CRESTDREAM LTD v. POTTER INTERIOR DESIGN LTD

HCCT 32/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 32 OF 2013

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BETWEEN

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ASSESSMENT OF DAMAGES

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INTRODUCTION

1.  This is an assessment of damages hearing pursuant to the interlocutory judgment dated 17 October 2013 entered in favour of the plaintiff.

2.  By the Order dated 7 March 2014, Master K Lo ordered inter alia that: -

(a) leave to the plaintiff to set down the case for Assessment of Damages before a Master at a date to be fixed by the court with 3 hours reserved;

(b) leave to the plaintiff to adduce the Valuation Report on Fit-Out Work at the Premises (defined herein below) dated 29 August 2013 and filed on 7 February 2014 with signed statement of truth prepared by Mr Steve Au-Yeung, a qualified quantity surveyor, as expert evidence on quantum in relation to valuation of works, without calling the report marker at trial; and

(c) the plaintiff do file and serve a Notice of Appointment of Assessment of Damages within 14 days from the date thereof.

3.  The Notice of Appointment of Assessment of Damages was filed and served on the defendant on 21 March 2014.  The Assessment of Damages hearing was fixed before me on 14 July 2014.

4.  By the letter dated 21 March 2014 by post, the plaintiff’s solicitors wrote to the defendant to inform them of the hearing. But the defendant failed to file any documents or turn up at the hearing on 14 July 2014.

BACKGROUND

5.  At all material times, the plaintiff was and is the registered owner of a residential flat at 15^th Floor, No 24 Fontana Gardens, Hong Kong (also known as 15^th Floor, Block A, No 24 Fontana Gardens, Hong Kong) (“Premises”).

6.  At all material times, the defendant was and is a limited company incorporated in Hong Kong and carrying on the business as an interior design contractor.

7.  By a written contract in simplified Chinese dated 7 September 2012 made between the plaintiff and the defendant, the defendant agreed to carry out and complete the fitting-out and building works of the Premises (“Works”) and the Plaintiff agreed to pay a fixed contract sum of HK$3,300,000 in accordance with the said written contract (“Contract”).

8.  The Contract contains inter alia the following express terms: -

(a) Clause 1(3) regarding the project commencement and completion date, ie project commencement date on 3 September 2012 and completion date on 5 July 2013, a total of 210 working days excluding Saturdays, Sundays and Public Holidays;

(b) Clause 5(1) regarding the contract sum, ie fixed contract sum of HK$3,300,000 including all construction costs and materials provided by the defendant as specified in the schedule thereof;

(c) Clause 6(2) regarding liquidated damages, ie calculated at 0.1% of the contract sum per day, ie HK$3,300 per day for each day of delay caused by the defendant; and

(d) Clause 6(5) regarding termination of the Contract, ie the plaintiff may give a written notice of termination (seven days prior to the termination) to the defendant if the defendant defaults by not completing the Works on time for more than one month (sub-sub-clause (2)) or by seriously not complying with the contract requirements (sub-sub-clause (3)).  In case of dispute between the parties, a quantity surveyor shall be appointed to prepare the project final account.

9.  On or about 7 September 2012, the parties orally agreed to vary the project commencement date to 17 September 2012 (“Revised Project Commencement Date”) and project completion date to 19 July 2013 (“Revised Project Completion Date”).

10.  On 17 September 2012, the defendant took possession of the Premises and commenced the Works.

11.  Pursuant to Clause 5(2) of the Contract, between 12September 2012 and 1 February 2013, the plaintiff made various payments to the defendant in the total sum of HK$2,701,305.

12.  On or about 5 March 2013, without the plaintiff’s approval, the defendant abandoned the Works and left the Premises.

Reinstatement Work ordered by BD

13.  In about early January 2013, the defendant drilled certain holes in the structural beam and wall in the Premises without advising the plaintiff that prior approval of the Buildings Department (“BD”) was required.

14.  On or about 8 March 2013, representatives from the BD inspected the Premises.

15.  In about mid-March 2013, the plaintiff received a letter dated 5 March 2013 from the defendant who indicated that they would suspend the Works at the Premises until the plaintiff obtained the BD’s approval of certain building works.

