HAY DESIGN LTD v. HENG TAI CONTRACTING (INT’L) CO LTD

HCCT 58/2016

[2020] HKCFI 358

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 58 OF 2016

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BETWEEN

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J U D G M E N T

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Background

1.  Pursuant to my Decision of 28 February 2018, an order was made for trial of preliminary issues as to:

(1) whether there was an oral agreement concluded in the terms alleged by the Plaintiff as pleaded in paragraphs 3 to 5 of the Statement of Claim;

(2) whether the projects pleaded by the Plaintiff in paragraphs 6 and 7 of the Statement of Claim fell within the alleged oral agreement; and

(3) whether the Plaintiff has proved liability on the part of the Defendant to share profits with the Plaintiff in any of the projects pleaded in paragraphs 7, 16, 25 and 29 of the Statement of Claim.

2.  It is the claim of the Plaintiff (“HD”) that in early 2009, it made an oral agreement (“Agreement”) with the Defendant (“HT”). The Agreement was pleaded as “a profit sharing arrangement for the construction of fitting out and decoration projects jointly completed by the parties”. According to the Statement of Claim, the express terms of the Agreement were that the parties would jointly prepare a tender for a project, and if the project is awarded to the party submitting the tender (“Leading Party”), the other party shall cooperate with the Leading Party to jointly complete the project. The Leading Party would be responsible for communication with the employer and other relevant parties of the project and preparing the summary of expenses incurred by the parties in completing the project, and after deducting all expenses, the profit of the project would be equally divided between them.

3.  The Plaintiff alleges that 6 projects were subject to the Agreement and claims from the Defendant half share of the net profit of the projects led by the Defendant, which are the One Central Project (“OC”) and the Lane Crawford Project (“LC”). According to the Plaintiff, a sum of $10,867,015.90 is payable to the Plaintiff as its share of profits under the OC and LC projects, and the Plaintiff agrees to give credit to the Defendant of $1,178,158.50, as the profits under the 4 projects led by the Plaintiff.

4.  The Defendant denies the existence of the Agreement. According to the Defendant, there were only ad hoc agreements made between the parties for the sharing of profits in different form for different projects. In respect of the OC and LC projects, the Defendant claims that they were short term management agreements, whereby the Plaintiff agreed to provide part-time staff to the Defendant, and the Defendant agreed only to pay specified fees to the Plaintiff for its provision of staff.

5.  There could be no doubt that the burden is on the Plaintiff to prove the existence of the Agreement on a balance of probabilities. This is accepted by the Plaintiff. It is not for the Defendant to prove its alternative account of its relationship with the Plaintiff, as it claims. The Plaintiff does not dispute this.

Whether there was an Agreement

6.  The trial of the first preliminary issue on the existence of the oral Agreement depends on the credibility of the witnesses in their different and rival accounts of the events, determined by the Court’s assessment of the inherent probability or otherwise of the parties’ assertions, and whether these assertions are consistent with the parties’ conduct and the contemporaneous documents. The Court bears in mind the fact that the witnesses are giving evidence on events which had occurred over 10 years ago. Their recollection can be less than perfect. Contemporaneous documents created in the course of the projects are likely to be more reliable as reports of the events, unless there is evidence that such documents have been tampered with or are falsified. There is no such suggestion in this case.

7.  On behalf of the Defendant, Counsel has emphasized that the Agreement was not recorded in writing of any form, and that there was no mention made of the Agreement in any of the contemporaneous documents or communication between the parties. I accept the submissions made on behalf of the Plaintiff, that by virtue of the prior dealings between Mr Kwong of the Plaintiff (“Kwong”) and Mr Chan of the Defendant (“Chan”), the parties had trusted each other and may have been content to rely on any verbal arrangement as may have been made between them. However, I agree with Counsel for the Defendant, that what is more important in this case is that the contemporaneous documents in this case in fact contradict the Plaintiff’s assertions as to the existence and terms of the Agreement as relied upon by the Plaintiff. This will be elaborated upon below.

