EVERGREEN (FIC) LTD v. GOLDEN CUP INDUSTRIES LTD t/a SUPER STAR GROUP

HCCT 14/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 14 OF 2015

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J U D G M E N T

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INTRODUCTION

1.  This is a construction dispute concerning renovation works carried out by the plaintiff at the defendant’s restaurant at Shop 621-630, Tsuen Wan Plaza.  The defendant operates a series of well-established restaurants under the name of Super Star Group.  The defendant engaged the plaintiff to carry out fitting out works as part of its renovation in its new branch restaurant in Tsuen Wan.

2.  The plaintiff’s claim is for HK$1,686,846.64 being the outstanding amount for work done on site.  The amount includes both contract work and variation works ordered by the defendant.

3.  On the pleadings, the defendant says the plaintiff is not entitled to charge the amount claimed due to substantial defects, incomplete works and delay by the plaintiff.  Further, the defendant counterclaims for HK$1,331,460 being damages suffered by reason of the defendant having to carry out remedial work and for damages for delay as per the parties’ agreement.

4.  The plaintiff does not dispute that the works were delayed.  It does, however, assert that the material delay (from 2 February 2015 to 12 February 2015) was not caused by the plaintiff.  Rather, the delay was caused by the other contractors engaged by the defendant for the renovation of the restaurant.

5.  Regarding the remedial work, it is the plaintiff’s case that the plaintiff had suffered delay in its works as a result of the default of other contractors engaged by the defendant.  Thus, the plaintiff was entitled to claim against the defendant for compensation arising from the delay.  In these circumstances, on 12 February 2015, it was orally agreed between Henry Yip of the plaintiff and Jefrey Lai of the defendant that the defendant would arrange and carry out the remedial work at the defendant’s own cost, and the plaintiff in turn would not claim any compensation for the delay.  The plaintiff further asserts that the said oral agreement was put in writing by Henry Yip in an email addressed to Jefrey Lai and copied to Jacqueline Ho of the defendant on 13 February 2015.

CONTRACTUAL POSITION BETWEEN THE PLAINTIFF AND THE DEFENDANT

6.  The fitting out contract is evidenced, inter alia, by a document in Chinese entitled “Undertaking as to Fitting Out Works of Super Star Restaurant Tsuen Wan Plaza Branch” signed by the plaintiff dated 19 December 2014 (the “Undertaking”).

7.  The agreed translation of the Undertaking provides, inter alia, as follows: –

“[The plaintiff] agrees to undertake the shop interior fitting-out works at the Tsuen Wan Plaza branch restaurant under [the defendant’s] group. [The plaintiff] undertakes to complete the works and vacate the site by the stipulated time of 2 February 2015. In case of delay, [the plaintiff] has to compensate 1% of the contract sum as daily delay penalty. If the delay extends beyond the designated opening day of the Shop, [the plaintiff] may be asked to compensate all losses which flow from the non-opening of the Shop as a result of the delay in works. If [the plaintiff] still cannot complete the works properly notwithstanding the delay, [the defendant] is entitled to engage another contractor to handle, and [the plaintiff] shall be responsible for all losses.”

8.  The total contract sum under the Undertaking was HK$5,032,600.00.

9.  It should be noted that the Undertaking is different from the more usual form of construction contract where there is a main contractor who would bear the responsibility of all the coordination and interfacing works amongst all its sub-contractors and nominated sub-contractors.

10.  Under the Undertaking, the plaintiff was indeed no different from the other contractors directly engaged by the defendant.  For the renovation works in question, there were MVAC (meaning mechanical ventilation and air-conditioning), Fire Services, Audio & Visual, and Roller Shutters contractors directly engaged by the defendant.  Under the Undertaking, the plaintiff did not have the duty to supervise or coordinate with these other contractors, as the plaintiff was working in the same capacity as these other contractors engaged by the defendant.

ISSUES AT TRIAL

11.  On the first day of trial, the defendant through its counsel conceded that the plaintiff is entitled to be paid the total sum of HK$1,686,846.64 (the “Claimed Sum”) under the two invoices, the subject matter of the plaintiff’s claim in this action.

12.  Given the defendant’s acceptance of the liability to pay the Claimed Sum, the real issue of the trial became whether the defendant can succeed on its counterclaim to set-off the Claimed Sum.