16.  On or about 27 March 2013, the plaintiff received a letter dated 26 March 2013 issued by the BD (“BD Notice”) stating that unauthorised building works were found inside the Premises. According to the BD Notice, the plaintiff was required to reinstate the unauthorised building works namely (1) holes formed in the structural beam and (2) one hole formed in the structural and external wall of bathroom in the Premises (“unauthorised building works”).

17.  By the letter dated 26 March 2013 from Messrs Cham & Co. Solicitors, the defendant’s solicitors (“Cham & Co”) to Messrs Li, Wong, Lam & WI Cheung, the plaintiff’s solicitors (“LWLC”), the defendant notified the plaintiff that they would treat the Contract as having been repudiated.

18.  By letter dated 12 April 2013 issued by LWLC to Cham & Co, the plaintiff instructed the defendant to carry out the reinstatement of the unauthorised building works as required by the BD.

19.  By letter dated 8 April 2013 from Cham & Co to the plaintiff, the defendant notified the plaintiff that they would not continue with the project.

20.  By the Building Order dated 2 May 2013 issued by the BD to the plaintiff, the plaintiff was ordered to reinstate the unauthorised building works and to appoint an authorised person to supervise the reinstatement of the unauthorised building works (“the Reinstatement Work”).

21.  In about June 2013, the plaintiff appointed Prudential Surveyors International Limited (“Prudential Surveyors”) to handle the Reinstatement Work which would cost a total sum of HK$90,000.

Valuation of Works by Quantity Surveyor

22.  On or about 24 June 2013, pursuant to Clause 6(5) of the Contract, the plaintiff appointed Mr Steve Au-Yeung, a qualified quantity surveyor of A1 Surveyors Limited (“the Quantity Surveyor”), to assess the works done by the defendant on the Premises and to prepare a valuation report on inter alia the works done and outstanding works left by the defendant.

23.  On 9 July 2013, the Quantity Surveyor together with his assistant and the representatives of the plaintiff conducted a site inspection at the Premises. Before the joint site inspection, LWLC had notified the defendant by letter to send its representative to attend the said site inspection.  However, the defendant or its representative did not show up on the date of site inspection.

24.  The main purpose of the site inspection by the Quantity Surveyor was to assess the works done and outstanding works left by the defendant and then prepare the valuation report.

25.  The Quantity Surveyor submitted the valuation report entitled “Valuation Report On Fit-Out Work at 15^th Floor, 24 Fontana Gardens, Hong Kong” dated 29 August 2013 (“Valuation Report”) to the plaintiff.

26.  The Valuation Report addresses inter alia the following issues:

(a) Valuation of works done by the defendant;

(b) Valuation of materials on site;

(c) Valuation of the unauthorised building works to be reinstated by other contractors;

(d) Valuation of outstanding works to be completed by other contractors; and

(e) Over-payment made by the plaintiff.

Replacement Contractor

27.  In order to mitigate the loss of the plaintiff, since about May 2013, the plaintiff had been searching for a replacement contractor to complete the outstanding works left by the defendant.

28.  On 10 October 2013, the plaintiff entered into a written contract in simplified Chinese with Ever Green Decoration Works Company Limited, a fitting-out contractor (“Replacement Contractor”), for the completion of the outstanding works left by the defendant (“Replacement Contract”).  The Replacement Contract contains inter alia express terms that the project commencement date be 15 October 2013 and the project completion date be 21 March 2014, ie a total of 100 working days (excluding Saturdays, Sundays and public holidays), and the contract price was agreed at HK$1,813,393.73.

29.  On 15 October 2013, the Replacement Contractor took possession of the Premises and commenced the works in accordance with the Replacement Contract.

MY ASSESSMENT

30.  The plaintiff claims in the statement of claim for a total sum of HK$2,267,255 which comprises 4 sums of money namely:-

(a) Cost of the Reinstatement Work:		HK$90,000
(b) Over-paid Amount:		HK$2,089,255
(c) Costs of the Valuation Report:		HK$88,000
(d) Liquidated Damages for Project Delay:		To be assessed
Total:		HK$2,267,255

31.  Mr Suen, Counsel for the plaintiff, rightly conceded that costs of the Valuation Report for HK$88,000 shall only form part of the plaintiff’s legal costs in these proceedings rather than damages.

Cost of the Reinstatement Work

32.  It is well established that damages for the cost of completion or reinstatement of work undertaken by a third party is recoverable[1].

