HONG KONG (SAR) HOTEL LTD v. WING KEY CONSTRUCTION CO LTD

HCCT 3/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 3 OF 2010

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HCCT 57/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 57 OF 2009

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(Consolidated by order of the Honourable Mr Justice Saunders
dated the 8th day of February 2010)

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J U D G M E N T

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1.  This is a trial de novo of the two actions. The defendant used to be the plaintiff’s main contractor to build a hotel at the plaintiff’s site at Nos 12-22, Davis Street. The plaintiff issued HCCT 57/2009 (“the 1st Action”) for an injunction to prevent the defendant from entering or remaining at the site after it had purportedly determined the building contract pursuant to its clause 25(1)(c) on 5 October 2009. The plaintiff issued HCCT 3/2010 (“the 2nd Action”) against the defendant for payment of money due under clause 25(3)(d) of the contract.

2.  The defendant defends the two actions.  It also has a counterclaim in the 2nd Action against the plaintiff for damages for wrongful termination of the contract by the purported determination under clause 25(1)(c) which amounted to a repudiation of contract that had been accepted by the defendant.

THE DETERMINATION OF THE BUILDING CONTRACT

3.  The plaintiff awarded the contract to the defendant on 11 April 2008.  The contract sum was HK$48 million.  The contract period was 435 calendar days from the date of possession of the site.  The parties agreed that the commencement date of the contract was 25 April 2008 and the completion date should have been 3 July 2009.

4.  The plaintiff pleaded in §9 of the Amended Statement of Claim that the defendant was granted 7 days extension of time by the architect on 19 May 2009.  That pushed the completion date to 10 July, but the defendant still could not complete the contract by the later date.  The architect then issued a certificate of non-completion on 10 July 2009.

5.  On 5 October 2009, the plaintiff as the employer issued a notice pursuant to clause 25(1)(c) of the contract to the defendant as the main contractor thereby purportedly determined the contract.  The defendant disputed the plaintiff’s entitlement to issue the notice determine the contract. The plaintiff then started the first action to require the defendant to vacate from the site and the defendant did so on or about 17 October 2009.

6.  The relevant parts of clause 25(1)(c) provide:

“25. Determination by Employer

(1) If the Main Contractor shall make default in any one or more of the following respects, that is to say:-

…

(c) If he refuses or persistently neglects to comply with a written notice from the Architect requiring him to remove defective work or improper materials or goods and by such refusal or neglect the Works are materially affected, or

…

then the Architect may give to him a notice by registered post or recorded delivery specifying the default, and if the Main Contractor either shall continue such default for fourteen days after receipt of such notice or shall at any time thereafter repeat such default (whether previously repeated or not), then the Employer without prejudice to any other rights or remedies, may within ten days after such continuance or repetition by notice by registered post or recorded delivery forthwith determine the employment of the Main Contractor under this Contract, provided that such notice shall not be given unreasonably or vexatiously.” (emphasis supplied)

The conditions in clause 25(1)(c)

7.  Mr Chan, counsel for the plaintiff submitted in his opening that the plaintiff has to satisfy four conditions so as to determine the contract under clause 25(1)(c).  The conditions are:

(1)  If the defendant is in default by refusing or persistently neglecting to comply with the architect’s written notice requiring the defendant to remove defective work or improper materials or goods and by such refusal or neglect the Works are materially affected (“Condition 1”).

(2)  The architect gives the defendant a notice by registered post or recorded delivery specifying the default (“Condition 2”).

(3)  If the defendant shall continue such default for 14 days after receipt of such notice or shall at any time thereafter repeat such default (whether previously repeated or not), then the plaintiff may within 10 days after such continuance or repetition by notice by registered post or recorded delivery forthwith determine the defendant’s employment (“Condition 3”).

(4)  The plaintiff’s notice shall not be given unreasonably or vexatiously (“Condition 4”).

The plaintiff’s case on the satisfaction of the four conditions

8.  The plaintiff’s evidence on the determination is mainly given by architect, Mr Felix Lok and his assistant the project architect Mr Lo Chun Wai Dicky (“D Lo”).

9.  The Buildings Department (“the BD”) made an inspection of the site on 25 June 2009.  The architect then issued a letter dated 26 June to the defendant identifying 11 irregularities in the safety works discovered in the inspection.  It required the defendant to rectify the same within 10 days (B 137-138).

10.  The BD also issued a letter dated 29 June to the architect with copy to the defendant referring to the safety irregularities discovered in that inspection.  The irregularities mentioned were:

(i)    Construction materials/debris in the bamboo scaffold, at building edges and lack of proper working platforms, particularly at construction floor;

(ii)  Discontinuous catch-fans, inadequate provision of catch-fans at lowest level of bamboo scaffold.

The BD required the irregularities to be put right within 7 days (B 135-136).

11.  The BD issued a further letter dated 2 July (“BD’s short complaint”) to the architect with copy to the defendant (B 162).  It referred to a complaint against the defendant for having carried out the mixing of cement/concrete at the public street area and discharging construction slurry to public drains. BD’s short complaint is the subject of Architect’s Instruction or AI M-205 and dated 13 August 2009.  M-205 required the defendant to comply with BD’s short complaint by 19 August and report on the same on 20 August (B 190).

12.  The BD conducted another site inspection on 21 July. It then issued another letter to the architect with copy to the defendant and dated 31 July 2009 (“BD’s long complaint”) (B 160).  This letter referred to ten irregularities at the site.  It is the subject matter of AI M-204 also dated 13 August 2009.  It required the defendant to rectify the irregularities by 19 August and report on the same on 20 August (B 187). 

13.  The irregularities mentioned in BD’s long and short complaints that are relevant to the determination of the contract are:

(1)Discontinuous catch fans.

(2)Lack of proper working platforms of bamboo scaffolding. For example, no kicking plates.

(3)Building materials/tools/debris/loose planks accumulated on bamboo scaffolding.

(4)Building materials placed on Kwan Yick Street outside the Site.

(5)Discharge of construction slurry to public drains.

(6)Water ponding on 3/F.

14.  The plaintiff takes AIs M-204 and M-205 and the BD’s long and short complaints enclosed therein respectively as written notices from the architect under clause 25(1)(c) that required the defendant to remove defective work.  It is the plaintiff’s case that the defendant’s failure to comply with M-204 and M-205 resulted in the satisfaction of Condition 1.

15.  The architect then conducted a site inspection on 28 August.  A video was taken in the course of the inspection.  The inspection revealed that the defendant had not rectified the irregularities above-mentioned.  That resulted in another letter from the architect dated 15 September 2009 issued expressly under clause 25(1)(c) requiring the defendant to make good the defects.  The letter also warned the defendant that if the defects should remain for 14 days, the plaintiff would determine the contract pursuant to clause 25(1)(c).  The letter was sent to the defendant by registered mail, fax and e-mail.  It is the plaintiff’s case that the despatch of this letter satisfied Condition 2.

16.  The architect conducted a further inspection on 29 September.  A video recording was also taken of the inspection.  This inspection revealed that the rectification works were still incomplete.  The architect reported the result of the inspection to the plaintiff by letter on the same day.  The architect in particular pointed out that the irregularities of:

(1)     discontinuous catch fans; and

(2)     lack of proper working platforms of bamboo scaffolding; for example, no kicking plates

posed a serious risk to the safety of the workers and the general public.  The architect also recommended to the plaintiff to determine the contract with the defendant (B 165). 

17.  The plaintiff says that by this stage, Condition 3 was satisfied and it could determine the contract within 10 days of 29 September.

18.  The plaintiff further says that even if the defendant should have received the 15 September letter only on 16 September, there was evidence showing that the above-mentioned irregularities were still not rectified on or after 30 September.  Hence, Condition 3 was still satisfied.

19.  The plaintiff then issued a notice dated 5 October 2009 to the defendant and purportedly determining the contract under clause 25(1)(c) (M 2276).  The plaintiff says that this notice of determination was neither unreasonable nor vexatious.  Hence, Condition 4 was also satisfied.

The low level catch fans facing Kwan Yick Street

20.  The above-mentioned irregularities relevant to the determination of the contract are all related to safety at the site.  Mr Niehorster, counsel for the defendant conceded in §128 of his closing submissions that the defendant was not disputing that it had failed to rectify these safety irregularities.  However, there was a dispute at the trial of whether the irregularity of discontinuous catch fans or catch platforms only referred to the catch fans at high level that extended horizontally for 1.5 metres or it also referred to catch fans at low level facing Kwan Yick Street that extended horizontally for 3 metres.  It is not clear if Mr Niehorster’s concession also covered this dispute.  In any case, Mr Chan, counsel for the plaintiff has dealt with this issue in §§39 to 51 of his closing submissions. I would therefore make a finding on it.

21.  The events leading to the purported determination of contract started from a site visit by the BD on 25 June 2009.  After the visit, the architect issued a letter dated 26 June to the defendant identifying 11 irregularities in the safety works discovered in the inspection (B 137-138).  The BD also issued a complaint letter on 29 June to the architect with copy to the defendant referring to these irregularities.  These irregularities included catch fans at high level extending for 1.5 metres horizontally (irregularity no. 4), catch fans at low level facing Kwan Yick Street extending for 3 metres horizontally (irregularity no. 5) and missing catch fans at low level at the south back lane (irregularity no. 10).

22.  The defendant had allegedly repaired the two low level catch fans (irregularities no. 5 and 10) on 6 July.  It then reported the repair to the architect on 14 July and the architect in turn reported it to the BD on 16 July (defence at A36 §44(iv), L-1879-1981, 1983, 1917-1920 and 1922). The discontinuous catch fans at high level (irregularity no. 4) were only purportedly rectified at a later day between 4 to 7 August 2009 (defence at A41, §56(9)).  Therefore, the photos sent by the architect to the BD on 16 July would only have revealed the repaired low level catch fans allegedly made good on 6 July. 

23.  However, the BD was not satisfied with the purported repair of the low level catch fans.  It replied in BD’s long complaint dated 31 July (before the high level catch fans were purportedly repaired between 4 to 7 August) that “discontinuous catch fans still exist”.  It did not accept the repair as “completion of rectification works to the irregularities mentioned in [its] letter dated 29 June 2009” (B-160-161).  The irregularities mentioned in that letter were:

“(i) Construction materials/debris in the bamboo scaffold, at building edges and lack of proper working platforms, particularly at construction floor;

(ii) Discontinuous catch-fans, inadequate provision of catch-fans at lowest level of bamboo scaffold.” (B-135)

24.  It is thus clear that the defendant had not properly rectified on 6 July the irregularities to the low level catch fans including those facing Kwan Yick Street.  I therefore find on a balance of probability that the safety irregularities that the defendant had failed to rectify included the low level catch fans facing Kwan Yick Street. 

25.  For the avoidance of doubt, I also accept the plaintiff’s evidence of the inspection on 29 September that the safety irregularities that the defendant had failed to rectify included building materials being found on Kwan Yick Street outside the site and discharge of construction slurry to public drains.

Four arguments on whether the determination was lawful and effective

26.  Though the defendant has conceded that it had failed to rectify the safety irregularities, it disputed the lawfulness of the purported determination of the contract.  It pleaded in §68 of the defence that its failure to rectify the safety irregularities in M-204 and M-205 did not constitute a refusal or persistent neglect to remove “defective work” and/or the refusal or neglect did not materially affect the Works.  The defendant has taken four points on the determination of the contract under clause 25(1)(c).  The four points are:

(1)    whether “defective work” includes methods of construction or temporary works including safety works;

(2)    whether “remove” defective works includes “rectify” defective works or site safety work;

(3)    whether the “Works” were “materially affected” by the defendant’s failure to comply with M-204 and M-205; and

(4)    whether the notice of determination was unreasonable and vexatious.

Whether “defective work” includes temporary works like safety works

27.  For the 1st point, Mr Niehorster submitted in §§12, 23 and 24 of his opening that the expression “defective work or improper materials or goods” in clause 25(1)(c) referred to the matters incorporated into the permanent works and did not extend to methods of construction or temporary works including safety works.  The expression also did not concern the safety of the Works.

28.  Mr Chan disagreed.  The contract itself does not have any definition for “defective work”.  He referred to Hudson’s Building and Engineering Contracts, 12 ed at §4-107 which defined defective work as:

“Defective work is work which fails to comply with the requirements of the contract and so is a breach of contract. For large construction or engineering contracts, this will mean work which does not conform to express descriptions or requirements, including any drawings or specifications, together with any implied terms as to its quality, workmanship, performance or design.”

29.  In §44 of his opening, Mr Chan submitted that under the contract, the defendant was responsible for the safety of the site.  It was also responsible for supplying, erecting and maintaining the safety measures like scaffoldings, screens, work platforms and catch fans, to pump and drain water off the site and to clean up the rubbish and debris from the site.

30.  Mr Chan in particular referred to various clauses in (i) the Special Conditions of Contract and (ii) Specification – Preliminaries that required the defendant to execute various works and measures relating to safety. These works were among the works mentioned in M-204 and M-205.  These clauses are:

Clause 1.01(i) of Specification – Preliminaries provided that “Works” (for which the defendant had contracted to carry out and complete included both permanent and temporary works as described in the Contract and/or shown on drawings and the performance of any services in connection therewith, as might be called for [I 514]. 

Clause 13 of Specification – Technical, General Specification-General provided that “temporary work” included, inter alia, all work of every kind required in or about the execution, completion or maintenance of the Works including temporary working platforms and scaffoldings [I 590].

SCC-3(1) provided that the defendant had to take full responsibility for the care of and complete the Works in accordance with the Contract Documents in every respect to the satisfaction of the architect and the relevant Government Authorities [I 489].

SCC-3(5)(a) provided that the defendant had to take full responsibility in the course of carrying out the Works for the adequate stability and safety of all operations on the site other than those of specialist contracts employed directly by the plaintiff and of utility companies and had to have full regard for the safety of all persons on the site [I 490].

SCC-3(5)(b) provided that the defendant had to comply with various statutes including the Building Ordinance, Construction Site (Safety) Regulations, and all other statutory requirements regarding safety on construction sites [I 490].

Clause 2.03(2) of Specification – Preliminaries defined “the Works” to include the duties (but not limited to) [I 517 - 519]:

clauses 2.03(2)(d) and 2.05 to maintain clear and proper pedestrian and vehicular  passage along Davis Street and Kwan Yick Street;

clause 2.03(2)(g) to prepare and submit Site Safety Supervision Plans as required for each stage of the Works;

clause 2.03(2)(m) to remove existing spoil heaps, debris and obstructions of all kinds within the Site which may affect the construction of the Works;

clause 2.03(2)(n) to uphold clean, tidy and free from dust working conditions at all times and maintain proper housekeeping to the satisfaction of the architect;

clause 2.03(2)(aa) to supply, install and finally remove from site all temporary works for all works areas.

Clause 4.05 of Specifications – Preliminaries provided that the defendant was also responsible for the safety of all persons engaged in the execution of the Works.  It also had to comply in every respect with the provisions of relevant statutes that were applicable to the Works or any temporary works [I 536].

Clause 5.01 of Specification – Preliminaries provided that the defendant had to provide, erect and maintain in good working order, among other things, proper scaffolding and screens and to submit structural calculations of the scaffoldings [I 542].

Clause 5.10 of Specification – Preliminaries provided that the defendant had to provide all pumping to keep the Works dry [I-545].

Clause 5.11 of Specification – Preliminaries provided that the defendant had to supply all necessary temporary channels and temporary drainage works which might be necessary to drain water from the Site and to prevent nuisance due to run-off on to adjacent land [I 545].

Clause 5.15 of Specification – Preliminaries provided that the defendant had to provide, erect, alter if necessary and maintain screens, fans, catch platforms and similar protective measures to prevent objects from falling outside the building boundary to the satisfaction of the architect and the Building Authority.  The defendant also had to ensure the adequacy of hoardings, covered walkways.  It was also required to supplement all necessary additional hoardings, fans, screens to adequately protect the public and the adjoining properties.  The contract period and price were deemed to have allowed for such works [I 547].

Clause 8.10 of Specification – Preliminaries required the defendant to take every precaution necessary to protect the public from injury or death during the course of the Works [I 559].

Clause 8.18 of Specification – Preliminaries provided that the defendant was also responsible for prompt removal of rubbish during the progress of the Works and to comply with the architect’s order in that connection [I 561].

Clauses 4.05, 5.01, 5.10-5.11, 5.15, 8.10 and 8.18 in the Schedule of Rates provided the costs for all the safety precautions and measures mentioned above [J 1104 – 1108].

31.  Mr Chan also set forth in §§21 to 26 of the closing submissions the clauses in (i) the Special Conditions of Contract; (ii) Specification – Technical and (iii) Specification – Preliminaries that were breached by the defendant in failing to rectify the safety works in M-204 and M-205.  The clauses are:

“Discontinuous catch fans amounted to breaches of the following clauses and conditions:

SCC-3(1) [1/489]

SCC(5)(a) [1/490]

SCC(5)(b) [1/490]

Clause 14 of Specification – Technical [1/590]

Clause 2.03(2)(aa) of Specification – Preliminaries [1/519]

Clause 4.05 of Specification – Preliminaries [1/536]

Clause 5.15 of Specification – Preliminaries [1/547-548]

Clause 8.10 of Specification – Preliminaries [1/559]

Lack of proper working platforms amounted to breaches of the following clauses and conditions:

SCC-3(1) [1/489]

SCC(5)(a) [1/490]

SCC(5)(b) [1/490]

Clause 14 of Specification – Technical [1/590]

Clause 2.03(2)(aa) of Specification – Preliminaries [1/519]

Clause 4.05 of Specification – Preliminaries [1/536]

Clause 5.01 of Specification – Preliminaries [1/542]

Clause 8.10 of Specification – Preliminaries [1/559]

Building materials/tools/debris/loose planks accumulated on bamboo scaffolding amounted to breaches of the following clauses and conditions:

SCC-3(1) [1/489]

SCC(5)(a) [1/490]

Clause 2.03(2)(m) of Specification – Preliminaries [1/518]

Clause 2.03(2)(n) of Specification – Preliminaries [1/518]

Clause 4.05 of Specification – Preliminaries [1/536]

Clause 5.01 of Specification – Preliminaries [1/542]

Clause 8.18 of Specification – Preliminaries [1/561]

Building materials placed on Kwan Yick Street outside the Site amounted to breaches of clause 2.03(2)d & 2.05 of Specification – Preliminaries [1/517 & 522]

Discharge of construction slurry to public drains was a breach of clause 5.11 of Specification – Preliminaries [1/545].