8.  What is more important is that for the Court to find a valid, binding and enforceable Agreement, the Plaintiff must prove that the parties had concluded an effective agreement on the fundamental and essential terms. The Defendant contends that there is no such agreement as the terms alleged by the Plaintiff are lacking in essential matters such as the duration of the Agreement, the share of capital required from each party, and the cost of management and administrative work of the projects to be borne by each party. The Agreement claimed to have been concluded between Kwong and Chan was lacking in essential terms and was void for uncertainty. According to the Defendant, what was agreed allegedly between Kwong and Chan in 2009 only constituted a conditional agreement, which was subject to further negotiation and agreement on the essential terms by the parties in the future as and when a particular project should emerge.

9.  As pleaded in paragraph 4 of the Statement of Claim, the Agreement contains the following express terms:

(1) When the parties jointly prepare a tender for a project, the parties intend the project, if so awarded, to be subject to the Agreement.

(2) Once the project is successfully awarded to the party submitting the tender as the Leading Party, the other party shall cooperate with the Leading Party to jointly complete the project.

(3) The Leading Party shall be responsible for the communication with the employer and other relevant parties of the project and prepare the summary of expenses incurred by the parties in completing the project.

(4) After deducting all expenses, the profit of the project shall be equally divided between the parties.

10.  In his witness statement, Kwong did not add to the terms of the alleged Agreement. He only claimed that when he spoke to Chan in about April 2009, the Agreement proposed by him and agreed to by Chan was that the party which had approached the outsider for the project would take lead, the Plaintiff and the Defendant would jointly tender, and jointly complete the project when the tender was accepted. Kwong accepted that they had not discussed how the capital contribution would be shared, as they expected that the expenses of the project such as labor costs, cost of materials and cost of site management could be paid from the project income.

11.  In cross-examination, Kwong accepted that what was contemplated in 2009 was that when a project materialized, the parties would discuss and agree the logistics, and on how to complete the work. He also accepted that amongst the terms to be discussed and agreed would be the capital injection to be made by each party, and the work to be contributed by each. He claimed that this would follow the pattern adopted by the Plaintiff and the Defendant in their past dealings, when they had worked on different projects before the Agreement.

12.  Significantly, Kwong himself claimed that what had first been proposed to Chan, in early April 2009, by Kwong’s colleague (Ken Ng) on Kwong’s instructions, was a framework agreement, or letter of intent, only. However, according to Kwong’s witness statement, the terms proposed by Ken and allegedly accepted by Chan under the framework agreement were exactly the same as those Kwong claimed to have been agreed between himself and Chan later in April 2009: namely, joint preparation of tender, joint completion after a successful tender, and equal sharing of profits and losses. Nothing further had been agreed between Kwong and Chan in April, to render the Agreement alleged any more detailed or concrete than the framework agreement reached between Chan and Ken.

13.  On Kwong’s own evidence, therefore, what was agreed between Kwong and Chan was only a framework agreement, subject to further negotiation and agreement on terms such as capital contribution, or an agreement to agree to “cooperate” in the completion of the project, without actual agreement on the exact detailed terms of cooperation. The terms on how the parties would cooperate, the parties’ work and capital contribution, and when capital was to be injected were all lacking but essential as was demonstrated when dispute later arose in relation to the work to be contributed by the Plaintiff in the LC project, and in relation to when funds had to be paid for the ISL project (included in paragraph 6 of the Statement of Claim).

14.  Even if, as Counsel for the Plaintiff argued, the Agreement was enforceable as an agreement to agree on the precise terms as to pricing or cost of the parties’ work, and their respective contribution to the projects jointly tendered, such Agreement is only consistent with the parties intending to enter into ad hoc agreements for individual projects as they arise, and which they agree to jointly tender for. Bearing in mind the nature of the projects intended to be undertaken, and the different scale of the projects that may be involved, it is not probable that the parties as commercial businessmen would have agreed to be bound on indefinite terms as to payment of capital and sharing of profits, when the nature of their work contribution and capital outlay are uncertain. When the parties do agree to jointly tender for a project, that would be the time when they would be expected to discuss and then agree on the work each party would undertake, and the capital and expenses to commit to, from which they can decide whether the share of profit and loss would be commercially worthwhile. In short, the evidence leads to the conclusion that there was no concluded and final agreement reached between the parties in April 2009, as contended by the Plaintiff.