13.  The defendant’s counterclaim is premised on two arguments: –

(1) By reason of the plaintiff’s delay in completing the fitting out works by 2 February 2015, the plaintiff was in breach of its Undertaking to the defendant to complete the fitting out works on time.  By reason of the plaintiff’s breach of the Undertaking, the defendant is entitled to enforce the liquidated damages clause in the amount of HK$503,260.00 (based on 1% of the contract sum per day); and

(2) At the time when the plaintiff vacated the site on 12 February 2015, various fitting out works were either defective or incomplete, with the result that the defendant incurred extra cost to rectify the said defects and uncompleted works.

14.  As to the defendant’s counterclaim referred to in paragraph 13(2) above, in the defendant’s closing submissions, the defendant further accepts that of all the items pleaded under paragraph 13 of the Defence and Counterclaim, not all the items are directly relatable to the plaintiff’s defects.  As a result, the defendant abandoned its claim based on remedial work, save in relation to 4 items set out in paragraph 29 of the defendant’s written closing submissions, for the total sum of HK$171,800.00.

15.  In order to rule on the defendant’s counterclaim, the following issues will have to be decided by the court: –

(1) Whether the plaintiff is responsible for the ten-day delay from 2 February 2015 to 12 February 2015;

(2) Whether the liquidated damages clause in the Undertaking is a penalty; and

(3) Whether there was an agreement made between the plaintiff and the defendant on 12February 2015 (as set out in paragraph 5 above).

WHETHER PLAINTIFF RESPONSIBLE FOR THE DELAY

16.  It is the plaintiff’s case that the material delay was caused by the delay of the other contractors engaged by the defendant.  In this regard, I agree that there is ample evidence, in the form of contemporaneous WhatsApp communications as well as email exchanges, supporting this conclusion. A summary of the relevant emails and WhatsApp communications relied upon by the plaintiff is set out in Annex B to the plaintiff’s written closing submissions.

17.  I agree that the contemporaneous documents provide the best guide as to what actually happened.  This is particularly so in building and construction cases, as Kaplan J observed in EU Asia Engineering Ltd v Wing Hong Contractors Ltd, HCCT 16/1990 (Judgment dated 23/12/1991), at page 9: –

“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents. These are usually prepared in good faith before a dispute has arisen or at any rate crystallised. It is a particularly devious contractor, employer or sub-contractor who systematically manufactures documents to assist in a future dispute. Fortunately, such instances are rare. I accept that once a dispute has been identified it is necessary to pay careful attention to the documents created after that time because it is only natural that parties will reflect their grievances and justification for actions taken in those documents. …”

18.  From the contemporaneous communications, it seems that all Jefrey Lai did was to transmit the complaints of the plaintiff to the other contractors via the WhatsApp Group but it did not seem to work effectively. 

19.  During the cross-examination of the plaintiff’s witnesses, the plaintiff was blamed for not erecting all the ceiling grids regardless of the progress made by the other contractors.  Peter Chan of the plaintiff explained that such suggestion was simply against the normal sequence of works.  Even if the plaintiff had erected the ceiling grid first, the same would have to be demolished when the other contractors came to install their parts of the works.  I agree that this would simply cause further delay to the project.

20.  Mr Kenneth Ho of the MVAC contractor confirmed the above at trial.  He said if the ceiling grid was put in first, although the MVAC contractor may be able to find ways to avoid taking down the installed ceiling grid, there is no guarantee that this could be done as the main MVAC trunk measured 1.2 m in dimension whereas the ceiling grid was only 600 mm each apart. 

21.  In short, I agree that by going through the numerous delaying events as recorded in the emails and WhatsApp communications, the conclusion one would reach is that the material delay was indeed caused by the other contractors (including MVAC, Fire Services and Roller Shutter) directly engaged by the defendant.

22.  In considering who is responsible for the material delay, it is important to bear in mind that the role of the plaintiff under the Undertaking was no different from the other contractors directly engaged by the defendant.  In particular, the plaintiff was not the main contractor.  There is no provision in the Undertaking which impose on the plaintiff the duty of coordinating and supervising the works of the other contractors.

23.  Nonetheless, at the trial, it transpired that Jefrey Lai, Kenneth Ho and Ling Cheuk Lam of the Electrical and Lighting contractor all erroneously regarded the plaintiff as the main contractor of the renovation project, and had the responsibility of coordinating and supervising all aspects of the works.  Perhaps this explains why Jefrey Lai all along regarded the plaintiff as responsible for the material delay, despite his acceptance that the delay was caused at least in part by the other contractors. 

24.  Jefrey Lai, Kenneth Ho and Ling Cheuk Lam all said it is the trade practice that the main renovator of the project bears the responsibility as the main contractor to supervise other contractors.  However, Mr Ho and Mr Ling both admitted that they did not in fact know the arrangement between the plaintiff and the defendant under the Undertaking.  Jefrey Lai also relied on the so-called trade practice to hold the plaintiff liable as the main contractor.  However, this alleged trade practice is not part of the defendant’s pleaded case in the Defence and Counterclaim.