Water ponding on 3/F amounted to a breach of clause 5.10 of Specification – Preliminaries [1/545].”

32.  Mr Chan then submitted that defective work meant work that failed to comply with the requirements stipulated in a contract.  This is so regardless of whether the defective work would be incorporated into the permanent works.  Clause 25(1)(c) makes no distinction between permanent or temporary work.

33.  Mr Niehorster in §11 of the defendant’s Written Reply Submissions, however submitted that even if the temporary work should fail to comply with the contract, that was only a temporary disconformity and not a breach of contract. He referred to the judgment of Kaplan J in Eu Asia Engineering Ltd v Wing Hong Contractors Ltd, 1990 Con List 16 (23 December 1991) for support.  He referred to pp 18-19 and 21-22 of the judgment where the learned Judge said:

“In my judgment the whole issue of honeycombing has been blown out of all proportion. Honeycombing is a frequent occurrence. I accept that it has to be put right. It has to be put right before finishes are appliedto the walls. I am quite satisfied that if there was any honeycombing Eu Asia would have made it good in the normal course of the work. To suggest that it could give rise either to termination or to an allegation that it prevented a floor from being completed is quite unreal. (pp 18-19)”

and

“The right to terminate on the grounds of sub-standard work cannot possibly relate to the complaints made in this case which were mere temporary disconformities. The reference to sub-standard work in paragraph D4 of the contract must relate to general sub-standard work and cannot possibly relate to defects which had been or would soon be rectified in the normal course of events. If Wing Hong had the right to terminate the contract for every defect, the contract would not make commercial sense. I do not suppose any building has ever been constructed in Hong Kong where minor defects did not occur and which were later remedied by the contractors. (pp 21-22)”

I also note that the learned Judge had said at pp 20-21:

“It is not pleaded that there was a contractual obligation to make good honeycombing with due diligence. I doubt very much whether it can be said that the remedying of honeycombing can be on the critical path. None of the witnesses called by Wing Hong said that it was. ... If making good honeycombing delayed the application of finishes then Wing Hong would have had a justifiable complaint. But that is not what happened here. …”

34.  I also note that in Eu Asia Engineering, there was no reliance by the principal contractor as against the sub-contractor on any clause like clause 25(1)(c) in the contract in this case.  There was also no comprehensive definition of the meaning of “Works” in Eu Asia Engineering as in the present case.  Hence, it is not helpful to consider Eu Asia Engineering for resolving the disputes in this case.

35.  By virtue of the definition of “Works” which included both permanent and temporary works in the contract, and that temporary works included the completion and maintenance of temporary platforms, scaffoldings, catch fans and screens that the defendant had to erect and maintain and the defendant’s obligation to comply with all statutory requirements on construction site safety, I am of the view that the temporary safety constructions are very much part of the “Works” just as the permanent works despite the temporary works will not remain after completion of the contract.

36.  In the premises, I dismiss the defendant’s argument that clause 25(1)(c) does not apply to temporary works including the safety works referred to in M-204 and M-205 but only applies to matters incorporated into the permanent works.  I agree with the plaintiff that clause 25(1)(c) catches temporary works as well as permanent works so long as they are part of the Works that the defendant had to execute pursuant to the contract.

Whether “remove” includes “rectify” defective works or site safety work

37.  For the second point, Mr Niehorster submitted in §§13, 25 to 32 of his opening that clause 25(1)(c) only catches failure to comply with a notice from the architect to “remove” defective works and not to “rectify” defective works or site safety work as in this case and that a notice “to rectify” is opposite of a notice “to remove”.  Since the notices served on the defendant only required the defendant to rectify but not remove the safety irregularities, Mr Niehorster submitted that they were not valid notices issued under clause 25(1)(c).

38.  Mr Niehorster referred to Holland, Hannen & Cubitts v Welsh Health Technical Services Organisation & Ors (1981) 18 BLR 80 where His Honour Judge Newey QC dealt with notices issued under clause 6(4) of the 1963 Form of the JCT Standard Form of Building Contract which is similar to clause 25(1)(c).  In that case, window assemblies installed in a hospital building were problematic.  The architect issued three notices under clause 6(4), but none of them required the removal of the window assemblies from the site.  The learned Judge said at p 120:

“The tenth issue concerns the notices, or purported notices, given by PTP under Clause 6(4) of the main contract, condemning the window assemblies as not complying with the contract and dated respectively 8 May 1974, 7 February 1975, and 30 January 1976. The first of these documents was in letter form and did not mention Clause 6(4); the second and third were more formal and referred to the sub-clause. None of them, however, instructed Crittalls to remove the window assemblies from the site; and the effect of doing so would have been to have exposed the interior of the hospital to wind and rain.

In the absence of any oral testimony from the architects, I have no hesitation in inferring that their motives for issuing the notices were declaratory only, to create evidence, and to bring pressure to bear on Cubitts to sponsor Crittalls’ remedial proposals.  In my opinion, an architect’s power under Clause 6(4) is simply to instruct the removal of work or materials from the site on the grounds that they are not in accordance with the contract.  A notice when does not require removal of anything at all is not a valid notice under Clause 6(4). The clause does not authorise architects to issue declarations as if they were courts.”

39.  I agree that the notices in Holland, Hannen and Cubitts were invalid as notices issued under clause 6(4) cannot be declaratory only.

40.  However, the authors of Determination and Suspension of Construction Contracts by Powell-Smith at p 48 of the book suggested that His Honour Judge Newey had drawn attention to the curious feature of this clause that the architect was not given power to instruct that the defective work be remedied but only to instruct that it be totally removed from the Works.

41.  Mr Niehorster relied on this commentary and submitted that rectification does not fall within clause 25(1)(c).  Hence, he said that the plaintiff could not rely on the notices issued by the architect purportedly under clause 25(1)(c) to determine the contract as the notices required rectification and not removal.  The determination was thus wrongful and amounted to a repudiatory breach that had been accepted by the defendant.

42.  I disagree that Judge Newey had opined that a notice under clause 6(4) (or clause 25(1)(c) in this case) can only instruct the removal but not the rectification of defects.  When the learned Judge said: “[i]n my opinion, an architect’s power under Clause 6(4) is simply to instruct the removal of work or materials from the site on the grounds that they are not in accordance with the contract”, he was focusing on the point of whether notices issued under clause 6(4) could be merely declaratory and not instruct the taking of any action.  He clearly did not think so.  Hence, he said an architect’s power under clause 6(4) was simply to instruct the removal of the non-compliant work or materials.  He was however not focusing on the point of whether a clause 6(4) notice can be used to instruct removal as well as rectification of defective work.  That point was not before him and he was not giving any view on it. 

43.  Depending on the situation, the removal of the defective work may entail the wholesale removal and replacement of the defective work or it may require the repair and replacement of the defective part(s) only.  There may also be situations where the removal of the defective work without replacement of proper work would suffice. 

44.  If the defective work was originally undertaken to fulfil a requirement in the contract, a notice requiring the removal of the defect in the work should also instruct its replacement with proper work.  Otherwise, the mere removal of the defective work would result in non-compliance with the contract. To say that clause 25(1)(c) only authorizes a notice to remove defect but not a notice to make good defect is to say that this clause cannot be used to instruct the builder to comply with the contract.  If the notice can merely instruct removal and the builder does just that without replacement with proper work, there may then be an argument of whether the builder is in breach of contract as he has followed the architect’s notice of removal under clause 25(1)(c). 

45.  I think the argument that the notice issued under this clause cannot instruct rectification is absurd.  I am of the view that a notice issued under this clause should instruct the removal of defect and the making good of the defective work so that the Works would comply with the contract.  In other words, the notice should ask for rectification of the defective work.  This is a matter of common sense.  To add the word “rectification” to this clause is just to mention the obvious.  I take this view however strict clause 25(1)(c) should be interpreted.  I therefore disagree with Mr Niehorster that clause 25(1)(c) does not authorize the issue by the architect of a notice requiring the rectification of defective work.  I hold that the defendant’s refusal or persistent neglect to comply with M-204 and M-205 by rectifying the safety works amounted to satisfaction of the 1st Condition for the contract to be determined under clause 25(1)(c).  The defendant therefore fails on this ground.

Whether the “Works” were “materially affected”

46.  For the third point, Mr Niehorster submitted in §§33 to 38 of his opening that the “Works” were not “materially affected” by the defendant’s failure to comply with M-204 and M-205.  He referred to the absence of any site accident and that neither the BD nor the architect had ordered a suspension or stoppage of the Works.

47.  He also referred to Determination and Suspension of Construction Contracts which states in connection with JCT Form of Contract at p 48 that “the Works are materially affected” could mean “material effect on progress of the Works” or “the Works to be completed with the defect unremedied would not be fit for the intended purpose” or “the defective work unremedied for an extended period would seriously affect subsequent work”.

48.  He also referred to Parris’s Standard Form of Building Contract JCT 98 at p 263 where the author said that “[i]f the Works are materially affected, they will be affected substantially or seriously”.

49.  Mr Niehorster in §137 of his closing submissions further said that when the contract was determined, the structure of the building had already been completed.

50.  Mr Chan on the other hand submitted in §46 of the plaintiff’s opening that the continued poor safety conditions on the site were a factor that materially affected every aspect of the Works and those who worked there. The safety works in question form part of the Works in the contract and the defendant was bound to build them properly as per the contract.  The defendant’s refusal and neglect to rectify the irregularities in the safety works was a refusal and failure to rectify parts of the Works. 

51.  I am of the view that safety works, though are usually of a temporary nature, are the most important parts of the Works at the site.  They must be in good order at all times and the life and property of those working on site and the public should not be prejudiced for the sake of the construction of the permanent works.  If the safety works and installations are not in proper functional order, all building operations at the site should be stopped.

52.  In this case, some safety works were found by the BD to be irregular.  The defendant had been notified repeatedly to rectify them. But it had failed and refused to do so.  Its refusal and persistent neglect to rectify them had indeed materially affected them as parts of the Works and hence materially affected the Works.  The fact that they were of a temporary nature did not make them any less important than the permanent works.  They were of paramount importance to the life and property of those working at the site and both the temporary and permanent works were parts of the Works in the contract. 

53.  Indeed, BD’s long complaint dated 31 July had already underlined the threat of disciplinary action against the architect, the structural engineer and the defendant because of the safety irregularities.  The architect had also stated in both M-204 and M-205 dated 13 August that if the defendant should fail to rectify the safety irregularities and obtain satisfaction from the BD within 7 days, the defendant would be required to suspend work immediately.

54.  Since the safety works in this case were parts of the Works of the contract, if they had been materially affected, the Works are likewise materially affected as a matter of contract.  From the evidence proffered by the plaintiff, which I accept, I find that the safety irregularities in particular the irregular catch fans, irregular working platforms and the presence of building materials, tools and debris on the platforms and scaffoldings have created serious safety problems for the workers on the site and the public and hygiene problems on the site.  The fact that there was no accident is neither here nor there.  The defendant’s breach of contract did not depend on whether any accident had occurred or any worker had been killed.  To cite the absence of accident as a justification for the defendant’s irresponsible conduct is unreasonable, to put it mildly.

Whether the notice of determination was unreasonable and vexatious

55.  The fourth point taken by the defendant is that the notice of determination was given unreasonably and vexatiously.  Mr Niehorster referred to, in §140 of the defendant’s closing submissions, three warning letters issued by the architect on 4 August, 9 September and 15 September which he said were without basis.  He submitted in §142 of the defendant’s closing submissions that the plaintiff had decided well before 5 October to determine the contract.  He also said in §24 of the defendant’s reply submissions that the plaintiff wanted to remove the defendant at all costs.

56.  Mr Chan submitted in §50 of his opening that it is for the defendant to show that the notice of determination was unreasonable and vexatious.  The test of whether a notice of determination is issued unreasonably is to be ascertained by reference as to how a reasonable employer would have acted in all the circumstances.  In considering whether to issue a notice of determination, the employer is entitled to have regard to its own interest, but the determination may be unreasonable if it is disproportionally disadvantages to the recipient (Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10).

57.  In order to consider whether the notice of determination was issued unreasonably or vexatiously, it is necessary to consider whether the architect was justified in issuing M-204 and M-205.  These two AIs were not issued just on the architect’s own volition.  They were issued by the architect to require the defendant to rectify the safety irregularities identified by the BD in BD’s short and long complaints.  The BD was serious in pursuing the irregularities in these complaints.  It had underlined in the long complaint the threat of disciplinary proceedings against the defendant, the structural engineer and the defendant.  The defendant should have quickly and properly rectified the irregularities to the satisfaction of the BD.  In fact, the defendant should have done so after the BD had issued the long complaint on 31 July and before the issuance of M-204 and M-205 on 13 August. There is no dispute that it would have required no more than 7 days to rectify all problems.  However, the defendant failed to do so making it necessary for the architect to issue M-204 and M-205.

58.  Furthermore, the irregularities were not purged satisfactorily so that the architect had to issue another notice on 15 September under clause 25(1)(c) demanding rectification.

59.  Alas, the rectification was still not carried out properly within 14 days after the service of the notice on the defendant.  The architect then reported to the plaintiff the result of his inspection of the site on 29 September. The plaintiff then issued the notice of determination on 5 October 2009 to the defendant.

60.  Mr Chan submitted in the closing submissions that given the defendant’s persistent refusal or neglect to rectify the irregularities, any reasonable employer in the plaintiff’s position would have wanted to put an end to the contract.

61.  Regarding the defendant’s allegation that the architect Mr F Lok or his assistant D Lo had a grudge against the defendant, Mr Chan pointed out that the defendant had not put this matter to the plaintiff’s witnesses including Mr Lok and Mr D Lo.  Hence, the defendant should not be allowed to take this point in submissions.  Mr Chan is obviously correct.  In any case, I do not think there is any evidence that the architect or his assistant had a grudge against the defendant rather than just be unhappy about the defendant’s performance.

62.  Regarding the three previous warning letters issued by the architect, I think the important point is to consider whether the defendant can establish that the determination notice of the plaintiff is unreasonable or vexatious.  If not, the fact that there were previous unreasonable warnings by the architect is neither here nor there.

63.  The notice of determination of 5 October related to problems raised by the BD in July.  These were safety matters and should have warranted top priority.  But the defendant failed to rectify them properly after two months.  The particular worrying irregularities were the catch fans, the working platforms and the leaving of building tools, materials and debris on the platforms and scaffoldings.  In the light of all these problems which had been there for no less than two months, I hold that a reasonable employer in the plaintiff’s position would have been entitled to determine the contract as the plaintiff had done.  I do not think the notice was disproportionally disadvantages to the defendant.  Nor was it unreasonable or vexatious.

Was the defendant’s non-compliance de minimus

64.  The defendant has also pleaded in §66 of the defence that if it had not complied with BD’s short and long complaints, the extent of the non-compliance was de minimus.  However, I do not regard discontinuous catch fans, irregular working platforms and the presence of lots of tools, materials and debris on the platforms and scaffoldings as de minimus.  They pose grave problems of health and safety to all those working on the site.   The defendant fails in this point too. 

Was the defendant’s neglect persistent and continuous?

65.  Mr Niehorster has also submitted in §§40 to 42 of his opening that there was no persistent neglect and the defendant did not continue the default.

66.  However, I accept the plaintiff’s evidence that the safety irregularities first mentioned in BD’s short and long complaints were found to exist again and again in site inspections conducted after 31 July up to 29 September 2009.  Hence, I find that the defendant had refused or persistently neglected to comply with the M-204 and M-205.

Late receipt of architect’s notice of 15 September 2009

67.  Finally, on the satisfaction of Condition 3 of the four conditions of clause 25(1)(c), there is the question of whether the defendant’s default had continued for 14 days after receipt of the architect’s notice dated 15 September.  The issue arose out of the defendant’s allegation that it only received the 15 September notice on 16 September.  If that was the case, then there was only a lapse of 13 days when the site inspection was conducted on 29 September.

68.  However, there is a letter dated 7 October 2009 from the architect to the BD saying that the architect had conducted a site inspection on 6 October 2009 and found that discontinuous catch fans and improper working platforms of bamboo scaffolding as referred to in BD’s long complaint were still not rectified (M-2279).  The architect further advised the BD that for safety reasons, the plaintiff had determined the contract with the defendant.

69.  I see no reason why the architect would have lied on 7 October to the BD that there was a site inspection on 6 October or that the discontinuous catch fans and improper working platforms were found in the inspection. I accept the statements in the letter dated 7 October as true and correct.

70.  Furthermore, Mr Chan has pointed out that the defendant’s solicitors had written to the plaintiff’s then solicitors on 9 October alleging that the default notice dated 15 September was wrongly issued under clause 25(1)(c) as it related to irregularities of safety work (M-2280).  The defendant at that time was still at the site.  It only left the site on 17 October.  If the safety irregularities had already been rectified properly after the inspection on 29 September, the defendant’s then solicitors would have said so in their letter of 7 October. The fact that they did not say so is evidence that the safety irregularities were still there on about 7 October.

71.  The architect wrote to the BD again on 21 October. He reported to the BD that the defendant had left the site on 17 October and all construction work had been suspended (M-2282).  He also advised the BD that all safety works including that mentioned in BD’s long complaint would be constructed by a separate contractor.  This letter is thus further evidence that the safety irregularities in BD’s long complaint were still not rectified.