15.  The contemporaneous documents produced in evidence support the conclusion reached as to the absence of the Agreement alleged by the Plaintiff. On the LC project, the share profit summaries and the financial statements issued in 2013, 2015 and 2016 all refer to management fees as the Plaintiff’s contribution to or share in the project, and none of the documents support the Plaintiff’s claim for half share of the profits from LC. The Plaintiff’s invoices likewise referred to “management fees” for the LC project. The profit summary prepared by the Plaintiff in April 2013 referred not to its share of 50% of the profit from the LC project, but to 11% share of profits based on the parties’ respective expenses incurred. Kwong has not given any satisfactory or credible explanation for such contradiction to the Plaintiff’s claim, and I consider the excuses he made to be incredible and unsupported by the documents. According to Chan, the reference to the 11% related to discussions which had taken place between the parties, as to the possible payment to the Plaintiff of a bonus, on top of payment for the management staff provided by the Plaintiff for LC (as was the Defendant’s case).

16.  Likewise, for the OC project, the invoices issued by the Plaintiff and the share profit summaries, dated 2013, 2015 and 2016, all referred to management fees for the Plaintiff’s provision of staff and management services. None of these documents made any reference to the Plaintiff’s half share of the profits.

17.  The above adequately disposes of the first preliminary issue, which makes decision on the second and third preliminary issues unnecessary. Even if there was an enforceable and concluded Agreement made between the parties in April 2009, it is clear from the evidence that the OC project does not fall within the ambit of the Agreement as alleged by the Plaintiff. On the Plaintiff’s case, the Agreement applies to projects in which the parties jointly made the tender (paragraph 4(a) of the Statement of Claim). On Kwong’s evidence, the tender for the OC project was made solely by the Defendant. It was only after the project was awarded to the Defendant that the parties started to negotiate the terms of cooperation. The OC project does not comply with the condition for the application of the Agreement as contended by the Plaintiff. As for the LC project, the net profit summaries prepared by the Plaintiff show that whatever was the initial arrangement, the parties had altered their arrangement for the Plaintiff only to provide management services and to charge therefor.

Observations on the evidence

18.  In the consideration of the evidence, I accept the submissions made on behalf of the Defendant in the following respects. First, the hearing in September 2019 was for trial of the preliminary issues as to the existence and scope of the Agreement. Chan was cross-examined on the figures in the accounts prepared for the projects. To the extent that he was not able to explain the figures in detail, I accept his explanation that he was and had been prepared and happy to defer to the evidence of his accountants, if the matter should proceed to a full trial on quantum and damages.

19.  Second, despite the submissions made on behalf of the Plaintiff, that the Defendant’s own employees (Ting the contract manager and Frankie the senior project manager) had affirmed the existence of the profit sharing agreement between the Plaintiff and the Defendant on the LC project, the evidence of Ting and Frankie were not, in fact, to such effect. Ting only stated that he had been told by Chan that the Defendant and the Plaintiff “would work together as joint venture and jointly complete the renovation project” for LC, and that he did not know the details. As for Frankie, his evidence simply was that Chan had told him that the Plaintiff and the Defendant were “business partners” for the LC project. These assertions of the Plaintiff and Defendant working in joint venture and being business partners scarcely support the Plaintiff’s claim, of the Agreement to share the profits on the terms Kwong alleged.

20.  Finally, I agree with Counsel for the Defendant on the entirely unsatisfactory nature of the evidence of Kwong and Ken as to the existence and making of the Agreement in early 2009.  The only evidence from the Plaintiff, on the negotiation and conclusion of the verbal Agreement with Chan, is that of Kwong and Ken. In his witness statement, Kwong claimed that he had asked Ken to inquire with Chan as to whether Chan was interested in making joint tenders, joint completion of the project and sharing of loss and profits, and Ken later informed him that he had spoken to Chan, and that Chan had indicated interest. Kwong then referred to his own discussion with Chan, when he repeated the offer and terms mentioned by Ken. The evidence from Kwong, on Ken’s discussion and agreement with Chan, is accordingly hearsay.

