PHILIPS HONG KONG LTD. v. ATTORNEY GENERAL

1989, MP No. 3288

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. The Plaintiffs are seeking three Declarations by this originating summons. There are very few disputes on the facts. It is the application of the relevant law which is at issue between the parties.

2. By a contract dated 24th November 1986 made between the Plaintiff and the Defendant, the Plaintiffs contracted to install a sophisticated supervisory system in and around the tunnel which is part of the new road between Sha Tin and Tsuen Wan in the New Territories.

3. This system is operated by a computer or computers and amongst other things, the Plaintiffs are required to supply the computer hard ware and soft ware facilities and a closed circuit television system. The cost of installing all the necessary equipment and providing appropriate services is slightly in excess of $53m.

4. However, as can be appreciated, this contract is only one of a number of contracts. I was told that the total value of all the contracts was of the order of $650m.

5. This is a material matter to be borne in mind. I am satisfied that Mr. O'Sullivan for the Defendant was correct in his submission that it is a valid exercise to have regard to the operation of all of contracts if a realistic assessment is to be obtained of the totality of the position.

6. The dispute which has arisen between the parties is in connection with the operation of Clause 29 of the contract which relates to the penalty clause for delay. This clause reads:-

        "29. LIQUIDATED DAMAGES FOR DELAY

29.1    If the Contractor shall fail to complete the Works or any Section thereof or shall fail to achieve a Specified Degree of Completion within the time prescribed by Clause 27 or extended time, or shall fail to complete or shall unduly delay the Tests on Completion then the Contractor shall pay to the Employer the sum or sums stated in the Appendix to the Form of Tender as liquidated damages for such default and not as a penalty for every day or part of a day which shall elapse between the time prescribed by clause 27 or extended time, as the case may be, and the date of completion of the Works or the relevant Section thereof or the relevant Specified Degree of Completion.

29.2    The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due or which may become due to the Contractor whether under this or any other Contract with the Employer.

29.3    The payment or deduction of such damages shall not relieve the Contractor from his obligation to complete the Works or from any other of his obligations and liabilities under the Contract.

29.4    If before completion of the Works, any Section of the Works is required by the Employer and capable of occupation or use by the Employer and has been confirmed by the Engineer as completed pursuant to Clause 31 (Taking Over), the liquidated damages (if any) prescribed for delay to the whole of the Works shall for any period of delay after such certification be reduced in the proportion which the value of the Section so certified bears to the whole of the Works:

Provided that -

Notwithstanding any provisions of this Clause or of the Contract providing for the reduction in liquidated damages for the early completion of any Section of the Works the resulting amount of liquidated damages shall not be less than the minimum amount of liquidated damages as stated is the Form of Tender."

 

7. Clause 29 has to be read in conjunction with the part of the Appendix to the contract which attempts to set out specific sums which are stated to be payable in the event of delays in relation to different contractual commitments. This reads as follows:-

        "Conditions of Contract :

Clause No.

8. The Declarations which are being sought by the Plaintiffs are:-

9. The first question I propose addressing is whether the contra proferentem rule has any application to this contract.

10. Mr. Scott for the Plaintiffs submitted that it did. In support of this contention he referred me to the conditions which were applicable when the Plaintiffs tendered for this contract. It was clear from these conditions that there was no scope whatever for any Tenderer to depart from the terms of the contracts which had been drafted by the Defendants.

11. Mr. O'Sullivan argued that it was only when it had been established that there was some ambiguity that the principal had any application. I am satisfied that there are numerous provisions in the Clause 29 which at least potentially could be described as ambiguous. I consider that this principal is applicable to the present situation.

12. Clause 29 is a highly sophisticated clause which attempts to cater for a number of different situations. It is, however, imperative to bear in mind that the Plaintiff is only one of a number of contractors and I can see no objection to interlinking the penalty clauses of the different contracts and introducing the concept of "key" dates.

13. The fact that it may be necessary to establish damages which are suffered as a result of a "knock on" effect does not seem to me to be fatal in attempting to sensibly assess what damages may arise if "key" dates are not adhered to.

14. It is evident that a considerable amount of time and energy has been expended by the Defendants in attempting to quantify losses which would be occasioned if "key" dates are not met and I am by no means satisfied that this approach to the drafting of Clause 29 necessarily leads to a conclusion that damages payable under the clause constitute a penalty.

15. It is, however, necessary to look at the drafting in some detail to determine whether the clause as drafted is either void for uncertainty or amounts to penalty.