72.  There is further evidence mentioned in §§93 and 94 of the plaintiff’s closing submissions showing the existence of safety irregularities after 30 September.  In the premises, I find that the defendant’s default had continued for 14 days or more after receipt of the architect’s notice dated 15 September.

DECISION OF LAWFULNESS OF DETERMINATION

73.  In the light of the above analyses and findings, I find that all four Conditions of clause 25(1)(c) were satisfied.  In the premises, the plaintiff’s determination of the contract pursuant to clause 25(1)(c) was lawful.

QUANTUM

74.  The quantum of damages payable by the defendant to the plaintiff or vice versa after a valid determination of the contract is governed by clause 25(3)(d) of the contract.  The relevant parts of clause 25(3)(d) provide:

“25. Determination by Employer

(3) In the event of the employment of the Main Contractor being determined as aforesaid and so long as it has not been reinstated and continued, the following shall be the respective rights and duties of the Employer and Main Contractor :—

(a) The Employer may employ and pay other persons to carry out and complete the Works and he or they may enter upon the Works and use all temporary buildings, plant, tools, equipment, materials and goods intended for, delivered to and placed on or adjacent to the Works, and may purchase all materials and goods necessary for the carrying out and completion of the Works.

…

(d) The Main Contractor shall allow or pay to the Employer in the manner hereinafter appearing the amount of any direct loss and/or damage caused to the Employer by the determination.  Until after completion of the Works under paragraph (a) of this sub‑clause the Employer shall not be bound by any provision of this Contract to make any further payment to the Main Contractor, but upon such completion and the verification within a reasonable time of the accounts therefore the Architect shall certify the amount of expenses properly incurred by the Employer and the amount of any direct loss and/or damage caused to the Employer by the determination and, if such amounts when added to the monies paid to the Main Contractor before the date of determination exceed the total amount which would have been payable on due completion in accordance with this Contract, the difference shall be a debt payable to the Employer by the Main Contractor; and if the said amounts when added to the said monies be less than the said total amount, the difference shall be a debt payable by the Employer to the Main Contractor.”

Argument of condition precedent for the operation of clause 25(3)(d)

75.  Mr Niehorster submitted in §§100-108 of his closing submissions that there is a pre-requisite or condition precedent to be complied with by the architect before any sum could be due from either the plaintiff or defendant to the other.  He referred to the architect’s obligation, after the Works had been completed by the replacement contractor and others as employed by the plaintiff under clause 25(3)(a), to certify the amount of expenses incurred by the plaintiff and the amount of direct loss and/or damages caused to the plaintiff by the determination of the contract under clause 25(3)(d).  The architect has indisputably not certified these amounts.

76.  Mr Niehorster referred to Determination and Suspension of Construction Contracts by Powell-Smith and Sims at p 61 and submitted that a notional final settlement account must be prepared for the contract under clause 27.4.4 of the UK Standard Form JCT 80 (similar to clause 25(3)(d)) by setting off the amounts certified by the architect against what is due to the defendant as if the defendant had completed the Works, and such notional final account is a condition precedent to the plaintiff’s right to recover monies from the defendant under clause 25(3)(d). 

77.  He also referred to §85(iii)(c) of the defence which was pleaded by way of an amendment on 9 August 2011 after the initial trial had been aborted in late July 2011.  He submitted that §85(iii)(c) pleaded that the plaintiff is not entitled to any damages for want of a notional final account.  §85(iii)(c) pleads:

“85. Without prejudice to the generality of the foregoing, the Defendant avers:

…

(iii) The Plaintiff’s alleged entitlement to loss and damages based on the contract price of the Completion Contract pleaded at paragraph 26(d) is flawed as, inter alia:

…

(c)   In paragraph 28, the Plaintiff (properly) recognizes the need for a ‘notional’ final account of the Contract to determine its entitlement, if any, but fails adequately to particularise the same, or at all. In the premises, the Defendant will submit at the hearing of this matter that there is no agenda for trial.”

78.  Mr Chan argued that §85(iii)(c) of the defence merely pleaded the lack of particulars but not that the notional final account is a condition precedent.  I disagree.  I think §85(iii)(c) does say that the notional final account is needed to determine the plaintiff’s entitlement and its absence means that there is no such issue for trial.  It makes a clear point that the notional final account is needed to determine the plaintiff’s entitlement.  I hold that the defendant is entitled to take this point although the words “condition precedent” do not appear in §85(iii)(c).

79.  Mr Chan’s 2nd point is that §85(iii)(c) was pleaded after the initial trial.  The defendant did not plead it for a long period during which the parties had incurred substantial costs and time to prepare for the trial of the action.  He thus submitted that the defendant had represented clearly and unequivocally that it would not take this point as a defence.  The plaintiff in reliance on the representation had suffered detriment in costs and time.  Hence, the defendant should be estopped from taking this point.

80.  I again disagree.  I do not think the defendant had represented that it would not take this point until its inclusion by amendment in August 2011.  In any case, this estoppel argument is only useful for opposing the amendment of §85(iii)(c), not to stop it from being argued when it is already part of the defence.  I also note that this estoppel argument has not featured in the reply and defence to counterclaim.

81.  Mr Chan’s 3rd point is that clause 25(3)(d) only directs the making of the notional final account, but has not made it a condition precedent for the plaintiff’s claim under that clause.  He further referred to clause 35(4) of the contract which stipulated:

“35(4) Nothing in these Conditions shall be taken as excluding or being intended to exclude from the review and determination of any competent court of law any matter of fact or law disposed of by such decision, opinion, consent, expression of satisfaction or approved determination of value or action or any certificate of the Architect or any of the rights or obligations of the parties which may be dependent upon or affected by such decision, opinion, consent, expression of satisfaction or approval; determination of value or action or certificate. Such court shall have full power to open up, review and revise any decision, opinion, consent, expression of satisfaction or approval, determination of value or action or certificate of the Architect. …”

82.  This clause makes it clear that any notional final account as may be certified by the architect is open to review by the court.  Hence, even if such an account has not been prepared, the court can still determine what is due under it had it been prepared.

83.  I agree with Mr Chan on this point.  If the notional final account should be a conditional precedent for the plaintiff’s claim, I see no reason why it should not have been so provided and to oust the application of clause 35(4) on it.  Mr Chan has also pointed out that the contract has indeed provided for a prerequisite or condition precedent for the defendant’s claim for loss and/or expenses resulting from variations (SCC-11) (I-496), for extension of time (SCC-23(5)) (I-503) and for loss and/or expense caused by disturbance of regular progress of the Works (clause 24 as amended by SCC-24) (I-505).

84.  I also note that the authors of Determination and Suspension of Construction Contracts have not suggested that the notional final account was a condition precedent for a claim to be made under clause 27.4.4 of the UK Standard Form JCT 80.

85.  Mr Niehorster also referred to the case of JF Finnegan Ltd v Community Housing Association Ltd, 77 BLR 22 where the English Court of Appeal held that a notice by the employer under clause 24.2.1 of the JCT Standard Form Building Contract, 1980 Private Edition with Quantities was a condition precedent to the deduction by the employer of liquidated and ascertained damages from the contractor.  But that case was decided on a different clause against different facts and is not helpful. 

86.  In the premises, I hold that the notional final account by the architect as directed by clause 25(3)(d) of the contract is not a condition precedent for the plaintiff’s claim for loss and damage under this clause.

CALCULATION PURSUANT TO CLAUSE 25(3)(D)

87.  The amount payable under clause 25(3)(d) is calculated as follows:

“Damages for direct loss and/or damage caused to the plaintiff by the determination.

Add: the monies paid to D before the date of determination of D’s employment.

Less: the total amount which would have been payable by P to D on due completion in accordance with the Contract.”

DAMAGES FOR DIRECT LOSS AND/OR DAMAGE CAUSED TO THE PLAINTIFF BY THE DETERMINATION

88.  I agree with Mr Chan that the first item of damages for direct loss and/or damage caused to the plaintiff by the determination comprise the following items as set out in §106 of his closing submissions:

(1)  The plaintiff’s management costs post-determination.

(2)  The plaintiff’s expenses to procure contractors to supply materials or carry out works included in the original scope of the contract but not awarded under the replacement contract to Dao Kwei Kee (“DKK”) (referred to as the Completion Contract in the pleadings).

(3)  Costs relating to the replacement contract awarded to DKK.

(4)  Liquidated damages. 

(5)  Damages for loss of profit for delayed opening of the hotel.

89.  Regarding the second item of monies paid to the defendant, it includes the monies actually paid to the defendant plus monies paid on behalf of the defendant to suppliers to secure building materials that should have been purchased and paid by the defendant directly.

90.  The third item is the total of the contract sum, the value of variation works that should be paid to the defendant and pre-determination prolongation site overhead costs and head office overhead costs.

The plaintiff’s management costs post-determination

91.  The plaintiff’s quantum expert Mr Ringo Lui (“Lui”) set out the sums under this item which have been summarized in §55.1 of the plaintiff’s opening submissions.  The defendant agreed with these sums in §112(i) and 113 of its closing submissions.  These sums totalling HK$556,414.98 are as follows:

Extension of insurance	HK$147,000.00
Making good bamboo scaffolding	HK$34,200.00
Provision of safety matter	HK$8,000.00
Killing of insects, bugs & mosquitoes	HK$3,000.00
Independent AP/RSE Report	HK$50,000.00
As-built survey work	HK$18,000.00
Safety Management	HK$38,250.00
Temporary power supply	HK$43,000.00
Security guard	HK$214,964.98
Total :	HK$556,414.98

The plaintiff’s expenses for materials and works within the original scope of the contract but not awarded under the replacement contract

92.  The total sum claimed by the plaintiff under this item is HK$875,190.05. It is made up of the following sums:

Paid to Falcon Building Materials Co Ltd (“Falcon”) for supply of tiles	369,790.05	Q/3612-3613
Paid to Venpower for external wall cladding works	500,000.00	Q/3617-3628
Paid to DKK for supply of hand drillers and labour	5,400.00	Q/3631-3634
Total :	875,190.05

93.  Mr Niehorster submitted in §99 of his closing submissions that the above payments to Falcon and Venpower made by the plaintiff after the determination of the contract had nothing to do with the determination of the contract, but were arranged earlier by the plaintiff.  They would be incurred in any event and thus not claimable under clause 25(3)(d).

94.  Mr Chan however submitted in §§125-127 of his closing submissions that these payments were made by the plaintiff on behalf of the defendant for the purposes of the Works and that the contract price of HK$48 million had included such purposes.  Even though the items for which the two payments were made were subsequently taken out of the contract by a variation, the defendant’s liability for the same was not affected because the HK$48 million contract price was not varied in line with the omission of the items.  Mr Chan’s argument is logical and reasonable. I agree with him that the defendant’s liability under this sum should be HK$875,190.05.

The costs of and relating to the replacement contract awarded to Dao Kwei Kee (“DKK”)

95.  There are 4 items under this heading.  The first at HK$260,000 for WT Partnership (HK) Ltd to record and value the outstanding works and defect rectification under the determination of the contract and to prepare re-tender documents for these works is not disputed.

96.  The second of HK$50,000 paid to the architect for work done relating to the re-tendering is also undisputed.

97.  The third is the contract price of HK$17,300,000 payable to DKK under the replacement contract.  This sum has been certified as payable by the plaintiff’s quantity surveyor and is due to DKK if not fully paid already. It is the consideration for all the works specified in the replacement contract. These works are (i) the outstanding parts of the Works under the contract (“the outstanding works”) and (ii) the rectification of the defendant’s defective works that were identified before the award of the replacement contract to DKK.  These defective works are hereinafter called “schedule 14 works”.  Of the sum of HK$17,300,000, HK$1,800,000 is fixed in the replacement contract as the costs for rectification of the schedule 14 works. 

98.  DKK later claimed HK$3,495,181.81 as for the costs of the preliminaries for the outstanding works.  The plaintiff’s quantum expert Lui considered that this sum is close to 25% of the costs for the outstanding works. Hence, he considered that the fixed costs of HK$1,800,000 for rectifying the schedule 14 works also entailed a further sum of HK$450,000 (25% of HK$1,800,000) for the preliminaries attributable to those works.  The sum of HK$17,300,000 can therefore be split into two parts of (i) (HK$12,040,000 + HK$3,010,000 =) HK$15,050,000 for completing the outstanding works including the costs of preliminaries and (ii) (HK$1,800,000 + HK$450,000 =) HK$2,250,000 for rectifying the schedule 14 works including the costs of preliminaries.

99.  The price of the Works in the contract is HK$48,000,000. The parties agree that the assessed value for the part of the Works done by the defendant in that contract (not include variations) is HK$32,677,292.67.  This sum is payable by the plaintiff to the defendant under clause 25(3)(d) of the contract. As a result of this agreement, the costs for completing the outstanding works in that contract is therefore at (HK$48,000,000 - HK$32,677,292.67 =) HK$15,322,707.33. This is fairly close to the HK$15,050,000 above-mentioned and supports Lui’s approach in treating the costs of preliminaries as a 25% component of the costs of the Works in the replacement contract.

100.  The experts also agreed that of the HK$17,300,000 in the replacement contract, HK$15,044,240 is the actual costs stipulated therein (inclusive of the costs of preliminaries) for completing the outstanding works. This sum is payable by the defendant to the plaintiff under clause 25(3)(d) of the contract.  It is slightly different from the above sum of HK$15,050,000 as it is arrived at by considering the terms of the replacement contract and not through apportionment of the costs of preliminaries.  This sum of HK$15,044,240 is also lower than the sum of HK$15,322,707.33 above which is arrived at by assessing the value of work done by the defendant under the contract.

101.  Since HK$15,044,240 is the actual costs for completing the outstanding works, the balance of the contract price HK$17,300,000 in the replacement contract payable to DKK at (HK$17,300,000 - HK$15,044,240 =) HK$2,255,760 must be regarded as the costs actually paid to DKK for rectification of the schedule 14 works.  This sum is also close to the HK$2,250,000 assessed by Lui for the rectification works.  The HK$2,255,760 also includes the share of the costs of preliminaries attributable to the rectification of the schedule 14 works. 

102.  The sum of HK$2,255,760 net of the 25% for preliminaries is HK$1,804,608.  It is very close to the price of HK$1,800,000 fixed in the replacement contract for rectification of the schedule 14 works (net of the preliminaries). Though the plaintiff had paid or had to pay DKK HK$1,804,608 (net of preliminaries) for rectification of all the schedule 14 works, the maximum liability of the defendant for such works is HK$1,800,000 (net of preliminaries) as that is the maximum sum fixed in the replacement contract.   The defendant is also liable for the 25% of HK$1,800,000 at HK$450,000 for the preliminaries for the schedule 14 defective works. The sum of HK$1,800,000 is, however, subject to a number of disputes that are dealt with below. 

103.  The fourth item is made up of two sums of HK$35,302 and HK$367,350 which are paid to DKK under its quotations Q-16 and Q-46 respectively for rectification of defects separately and independent from those in the replacement contract.

The costs for rectifying the schedule 14 works by DKK under the replacement contract for which the defendant should be responsible

104.  The items of the schedule 14 works that the plaintiff says that needed rectification and for which the defendant should be liable are listed in §5 of the replacement contract (S-4134) and repeated in the defects report of Chao Chi Man (“Chao”), architect and defect expert of the plaintiff (E-1321-7) as follows:

•      Rectification/Recasting of RC staircases from G/F to 3/F due to insufficient headroom.

•      Rectification/Recasting of RC staircases, walls and slabs for Lift Machine Room and Upper Roof due to insufficient headroom.

•      Rectification/Recasting of RC external wall for those bay windows which are insufficient to install the windows.

•      Rectification/Re-Plastering of the defective external cement sand plaster.

•      Rectification/Re-coring of slabs and wall openings for E/M services.

•      Step joint wall finishing in guest rooms and corridors.

•      Defective works as stated in AP/RSE report.

•      Other defective works caused by previous main contractor.

105.  Payments to DKK for the rectification works are provided in schedule 14 of the replacement contract (S-4146 – 4149) on the basis of a lump sum for each floor and not on the basis of the individual items set out in §5 of the replacement contract.  The total of the lump sums in schedule 14 is HK$1,800,000 (which does not include the costs of the preliminaries which is at about 25% of the overall price of HK$17,300,000).  §5 of the replacement contract provided that the quantities of defective works in schedule 14 are subject to re-measurement. The items that the plaintiff in the end wants to hold the defendant responsible are discussed below.

Insufficient headroom for staircases from G/F to 3/F and for the Refuge Floor below the Left Machine Room that needed recasting of RC

106.  Mr Chan devoted §§136 to 149 and 150 to 153 of his closing submissions on these two items respectively.  He submitted that the defendant as the registered general building contractor (“RGBC”) had the duty under section 9(5)(c) of the Building Ordinance to comply with the provisions of the Ordinance. Section 9(5) provides:

“(5) A registered general building contractor appointed to carry out building works or street works other than specialized works is required to —

(a) provide continuous supervision to the carrying out of the works in accordance with his supervision plan;

(b) notify the Building Authority of any contravention of the regulations that would result from carrying out the works shown in the plan approved by the Building Authority for the works; and

(c) comply generally with this Ordinance.”

107.  Clause 2.03(0) of the Specifications-Preliminaries reinforced the defendant’s obligation under the Ordinance by providing that the Works included (I-517):

“Acting as and performing the roles of Registered General Building Contractor (RGBC) of the Project in accordance with the Buildings Ordinance (Cap. 123), Practice Note, etc.”

108.  Mr Chan then referred to Regulation 39(3)(a) of the Building (Planning) Regulations which stipulates that the main staircase of every building that exceeds 1 storey in height shall have a clear height of not less than 2 metres.

109.  The architect also stated in note no. 2.4 under the General Notes of the approved General Building Plan (“GBP”) that “Clear Headroom of Staircase to be 2,000mm Minimum” (I-518).

110.  There was, however, a layout plan supplied by the architect to the defendant that showed the height of the main staircase from 2/F to 3/F at only about 1.7 metres (F1-1545-73).  Unfortunately, the defendant constructed the staircase according to this plan on 22 October 2008 and only discovered the problem afterwards (E-1321-8 §5).