33.  After the defendant’s abandonment of the Works and refusal to return to the Premises, by the agreement dated 7 June 2013, the plaintiff appointed Prudential Surveyors International Limited (“Prudential Ltd”) to carry out the Reinstatement Work as ordered by the BD.  The terms of the agreement include inter alia that Prudential Ltd would-

(a) submit and agree with the BD a remedial proposal to reinstate the structural beams with 7 holes formed and the structural wall of the bathroom with one hole formed;

(b) engage a Registered General Building Contractor to carry out the reinstatement work in accordance with the remedial proposal;

(c) supervise the carrying out of the remedial work and on completion, certify that such works have been carried out in accordance with the provisions of the Buildings Ordinance and regulations; and

(d) appoint an Authorised Person (ie Mr Richard K.H. Cheung “Mr Cheung”) to supervise the reinstatement work (collectively “the Consultancy Work”).

34.  It was agreed between the plaintiff and Prudential Ltd that the service fees for the Consultancy Work to carry out and supervise the Reinstatement Work be HK$90,000.

35.  On 23 October 2013, Mr Cheung formally agreed to succeed the Consultancy Work under the same terms and condition of the agreement between Prudential Ltd and the plaintiff dated 7 June 2013.

36.  The Reinstatement Work was completed by the contractor under the supervision of Mr Cheung and Mr Chan Hei Leung, a Registered Structural Engineer, of Petros Consulting Engineers Limited (“Mr Chan”) on 8 May 2014.

37.  Mr Chan has already submitted the Certificate of Completion of the Remedial Work to the Buildings Department.

38.  Mr Suen, Counsel for the plaintiff, referred me to para 4.3 (3) of the Valuation Report which reads:

“3) On the issue of rectification and reinstatement of the unauthorised building works as alleged by BD…stating that (i) 7 holes formed in the structural beams, and (ii) one hole formed in the structural wall of bathroom. The Client, by an Agreement made on 10 June 2013, had appointed Prudential Surveyors International Limited as the Authorised Person to supervise and/or coordinate such reinstatement work. I considered the professional charges quoted by the Authorised Person in the sum of HK$90,000 including the allowance for the reinstatement was in general reasonable, and hence it would be acceptable for inclusion as part of my valuation in this report.” (emphasis added)

39.  On the basis that (1) the principle that damages for the cost of reinstatement of work undertaken by a third party is recoverable, (2) the Quantity Surveyor’s view that the relevant fees charged by Prudential Ltd for the Reinstatement Work was reasonable and (3) the Reinstatement Work has been completed, I conclude that the plaintiff’s claim for the cost of the Reinstatement Work at HK$90,000 should be allowed. 

Over-Paid Amount

40.  Upon the termination of the Contract and pursuant to Clause 6(5) of the Contract, the plaintiff appointed A1 Surveyors Limited (the Quantity Surveyor) to finalise the project account by valuating the works done by the defendant and the amount of payments already paid by the plaintiff to the defendant.

41.  According to the Valuation Report (in para 4.1), the valuation of works completed by the defendant including the 3 No. variation orders and 1 No. quotation work is HK$612,050.

42.  Mr Suen, Counsel for the plaintiff, referred me to para 6.2 of the Valuation Report which reads:

“According to the payment records provided by the Client [the plaintiff] to the Original Contractor [the defendant] through eight number cheque payments in the sum of HK$2,701,305 (See Appendix “5”); and compared with the valuation of the works completed by the Original Contractor in the sum of HK$612,050 within this report, I considered that the Client had overpaid the Original Contractor an amount of HK$2,089,255 (i.e. HK$2,701,305 minus HK$612,050).” (emphasis added).

43.  On or about 29 August 2013, the plaintiff received a refund of deposit of HK$83,167 from a material supplier for the defendant (“the Refund”) namely Man Chong Engineering Co. Ltd. (“Man Chong”).  The deposit was previously paid by the defendant to Man Chong for the order of window frames and glasses, etc.  According to Man Chong, the said order was regarded cancelled due to the defendant’s abandonment of the Works.  Taking into account of the Refund, I accept and assess that the over-paid amount by the plaintiff should be HK$2,006,088 (being HK$2,089,255 minus HK$83,167).

Cost of the Replacement Contract

44.  Originally, Mr Suen, counsel for the plaintiff, made the claim for costs of the Replacement Contract in the opening submission but after discussion with me, he rightly conceded to withdraw this submission on the reason that such claim is never pleaded in the statement of claim.