16. The first objection made by Mr. Scott is that a minimum figure is provided for liquidated damages. He referred to a passage on page 267 from the judgment of Sears, J. in Arnhold v. A.G. 1989 Construction Law Journal 263, where he was referring to a clause drafted in virtually identical terms to Clause 29.

"Mr. Scott takes a further point that the operation of special condition of contract ('SCC') - clause 2 - is that of a penalty, in that it provides a minimum figure of $400 a day. In clause 63(4), a decreasing figure from $2,700 per day (assuming that is the figure so prescribed) is stipulated, dependant on the amount of work certified for occupation. This figure, therefore, should ultimately decrease to zero, but because of the operation of SCC-2 the minimum figure is $400. If, therefore, more that 85 per cent of the work is caplable of occupation or used by the Government, the contractor is liable to pay a figure higher than what could possibly be a genuine pre-estimate of the anticipated loss.

I must examine the 'terms and inherent circumstances of each particular contract' as at the making of the contract. Even were I doubtful that the sum specified in the appendix was a penalty, the operation of SCC-2 convinces me that looking at all the terms, the sum stipulated is a penalty."

17. With the greatest respect I would concur in the reasoning of Sears, J. and I also hold that the provision of a minimum figure where it is obvious that an attempt is being made to scale down liquidated damages which may be payable does constitute a penalty.

18. The second point made by Mr. Scott in his skeleton argument is his criticism of the way reductions are made in certain circumstances under Clause 29 by reference to the pro rata value of sections of work which have been taken over. I consider that the criticisms made in this connection have even greater force that those directed at the minimum amount payable. I think that it is fairly obvious that the Draftsman of the clause has made an error.

19. Calculations can be prepared of examples which could occur under the operation of the clause where it becomes apparent that a situation can arise where the more work which is performed by the contractor the greater the penalty it will incur.

20. Mr. Scott produces two calculations of liquidated damages which would be payable in respect of the failure of the Plaintiff to complete work on the consoles which are part of the contractual work.

21. This work is one of the specific types of work for which separate provision is made under Clause 29 for liquidated damages to be treated individually in certain circumstances. It is the item under 9/10 in Clause 29 referred to in the Appendix.

22. Mr. Scott worked out that consequences which would arise if 10% of value of the whole of the works was completed. He then went on to give figures under a similar situation if 20% of the said work was completed.

23. His calculations were as follows:-

24. Mr. O'Sullivan's answer to this was that in reality such a situation could not arise. This was because it was impossible to envisage a situation where there would be abatement of damages in the manner contemplated by Mr. Scott's examples.

25. I do not think that this is an acceptable answer to this dilemma. We have no evidence of such impossibility and over and above this it is necesssary when dealing with questions of construction of clauses under a contract to accept the drafts at their face value.

26. I am satisfied that if this is done, it is possible and indeed in many cases probable that the sort of illogicality referred to by Mr. Scott will arise. I do not consider that damages assessed in accordance with such a formula can possibly amount to a genuine predetermination of any financial loss likely to arise. This of itself would be sufficient reason to find that the clause offended the principles propounded in Dunlop v. New Garage Ltd. 1915 AC 79.

27. The third objection made by Mr. Scott is that the operation of the penalty clause is by reference to sections of work rather than to physical stages. As indicated earlier in this judgment I do not consider that this is necessarily fatal. Provided that the drafting is sufficiently clear and explicit I do not think that there is any inherent objection in the concept of "key dates". It may well be possible to make genuine pre-estimates of damages referable to different sections of work.

28. The fourth complaint made by Mr. Scott relates to the unsatisfactory linking of Clause 29 to the Appendix where the different amounts are specified for the situations referred to.

29. The drafting certainly leaves much to be desired. There is nothing in the Appendix which states explicitly that any of the amounts referred to is the maximum level of liquidated damages. Reference is made to "Amount of liquidated damages on the whole of the works".

30. I do not think that this is very satisfactory. If this had been the only matter complained of I may have been disposed to find that there was sufficient clarity. However, when it is taken in conjunction with the other matters complained of I consider that this objection must also succeed.

31. The result of all this is that the Plaintiff succeeds on the three out of the four grounds of complaint which are made. In these circumstances, I am prepared to make the Declarations which are sought. In doing so, I am mindful of the fact that it will be possible to work out the actual damages which have been suffered as a result of delays and very little prejudice will be occasioned to the Defendants.

32. I will hear the parties on costs.