111.  Regarding the Refuge Floor and Upper Roof, the original design of the headroom of the landing and staircase was at 2.2 metres.  However, there was a drawing produced by the registered structural engineer (“RSE”) in December 2007 that had beams of 400 mm depth.  The beams reduced the designed headroom to 1.8 metres.  The defendant erected the formwork for this floor at the end of August 2009 without being aware of the problem.  After concreting and removal of the formwork, the defendant found that the headroom of the staircase was at about 1.75 metres only contrary to Regulation 39(3)(a) (E-1321-8 §6).

112.  These defective works were rectified by DKK under the replacement contract.  But the defendant disputed liability for the costs of the rectification.

113.  Mr Niehorster dealt with this liability issue in §§29 to 33 of his closing submissions.  There is no dispute that the defendant was not aware of the problems before concreting the staircases.  But Mr Niehorster submitted that the failure of the RC staircases to comply with Regulation 39(3)(a) was the fault of the RSE.

114.  He also submitted that the obligations of the architect (the AP), RSE and RGBC were co-extensive as section 4 of the Building Ordinance imposed on the AP and RSE similar obligations as imposed by section 9(5) on the RGBC. 

115.  He further submitted that the contract was one of build only and not design and build.  Hence, in so far as the structure was concerned, the defendant was only required to work in accordance with the plans and drawings provided by the AP and the framing plans provided by the RSE.

116.  He also referred to the evidence of Patrick Tsang, DW2 that the RSE had inspected the works after fixing reinforcement but before concreting. But the RSE did not point out any error (B-423 §§130, 131 and F1-1545-50 §82).

117.  Mr Chan disagreed.  He referred to the defendant’s statutory and contractual duties to comply with Regulation 39(3)(a) to ensure a minimum height of 2 meters for the staircases.  He referred to Townsend (Builders) Ltd v Cinema News and Property Management Ltd (1958) 20 BLR 118 at 142-143. In this case, the architect designed two bathrooms containing toilets for the defendant. The design did not comply with the London County Council’s water closet by-laws which forbade the construction of a WC entered directly from a room for human habitation unless it is exclusively a bedroom or dressing room.  The bathrooms were built by the plaintiff’s contractor who did not know about the non-compliance until the Works were far advanced. 

118.  Under clause 3 of the RIBA Conditions, the contractor had to comply with any Act of Parliament or any regulation or byelaw of any local authority that had jurisdiction over the Works.

119.  The English Court of Appeal held that the contractor was obliged by clause 3 of the RIBA Conditions to comply with the byelaws.  As between the contractor and the owner, it was no answer to the claim of breach of contract that the contractor had not unreasonably relied upon the architect to ensure that the design was in compliance with the byelaws.

120.  Mr Chan thus submitted that even though the AP and RSE were also in breach of their statutory duties and the plaintiff had a valid claim against them, that did not immune the defendant from liability. 

121.  Mr Chan also referred to Plant Construction Plc v Clive Adams Associates and Anor [2000] BLR 137 at 147.  In this case, a sub-contractor was instructed to construct some temporary support work for a steel column and a roof pending excavation of the concrete base of the column.  After the temporary works were constructed, the site agent of the sub-contractor recognized that they were inadequate.  There was a heavy rain after the excavation.  The roof then collapsed resulting in substantial damage.  The English Court of Appeal held that the sub-contractor knew that the temporary support works were dangerous.  Its implied contractual obligation to perform with skill and care carried with it an obligation to warn of the danger which it perceived.  The fact that there were others liable for the fault and that the sub-contractor was obliged to do what it was instructed to did not negate or reduce the extent of the performance of its implied contractual obligation to give proper warning about the risk.

122.  Mr Chan also referred to Hudson’s Building and Engineering Contracts, 12 edn at §3-097 for further support of this “duty to warn”.

“(iii) ‘Duty to warn’ cases

Even where there is no reliance on the Contractor for the design in the pre-contract stages of the parties’ relationship, what may effectively become a design or suitability obligation (although discharged in a different manner and if breached giving rise to a possibly somewhat different measure of damages) may arise if, in the light of present or subsequent events, a reasonably competent Contractor should then have realised that the original design was likely to prove unsuitable, but failed to warn the Employer or, in suitable circumstances, their consultant. Thus it has been held quite independently, in a number of jurisdictions, that the Contractor will be in breach of contract if they do not warn the Employer or their consultant of the inadequacy, or the likely inadequacy, of the design. …

…

      Construction contracts not uncommonly address the division of design responsibilities between Employer and Contractor expressly, and it may be suggested that such provisions are inconsistent with a duty to warn.  It is submitted that the purpose of such provisions is merely to avoid any suitability or other implied term operating automatically should the design prove unsuitable, and not as excluding a duty of care or reasonable workmanship which might give rise to a duty to warn of a design deficiency of which a reasonably competent Contractor should be aware.”

123.  Regarding the defendant’s reliance on the inspection of the formwork by the RSE before concreting, I agree with Mr Chan that the RSE’s concern was on the structural aspect.  Further, the defendant said that the inadequacy was so apparent that the RSE should have spotted it upon inspection of the formwork. In that case, the defendant should also have spotted it.  I also refer to section 9(5) of the Ordinance which required the defendant to provide continuous supervision to the carrying out of the Works.  The defendant should have spotted the inadequacy and notified the AP or the Building Authority about it under section 9(5). 

124.  In the light of these authorities, I agree with Mr Chan that the defendant clearly had a duty to warn the plaintiff and/or the AP of the inadequacies in the designs for the height of the staircases and had failed to discharge it.  The fact that the AP and/or RSE might also have been in breach of their duties and at fault and the plaintiff could have a valid claim against them is not a defence for the defendant.

125.  The defendant also purportedly rely on 4 letters it exchanged with the architect in which it raised a general concern on the adequacy of the height of 33/F.  But these letters did not pin-point at the actual problem of inadequate height of the staircase.  The defendant also admitted that at the time when these letters were exchanged, it was not aware of the actual problem. I would therefore hold that these letters do not assist the defendant as they did not point to the actual problem.

126.  Apart from the above legal arguments, both parties also referred to the expert evidence on whether the defendant should be liable for the rectification of these works.  I consider that the defendant’s liability is a matter of law and not a matter for the experts to advice.

Recasting of RC external wall for the bay windows that are insufficient to install the windows and step joint walls finishing in guest rooms and corridors

127.  Subject to three qualifications, the defendant does not dispute the liability to these two items of defective works.

128.  The qualifications are:

(1)  if the court should find the determination of the contract unlawful, then these defective items should be regarded as temporary and the defendant should not be liable for the rectification costs;

(2)  the plaintiff’s quantum expert, Lui did not value these items individually; and

(3)  the plaintiff has not proved that it had paid for the rectification of these items.

129.  I have already held that the determination was lawful. I have also held that the plaintiff is obliged to pay DKK the full sum of HK$17,300,000 in the replacement contract as the same has been certified by its quantity surveyor as payable.  That sum included the costs for rectifying these items.  I will deal with the qualification on valuation below.

Re-coring of slab and wall opening for E&M services

130.  The plaintiff’s defect expert, Chao dealt with this item in section 9 of his report (E-1321-13).  This item involved the following:

(1)  Coring to make openings in existing RC structure for the passage of building services;

(2)  Filling up existing sleeve openings wrongly formed by former contractor;

(3)  Cutting in existing RC wall outside guest rooms to make recesses for door bells and make grooves for associated wire conduits;

(4)  Cut through lift wall to make opening for call-button panel;

(5)  Cut corridor walls to make opening for passage of telephone cable trunking; and

(6)  Cut wall to make opening for passage of air ducts on 2/F and 3/F.

131.  A total of 872 holes had to be cored (S-4100 SR/14/1 n, o).  Chao took the view that these defective works were the result of the defendant’s failure to properly coordinate the works of the nominated sub-contractors (“NSCs”) by preparing combined services drawings (“CSDs”) pursuant to the terms of the contract. Chao said he had asked the plaintiff for the CSDs, but was told that they did not exist.

132.  Mr Chan referred to schedule 14 item 1 of the Schedule of Rates in the contract which provided that HK$1.5 million out of the HK$48 million contract price was the defendant’s profit for attending on the NSCs (J-1180).

133.  Mr Chan also referred to a number of clauses in the Specification-Preliminaries that stipulated the defendant’s obligations to coordinate the works of the NSCs and to prepare the CSDs.  They are:

“6.04 Attendance, etc. on Nominated Sub-contractors and Specialist Contracts

…

The Main Contractor is to make his own arrangements with the Nominated Sub-Contractors and Specialist Contractors as to the time and manner of executing their work and is to obtain full particulars as to their requirements with regard to holes, chases, recesses, etc. in all concrete work and form same including setting in sleeves, anchor bolts, fixing brackets, etc. where such sleeves, anchor bolts, fixing brackets, etc. are supplied by the Nominated Sub-Contractors and Specialist Contractors. The Main Contractor is to supply the Nominated Sub-Contractors and Specialist Contractors with all necessary dimensions and other information so that their work may be correctly executed and subsequent alterations obviated. Should the Main Contractor fail to so form holes, chases, recesses, etc. in the concrete work he will be required to cut them at his own expense. …

…

6.06 Building Services Co-ordination

(a) … The Main Contractor in conjunction with the respective Nominated Sub-Contractors and Specialist Contractors shall also be responsible for preparing ‘co-ordinated services drawings’ which shall include all builder’s work in connection with building services installations inclusive of plumbing and drainage to facilitate co-ordination of the installation of all services in the correct sequence and position. All working drawings for the various services installations (inclusive of plumbing and drainage) must be submitted to the Architect and his confirmation must be obtained that such drawings comply with design intent prior to execution of the respective building services installation works. The Main Contractor shall co-ordinate with the respective Nominated Sub-Contractors and Specialist Contractors and arrange timely submissions of same to the Architect. Co-ordinated services drawings shall be submitted within one(1) month of submission of the working drawings of the related Nominated Sub-Contract awarded to allow the Architect to satisfy himself that co-ordination of the works is being implemented. …

Should the Main Contractor, during the preparation of the ‘co-ordinated services drawings’, discover any discrepancy in the design intent or the design intent shown on the drawings issued for all building services is unable to be implemented, the Main Contractor shall forthwith refer the issue to the Architect/Building Services Engineers as soon as possible and allow ample time for clarification/decision and issuance of the revised building services drawings. Any variation resulted from the above shall be dealt with under the terms of the Contract.

Should the Main Contractor fails to identify the above during the preparation of the ‘co-ordinated services drawings’, any cost involved in the works which deviates from the ‘co-ordinated services drawings’ prepared by the Main Contractor and approved by the Architect shall be borne by the Main Contractor.

…

(c) The Main Contractor shall be responsible for checking the effect on the working drawings or co-ordinated drawings of any instruction or variation order issued by the Architect and for liaising with the Nominated Sub-Contractors in making any adjustments to the drawings which may be required as a result. …

(d) It is a particular requirement of this Contract that the Main Contractor ensures, prior to the installation of any of the building services (including plumbing and drainage), that the positions and routes of same are fully co-ordinated and that notwithstanding approval by the Architect of the shop drawings, any costs incurred in dismantling, re-positioning or re-routing as a result of poor co-ordination by the Main Contractor will be for the Main Contractor’s account.

(e)  The Main Contractor shall be required to produce co-ordinated builder’s work drawings based upon the requirements of the Nominated and Specialist Sub-Contractors for approval by the Architect within the time frame as specified in Sub-clause (a) above and in all cases at least 2 weeks before the concerting work is commenced.  The builder’s work drawings shall fully indicate all the dimension requirements of openings, temporary access, plinths, weight of equipments etc. THREE (3) Sets for building services works paper prints shall be prepared during submission or re-submission and EIGHT (8) sets paper prints for subsequent distribution upon approval.”

134.  The defendant disputed the allegation that it had failed to prepare the CSDs.  DW2, Tsang said in evidence that the defendant had meetings with the NSCs once every two weeks to discuss coordination work.  Concreting was done after the NSCs had been consulted on whether the holes had been correctly positioned.  CSDs were prepared every time.

135.  Furthermore, Mr Niehorster in §27 of his closing submissions referred to AI-150 dated 12 May 2009, AI-158 dated 9 June 2009 and AI-161 dated 11 June 2009.  The architect through these AIs instructed changes to the locations of the door opening and sunken slap from 20/F to 26/F, revision to layouts for bathrooms and sunken slabs to guest rooms 5 to 7 from 27/F to 30/F and changes to the layout of the bathrooms to the guests rooms from 5/F to 20/F respectively.  The changes in AI-150 were not in line with the builder’s work already done.  Furthermore, the shower locations and the changes instructed by AI-158 were further revised in the replacement contract.  The changes instructed in AI-161 also required additional floor openings for the drainage system.

136.  Mr Chan disputed the defendant’s evidence.  He submitted that if Tsang was truthful, then there should be many CSDs prepared in the course of the contract.  However, there were only produced eight combine builder’s work drawing (“CBWDs”) (01-230-237) and very few CSDs.  The CBWDs were prepared pursuant to clause 6.06(e) of the Specification-Preliminaries and not the above clauses.

137.  Mr Chan also referred to a letter dated 27 July 2009 from Mr Ernst Chan, project manager of the defendant to the architect where he said:

“Our contract obligation is very clear such that the NSC(s) shall provide shop drawings indicating the layout and size of ‘boxing out’ at each level of floors. Before our concreting work, our staff had informed all NSCs to counter check our setting out/’boxing out’ work, we are sure we have installed all the ‘boxing out’ as according to these information provided by all NSC(s). Should there be any added/alternated/change of position due to whatever reason, it is not our fault/our contract obligation to adding any variation of design work at our costs and time to complete this revised work.”

138.  In addition, Mr Chan referred to the minutes of the Building Services Coordination Meetings No. 4 held on 30 May 2008 (§ 3.3.5) (K-1299) and No. 28 held on 7 May 2009 (§ 2.3.7) (L-1717) as follows:

“3.3.5 WK reported that they already sent to different NSC some layout plans for their review and if they found out any conflict, please tell WK to arrange other NSC to change.” (BS Coordination Meeting No. 4)

“2.3.7 WK stated that all NSC will be informed before the date of concreting. All NSC should check their works and report to WK if any enquires” (BS Coordination Meeting No. 28)

Neither Mr Ernst Chan in his letter nor the minutes of meetings mentioned any CSD.

139.  Mr Chan submitted that by virtue of the evidence, the defendant had relied on the shop drawings rather than CSDs that it should have prepared.  He further said that his view was supported by Mr Tsang’s evidence that concreting was only done after the NSCs had been consulted on whether the holes were correct and that very few CSDs were found in the hearing bundles.  Mr Chan submitted that on a balance of probability, the defendant had produced very few CSDs and had just relied on the shop drawings and information from the NSCs and without doing proper coordination work.

140.  Regarding the three AIs relied on by Mr Niehorster in §27 of his closing submissions, Mr Chan said that AI-150 was dated 12 May 2009 and instructed changes to the 20/F to 26/F.  He referred to the fact that the defendant had finished concreting the floor slab of 19/F on 5 May and the floor slab of 21/F on 21 May.  Thus when AI-150 was issued on 12 May 2009, it was early enough for the changes therein to be incorporated into the formwork before concreting.  AI-150 therefore had not caused any need to re-core holes.  I think this submission is only correct for 21/F or 22/F and above.  The defendant, having completed the concreting of the 19/F on 5 May, would have proceeded with the construction of the 20/F.  By the time it received AI-150, which was dated 12 May, it should have finished with concreting the 20/F and might have progressed substantially with the formwork of 21/F.

141.  Regarding AI-158 dated 9 June 2009, it affected 27/F to 30/F.  It is the defendant’s case that it had completed 27/F on 20 June 2009. Hence, Mr Chan rightly submitted that there was enough time for the changes in AI-158 to be incorporated into the Works.

142.  However, Mr Chan has no answer to the changes brought about by AI-161 and dated 11 June 2009 which affected the 5/F to 20/F. 

143.  Mr Chan also fairly pointed out that the minutes of two Building Services Coordination Meetings do refer to some CSDs.  They are the CSDs for 27/F to 30/F (26 BS Coordination Meeting on 2 April 2009 at L-1631) and the CSDs for G/F, UG/F to 2/F and 31/F to UR/F (28 BS Coordination Meeting on 7 May 2009 at L-1717).

144.  There are in fact a few more sets of minutes of BS Coordination Meetings in the bundles which make reference to CSDs and CBWDs.  The relevant pages in chronological order are:  26^th meeting on 2 April (L-1631), 27^th meeting on 23 April (L-1701), 28^th meeting on 7 May (L-1717), 30^th meeting on 4 June (L-1750), 31^st meeting on 18 June (L-1794), 32^nd meeting on 2 July (L-1817), 33^rd meeting on 16 July (L-1906) and 36^th meeting on 27 August (M-2165).  These minutes support the evidence of DW2, Mr Tsang in that they show that BS Coordination Meetings were indeed held once every two weeks.

145.  These minutes recorded the defendant’s call to the NSCs to submit shop drawings and their updated versions for preparation of CSDs and CBWDs.  They also recorded the submission and re-submission of the CSDs and CBWDs.  There were 13 sets of CSDs and 13 sets of CBWDs.  They had been submitted and resubmitted on or before 9 May 2009.

146.  I also refer to the clauses of the contract cited above that required the defendant to prepare the CSDs and CBWDs.  I note that they also provide that these drawings had to be submitted to the architect for his confirmation or approval.

147.  There is also a letter dated 8 July 2008 from the architect that reminded the defendant not to be late in the submission of CSDs (K-1310). The defendant in turn by letter dated 10 July 2008 (enclosing the architect’s letter) reminded the NSCs to provide their outstanding drawings and documents.  The defendant had also submitted CSD and CBWD for G/F earlier on 5 and 18 June 2008 respectively ((03-081).