25.  In its closing submissions, the defendant pointed out that there were undoubtedly uncompleted works by the plaintiff which had nothing to do with the ceiling.  The defendant went on to submit that even if the Fire Services contractor and the MVAC contractor had caused some delays to the ceiling works, the plaintiff would not have been able to complete all the fitting works by 2 February 2015 in any event.

26.  In answer to this argument, Mr Harrison Cheung, counsel for the plaintiff correctly pointed out that the defendant had never identified these uncompleted works as delaying events during the cross-examination of the plaintiff’s witnesses.  In other words, there is no evidence linking these uncompleted works to the delay in question.

27.  Finally, the defendant argues that the plaintiff and the defendant have mutually agreed to extend time to 8 February 2015, without prejudice to the defendant’s entitlement to claim for liquidated damages.  By reason of this new agreement, liquidated damages would start to run from 8 February 2015 to 12 February 2015, even if the court is of the view that the defendant is not entitled to charge liquidated damages as at 2 February 2015.

28.  The short answer to this argument is that this so-called new agreement and the revised completion date of 8 February 2015 simply do not form part of the defendant’s pleaded case, either in the Defence and Counterclaim or in the Reply to Defence to Counterclaim.  Further, the revised date of 8 February 2015 was simply a target date for completion unilaterally set by the defendant, which has never been formally agreed by the plaintiff as the revised completion date.

29.  For the reasons set out above, I hold that the plaintiff is not responsible for the ten-day delay from 2 February 2015 to 12 February 2015.

WHETHER THE LIQUIDATED DAMAGES CLAUSE IN THE UNDERTAKING IS A PENALTY

30.  In this regard, I agree with Mr Sunny Chan, counsel for the defendant, that the present liquidated damages clause at 1% of the contract sum a day is not a penalty.  I agree that the liquidated damages clause as contained in the Undertaking is a genuine pre-estimate of loss under the four-point test in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Limited [1915] AC 79, namely: –

(1) A liquidated sum payable on a breach will not be held to be a penalty unless it exceeds the greatest loss which would be predicted at the time that the contract was entered into;

(2) Where the breach consist only in not paying a sum of money the sum stipulated will be penal if it exceeds the sum which ought to have been paid;

(3) Where a single lump sum is payable on the occurrence of one or more events some of which may give rise to a more significant loss than others there is a presumption (but no more than a presumption) that the clause providing for liquidated damages is penal;

(4) The fact that precise pre-estimation of the loss is difficult or impossible to determine does not render the assessment of liquidated damages penal, “on the contrary, that is just the situation when it is probable that the pre-estimated damages was a true bargain between the parties”.

31.  Applying the principles set out above, I agree that liquidated damages at 1% of the contract sum per day is not penal: –

(1) It would be well known to the plaintiff at the time when the agreement was entered into that the defendant will suffer loss of profit and rent each day the fitting out works delay the opening of the restaurant;

(2) Such loss could exceed the liquidated sum of HK$50,326.00 per day; and

(3) This is evidenced by Jefrey Lai’s WhatsApp message to Henry Yip on 4 February 2015 showing that the estimated turnover from 12 February 2015 onwards would be some HK$200,000 per day.

32.  For the reasons set out above, had I come to the conclusion that the plaintiff were responsible for the ten-day delay from 2 February 2015 to 12 February 2015, I would have held that the liquidated damages clause in the Undertaking was not a penalty and should be enforced, so that the sum of HK$503,260.00 would be payable by the plaintiff.

WHETHER THERE WAS AN AGREEMENT MADE BETWEEN THE PLAINTIFF AND THE DEFENDANT ON 12FEBRUARY 2015  

33.  The plaintiff’s case is that on 12 February 2015, it was orally agreed between Henry Yip and Jefrey Lai that the defendant would arrange and carry out the remedial work at the defendant’s own cost, and the plaintiff in turn would not claim any compensation for the delay.  The plaintiff further asserts that the said oral agreement was put in writing by Henry Yip in an email addressed to Jefrey Lai and copied to Jacqueline Ho of the defendant on 13 February 2015 (page 683 of the Trial Bundle)(the “13 February 2015 email”).

34.  During his cross-examination, Henry Yip clarified that the oral agreement was not in fact reached in a face-to-face meeting, rather it was reached in a telephone conversation with Jefrey Lai at around 9 pm when Henry Yip was at the site.

