Court upholds 15% administrative fee in construction contract for non-payment of wages

In the recent case of Yau Lee Construction Company Ltd v China Steel Engineering Co Ltd & Anor, HCCT 49/2010, Hong Kong’s High Court (Court of First Instance) had to decide whether the Plaintiff was entitled to charge an administrative fee of 15% of a wages payment pursuant to the contract between it and the Defendant. Such administrative fees are a common feature of construction contracts.

The dispute between the parties related to final works under a “labour only” sub-contract (Contract). The Plaintiff was the Main Contractor and had sub-contracted certain steel works to the Defendant. The Plaintiff claimed that after deduction for excessive wastage and administrative costs, which it was entitled to deduct under the Contract, it had overpaid the Defendant almost HK$12 million, which it now sought to recover. The Defendant counterclaimed for the sum due to it under the Contract for executed works plus damages due to the Plaintiff’s delay in handover of the site to it, resulting in additional costs, overheads and loss of profit (prolongation claim).

One of the items claimed by the Plaintiff was an administrative fee of 15% of the wages payment, pursuant Clause 7(b) of the Contract, which provided that if the Defendant was unable to pay wages to its directly or indirectly employed workers and such wages had to be paid on its behalf by the Plaintiff, then the wages plus 15% as an administrative fee would be deducted from the Contract sum upon completion of the works and any balance would have to be paid by the Defendant. In the event that the Defendant could not reimburse the wages paid, the Plaintiff had the right to seek recovery of the payment made and all damages incurred.

The Plaintiff claimed HK$1,147,012.25 as administrative costs of 15% of the wages payment. The Defendant disputed this on the basis that the wages payment had already been deducted as interim payments under the Contract and that the administrative fee was a penalty.

On the evidence, it could not be disputed that the Defendant had failed to pay the wages in question and that the Plaintiff had paid the same to the Defendant by monthly payments and the Defendant had then been able to issue cheques to its workers. Clause 7(b) did not require the Plaintiff to make direct payment of wages to the workers and it was sufficient to show that the wages payment had been made by the Plaintiff for and on behalf of the Defendant.

The Court held that the Plaintiff was entitled to HK$1,147,012.25 as administrative costs of 15% of the wages payment. It said:-

• The Plaintiff made the wages payment under Clause 7(b) of the Contract and such payments could not in law be interim payments under Clause 18 of the Contract which provided for interim and provisional payment based on “the quantity of work actually carried out” at the time when the interim payment is made.

• As to whether the 15% administrative fee was penal so as to be unenforceable, the Court held that in the circumstances of this case it could not be said that the 15% specified in Clause 7(b) was not a genuine pre-estimate (at the time the Contract was made) of the loss or damage which the Plaintiff may have incurred in the event of the Defendant’s breach of its contractual obligation to make timely payment of wages to its own workers.

• At the time the Contact was made, the parties had equal bargaining power in a commercial transaction and the 15% administrative charge was not out of all proportion to the Plaintiff’s likely loss or damage so as to be unconscionable and struck down.

The Defendant’s expert had argued that the Plaintiff’s reasonable administrative costs would only be for the time taken to check wage records against payment and on that time basis the Plaintiff’s reasonable administrative costs would be HK$162,486, which was way below the amount claimed. However, on the Defendant’s expert’s own evidence, administration costs normally charged in the construction industry for work carried out by a main contractor for the employer can amount to 15%, represented by 5% for profit, 5% for office overheads and 5% for site expenses. The HK$162,486 estimated by the Defendant’s expert for the Plaintiff’s reasonable administrative costs only included the limited time he considered was required for checking the work records. However, in the circumstances of this dispute, the method of payment adopted, the number of workers involved and the amount of the wages payments, the time estimate given by the Defendant’s expert appeared to be inadequate. At most is would only cover office time spent and did not take into consideration the work which would inevitably be involved on site or office overhead expenses. 

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