148.  If the defendant should have failed to produce the necessary CSDs and CBWDs, I do not think the architect would have just ignored the defendant’s failure.  If there were indeed such failure, the architect would have written many complaints to the defendant and these complaints would be in the bundles of documents, but Mr Chan has referred to none.

149.  I also note Chao’s evidence that he had asked the plaintiff for the CSDs, but was told that they did not exist.  I think it is unfortunate that Chao should have addressed his request to the plaintiff as the CSDs were prepared by the defendant and submitted to the architect for confirmation or approval.  The plaintiff was not involved in these matters.  If Chao should have addressed his request to the defendant or the architect, he might have received a different answer.

150.  In the light of the contents of the above minutes of the BS Coordination Meetings and the lack of contemporaneous complaint by the architect that the defendant had failed to prepare sufficient CSDs or CBWDs, I hold that the plaintiff has failed to prove on a balance of probability that the defective works as rectified by re-coring of slab and wall openings were caused by the defendant’s reliance on the shop drawings rather than the CSDs that it should have produced. I accept that the defendant had consulted the NSCs on the positions of the holes before concreting.  That was not because of the lack of CSDs or CBWDs, but was an additional measure of prudence.

151.  Since there could be many possible causes that have led to the need to re-core the slab and wall openings, I am not prepare to make any guess as to what was the actual cause in this case.  In the premises, I hold that the plaintiff has failed to prove that the defendant is liable for this item of rectification work.

The remaining schedule 14 items

152.  The plaintiff’s defect expert Chao did not find the defendant liable for the re-plastering of the defective external cement sand plaster, the defective works as stated in the AP/RSE report (except those items covered above) or the other defective works allegedly caused by the defendant as the previous main contractor.  Mr Chan has not submitted to the contrary.  I therefore find that the plaintiff has failed to prove the defendant’s liability for the re-coring of slab and wall opening for E&M services.

The schedule 14 items for which the defendant is liable

153.  The items in schedule 14 have been itemized in DKK’s interim application for payment no. 15 (S-4100-4101).  Instead of claiming HK$1,800,000 for having rectified all the defects in all the floors as provided in the replacement contract, DKK claimed “star rates” for the individual items of rectification works.

154.  In accordance with my findings above, I hold that the defendant is liable to pay the plaintiff for the items below.  The amounts claimed by DKK on “star rates” basis are also stated for reference purpose.  The items are:

“Project: No. 12-22 Davis Street, Kennedy Town, Hong Kong – Interim Payment No. 15

SR/14/1	Rectification works	Qty. already done	Unit Rate	Claimed Amount
…	…	…	…	…
g	Built starter bars into adjacent conc. structure for reconstruction of	800.00 no.	40.00	32,000.00
h	Demolish & dispose of one leg respective of R.C. stairs ST1 & ST2	2.00 item	15,000.00	30,000.00
i	Built starter bars into adjacent conc. structure for reconstruction of ST1 & ST2	300.00 no.	40.00	12,000.00
…	…	…	…	…
m	Rectify conc. stepped joint on internal wall surface on 5-32/F	25.00 storey	5,000.00	125,000.00
…	…	…	…	…
p	Demolish Lift Machine room on roof floor (including heavy duty metal framed covers to lift shafts for avoiding falling of demolished	100% item	196,700.00	196,700.00
q	Reconstruct Lift Machine room on roof floor (provisional)	100% item	120,300.00	120,300.00
r	Rectify window openings
…	…	…	…	…
u	Rectify window corners	11.00 no.	1,050.00	11,550.00
…	…	…	…	…
aa	Extend bay window slab for windows installation	100%	59,400.00	59,400.00
ab	Insufficient headroom at stairs 1 & 2 from G/F to 5/F	100%	63,478.00	63,478.00
ac	Hacking to window jambs due to insufficient space for windows installation	100%	43,400.00	43,400.00
…	…	…	…	…
ae	Hacking to window openings along GL 6 on 23-32/F due to misalignment	100%	4,500.00	4,500.00
…	…	…	…	…
	Total:			698,328.00”

Quantum of the schedule 14 items for which the defendant is liable

155.  Despite the evidence of the plaintiff’s own defect expert which does not support the plaintiff’s claim against the defendant for some of the items of the schedule 14 works, Mr Chan still claims that the defendant should be responsible for the whole of the replacement contract sum of HK$17,300,000 which includes the HK$1,800,000 for rectification of all items of the schedule 14 works.  This is unreasonable.

156.  Mr Chan also argued in §187 of his closing submissions that an employer like the plaintiff would be entitled to include in the measure of damage for defective works the reasonable market price it would have to pay – as opposed to costs it had actually incurred – in order to repair the defects or complete the Works.

157.  I disagree.  The function of damages in contract is primarily to put the injured party as far as possible in the position in which he would have been had the contract been performed (Chitty on Contracts, Vol 1, §1-122).  If the actual costs of rectification of defect is available and reasonable, the court would not resort to the market price which is just a reasonable estimate and not the actual amount that would have put the plaintiff in the position he would have there been no defect.

158.  Mr Niehorster suggested that reference should be made to DKK’s total claim on star rates basis for rectifying all the schedule 14 works and then have it discounted it to HK$1,800,000.  The rate of discount should then be applied to the star rates claimed by DKK for the items that the defendant should be liable.  I think this is a reasonable approach.  This approach also disposes of Mr Niehorster’s qualification on valuation of items that he made to the rectification of the windows and step joint walls.

159.  DKK has claimed a total sum of HK$18,056,528.81 under the replacement contract.  It exceeded the overall lump sum of HK$17,300,000 by HK$756,528.81 from DKK’s claim.  Lui, the plaintiff’s quantum expert confirmed in cross-examination that this excess was caused by DKK’s star rates claim for rectifying the schedule 14 works.  DKK claimed HK$2,556,479 for these works (S-4100-4101). To deduct HK$756,528.81 from this sum gives HK$1,799,950.19.  That is almost HK$1,800,000 as fixed for rectifying all the schedule 14 works.  That shows Lui is right.  To discount HK$2,556,479 to HK$1,800,000 is to discount the larger sum by 29.59%.

160.  In the premises, the price payable by the defendant for the rectification of the items that it is responsible for is: DKK’s star rate price for the relevant items x (1-29.59%).  The sum payable by the defendant for these items is HK$698,328 x (1-29.59%) = HK491,692.74. 

161.  The total sum due under the replacement contract for which the defendant is liable is thus at: (HK$15,044,240 for the actual costs for completing the outstanding works under the replacement contract + HK$450,000 for preliminaries for the schedule 14 works + HK$491,692.74 for the schedule 14 items =) HK$15,985,932.74).

Liability for the Q-16 works

162.  DKK issued quotation Q-16 to the plaintiff for HK$35,302 as the price for making nine openings covered by metal louvres in the external wall facing Kwan Yick Street on the G/F, 1/F and 3/F (S-3955-3978).  These openings were not shown in the GBP given to the defendant but were shown in the GBP given to DKK.

163.  Chao, the plaintiff’s defect expert said in cross-examination that without the CSDs, he could not tell if these openings were omissions by the defendant or additional work necessitated by subsequent variation.  In order to explain why they were not in the GBP given to the defendant but were present in the GBP given to DKK, he said these openings were for the E&M Floor and for sanitary purpose.  They were not drawn by the architect at the beginning but were left to be dealt with by E&M.  But he repeated that he needed the CSDs at the time of construction before he could tell whether these metal louvres were later additions or omissions of the defendant through lack of coordination.

164.  Mr Niehorster emphasised in §43 of his closing submissions that these openings were not in the GBP given to the defendant but were present in the GBP for DKK.  He submitted that these were later additions.

165.  Mr Chan repeated his submissions made for the issue of re-coring of holes that the defendant had the obligation to coordinate the works of NSCs by preparing CSDs but had failed to do so.  Hence, he submitted in §§201.3 and 201.4 of his closing submissions that the defendant had failed to make these openings because of its failure to carry out coordination work properly.  These holes were then made by DKK but in different locations because of change of time and events.  Mr Chan in §204 also disputed Mr Niehorster’s submissions by repeating the evidence of Chao that the CSDs and CBWDs at the time of construction were required before one can tell if these openings were new additions or the defendant’s omissions.

166.  I have referred to the minutes of BS Coordination Meetings which dealt with CSDs and CBWDs.  It is clear that such drawings for the G/F to 3/F had been prepared by the defendant and submitted to the architect for approval.  Hence, Mr Chan’s argument that the defendant should be liable because of its failure to coordinate the works of the NSCs cannot be right.  I also consider it unlikely that the defendant would have omitted these openings from the CSDs and CBWDs and the architect also overlooked them when approving the plane.  I therefore find on a balance of probability that the plaintiff had failed to prove that they were the defendant’s omissions.  I find that they were later additions that DKK was asked to implement.  The plaintiff has therefore failed to prove this item.

Liability for the Q-46 works

167.  This is a claim for the costs of chiselling corridor wall by peeling off 20 mm surface for 1,699 m² and the removal of debris from 25 floors at HK$254,850 and HK$112,500 respectively totalling HK$367,350.

168.  Mr Niehorster opposed it on the grounds of lack of substantiation in DKK’s quotation Q-46 and the absence of evidence of measurement or other basis to demonstrate that the defendant had constructed the walls out of tolerance.  He also raised the question of why DKK only submitted this quotation at the end of the construction period after all other works had been completed.

169.  Mr Chan relies on the evidence of D Lo who said that many of the corridors constructed by the defendant had widths less than the designed widths by 100 mm in most cases and by nearly 200 mm in some cases.  Such defects were caused by defective formwork some of which slanted at different angles.

170.  Mr Lo’s evidence is corroborated by the prevalent defect at the step joint wall which was also caused by defective formworks.  Furthermore, there are numerous photos showing the walls after chiselling and the debris from chiselling of walls (S-4007-4095).  The walls were built by the defendant and not by DKK.  I agree with Mr Chan that the late submission of the quotation by DKK, which is unusual, is not enough to negate the evidence of D Lo as well as the photos. I accept D Lo’s evidence and find that there was the defect of insufficient width of the corridors which required rectification by chiselling of walls.  The defendant is liable for the costs of rectification and clearance of the debris.

Quantum of Q-46 works

171.  DKK claimed HK$11,001,892.50 for all works in quotations Q-1 to Q-86 which were outside the replacement contract.  This sum was, for unknown reasons, certified by the plaintiff’s quantity surveyor down by 88.13% to HK$1,306,000 (S-4106).  However, Lui, the plaintiff’s quantum expert gave evidence that the reasonable unit rate for chiselling wall ranged between HK$150 to HK$200 per m². The plaintiff’s claim is based on HK$150 per m².

172.  I cannot tell why the HK$11,001,892.50 was discounted by 88.13%, but if the unit rate for chiselling wall is likewise discounted, it would become HK$17.80 per m².  Such price is ridiculously low.  I accept HK$150 per m².  There is no dispute on the quantum for removing debris save the general point of absence of evidence of payment for Q-46.

173.  Mr Niehorster submitted that there is no evidence that the plaintiff had paid the sums in Q-46 as the total sum for Q-1 to Q-86 had been discounted by 88.13%.  I cannot tell the reason or consideration for the discount. I would however accept that DKK should have been remunerated for its work in Q-46 according to the market price.  I hold that the defendant is liable to the plaintiff for HK$367,350 under Q-46.

Total costs of and relating to the replacement contract including the costs of Q-46

174.  From the above findings, the total costs is as follows:

1.	Amount P paid to WT Partnership (HK) Ltd for the retendering work	HK$260,000
2.	Amount P paid to the Architect for the retendering work	HK$50,000
3.	Contract price of the replacement contract awarded to DKK	HK$15,985,932.74
4.	Costs in respect of WQ-46	HK$367,350
	1+2+3+4=	HK$16,663,282.74

Liquidated damages

175.  The original contractual completion date was 3 July 2009 and the contract was determined on 5 October 2009.  The delay up to the determination was 94 days.  Clause 22(1) (as renumbered by SCC-22) provided that liquidated damages was payable by the defendant at HK$30,000 per day of delay beyond the completion date as extended by the architect under the contract.  Extension of time is governed by SCC-clause 23.  The relevant parts are as follows:

“(1) Upon it becoming reasonably apparent that the progress of the Works is delayed, or is likely to be delayed, the Main Contractor shall within seven days of the date or dates upon which the delay becomes apparent give written notice to the Architect of the material circumstances including the cause or causes of the delay. The Main Contractor shall, if practicable in such notice or otherwise is writing as soon as possible after such notice, give particulars of the expected effects of the delay, or potential delay, and shall estimate the extent, if any, of the expected delay to the completion of the Works beyond the Date for Completion …

(2) If, in the opinion of the Architect, upon receipt of any notice, particulars and estimate given by the Main Contractor under sub-clause (1) of this Condition, the completion of the Works is likely to be or has been delayed beyond the Date for Completion …

…

(e) by reason of Architect’s instructions issued under clauses 1(2), 11(1) or 21(2) of these Conditions, or

(f) by reason of the Main Contractor not having received in due time necessary instructions, drawings, details or levels from the Architect for which he specifically applied in writing on a date which having regard to the date for Completion stated in the appendix to these Conditions or to any extension of time then fixed under this clause or clause 33(1)(c) of these Conditions was neither unreasonably distant from nor unreasonably close to the date on which it was necessary for him to receive the same, or

…

then the Architect shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair and reasonable extension of time for completion of the Works.

…

(4) Any extension of time granted by the Architect to the Main Contractor shall be deemed to be in full compensation and satisfaction for any loss or injury sustained or sustainable by the Main Contractor in respect of any matter or thing in connection with which the extension shall have been granted and every extension shall exonerate the Main Contractor from any claim or demand on the part of the Employer for the delay during the period of the extension but not for any delay prior to or continued beyond such period. No claims on preliminaries cost will be entertained even if extension of time is granted.

(5) The Main Contractor shall give written notice of all claims for any extension of time within 14 days of the occurrence of the event giving rise to the claim. Such notice shall give full and detailed particulars of the event giving rise to the claim and of the part or parts of the Works affected. The giving of notice strictly in accordance with this clause shall be a condition precedent to the Main Contractor’s entitlement to receive an extension of time in respect thereof and the Main Contractor shall be deemed to have waived such entitlements in respect of the consequences of any event of which notice has not been given in accordance herewith.

Notwithstanding the provision of clause 23 and of the Conditions of the Contract, any claims for extension of time shall include specifically the following information:-

1) Details of the clause and extent of the delay.

2) Details of the contract provision under which the claim is made.

3) State the proposed period of extension to the Date for Completion.

4) A demonstration that the Main Contractor’s progress of work has been substantially affected by work analysis and procedure diagrams.

5) Critical path programmes to substantiate (3) and (4) above with explanatory notes in reference to original programme submitted at the beginning of the Contract.

6) Evidence that the main Contractor has used constantly his best endeavours to prevent delay.

7) Evidence that the Main Contractor has done all that is reasonably required to the satisfaction of the Architect to proceed with the Works.

8) A demonstration that notification of the claim has been submitted within the stipulated time period.

9) Copy of site photos, record drawings, site reports, correspondence, minutes of meetings, Architect’s Instructions, orders, invoices, delivery notes and any other information as required by the Architect.

10) If the claims involve more than one event, the effect of each relevant event should be noted separately, stating whether or not the delays are concurrent.

11) Any other information that the Architect may require.

Any claims for extension of time will not be considered by the Architect unless they are presented with all the required information and are supported by evidence as described above.” (emphasis supplied)

176.  The plaintiff called an architect Mr Chee (“Chee”) as its programme expert to give evidence.  The defendant has not called any programme expert.  Chee stated in his report that subject to the defendant’s compliance with the condition precedent in SCC-clause 23(5), there should be an extension of time of 47 days.  The plaintiff repeated this in §55.4 and note 7 of its opening.  However, Chee said that the defendant had only satisfied the condition precedent in its claim no. 1 for extension of time but not in the other claims.  The defendant sought an extension of 24 days in claim no. 1.  But the architect only gave 7 days to this claim.  Chee was willing to give it 22 days and I accept Chee’s opinion.

177.  Subject to the issue of the condition precedent, Chee in his report agreed to give two more extensions of time of 4 days and 21 days for a revision of floor heights for the 3/F to 5/F from 4.75 m to 4.5 m and a revision of water tanks above 33/F respectively.  He in cross-examination gave another 8 days for a revision of floor height for 3/F to 5/F from 3.5 m to 4.75 m and another 20 days for drainage connection works. 

178.  Of the 94 days of delay, Chee thus agreed to give 75 days’ extension for five of the defendant’s applications for extension.  However, of the 75 days, only the 22 days covered by claim no. 1 had satisfied the condition precedent.  Hence, the defendant had to pay liquidated damages for the remaining 72 days of delay before the contract was determined.

179.  The defendant did not dispute its failure to comply with the condition precedent in SCC-clause 23(5) for granting of extension of time except for its claim no. 1.  It also had not adduced any evidence to show that it had complied with the condition precedent for the other claims. Mr Niehorster instead submitted in §§73 and 74 of the opening that insofar as the delaying events were those for which the plaintiff should be responsible, the plaintiff should not be given liquidated damages for the related periods of delay.  He submitted that to hold otherwise would breach the cardinal principle that a party should not benefit from its own wrongdoings and breaches of contract.  He relied on Alghussein Establishment v Eton College [1988] 1 WLR 587 and Kensland Realty v Whale View Investment Ltd (2001) 4 HKCFAR 381.

180.  In Alghussein Establishment, clause 3b of a 99-year lease provided, among other matters:

“3b … the tenant shall … as soon as is reasonably practicable following all necessary licences … use its best endeavours to commence and proceed diligently with the development” of a block of flats.

Clause 4 provided:

“that if for any reason due to the wilful default of the tenant the development shall remain uncompleted by 29 September 1983 the lease shall forthwith be completed …” in the terms provided by the agreement.