21.  On Ken’s part, however, he did not give any direct evidence as to his discussion and alleged agreement with Chan in early 2009. He only referred to Kwong’s witness statement, and confirmed the truth of its contents, without any elaboration on or independent account of his meeting with Chan. I have placed no weight on Ken’s evidence at all (Ho Sing Yin v Chan Yiu Ling HCA 90/2010, unreported, 13 July 2012).

Conclusion

22.  For the reasons set out in the foregoing paragraphs, I find that there was no Agreement concluded in the terms alleged by the Plaintiff, and as pleaded in paragraphs 3 to 5 of the Statement of Claim. I also find that neither the LC nor the OC projects fell within the Agreement, as alleged.

23.  The Defendant has confirmed that it will not pursue its counterclaim if the Court should find against the Plaintiff on the existence of the Agreement. Accordingly, the findings made in this Judgment should dispose of the entire action including the counterclaim.

24.  The costs order nisi that I make is that the Plaintiff should pay to the Defendant the costs of the entire action including the counterclaim, with certificate for Counsel.

Mr Yeung Ming Tai and Mr Pakco Chan, instructed by Fung Wong Ng & Lam LLP Solicitors, for the plaintiff

Mr Erik Shum and Ms Christy Wong, instructed by Lo & Lo, for the defendant

HCCT 58/2016

[2018] HKCFI 428

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 58 OF 2016

______________

______________

_________________

D E C I S I O N

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Background

1.  In this action, the plaintiff (“HD”) claims that it made an oral agreement with the defendant (“HT”), whereby the parties agreed, in early 2009, on a “profit sharing arrangement” for various fitting out and decoration projects which were jointly completed by them (“Agreement”). According to the Statement of Claim filed in these proceedings (“SOC”), the express terms of the Agreement were that the parties would jointly prepare a tender for a project, and if the project is awarded to the party submitting the tender (“Leading Party”), the other party shall cooperate with the Leading Party to jointly complete the project.  The Leading Party would be responsible for communication with the employer and other relevant parties of the project, and preparing the summary of expenses incurred by the parties in completing the project, and after deducting all expenses, the profit of the project would be equally divided between them.

2.  According to HD, it was the Leading Party in respect of 4 fitting out projects (“HD Projects”), namely, the ISL Project, the King’s Road Project, the Café Too Project and the Marina Club Project, whereas HT was the Leading Party in respect of 2 projects (“HT Projects”), known as the One Central Project and the Lane Crawford Project.  HD claims that for the One Central Project, it had incurred expenses in the total sum of $1,181,589.50, but that in breach of the Agreement, HT only reimbursed a sum of $579,089.50 to HD.  HD further claims that a sum of $835,246.88 is due to it from HT, as 50% of its share of the profits of the One Central Project (which it claims to be $1,670,493.76).

3.  In respect of the Lane Crawford Project, HD claims that it had incurred expenses in the sum of $1,259,788.80, and is further entitled to a sum of $8,169,480.22, being 50% of the profit of $16,338,960.43 of the Lane Crawford Project.

4.  HD accordingly claims from HT the total sum of $10,867,015.90 as its share of the profits under the 2 HT Projects.  It agrees to give credit to HT of $1,178,158.50, being the profits under the 4 HD Projects.

5.  By way of defence, HT denies that there was any Agreement made between the parties in early 2009 for profit sharing, as HD alleges.  HT claims that there were agreements made at different times in August 2009, May 2010 and mid-2011, whereby HT agreed to provide “funding, staff, construction materials and services” to HD for the ISL Project, Café Too Project, the King’s Road Project and the Marina Club Project.  HT accepts that HD had offered to share with HT half of the net profit of these projects.

