenance costs; and additional storage expenses. 45.Two broad points were made by the Petitioner in respect of the calculation. First, the Petitioner questioned the claim for hiring of replacement plants when the July charges were already subject to deduction. Allowing such claim would be double-counting. Secondly, there was no substantiation for adding 25% to the various heads as site management and overheads. 46.In response, Mr Maurellet (counsel for the Company) accepted in principle that there would be double-counting if the claim had related to replacement plants to perform the work but he submitted that the claim was in fact based on the idling of the various machinery as a result of the Petitioner’s going slow. He also drew attention to Mr Matsumoto’s evidence (filed on behalf of the Company) where he stated that the basis of the claim was the Company’s inability to carry out its works with other equipment due to interference caused by the Petitioner’s equipment remaining on site, and hence the claim based on idling of the other equipment and labour. I accept that on face of the Company’s formulation of its claim, it is at least arguable that there is no double‑counting. 47.As to the criticism that the cross-claim was not properly substantiated, especially the addition of the 25% of management and overheads, I am prepared to take a broad view of the matter here. While there is justification to say that not all aspects of the calculation were supported by evidence, I do not believe much will be gained at this stage to delve further to see whether the Company is likely to prove all components of its claims. As Richards J had remarked in the English Court of Appeal in the case of Tallington Lakes Limited v Ancasta International Boat Sales Limited [2012] EWCA Civ 1712, at §41:
48.I think in this case it is pertinent to note that Mr Tang (the managing director of the Petitioner) did not seriously dispute that there had been idling or slow operation of the equipment after 3 July. Indeed, it was the Petitioner’s proposal after termination that the Petitioner could arrange its labour and machinery to attend the site “in a stand-by manner and to provide limited assistance to the [Company] if needed”: see §14 of Mr Tang’s 2nd affirmation. 49.In the circumstances, I am prepared to accept that this aspect of the Company’s cross-claim, though not demonstrated with evidence in every respect, is nevertheless genuine and capable of being substantiated. While I bear in mind that it is for the Company to establish that its cross-claims are genuine and of an amount at least equal to the Petitioning Debt, taking into account the nature of the cross-claim here I am satisfied that it is a genuine cross-claim arising from the Petitioner’s slow operation of the plants and equipment, and that at this stage this aspect of the claim ought not to be rejected as unsubstantiated. 50.Turning to the second aspect of the cross-claim, namely the loss to the Company because of the withdrawal of sub-contract works by Hsin Chong as a result of the Petitioner’s termination of service. The loss of profits was calculated as the value of the proportionate part of the Company’s contract that had been withdrawn. 51.There was no specific objection to the methodology of the calculation. Mr Wong however made a similar challenge that this aspect of the cross-claim was not properly substantiated, in particular, the Company’s subcontract was not exhibited and there was no evidence to support the component regarding the 15% profit margin. 52.I think the Petitioner’s attack should be considered in context. The value of the subcontract was stated in Mr Matsumoto’s affirmation to be $161,101,100. Although the subcontract itself was not exhibited, there was nothing to cause me to doubt the contract value as stated. Furthermore, Mr Tang did not respond to or comment on any specific aspect of the quantum of the Company’s cross-claim in his evidence. No issue was taken in respect of any particular aspect of the calculations: see §§53 & 54 of Mr Tang’s 2nd affirmation. The brevity of Mr Tang’s response was a notable contrast with some other parts of his evidence, for instance, regarding the outstanding invoices. 53.The Petitioner, no doubt, had considerable experience itself in the trade. If an issue was taken in connection with the extent of the proper profit margin, Mr Tang could readily have made reference to it. I do not mean to say thereby that the burden should be shifted to the Petitioner. But given the details to which Mr Matsumoto had gone to formulate the quantification of the Company’s claims, I think there certainly is some justification in Mr Maurellet’s complaint that if only Mr Tang had mentioned that there would be an issue concerning the component of the 15% profit margin, evidence could have been adduced to address the point. 54.Ultimately, whether or not one takes account of the 15% profit margin, on a broader perspective I am satisfied that the Company has established a substantial and genuine cross-claim arising from the partial withdrawal of its sub-contract by Hsin Chong. 55.Finally, there is the question about the Petitioner’s reverse cross-claim allegedly arising from the loss of the Petitioner’s Casings. I have been asked to take the reverse cross-claim into account, estimated to be $4,400,000. 56.I think it is fair to say that the evidence concerning the reverse cross‑claim is far from clear. I have been shown correspondence relating to the disputes about the responsibility for the detention or loss of the Casings. But on the state of this evidence clearly I am not in a position to form a view with any certainty that the reverse cross-claim will reduce the Company’s cross-claims or indisputably increase the Petitioning Debt. 57.In summary, I am satisfied that the Company has established that it will have substantial and genuine cross-claims against the Petitioner which will be in excess of the Petitioning Debt. I note, also, that the Company’s action against, inter alia, the Petitioner for patent infringement will proceed to trial. I have no doubt that these disputes between the Company and the Petitioner should properly be determined in the respective High Court Actions already commenced. Conclusion 58.I would grant the Company’s application and would order that the Petition for winding-up be struck out. 59.I would also make an order nisi that the Petitioner should bear the costs of this application.
Mr Jonathan Wong, instructed by Tsui & Co, for the petitioner Mr Jose Maurellet and Ms Connie Lee, instructed by Robert Lee Law Offices and by Gall, for the respondent | ||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCCW 308/2012