The development had not begun in 1984.  In October 1984 the defendants (landlord) treated the agreement as repudiated because of the tenant’s failure to commence and complete the development.  The plaintiffs (tenant) claimed specific performance by the defendants of the obligation to grant a lease under clause 4.  The defendants counterclaimed possession of the site. 

181.  The House of Lords held that the well known rule of construction, that there was a presumption that a party to a  contract could not be permitted to take advantage of his own wrong as against the other party, applied, in the absence of an express provision to contradict the presumption, as much to a party who sought to obtain a benefit under a continuing contract on account of his breach, as it did to a party who relied on his breach to avoid a contract and thereby escape his obligations; that the terms of the proviso to clause 4 were not apt to displace that rule of construction and that, therefore, the plaintiffs were not entitled to invoke the proviso to obtain the grant of the lease.

182.  In Kensland Realty the CFA held that in contractual context, the prevention principle operated to prevent a party in breach of an obligation owed to the other party from asserting rights or claiming benefits which arose as a consequence of the breach.

183.  Mr Niehorster in §52 of his reply submissions also referred to a paper on the prevention principle of Peter Clayton, SC delivered in a seminar.  Mr Clayton referred to the principle explained by the CFA in Kensland Realty.  He suggested that the principle can be applied to delays caused by the employer’s breach of contract by disentitling the employer from claiming liquidated damages for such delays.

184.  Mr Niehorster also submitted in §53 of the reply submissions that for the 53 days’ extension of time that Chee was prepared to give the defendant but for which the defendant had not complied with the condition precedent, these days constituted delays caused by the architect’s failure to properly fulfil his role as the plaintiff’s agent in designing and managing the Works.  Hence, they were delays caused by the plaintiff’s breaches of the contract.  Mr Niehorster in §55 further referred to the architect’s alleged delay in obtaining the approved building plan for the underground drainage connection.

185.  Mr Chan disagreed.  He submitted that if the defendant in applying for an extension of time had failed to comply with the condition precedent in clause 23(5), then it was deemed that the defendant had waived the entitlement to extension of time.  He also referred to §17 of the plaintiff’s reply which expressly pleaded to the defendant’s failure to comply with the condition precedent and that the defendant was not entitled to extension of time up to 9 October 2009.

186.  Mr Chan also referred to Steria Ltd v Sigma Wireless Communications Ltd [2008] BLR 79 at §§94 to 95 where HHJ Stephen Davies made some observations on the application of the prevention principle in situations where the contractor has failed to comply with the condition precedent in extension of time applications:

“94. I am extremely fortunate in that I have the benefit of the analysis of Jackson J in the Multiplex case of the conflicting Australian authorities (Turner, Gaymark and Peninsula), the decision of the Court of Session in City Inn v Shepherd Construction 2003 SLT 885, and the views expressed both by the editors of Keating on Building Contracts and by the late Professor Wallace QC. In summary, Jackson J concluded in para 103 that:

I am bound to say that I see considerable force in Professor Wallace’s criticisms of Gaymark. I also see considerable force in the reasoning of the Australian courts in Turner and in Peninsula and in the reasoning of the Inner House in City Inn. Whatever may be the law of the Northern Territory of Australia. I have considerable doubt that Gaymark represents the law of England. Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes give the employer the opportunity to withdraw instructions when the financial consequences become apparent. If Gaymark is good law, then a contractor could disregard with impunity any provision making proper notice a condition precedent. At this option the contractor could set time at large.

   95. Although on the facts of that case Jackson J did not, due to the particular wording of the extension of time and liquidated damages clauses employed, need to express a final decision on the point, nonetheless I gratefully adopt his analysis and agree with his preliminary conclusion.  Generally, one can see the commercial absurdity of an argument which would result in the contractor being better off by deliberately failing to comply with the notice condition than by complying with it.  Furthermore, when applied to the facts of this case, particularly acute difficulties arise when considering how the application of the prevention principle should work in practice.  Thus clause 6.1 permits an extension of time in three relevant circumstances, one of which is ‘any circumstance which entitles the contractor to an extension of time under the main contract’.  Clause 33.1 of MF/1 (the main contract term relating to extension of time), allows an extension of time in four specified circumstances, one of which is ‘any industrial dispute’ and the other of which is ‘circumstances beyond the reasonable control of the contractor arising after acceptance of the works’.  Does the prevention principle apply to such circumstances? It is difficult to see why they should, since these circumstances cannot readily be characterised as acts of prevention by the employer.  If not, however, is the effect that the notice procedure is a condition precedent in relation to delays caused by those events, but not to delays caused by other events?  That would produce an inconsistent and undesirable result.  Furthermore, in addition to conferring a right to an extension of time, clause 6.1 also confers a right on Steria to recover ‘all extra costs incurred in relation to [the delay] together with a reasonable allowance for profit’.  Does the prevention principle mean that Steria could obtain these benefits even if it had not complied with the notice condition precedent? Again, that would appear to involve the contractor obtaining a benefit from his own breach, which is the converse of the prevention principle and hence might be said to be equally objectionable, but to construe the clause such that Steria was entitled to an extension of time even if it did not comply with the notice condition, but not to an extra payment, would again in my judgment be consistent and undesirable.”

187.  Mr Chan also referred to Hudson’s Building & Engineering Contracts, 12^th edn at §§6-031 to 6-033 which cited Jack J in Multiplex and HHJ Stephen Davies in Steria Ltd with approval. Hudson’s also approved the Hong Kong decision of Hsin Chong Construction (Asia) Ltd v Henble Ltd (HCCT 23/2005) at §§133-135 where the prevention principle was advanced before and dismissed by Reyes J.  The learned Judge referred to the similar paragraphs of a previous edition of Hudson’s and rejected the argument that the employer should not be entitled to liquidated damages where its conduct had led to delay but the contractor had failed to give the necessary notice under the contract for extension of time.

188.  Hudson’s also adopts the commentary in the BLR report of Steria Ltd against the “prevention principle”:

“The employer’s entitlement to damages, it might be said, was caused not by the delay but by the delay coupled with the contractor’s failure to satisfy the condition precedent.”

189.  I agree with the observations of HHJ Stephen Davies and BLR’s commentary in the report of Steria Ltd.  I also agree that if the prevention principle as advanced by Mr Niehorster is good law, even limited to preventing the employer from obtaining liquidated damages for delays caused by its breach, that would allow a contractor to disregard with impunity any provision making proper notice a condition precedent.  In the present case, I regard the condition precedent in clause 23(5) as an express provision that contradicts the presumption as mentioned by the House of Lords in Alghussein Establishment.  The prevention principle in Kensland Realty is to be invoked by the defendant complying with the condition precedent.  This disposes of the defendant’s argument on extension of time. 

190.  In the premises, the defendant is only entitled to 22 days of extension of time despite Chee’s estimate of 75 days as the defendant had only complied with the condition precedent for 22 days.  Of the 94-day period from 3 July 2009 to 5 October 2009 when the contract was determined, the defendant is liable to pay liquidated damages at HK$30,000 per day for 72 days of delay. The total amount of liquidated damages is HK$2,160,000.

Delays allegedly caused by the plaintiff

191.  Mr Niehorster argued in §§55 and 77 to 80 of his closing submissions that it is incorrect to use the extension of time criteria to arrive at the plaintiff’s entitlement to general damages as that is looking through the “wrong end of the telescope”.  He stressed that the burden is on the plaintiff to prove its entitlement to general damages or the loss caused to it by the determination of the contract and that the defendant’s entitlement to an extension of time is not determinative of the plaintiff’s entitlement.  He submitted that the plaintiff in considering the extent of delay by reference to the defendant’s entitlement to extension of time has failed to discharge its burden to prove its loss of net profit from determination of the contract.

192.  He also submitted in §§62 to 69 and 80 that the plaintiff had failed to prove its case for general damages because of the delays caused by:

(i)     Drainage connection works;

(ii)    External lighting contract;

(iii)   Late issue of E&M Layout Plan (revisions to the guestrooms and, in particular, the guest bathrooms);

(iv)   Glass cladding (Chee during cross-examination accepted that a realistic period to carry out these works was in the order of 4 to 5 months with an additional initial period of 2 to 3 weeks for preparatory work and concurrently a lead-in period of 4 weeks for ordering the glass);

(v)    Glass balustrade (D Lo in cross-examination confirmed that the glass balustrade was carried out by a directly appointed contractor of the plaintiff and not an NSC, the application for BD approval was submitted on 7 August 2009 and approval was obtained on 8 October 2009.  Chee accepted in relation to the glass cladding and of equal applicability that at least a further month would be required to obtain BD consent before works could commence on site);

(vi)   External wall cladding (D Lo confirmed in cross-examination that it was constructed under a directly appointed contractor (Venpower) (not an NSC) of the plaintiff who was appointed on 25 June 2009 and they only submitted their first invoice for payment on 18 September 2009); and

(vii)  Interior fitting out contract (Chee estimated in cross-examination that a period of 4 to 6 months would have been required to carry out these works and that such works were carried out after Practical Completion under the DKK’s Completion Contract).

Lead-time before commencement of works by DKK

193.  Before considering the delays allegedly caused by the above-mentioned items of works, I think it is useful to consider when should DKK finish the remaining works of the contract after the contract was determined on 5 October 2009.  Chee suggested in §75 (C-714) of his report that there should be a lead-time of 18 weeks before the resumption of the remaining works. He gave a breakdown of the lead-time as follows:

(a)	Auditing in details of the nature and amount of outstanding works based on the site conditions and the scope of the Contract -		2 weeks;
(b)	Preparation of necessary re-tendering documents -		3 weeks;
(c)	Approval and final revision of the re-tendering documents -		2 weeks;
(d)	Re-tendering -		3 weeks;
(e)	Tender analysis, interviews, and report with recommendation -		3 weeks;
(f)	Negotiation -		2 weeks;
(g)	Tender award -		1 week;
(h)	Submission of Form BA 10 to Buildings Department -		1+1 week;
(i)	Contractor’s mobilization -	1 week (concurrent with (h))

194.  Event (g) above-mentioned in fact took place on 11 January 2010 as DKK was awarded the replacement contract on that date.  Hence, the time for completing the above-mentioned events up to (g) only took 14 weeks instead of 16 weeks as estimated by Chee.  Adding the 2 weeks for event (h) will take the lead-time from 6 October 2009 to 25 January 2010.

195.  Chee suggested in §76 (C-714) of his report that another 2 weeks allowance should be added to the lead-time as Chinese New Year commenced on 14 February 2010.  I disagree.  Had the contract continued, the defendant would not have been given this 2-week extension for the New Year.  I see no reason why DKK or any other replacement contractor should be given this 2-week allowance. I am of the view that the lead-time should be 16 weeks or 112 days and would end on 25 January 2010.  The replacement contractor should start working on 26 January 2010.

Date of completion of the remaining works

196.  Chee said in §§72-74 and 77 (C-712-713 and 715) of his report that the reasonable time for completing the part of the Works left behind by the defendant should be based on the latest, realistic and relevant master programmes submitted by the defendant and that such programmes should be checked to identify which of the outstanding activities was the one that was critical to the final completion of the contract.  The time to complete that activity would determine the time of completion.

197.  He listed in §28 (C-659) a number of activities and their respective periods of completion after determination of the contract on 5 October 2009.  The activity that required the longest time to complete was the revised external wall tiles.  It required 346 days from 5 October 2009. 

198.  The period of 346 days was arrived at by adding Chee’s 18-week lead-time (126 days) (C-715, §77) to a lead-time of 62 days for carrying out the external rendering works before laying the tiles (C-767, §158) and to 158 days for laying the tiles (C-750, table 10). 

199.  However, I have reduced the 18-week lead-time to 16-week to end on 25 January 2010.  Chee also agreed that the 62 day period was not required as the external cement rendering had already reached the 28/F by 25 September 2009.  Hence, the extra 2 weeks lead-time and the 62 days should be taken out from the 346 days.  The period estimated for finishing the external wall tiles would be reduced from 346 days to 270 days.  That is not the longest period leading to completion as stated in §28 (C-659).

200.  Chee also said in §28 that if the activity estimated to finish the last should be rejected by the court, then the activity that required the second longest period would determine the estimated completion date.  The activity stated in §28 that required the second longest period is to make the transformer room staircase.  It should be completed in 339 days after 5 October 2009.  The 339 days should be reduced by two weeks of lead-time that I have disallowed.  The period thus becomes 325 days and this activity should be finished on 26 August 2010.  That is also the date when the plaintiff’s claim for general damages should end.

The plaintiff’s events of delay as alleged by the defendant

201.  I now consider the events of delay as allegedly caused by the plaintiff.  If none of such alleged delays would postpone the completion date to beyond 26 August 2010, then as a matter of fact, they are irrelevant to the general damages that the plaintiff is entitled to as a result of determination of the contract. 

Drainage connection works

202.  Regarding the drainage connection works, Mr Niehorster submitted in §69 of his closing submissions that had the contract not been determined and the defendant been permitted to complete the Works after 5 October 2009, the defendant would have been entitled to an extension of time to 23 June 2010 because of the drainage works.  Then the plaintiff would not be entitled to any liquidated damages up to 5 October 2009 or any general damages up to 23 June 2010.  However, I have already held that the determination of the contract on 5 October was lawful. I have also pointed out above that if the alleged delay would not go beyond 26 August 2010, it would be irrelevant to the quantum of the plaintiff’s general damages. This alleged delay caused by the drainage works is therefore irrelevant.  In case I am wrong in adopting this approach, I would also consider Mr Niehorster’s submissions on this alleged delay.

203.  Mr Niehorster in §63 referred to the evidence of DW2, Tsang that the drainage connection problem arose from:

“(a) the Consultant’s design route for underground drainage which crashed (sic) with the existing gas pipe and water pipe; and

(b)   BD’s approved General Building Plans (‘GBP’) were different from the latest revised GBP issued by Architect to us.”

204.  A letter issued by the defendant to the architect of 30 September 2009 (03-080 to 083) shows that the defendant had only commenced excavation works for underground drainage and conducted trial pit in April 2009. These works were to find out if there were any existing underground services or utilities in the vicinity of the original routing for drainage pipe designed by the architect.  The investigation revealed a crash of the designed routing with the existing gas pipe and water pipe.

205.  Then on 8 June 2009 the defendant advised the architect of the crash by way of a summary plan and photos and proposed a solution by way of sketches and shop drawing (03-130).  It then waited for the revised approved drainage plan and revised GPB from the architect.  It had also assisted the architect to amend the drainage plan several times at the BD.  But the BD did not approve the revised drainage plan even up to the end of September 2009 as the architect had not submitted the latest revised GBP for approval.  The defendant estimated in its master programme of 29 May 2009 that it would require 191 days to complete the underground drainage works (C-742, §44(b)).  Chee accepted this estimate (C-788, §200).  Mr Niehorster estimated the completion of these works at 23 June 2010. He did so by adding 191 days to 14 December 2009, the date when the Drainage Services Department asked the architect for further information.

206.  Chee however said in §§46-47 and 50 of his report (C-744 - 745) that for underground drainage works involving connections to the public drainage system, the main contractor should first identify all information accurately on the existing underground public installations along and abutting the pavements and even the public sewers along the driveway.  It should supply the information to the architect and engineers to finalize the design drawings for statutory approvals and consents.  These works are required in clause 8.03 of Specification-Preliminaries.

207.  Chee also pointed out in §53 (C-746) that the drainage connection works were programmed as a separate section of activities unattached to any other part of the project as they did not hinge on any critical path of the programme unless their own progress were unduly delayed to exceeding the critical path of the construction of the building so that it became a superseding critical event.  That means these works could have been undertaken much earlier than the latest dates referred to below.

208.  Chee also opined in §49 (C-745) that there should be some allowance between the investigation by the main contractor of the existing underground conditions and the commencement of the underground drainage works. This was to cater for the need to redesign the approved drainage plans.  If the incompatibility between the existing conditions and the approved plan should be minor, an allowance of 7 to 21 days would be required.  If the incompatibility should be substantial, which is not uncommon, it may require 14 days for redesign and another 30 days for submission to and approval and consent by the BD.

209.  Chee indicated in his diagrams 1 (C-743) and 12 (C-785), the latest dates for (i) the issuance of the excavation permit to the defendant, (ii) the provision of advice by the Road Management Office (“RMO”) of the police to the defendant, (iii) the commencement by the defendant of underground site investigations and (iv) for the submission by the defendant to the architect of the result of its investigation and its proposal at 28 February, 8 March, 16 March and 1 April respectively. These dates were fixed so that these works could be completed on 22 November 2009, the scheduled date for issuance of Occupation Permit.  However, the defendant was, as shown in Chee’s diagram 12 (C-785), late in achieving these events which resulted in delay in the progress of the project.  After the completion of the construction of the main structure in September 2009, these works were on the critical path (C-787, §198).

210.  Chee also said in cross-examination that the defendant could not assume that there would be no crash between the approved underground plan and the existing underground conditions.  It should have carried out the underground investigations well in advance to allow sufficient time to deal with any rude awakenings. In fact, the BD had approved the drainage plan on 25 February 2008 and gave consent to commence drainage works on 12 March 2008.  The contract only commenced on 25 April 2008.  Hence, the defendant could have applied for all necessary permits and approvals to carry out the underground investigation at or soon after the commencement of the contract.

211.  Furthermore, Mr Chan also pointed out in §230.6 of his closing submissions that the defendant only obtained the excavation permit on 30 March 2009.  The defendant’s master programme dated 29 May 2009 estimated that it needed 251 days to complete the underground investigation and underground drainage connection works.  Of these 251 days, Chee was of the opinion that there was an excess of 20 days for the architect to issue the revised drainage plan for the G/F. The estimated period should thus be at 231 days.  However, there were only 117 days from 30 March to the extended contractual completion date on 25 July 2009.  Hence, even if the defendant should have immediately started with the underground investigation on 30 March 2009 and then proceeded with the underground drainage connection works, it still could not have completed these works by the extended contractual completion date on 25 July 2009.  Hence, on 30 March 2009 when it was issued with the excavation permit, it had already delayed these works.  This delay was caused by the late investigation of the existing underground conditions and resolution of the crash between such conditions and the original underground design plan.  The blame of this delay lies with the defendant. 