6.  However, HT claims that in respect of the One Central Project and the Lane Crawford Project, HD had agreed at HT’s request in August 2010 to provide one or 2 members of staff to HT on a short-term and part-time basis, for an agreed monthly fee.  HT alleges that although there had been discussion in mid-2011, when HD asked to participate in the Lane Crawford Project, HD was short of funds and could not afford any capital injection, and accordingly no agreement was reached for HD to participate in the completion of the Lane Crawford Project at all.

7.  HT counterclaims in the proceedings for its cost of providing staff, services and for incurring expenses for the Marina Club Project and for another Cable TV Project, in the total sum of $1,601,489, together with its share of the profits, and the expenses incurred under the ISL Project, Café Too Project and the King’s Road Project, in the total sum of $1,695,897.

8.  Directions for discovery and exchange of witness statements were given at the 1^st Case Management Conference on 16 October 2017.  On 5 December 2017, HT formally applied for there to be a separate trial of liability, as to whether there was in fact an oral agreement concluded in the terms alleged by HD in the SOC, and whether the total of 6 projects comprising the 4 HD Projects and the 2 HT Projects fell within the scope of the Agreement, before any further trial on the sums claimed to be payable by HT to HD under the Agreement.

9.  The application for separate trials is opposed by HD, on the basis that there are no exceptional circumstances to justify the separate trials on liability and quantum, and that it is not just and convenient for there to be a departure from the general rule for all issues in the case to be tried at the same time.

10.  The Court has the discretion under Order 33 rule 3 RHC to order any question or issue arising in a cause or matter to be tried before, at or after the trial and to give directions as to the manner in which the question or issue should be stated.  The parties do not dispute that the general rule is that all issues are to be tried at the same time unless it is just and convenient to do otherwise, and that “just” means fair to both sides, without one side or the other gaining an undue advantage by a separation, whereas “convenient” means convenient to both parties and advantageous from the point of view of costs.

11.  At the end of the day, it is a question of case management, and the Court is to consider whether an order to separate the trial on liability and quantum would be conducive to achieving the underlying objectives of the CJR, of increasing the cost-effectiveness of any practice and procedure to be followed, ensuring that a case is dealt with as expeditiously as is reasonably practicable, to promote a sense of reasonable proportion and procedural economy, and of course ensuring fairness between the parties.  It is the duty of the Court to further the underlying objectives of the rules by actively managing cases, and this includes identifying the issues at an early stage, deciding promptly which issues need for investigation and trial, and deciding the order in which the issues are to be resolved.

Whether there should be split trials

12.  Having carefully considered the pleadings, the issues raised in the pleadings, and the submissions made by counsel for both parties, I have come to the conclusion that it will be just and convenient to order the liability of the parties under the Agreement to be determined first, and that such an order will better serve the underlying objectives of the rules, of cost-effectiveness and proportionality, for this action.

13.  It is pertinent that at the hearing of the Case Management Conference, HD indicated that expert evidence will be required on the quantification of the expenses and the profits of the projects in question which are said to comprise the subject matter of the claim and the counterclaim in the proceedings.  HT has not formally indicated its stance on expert evidence, since it maintains that the issue of the parties’ liability under the Agreement should be determined first. 

14.  On the face of the pleadings as they currently stand, it is inevitable that expert evidence on quantum would be required in the absence of agreement on the figures identified in the pleadings for expenses incurred, deductions made and profits allegedly accrued in respect of each of the Projects.  Whether the expert evidence to be adduced will be in the form of a single joint expert’s report, as the Court prefers, or separate reports of experts to be appointed by each party, the expert evidence will have to address the parties’ breakdown and treatment of their expenses and the costs of each of the Projects, before the profits and the parties’ alleged share can be ascertained.

15.  Directions on expert evidence will inevitably require production of documents relating to each party’s costs and expenses paid for each of the Projects and to payments received by each party, the compilation of expert reports, meetings of experts if separate experts are to be appointed, identification of issues in dispute between the experts, and preparation of final reports of the experts justifying any difference in their views.  If separate experts are to be appointed, there will be examination and cross-examination of experts at trial, and submissions on the expert evidence, and which aspects should be preferred by the Court on the issues in dispute so far as quantum is concerned.  This will be a time-consuming and costly process, for each party.