Liquidated Damages for Project Delay

45.  As to the question of whether a contractor is liable for any liquidated damages accruing after termination of contract (provided that the contract itself does not specify otherwise), Mr Suen, Counsel for the plaintiff, is very helpful to draw my attention to the conflicting authorities.  Keating on Construction Contracts has this to say:-

“if the contract is brought to an end by determination or otherwise, then prima facie all future obligations cease and no claim can be made for liquidated damages accruing after determination. But there may be some special clause which has the effect of keeping the provision for payment of liquidated damages alive although the work has been taken out of the hands of the contractor” (see 10-020, p. 376, Keating on Construction Contracts 9^th ed.).

46.  However, some do not agree with Keating’s view.  Construction Briefings on Liquidated Damages (p27), which deals with the issue of whether a claim for liquidated damages after termination of a contract can be made, reads:-

“Abandonment

Some Courts have held that the “Liquidated Damages” clause is voided by the contractor’s abandonment of the work. Thus, the owner can recover actual damages from the contractor, which- in the case of abandonment – can be significantly greater than the amount allowed under the clause. On the other hand, one Court-in deciding whether to award liquidated damages in a case where the contractor abandoned the work and the owner completed performance – held that the “Liquidated Damages” clause was not voided by the contractor’s action. In this instance, the owner was entitled to recover damages for the period of time he could show that the contractor would have consumed had he not abandoned performance….In most cases of abandonment, the owner will hire another contractor to complete the project-usually incurring increased costs in the process. In this situation, the owner is still entitled to liquidated damages from the original contractor for the delay in completion, since it is likely that the follow-on contractor will not complete before the scheduled completion date.” (emphasis added)

47.  Mr Suen, counsel for the plaintiff, further cited the case of Hall & Shivers v Jan Van Der Heiden [2010] EWHC 586 (TCC), in whichCoulson J adamantly rejected the principle that claim for liquidated damages after termination of the contract is not allowed, and allowed an employer to claim liquidated damages after termination of the contract.  In his judgment, Coulson J awarded the employer liquidated damages beyond termination through to completion of the project several months later by a replacement contractor.  To explain his reasoning, he gave this example (para76-77 of his Judgment):-

“Take the example of a contractor who has wholly failed to comply with the contract, is in considerable delay, and is facing a notice of termination. The defendant’s case would mean that such a contractor was only liable to pay liquidated damages for delay before the decision was taken to terminate, thereby penalising the employer for trying to get the works completed by another contractor, and rewarding the contractor for sitting on his hands and failing to carry out the works in accordance with the programme. If the defendant was right, the contractor would be better off not coming back on site to carry out the works because, if he refused to do so, the contract would then be terminated and his liability to pay liquidated damages would automatically come to an end. That would not be a common interpretation of this (or any) construction contract….Accordingly, as a matter of principle, I reject the submission that the defendant’s liability to pay liquidated damages came to an end when the employment was terminated”. (emphasis added)

48.  On the basis of Construction Briefings on Liquidated Damages and Hall & Shivers v Jan Van der Heiden, Mr Suen for the plaintiff submitted that the plaintiff’s claim for liquidated damages should be allowed for the following reasons:-

(a) Culpability of the defendant: Project delay to the ultimate completion date was due to the culpability of the defendant who abandoned the Works and refused to return to the Premises to complete the Works despite repeated demands;

(b) No Provision: There is no provision in the Contract saying that the defendant’s liability to pay liquidated damages came to an end when their engagement under the Contract was terminated; and

(c) Commonsense Interpretation: As a matter of principle, the plaintiff should not be penalised for trying to get the Works completed by the Replacement Contractor and the defendant should not be rewarded for failing to carry out the works in accordance with the Contract.  Otherwise, the defendant would be better off not coming back to carry out the works, if they refused to do so, the Contract would then be terminated and their liability to pay liquidated damages would automatically come to an end.  That would not be a reasonable interpretation of the Contract.

49.  As I do not have the benefit of argument by the defendant, I accept the above submissions by Mr Suen that the plaintiff is entitled to claim for liquidated damages under Clause 6(2) of the Contract after termination of the Contract. 