212.  Mr Niehorster argued in §57 of his reply submissions that the plaintiff had failed to put to DW2, Tsang that the delay in resolving the crash was caused by the fault of the defendant and the failure to put the plaintiff’s case was contrary to the principle of Browne v Dunn (1894) 6 R 67 (HL). Mr Chan replied in §18 of his reply submissions that the principle of Browne v Dunn does not require each and every point that may be used against a witness to be put to him.  It has been pointed out by Kwan JA in §125 of Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, CACV 90-91 and 93-96/2012 (unreported) that the principle of Browne v Dunn is only breached if in all the circumstances of the case, an omission to cross-examine a witness on a specific point is unfair to a witness.

213.  On the question of who should be blamed for the delay in the drainage works, the defendant has made clear its case in the evidence of DW2, Tsang and the plaintiff has also set forth its case in Chee’s expert report. Each side is fully aware of the other’s case on this issue.  I do not think DW2, Tsang or the defendant has been unfairly treated by the plaintiff’s failure to put Chee’s case on the cause of the delay to Tsang.

214.  Mr Niehorster also argued in §57 of his reply submissions that Mr Chan had not put to Chee in re-examination the matters contained in §230.6 of Mr Chan’s closing submissions as referred to above.  I however agree with Mr Chan that these are matters of fact gathered from the evidence of Chee and it is not necessary to ask Chee to confirm them in re-examination before the plaintiff can use them to advance its case.

215.  Hence, even if I am wrong in ignoring delays that do not drag the completion date to beyond 26 August 2010, the defendant still cannot blame the plaintiff for the delay in completing the underground drainage connection works.  The plaintiff’s right to general damages following determination of the contract on 5 October 2009 is not affected by this delay as it was caused by the defendant.

The external lighting contract

216.  Mr Niehorster dealt with this in §§71-76 of his closing submissions.  The architect only issued the drawing for the setting out for external lighting in AI-222 on 31 August 2009 (P-3414).  This was owing to the plaintiff’s late decision on whether to have external lighting and, if so, who to appoint as the NSC for it.  The defendant had completed the external rendering to the building up to the 28/F by the end of September or early October 2009.  But external wall tiling could not commence until after the conduit had been installed for the external lighting.  Chee estimated that it would take 3 to 4 weeks to install the necessary conduits and junctions including the making good of the external rendering. 

217.  Mr Niehorster assumed this period to be 25 days and that the installation of the conduits and junctions would be completed by 28 October. The external wall tiling could then follow.  The defendant’s master programme dated 29 May 2009 had estimated 158 days for the tiling.  Chee did not query it (C-768, §160).  Adding 158 days to 28 October would take the completion of tiling and issuance of OP to 4 April 2010.  This delay is thus irrelevant as it did not go beyond 26 August 2010.

218.  Nonetheless, Mr Chan disagreed that the plaintiff had caused any delay on this item of work.  He submitted in §231 of his closing submissions that it was because of the defendant’s inability to pay for the external wall tiles that caused the delay.  He referred to the correspondence which showed that the defendant was unable to meet the terms of payment of tile supplier Falcon. Falcon demanded 30% payment upon signing of contract and 40% cash payment and a 30-day post-dated cheque for the balance of 30% payment upon delivery.  If the defendant should have paid Falcon from its own resources, the tiles would have been delivered in two lots in mid-June and the end of June.  In the end, they only asked Falcon to contact the plaintiff for direct payment on 15 July 2009 and the tiles were only delivered on 1 September 2009 (L-1722-1725, 1729-1730, 1734-1735, 1847, 1904 and Q-3613).  Furthermore, the laying of tiles could be undertaken together with the installation of conduits and junctions.  Hence, the issuance of AI-M 222 on 31 August 2009 did not produce any delay in the laying of tiles and the issuance of the occupation permit as the tiles were only delivered on 1 September 2009.

219.  I agree with Mr Chan’s submissions as it is based on contemporaneous documents and undisputed facts.

Late issue of E&M layout plan

220.  I have dealt with above the effects of delay that could have been caused by AIs-150, 158 and 161 in the context of the defendant’s liability for re-coring of slabs and walls.  The defendant has not clearly stated the extent of the delays that might have been caused by these AIs.  I do not think the delays as might have been caused by AIs-150 and 161 could have been substantial.  In any case, they could not have postponed the completion to 26 August 2010.

Glass cladding

221.  DW1, Sam Lai referred to AI-196 on the BD approved drawings for glass cladding and aluminium canopy which was only issued on 31 July 2009 and after the extended contractual completion date of 10 July 2009.  He did not quantify the delay as might have been caused by this AI.  Chee in cross-examination agreed that there had to be a 4-week lead-in period for ordering glass which was to run concurrently with a 2-week initial period for preparatory work.  The actual work to follow would require about 4 to 5 months (§80(iii) of Mr Niehorster’s closing submissions).  Hence, the total time required from 31 July 2009 is 5 to 6 months which would bring the completion date to about 31 January 2010.

Glass balustrade and external wall cladding

222.  These two items were taken out of the contract and were undertaken by other direct contractors and not NSCs of the defendant.  Their delay need not be considered as they did not affect the completion of the contract (§232.7.1 of Mr Chan’s closing submissions).

Interior fitting out contract

223.  §2.03(jj) of Specification-Preliminaries provided major exceptions to the defendant’s responsibility to interior fitting out works. The defendant’s role in fitting out works are limited to:

“jj. All interior fitting-out works except fitting out works to main entrance lobby, typical lift lobbies, restaurant/café, guestrooms and all lift cars which to be carried out by interior fitting-out contractor.” (1-520)

224.  Chee said in evidence that the interior fitting out works would require 4 to 6 months to be undertaken after practical completion under DKK completion contract.  However, he was referring to fitting out works for the guestrooms which have been excluded from the contract by clause 2.03(jj).  I accept Mr Chan’s suggestion to ignore these works so that the defendant would not be liable for the delay beyond the practical completion date under DKK’s contract as might have been caused by these fitting out works (§232.7.2 and note 70 of Mr Chan’s closing submissions).

225.  Before moving on to the next topic, I would also say that I accept Chee’s evidence save to the extent as qualified or rejected by me above.  The reason being that he has relied on the defendant’s master programmes and other contemporaneous documents and his evidence is on the whole reasonable.

The period of accrual of the plaintiff’s general damages

226.  The next issue is the period during which general damages should accrue.  DKK was awarded the replacement contract on 11 January 2010 and the contract period was for 240 days or up to 8 September 2010.

227.  Chee estimated that the replacement contract works should be completed in 346 days from 5 October 2009 or on 16 September 2010 on the basis that the revised external wall tiles were the last activity to complete and they would be completed on 16 September 2010.  I have, however, shortened the time line of this activity by 62 days.  Hence, this activity would not be the last one to finish.  According to the estimates of Chee in §28 (C-659) of his report, the making of the transformer room staircase would then become the final work to complete. Chee estimated that it would be completed in 339 days after 5 October 2009.  I took out 2 weeks of the 18 weeks lead-time before commencement of the replacement contract and arrived at 26 August 2010 as the reasonable completion date of this work and thus of the replacement contract.  DKK’s contractual completion date on 8 September 2010 was therefore too late to be reasonable.  Mr Chan also submitted in §239 of his closing submissions that I should apply Chee’s estimate.  I therefore hold that the defendant should be responsible for the plaintiff’s general damages from 6 October 2009 to 26 August 2010 or 325 days.

The amount of daily loss - The valuation based on the actual figures of a later period

228.  The plaintiff called Ms Karen Tsang, a certified public accountant to give valuation evidence on what would have been the plaintiff’s loss from 6 October 2009 to 26 August 2010.  It is the loss of profit after expenses and tax.

229.  Ms Tsang produced two valuation reports.  She used the comparables approach in the first report and the actual performance of the hotel from 23 June 2011 to 31 March 2012 in the second report. 

230.  I deal with the second report first (S-4177 - 4181-2).

231.  The plaintiff’s hotel opened on 23 June 2011.  Its first audited report ended on 31 March 2012 and was for 283 days.  Ms Tsang used the figures in this report without any adjustment to prepare her second report.

232.  The total revenue for this period was HK$47,055,181. The profit was at HK$11,461,751 after the deduction of operating costs, depreciation, administration expenses and finance costs.  Ms Tsang divided this sum by 283 days and arrived at the average daily figure of HK$40,501.  The pre-opening expenses of HK$2,944,076 have not been taken into consideration in computing this figure as those expenses would have to be incurred regardless of when the hotel was to open for business.  If such expenses should be taken into consideration and deducted from the total revenue, the average daily loss would be reduced to HK$30,097.  But it is wrong to deduct these expenses from the revenue.

233.  Mr Niehorster submitted that it is wrong to rely on the audited figures for 23 June 2011 to 31 March 2012 without adjustment to value the plaintiff’s loss from 6 October 2009 to 26 August 2010.  The main reason is the different business environment for the two periods.  In 2009, Hong Kong was hard hit by the Global Financial Crisis (or financial tsunami).  Business however recovered substantially in 2011 and 2012.  Ms Tsang should have made some negative adjustment to the audited figures to reflect the recovery.

234.  Mr Niehorster suggested using the change in RevPAR of the hotels of Far East Consortium International Ltd (“FECIL”) (the ultimate holding company of the plaintiff) as a means to arrive at the adjustments.

235.  RevPAR is the short form for “revenue per available room”.  It is the average room rate of a hotel or group of hotels in a particular period multiplied by the occupancy of the hotel or hotels in that period.  It is frequently used in the calculation of the expected room revenue of a hotel in a given period (see §§145 to 146 and 150 to 154 of Cityability Ltd v Treasure Spot Investments Ltd, HCA 1604/2007 (1 February 2010). 

236.  Mr Niehorster referred to the accounts of FECIL ending 31 March 2010 (the plaintiff was not opened yet).  The accounts stated that the hotel operation of the group during April to December 2009 was significantly affected by the weakness of the global economy and the H1N1 pandemic.  There was however a strong recovery in room rates and occupancy from January to March 2010.

237.  He also referred to FECIL’s announcement of results for the year ending 31 March 2011 which stated that the revenue of its hotel operation had increased by 40.7% comparing with the previous year.  This was the result of higher RevPAR and contribution from new hotels.  During this year, the RevPAR for FECIL’s hotels in Hong Kong increased by 33%. 

238.  He further referred to FECIL’s announcement of results for the year ended 31 March 2012 which stated that the revenue and gross profits of the hotel operation had increased by 26.4% and 37.8% respectively over the previous year.  The gross profit margin had also increased from 54.5% to 59.4%.  The net profit also increased by 190.3% over the previous year.  The growth was the result of contribution of new hotels including the plaintiff’s hotel, disposal of a hotel and the increase of RevPAR for all hotels in Hong Kong and elsewhere by 23.9%.

239.  He submitted that in the light of the increase in RevPAR in the two years, the daily loss of profit at HK$40,501 in Ms Tsang’s second report as calculated from the audited figures of 23 June 2011 to 31 March 2012 should be adjusted downwards.  The rates of downward adjustments should be 30% for the year ending 31 March 2011 and 20% for the year ending 31 March 2012.  Applying these adjustments to the daily loss at HK$40,5 produces the figure of:

HK$40,501 x 1/1.2 = HK$33,750

HK$33,750 x 1/1.3 = HK$25,962.

240.  Mr Chan disagreed with Mr Niehorster’s approach. He objected to the use of the accounts and announcement of results of FECIL on the ground that the defendant had never disclosed these documents in discovery and they were not produced in evidence. 

241.  I think the parts of the announcements which Ms Tsang had considered and accepted in her cross-examination have become part of the evidence. However, it is correct that these announcements have not been disclosed in discovery or mentioned anywhere in the pleadings and witness statements.  The plaintiff is therefore not alerted to them or that the defendant would make use of them.  The plaintiff was therefore not given any chance to prepare for the defendant’s case as built on these figures.  These figures are also for the hotel operation of FECIL in Hong Kong and the rest of the world.  If the plaintiff should have been alerted to the fact that the defendant would rely on the accounts and announcements, it could have adduced more evidence to show how the different hotels had performed differently and why.  It could also have produced the RevPARs and their changes over the years for each of its hotels in Hong Kong and use the RevPARs of the hotels that are similar to the plaintiff’s hotel for comparison.  Since the plaintiff was not given a chance to prepare its case to deal with the figures in the accounts and announcements, I would ignore Mr Niehorster’s submissions as based on them.

242.  Mr Chan also objected to the use of the increase in RevPAR as a yardstick for measuring the daily loss of the plaintiff.  But he had not made any objection when Mr Niehorster used it to cross-examine Ms Tsang. Nevertheless, I would still not make use of the increase in RevPAR for several reasons. The first being that Ms Tsang did not know what was RevPAR though she had in fact used the concept of average room rate multiplied by occupancy rate in section 9 of her first report.  Since Ms Tsang did not know about RevPAR, her response in cross-examination to the questions that were built on RevPAR is not meaningful.

243.  Furthermore, any hotel has its own particular RevPAR and its own reasons for the change in the figure.  To use the RevPAR for all the hotels of FECIL in Hong Kong or all over the world to extrapolate the net income after tax of the plaintiff’s hotel at a time in the past is not an accurate method of extrapolation. 

244.  In any case, RevPAR is only for estimating the room revenue.  It does not reflect the expenses for maintaining the rooms, the revenue and expenses of the food and beverage section (“F&B”) and the other expenses of the hotel.  I thus consider Mr Niehorster’s use of the rates of increase of RevPAR to adjust the daily loss in Ms Tsang’s second report as crude and unreliable and I dismiss it.

245.  Since there is no other adjustments suggested by either side to reflect the effect of the Global Financial Crisis on the business environment in Hong Kong in 2009 to 2010 and to bring Ms Tsang’s figures for 23 June 2011 to 31 March 2012 into the reality of 6 October 2009 to 26 August 2010, I will not rely on her second report.

The amount of daily loss - The valuation based on the comparables approach

246.  Ms Tsang’s first report is based on the comparables approach (R-3635–3651).  She used the following as comparables:

(a) Traders Hotel Hong Kong;

(b) Island Pacific Hotel Hong Kong;

(c) Ramada Hong Kong;

(d) High Tariff B Hotels (HK Tourism Board (“HKTB”) statistics

     by category); and

(e) Eastern HK/Other HK (HKTB statistics by district).

247.  Ms Tsang assumed that for the initial period of the hotel’s operation (from 6 October 2009 to 26 August 2010), the F&B would achieve a breakeven and make no contribution to net income.  For the income other than from room revenue and F&B, she had studied the cases of (i) Sino Hotels (Holdings) Ltd for the year ending 30 June 2010 and (ii) Asia Standard Hotel Group Ltd for the year ending 31 March 2010 which showed that such income constituted only 0.4% and 0.6% respectively of their gross income.  She thus regarded such income for the plaintiff’s hotel for the period in question as immaterial.  Hence, she just considered room revenue in her valuation of the plaintiff’s loss between 6 October 2009 and 26 August 2010.

248.  For the three comparable hotels, she used their average room rates including 10% service charge from 16 November to 31 December 2010 and adjusted them for (i) the poorer location of the plaintiff’s hotel and (ii) a lower occupancy rate for the first year of the plaintiff’s operation.  The figures after adjustments were supposed to reflect the plaintiff’s daily room revenue for 6 October 2009 to 26 August 2010.  She applied a 30% adjustment for poorer location and a 40% average occupancy for the plaintiff’s hotel in first year.

249.  Taking Ramada Hong Kong at 308 Des Voeux Road as an example, its average room revenue from 16 November to 31 December 2009 was HK$893/day. After making the said adjustments, the figure which may reflect the plaintiff’s room revenue for 6 October 2009 to 26 August 2010 is: HK$893 x (1-30%) x (40%) = HK$250.04/day.

250.  The plaintiff’s hotel had 209 rooms.  The average daily revenue for all the rooms at this rate would be: HK$250.04 x 209 = HK$52,258.36. The total loss of room revenue for the period in question would be: HK$52,258.36 x 325 days = HK$16,983,967.

251.  The next step is to assess the expenses for producing the revenue and hence the profit before tax for the period in question.

252.  For the hotel operation of FECIL, the total direct expenses including staff costs, room costs and F&B costs equalled to 34.72% of the total revenue.  Ms Tsang then assumed that the plaintiff’s costs for producing HK$16,983,967 was also at its 34.72%.  The net profit before tax for this period was thus at: HK$16,983,967 x (1-34.72%) = HK$11,087,133.66.

253.  Applying the same method of adjustment and calculation to the figures of Traders Hong Kong Hotel and Island Pacific Hotel produces the figures of total loss of room revenue for the period in question at HK$14,377,268.51 and HK$14,650,411.78 respectively.

254.  For the High Tariff B Hotels, Ms Tsang used the average achieved hotel room rate of High Tariff B Hotels published by the HKTB for October 2009 to October 2010.  She also made a 30% discount to the average rate to reflect the poorer location of the plaintiff’s hotel.  She however assumed an occupancy rate of 30% (lower than the 40% for the three comparable hotels) to reflect the first year business of the plaintiff’s hotel.  The loss of room revenue estimated by this means for the plaintiff’s hotel from 6 October 2009 to 26 August 2010 was at HK$14,856,683.15.  Treating 34.72% of it as the overall expenses of the hotel, the net profit before tax would be HK$9,698,442.76. 

255.  For the Hotels in Eastern HK/Other HK, Ms Tsang used the same figures of High Tariff B Hotels and also produced HK$9,698,442.76 as the net profit before tax for the period in question.

256.  Ms Tsang then took an average of the five figures and divided it by 325 days to arrive at the daily loss of the plaintiff during the relevant period at HK$36,623.