16.  However, on the pleadings and according to the factual evidence, the key witnesses of HD and HT who had allegedly agreed on the terms of the Agreement relating to the Projects have put forward opposing versions of the Agreement, and whether it was in fact made, in 2009.  According to the Defence, HT claims that there was no agreement at all to share the profits of the One Central Project and the Lane Crawford Project at all, since HT only agreed to pay for monthly fees for HD’s provision of the services of Ken Ng and Albert Au.  In respect of the HD Projects, HT claims that the express terms of the Agreement as pleaded in the SOC and as relied upon by HD are too uncertain and vague to be enforceable.  If any agreement existed for the sharing of profits under the HD Projects, HT claims that there were separate agreements, made at different dates.

17.  It remains to be determined at trial, after examination and cross-examination of the main protagonists (ie Mr Kwong of HD and Mr Chan of HT), whether the Agreement was made in early 2009 as HD alleges, the exact terms discussed and agreed between Kwong and Chan, and whether these terms extended to all the HD Projects and the HT Projects, as to how profits were to be calculated and shared between the parties.  The trial judge may, after hearing and considering all the evidence, accept all or only a part of the evidence of Kwong on the terms of the Agreement.

18.  Without a determination on the exact terms and effect of the Agreement, and the Projects to which the Agreement relates for the sharing of profits, it will be a futile exercise for any expert to be instructed at this stage, before trial, to give expert evidence on what expenses should be considered, whether and how such expenses should be deducted, which Projects are relevant to the Agreement, and how any profits are to be ascertained for sharing.  The experts can only be instructed to give their opinion on the calculation of expenses and profits on the assumption that the terms are as alleged by HD.  The time to be spent by the legal advisors in appointing and instructing the experts, and by the experts in considering the papers and compiling their reports, and the expenses associated therewith, may all be wasted if the trial judge should ultimately find, either that there is no Agreement as alleged by HD, or that the terms of the Agreement materially differ from those asserted by HD, and/or differ from those terms as asserted by HT - after the evidence of Kwong and Chan have been tested against the entirety of the evidence at trial.

19.  It will be more costs effective if the engagement of experts and the preparation of evidence on quantum is postponed until after a trial on the existence and effect of the Agreement.  That, according to HT, should take about 3 days (instead of 10 days for both liability and quantum).  If the Court finds that there is no binding Agreement, that should be the end of the matter. If the Court finds that there was an Agreement on the terms alleged by HD, or on such other terms as alleged by HT or as found by the Court, the parties may then proceed with the engagement and preparation of expert evidence on the calculation of expenses and profits, on the basis of the terms and effect of the Agreement as found, and not on any other irrelevant terms.  If necessary, a separate trial on quantum can thereafter proceed.

20.  The saving of the costs of the preparation of expert evidence on quantum (which may well prove to be inappropriate, and largely if not entirely wasted, in the light of the Court’s findings on the Agreement and its precise terms) until after the conclusion of the trial or liability should be fair and advantageous to both sides.

21.  For these reasons, I will make an order that the issues identified in paragraph 1 of the Summons issued by HT on 5 December 2017 be tried before the trial on the quantum of any amount payable to the Plaintiff under its claim in the action, save that paragraph 1 (2) be amended to refer to “paragraphs 6 and 7” of the SOC.

22.  It should be recorded that HT, through its Counsel, undertook to the Court that HT would withdraw all its counterclaims if the 1^st trial on liability under the Agreement should conclude in favor of HT, with HD’s claims against HT dismissed by the Court.

23.  There is no necessity to make further directions on the exchange of factual witness statements, which should have taken place already and should have dealt with both liability and quantum, to the extent that it has to be dealt with by the factual witnesses of HD and HT.  Discovery should extend to all questions in issue on the question of liability, including the making and the terms of the Agreement relating to all the HD and HT Projects.

24.  The fair order for costs would be that such costs should be in the cause, and I make an order nisi to such effect.