35.  On the other hand, Jefrey Lai testified to the following effect at trial: –

(1) On 12 February 2015, Jefrey Lai did call Henry Yip and told Henry Yip to vacate the site;

(2) Jefrey Lai told Henry Yip that he would carry out the remedial work by engaging Heng Wah; and

(3) Jefrey Lai never promised that the remedial work would be carried out at the defendant’s own cost.

36.  Based on all the evidence adduced at trial, I would accept the evidence of Henry Yip in this regard and reject the evidence of Jefrey Lai.

37.  First, I find it significant that the defendant had never compiled or provided a defect list to the plaintiff before the commencement of this action.

38.  I agree with Mr Harrison Cheung that it is difficult to understand why Jefrey Lai, who is experienced in supervising the fitting out of many restaurants of the defendant, did not provide a defect list to the plaintiff when the plaintiff was asked to vacate the site, or indeed at anytime thereafter before the commencement of this action.  The absence of a defect list provided to the plaintiff supports the plaintiff’s case that the defendant had agreed to carry out the remedial work at the defendant’s own cost.  It is further to be noted that when the defendant instructed various contractors to carry out the remedial work after the defendant had commenced its operation of the restaurant, the plaintiff was never informed of the alleged defects nor the rectification of such.  It was not until after the present action was commenced that the plaintiff was presented with the contra charge claim for the remedial work. 

39.  Secondly, it is Henry Yip’s evidence (uncontradicted by the defendant) that due to the material delay, the plaintiff had to incur substantial additional overhead and overtime payments to its workers.  Given my finding that the delay was caused by the other contractors, I agree that it would be against commercial common sense for the plaintiff not to bill the defendant for such additional expenses.  If there was no agreement made on 12 February 2015 as alleged by the plaintiff, it is difficult to envisage why the plaintiff would forego these compensation and not include the same in the 2 invoices sent out after 12 February 2015.  In the circumstances, the reasonable inference to be drawn on a balance of probabilities from the plaintiff not billing the additional expenses is that there was indeed such an agreement made that the defendant would arrange and carry out the remedial work at the defendant’s own cost, and the plaintiff in turn would not claim any compensation for the delay. 

40.  Thirdly, I find it significant that the defendant did not give a reply to the 13 February 2015 email.

41.  When asked in cross-examination why he did not give a reply to the 13 February 2015 email, especially when his boss Jacqueline Ho specifically made enquiries of the meaning of the said email, Jefrey Lai gave the reason that he was too busy at the material time.

42.  Jefrey Lai was then taken to an email that he sent out on 17 February 2015, where he asked for a list of the remaining furniture from Henry Yip.  He was asked why he had the time to send this email while at the same time chose not to spend five minutes to rebut the 13 February 2015 email.  Jefrey Lai again said he was focusing on the opening of the restaurant and did not realise the importance of putting in a rebuttal to the 13 February 2015 email.

43.  I agree with Mr Harrison Cheung that the explanations put forward by Jefrey Lai in this regard are most unsatisfactory and I have no hesitation in rejecting the same.  It is indeed a matter of common sense that if one receives an allegation in writing on an important matter which is untrue, one would be expected to put forth a timeous rebuttal to set the record straight.  Nonetheless, Jefrey Lai and Jacqueline Ho, both being top management of the defendant, chose not to give a reply to the 13 February 2015 email.  The obvious inference must be that the content of the 13 February 2015 email was true.

44.  For the reasons set out above, I accept that on 12 February 2015, it was orally agreed between Henry Yip on behalf of the plaintiff and Jefrey Lai on behalf of the defendant that the defendant would arrange and carry out the remedial work at the defendant’s own cost, and the plaintiff in turn would not claim any compensation for the material delay.  In the premises, I reject the defendant’s counterclaim for the cost of the remedial work.

DISPOSITION

45.  I give judgment in favour of the plaintiff against the defendant as follows: –

(1) There be judgment in favour of the plaintiff against the defendant in the sum of HK$1,686,846.64;

(2) The defendant do pay to the plaintiff interest on the said sum of HK$1,686,846.64 at the judgment rate from 14 April 2015 until payment in full; and

(3) The counterclaim by the defendant against the plaintiff be dismissed.

46.  I further order that the defendant do pay to the plaintiff the costs of this action and the defendant’s counterclaim, such costs to be taxed if not agreed.

47.  The above orders as to interest and costs are nisi and shall become absolute in the absence of any application within 14 days to vary the same.

48.  Lastly, I thank counsel on both sides for their helpful assistance in this matter.