Genuine Pre-estimate of Damage

50.  Chitty on Contracts 31^st ed Vol II Specific Contracts (Paragraph 37-121) provides a succinct summary of liquidated damages clause in construction contracts:

“Most construction contracts make provision for recovery of pre-fixed or “liquidated” damages for delay in completion by the contractor. While such damages may be regarded as limiting the contractor’s liability, all the modern authority treat such damages potentially as a penalty, recoverable only where it is shown to be a “genuine pre-estimate of loss”. There are very few instances in which the stipulated damages have been successful challenged on the ground they were not a genuine pre-estimate….the test for whether a clause was an enforceable penalty was an objective one; for a pre-estimate to be unreasonable there had to be a substantial difference between the estimated and actual damage sustained…” (see also para 10-005 of Keating on Construction Contracts 9^th ed; para 6-044 to 6-046 of Hudson’s Building and Engineering Contracts 12^th ed).

51.  In the present case, Clause 6(2) of the Contract provides that liquidated damages be calculated at 0.1% of the contract sum per day, ie HK$3,300 per day for each day of delay caused by the defendant.  Mr Suen for the plaintiff submitted that the calculation of the liquidated damages based on the formula “HK$3,300 x number of day of delay” is precise and simple to apply, hence damages can be easily assessed.

52.  Mr Suen for the plaintiff also submitted that the sum of HK$3,300 per day of delay stipulated for the liquidated damages realistically reflects the level of damages the plaintiff would likely to suffer in the event of delay.

53.  In the case of Tennyson Estate Limited[2], the court accepted that the agreed liquidated damages at HK$2,000 and HK$3,000 per day are more than reasonable and in no way can they be suggested to be extravagant or unconscionable or oppressive, and certainly does not go beyond a genuine pre-estimate of the likely loss to the plaintiff.

54.  I accept the above submissions by Mr Suen that the liquidated damages clause of the Contract is a genuine pre-estimate of damage and therefore the plaintiff’s claim under this head should be allowed.

Calculation of Liquidated Damages

55.  According to the Contract, the Revised Project Completion Date was 19 July 2013.  However, the contractual project completion by the Replacement Contractor was 21 March 2014.  Therefore, the total number of days of delay is 245 days (inclusive of Saturdays, Sundays and Public Holidays, and both 20 July 2013 and 21 March 2014).

56.  Concerning the issue of duty to mitigate, the “Reasonable Steps” test is well established.  The onus of proof is on the defendant to prove any failure on the part of the plaintiff to mitigate[3].  So I do not need to consider this issue.  If I need to do so, I am of the view that the plaintiff has taken reasonable steps to mitigate the loss, in particular in selecting and engaging the Replacement Contractor within a reasonable time, ie the Replacement Contract commenced on 15 October 2013.

57.  Para 4.4 of the Valuation Report reads inter alia that:

“1) I have assumed, in order to mitigate the cost to complete the outstanding works, the tentative commencement date of completion of the outstanding works to be scheduled on and around September 2013, will be through competitive tendering for awarding of the Completion Work Contract….”

58.  Therefore, for the reasons given above, I accept the submissions by Mr Suen that the plaintiff’s claim for Liquidated Damages for Project Delay at HK$808,500 (being $3,300 x 245 days) should be allowed.

Conclusion

59.  In the circumstances, I assess the damages suffered by  the plaintiff as follows:

(a) Cost of the Reinstatement Work:	HK$90,000
(b) Over-paid Amount:	HK$2,006,088
(c) Liquidated Damages for Project Delay:	HK$808,500
Total:	HK$2,904,588

60.  I also award interest on the damages assessed at the rate of 8% per annum from the date of the Writ to the date of judgment and thereafter at judgment rate until payment.

61.  Regarding costs of this action and hearing for assessment of damages, Mr Suen for the plaintiff submitted a statement of costs for $337,000 and requested me to do the summary assessment under Order 62 rule 9A RHC.

62.  By adopting the broad-brush approach, I consider that the costs claimed are unreasonable and excessive.  I only allow $100,000 for the solicitors’ costs, $60,000 for Counsel’s fees and $70,000 for the Valuation Report totaling $230,000.

63.  I now make an order nisi that costs of this action and this assessment of damages be to the plaintiff with certificate for counsel summarily assessed at $230,000 payable by the defendant.  Such order nisi shall become absolute unless any of the parties apply to vary within 14 days.