257.  Mr Niehorster submitted in §121 of his closing submissions that the net income of the three comparables for 6 October 2009 to 26 August 2010 after adjustments for locality and occupancy for first year business were all at 65.3% of the gross income whilst the actual net income of the plaintiff’s hotel from 23 June 2011 to 31 March 2012 (HK$11,461,751) was at only 24.4% of the actual rental income (HK$47,055,181). Hence, he submitted that the figures of the three comparables underestimated the direct expenses of the plaintiff’s hotel.

258.  I think Mr Niehorster’s submission overlooked two matters.  The first is the fact that the expenses of the three comparables were only assumed to be 34.72% of the profits after adjustment.  The use of 34.72% of their profits as their expenses rather than their actual expenses is because 34.72% was the percentage achieved by FECIL in its hotel business.  Ms Tsang assumed that if the three comparable hotels were also managed by FECIL, the expenses would have been kept at the same level.  I think this is a reasonable assumption to make. The second matter that Mr Niehorster overlooked is the very different business environment of the period of 6 October 2009 to 26 August 2010 from that of 23 June 2011 to 31 March 2012.  The plaintiff was unable to keep the expenses of its hotel at the low level of 34.72% in the latter period.

259.  In the light of the adjustments made by Ms Tsang, I consider her approach in assessing the plaintiff’s income loss during the period in question a reasonable one. 

260.  However, the loss assessed by Ms Tsang is the profit before tax.  Damages are not profits and not taxable.  Taking the 16.5% profits tax out of HK$36,623 gives HK$30,580 as the daily profit after tax.  The net loss of profit after tax for 6 October 2009 to 26 August 2010 is at HK$30,580 x 325 = HK$9,938,500.

MONIES PAID TO THE DEFENDANT BEFORE THE DETERMINATION OF THE CONTRACT

261.  The parties agreed that before determination of the contract, the plaintiff had paid the defendant HK$28,582,192.16.  In addition, the plaintiff had paid at the request and on behalf of the defendant to Falcon HK$339,872.85 and HK$423,246.60 or a total of HK$763,119.45.

262.  Mr Niehorster submitted in §86(ii) of his closing submissions that these sums should not be treated as monies paid by the plaintiff to the defendant before the contract was determined because the value of the works did not include any allowance for the tiles supplied by Falcon.

263.  This submission is incorrect.  Mr Chan has rightly pointed out that these payments to Falcon were for the defendant’s work on the external wall for which HK$1.8 million was provided in the schedule of rates as part of the HK$48 million contract sum (H-130).  I have already dealt with a similar payment to Falcon above in the context of the plaintiff’s payment after the determination of the contract for materials within the scope of the contract. This HK$763,119.45 should be treated as money paid to the defendant before the determination of the contract.

264.  In the premises, the plaintiff had paid the defendant a total of HK$29,345,311.61 prior to the determination of the contract.  This sum does not include a sum of HK$200,000 paid by the plaintiff to the defendant on account of variation works done by the defendant.  This sum will be dealt with below.

AMOUNT THAT WOULD HAVE BEEN PAYABLE BY THE PLAINTIFF TO THE DEFENDANT HAD THE DEFENDANT COMPLETED THE PROJECT ACCORDING TO THE CONTRACT

265.  There are three elements in this item.  They are the contract sum, the price for the additional works and the site and head office overhead costs for the extension of time. 

266.  The contract price is at HK$48 million. 

267.  For the variation works, the quantum experts agreed that, save for AI-M132 and A1-M148, the sum should be HK$486,297.27.  Since HK$200,000 had been paid on account of additional works prior to determination of the contract, the further sum payable is HK$286,297.27.

Costs for the variation works in AI-M-132

268.  Regarding AI-M-132, the quantum experts agreed that the quantum should HK$79,423.95, but they dispute over the plaintiff’s liability for these works.

269.  The architect issued M-132 on 16 April 2009 requiring the defendant to reconstruct the transformer room staircase.  It was common ground that the headroom of the door of the transformer room was less than that stipulated by Hong Kong Electric Co Ltd (“HKE”).  Hence, the door and staircase had to be reconstructed. The architect put the blame on the defendant by saying in M-132 that the cause for the work was the defendant’s late co-ordination with HKE (P-3105). 

270.  There was a plan entitled “Detailed Requirements for Substation Door” (H-434) which was supplied by the plaintiff to the defendant on 20 February 2008 together with many other drawings and plans (H-419 and 426). This plan was supplied together with other details on the transformer room for the defendant’s consideration on pricing.  It bears the logo of HKE.  Note 7 of the plan stated a requirement of HKE on the dimension of a standard door as follows:

“7) FOR STANDARD DOOR. IT MUST BE ENSURED THAT A CLEAR PASSAGE OF NOT LESS THAN 2000 mm WIDE BY 2500 mm HIGH IS PROVIDED WHEN THE DOOR IS FULLY OPENED. IF THERE IS A CHANGE IN DIRECTION IN THE PASSAGE TO SUBSTATION, EXTRA WIDTH SHALL BE ALLOWED FOR AT THE TURNING SECTION AND IN THIS CASE. THE LENGTH OF HEC EQUIPMENT SHALL BE TAKEN AS 2000 mm.”

271.  The plaintiff by a letter dated 10 March 2008 asked the defendant the following (K-1229):

“001 Please confirm your tender sum has included the cost for the hoist beam and all builder’s works in the 1/F transformer room and constructed as per the requirements and standard of Hong Kong Electric Co. Ltd.”

272.  The defendant replied by a letter dated 13 March 2008 as follows (K-1227):

“1) This is to confirm that our tender sum includes the cost for the hoist beam and all builder’s works on 1/F transformer room and in accordance with the requirement to the standard of Hong Kong Electric Co. Ltd.”

273.  It is thus clear that the defendant had a contractual obligation to comply with HKE’s requirements on the door of the transformer room.

274.  Furthermore, Clause 1 of the contract as amended by SCC-3(1) required the defendant to complete the Works in accordance with the contract documents in every aspect to the satisfaction of the architect.  I have also referred to above the defendant’s duty to warn the architect if the design drawings should for any reason be unsuitable.  Nevertheless, the defendant failed to follow the requirements of HKE in the above-mentioned Note 7 in constructing the door of the transformer.

275.  Though the defendant said that the formwork and reinforcement bar of the staircase had been inspected by the RSE before concreting, I have already pointed out above that the RSE was concerned with the structural aspect of the construction. I have also mentioned that the fact that the RSE may be liable to the plaintiff cannot exonerate the defendant’s liability to the plaintiff.

276.  Though DW2 Tsang also said in cross-examination that the defendant had been instructed by an e-mail to build the transformer room per the construction drawings, that e-mail was only mentioned in cross-examination and never produced.  In any case, such e-mail could not have defeated the defendant’s duty to warn the architect of design problems.

277.  In the light of the above, I hold that the defendant is not entitled to be paid for reconstructing the staircase as per M-132.

Liability for the costs of AI-M-148

278.  Regarding AI-M-148, Mr Chan said that the parties disputed both liability and quantum.  But Mr Niehorster said that the quantum had been agreed at HK$1,139,039.87.

279.  This AI required the defendant to rectify the sleeves of all E/M openings including waterproofing work as per some original construction drawings annexed to it (P-3144-3151).  These drawings are the same as the tender drawings supplied to the defendant under cover of a document called Notes for Tender on about 28 April 2008 (F1-1545-81-1545-86).  The Notes for Tender stated, among other things, that: “All floor and wall make good for sleeve and pipe would be done by related NSC”. This instruction is repeated at the bottom of the tender drawings annexed thereto.

280.  These drawings also repeatedly stated the obligations of the related NSC to provide the materials for the sleeves and to provide and make the sleeves.  It is thus clear that the obligation to make good the sleeves as shown in these drawings were originally on the related NSCs and not on the defendant. Hence, when the architect issued M-148 to require the defendant to rectify the sleeves of all E/M openings including waterproofing work and annexed to the AI the same drawings, he was asking the defendant to assume an additional obligation.

281.  The plaintiff’s quantum expert Lui however took the view that the defendant should be responsible for the work in M-148 as such work was within the scope of clause 6.04 of the Specification-Preliminaries (I-550) and clause 8.6 of the General Specifications-General-Provision of Facilities/Attendance to NSCs/Nominated Suppliers (I-583) (C-541).  Mr Chan adopted this argument in his submissions. 

282.  I have already referred to clause 6.04 above.  I do not think that it has made the defendant exclusively responsible for forming and rectifying all sleeves.  It only required the defendant to co-operate with the NSCs and specialist contractors in the setting in of sleeves where the sleeves were supplied by the NSCs and specialist contractors.

283.  Regarding clause 8.6, it provided:

“8.6 The Main Contractor shall attend on all Nominated Sub-Contractors and allow for cutting or forming chases, holes and openings, etc. of all sizes (boxings for forming major openings in the structure as detailed on the structural drawings have been measured in the ‘Concretor’), building in sleeves, supplying cement mortar for fixing, supplying cement mortar for filing around, painting surface wiring exposed to view, painting conduits exposed to view, sealing around all pipes, ducts and cables with approved mastic, providing electrical power for testing installations, making good all work disturbed together with all other necessary work of a like nature, and labelling of all machine rooms, plant rooms, service rooms, water tanks, service ducts and cabinets.”

284.  I again do not consider that clause 8.6 has the effect of making the defendant exclusively responsible for forming and rectifying all sleeves. It only required the defendant to attend to the NSCs and facilitate them in building in sleeves.

285.  Mr Chan further submitted in §266 of his closing submissions that even if clause 8.6 did not make the defendant responsible for rectifying the sleeves in M-148, that clause and the drawings attached to the Notes to Tender would have created an ambiguity as to who should be responsible for rectifying the sleeves.  In the circumstances, the defendant would have been contractually bound to seek clarification from the architect on the ambiguity.  Since the defendant had not done so, Mr Chan submitted that the defendant should not benefit from its dereliction of duty.

286.  I disagree with this submission.  Nowhere in either clause 6.04 or 8.6 does it say that the defendant had the exclusive liability to rectify the sleeves in question.  Instead, the Notes to Tender and the drawings under its cover had clearly stated the NSCs’ obligations to make good the sleeves. The NSCs should therefore be liable to rectify these sleeves.  There is no ambiguity in this.  Hence, when the architect issued M-148 to the defendant, he was instructing the defendant to assume an additional obligation.  Hence, the defendant is entitled to be paid for the same.

Quantum for the costs of AI-M-148

287.  Regarding quantum for M-148, Mr Niehorster in §§5(ii) and 88 of his closing submissions stated that it had been agreed at HK$1,139,039.87. But Mr Chan on the other hand paid no regard to this alleged agreement in his closing submissions.  He instead just asserted in §249.2 of his closing submissions that the plaintiff disputed both the liability and quantum under this AI.  He further submitted in §264 that Mr Wan (“Wan”), the defendant’s quantum expert took the view that the works under M-148 should be valued at HK$1,139,093.87, but the substantiation Wan relied on was concerned with the costs for opening the E/M openings and not the rectification of sleeves as instructed by M-148.  Mr Chan further said that Wan had agreed in cross-examination that he had used the wrong substantiation in this valuation.  Hence, Mr Chan further submitted in §265 that there was no evidence on quantum for rectification of these sleeves as Wan’s evidence was wrongly based.  Therefore, I cannot award anything to the defendant for the works in M-148 even if I should be with the defendant on its liability.

288.  Mr Niehorster again referred to the agreement on quantum in §106 of his reply submissions. 

289.  Mr Chan then said in §38.1 of his reply submissions that even if an expert opinion is not contradicted or when all experts subscribed to the same opinion, the court is still not bound to accept it.  The court must consider the merits of the evidence and reasons supporting the opinion.  If the opinion is not supported by evidence or the reasons are flawed, the court is entitled to reject the opinion.

290.  I agree with Mr Chan’s approach if it is just an expert opinion tendered to the court.  However, what is being considered is not an uncontradicted or joint expert opinion, but an agreement between the parties on quantum.

291.  In order to address this matter fairly, I have to recount how the agreement on quantum of this item was made known to the court and how did the question of substantiation of this quantum creep in.

292.  The quantum experts on both sides were called on the 17th day of the trial.  Prior to that, the plaintiff’s expert Lui gave no valuation on the quantum for M-148.  He merely opined that by reason of clauses 6.04 and 8.6 above-mentioned, the defendant was not entitled to be paid for these works (C-541). The defendant’s expert Wan however valued the works at HK$1,139,093.87 (D-923).

293.  On the 17th day, the trial resumed late to give the parties time to negotiate some figures.  When the trial resumed, Mr Chan told the court that some figures had been agreed.  One of which was the quantum for the variation works under M-148.  That was agreed at HK$1,139,039.87 (slightly different from Wan’s figure of HK$1,139,093.87 in D-923). 

294.  Mr Chan then called Lui, the plaintiff’s quantum expert and led him to confirm in his evidence in chief the agreed figures including the figure for M-148.

295.  Wan, the defendant’s quantum expert was called in the afternoon.  Mr Chan asked him to go to his report at D-923 and confirm his opinion that the value for M-148 was at about HK$1.13 million.  He confirmed that without hesitation.  Mr Chan then took him to 01-195-229 and asked him if that was the substantiation that he had based his opinion on and in relation to the value of M-148.  He said “yes” in a casual and responsive manner.  Mr Chan then told him that the substantiation was for the costs for the openings.  He again answered “yes” in a casual and responsive manner.  Mr Chan further asked him to confirm that the substantiation was not about the making good of sleeves.  He also confirmed it in a causal and immediate manner by saying that they were for openings only.  I then repeated the question that they were not for making good the sleeves.  He again said “no” rather instantly and still in a causal manner.  Mr Chan then moved to another issue.

296.  Throughout his cross-examination on the quantum of M-148, Wan did not appear to be surprised by Mr Chan’s revelation that the substantiation he relied on was for making openings and not for rectifying the sleeves.  The way he answered the questions made it plain that he knew what he was saying.  He did not appear that he had been caught by Mr Chan in using the wrong substantiation for valuing the quantum of M-148.  He was cool, calm and composed throughout.

297.  Unfortunately, Mr Chan, for reasons not known to the court, did not put to Wan that his valuation for M-148 was wrong as Wan had relied on the wrong substantiation. 

298.  Mr Chan also did not suggest at the trial that Lui, his quantum expert, when agreeing with Wan on quantum of M-148, had also erred or been misled by Wan in relying on the wrong substantiation.  Mr Chan also made no attempt to re-open or withdraw from the agreement on the quantum of M-148 which he had revealed to the court in the morning of the same day. 

299.  In the premises, I do not know whether the parties or their experts, in agreeing to the quantum of M-148, had a good reason to rely on the substantiation for making openings or had erred.

300.  Since there was the agreement on the quantum of this AI which was not challenged in a proper way and there is no proper evidence showing that the experts on both sides had mistakenly or erroneously relied on the wrong substantiation for the agreed quantum, I would hold the plaintiff to the agreement and award the defendant HK$1,139,039.87 for the works under M-148.

301.  The quantum for the variation works is therefore at: HK$286,297.27 + HK$1,139,039.87 = HK$1,167,667.14.

Pre-determination prolongation costs

302.  The quantum experts have agreed that the daily site and head office overhead costs are HK$12,049.64 and HK$4,171.03 respectively or a total of HK$16,220.67.  For the 22 days extension, the total sum should be: HK$16,220.67 x 22 = HK$356,854.74.

Amount that would have been payable to the defendant

303.  The total amount that would have been payable to the defendant had it completed the Works per the contract is: HK$48,000,000 + HK$1,167,667.14 + HK$356,854.74 = HK$49,524,521.88.

DAMAGES THAT SHOULD BE AWARDED TO THE PLAINTIFF ON THE BASIS OF A LAWFUL DETERMINATION OF THE CONTRACT

304.  In the light of the above findings, the damages for direct loss and/or damage caused to the plaintiff by the determination of the contract are as follows:

(1)	The plaintiff’s management costs post-determination	HK$556,414.98
(2)	The plaintiff’s expenses to procure contractors to supply materials or carry out works included in the original scope of the contract but not awarded under the replacement contract to DKK.	HK$875,190.05
(3)	Total costs of and relating to the replacement contract awarded to DKK.	HK$16,663,282.74
(4)	Liquidated damages.	HK$2,160,000
(5)	Damages for loss of profit for delayed opening of the hotel.	HK$9,938,500
	Total:	HK$30,193,387.77

305.  The total amount of damages payable to the plaintiff is:

Damages for direct loss and/or damage caused to the plaintiff by the determination.	HK$30,193,387.77
Add: the monies paid to the defendant before the date of determination of the defendant’s employment.	HK$29,345,311.61
Less: the total amount which would have been payable by the plaintiff to the defendant on due completion in accordance with the contract.	HK$49,524,521.88
Total:	HK$10,014,177.50

THE DEFENDANT’S LOSS AND DAMAGE RESULTING FROM WRONGFUL DETERMINATION OF THE CONTRACT

The defendant’s loss of profit from the uncompleted works

306.  If my finding that the plaintiff had lawfully determined the contract should be wrong, the defendant would be entitled to its loss and damage arising from the determination.

307.  One of the items that needs to be ascertained in calculating the defendant’s loss and damage is the defendant’s loss of profit for the uncompleted works.

308.  Mr Niehorster alleged in his closing submissions and emphatically maintained in his reply submissions that the experts had agreed on 15 August 2013 the quantum for this loss of profit at HK$1,360,606.72. 

309.  Mr Chan disagreed.  He said the document Mr. Niehorster disclosed in his closing submissions and dated 15 August 2013 was just part of the without prejudice negotiation between the parties and Mr Niehorster should not have revealed that to the court without the plaintiff’s agreement. 

310.  I agreed with Mr Chan for the following reasons. When Lui gave evidence on quantum for the plaintiff on 19 August, he said his valuation of the defendant’s loss of the profit for the uncompleted works was at HK$1,350,931.72 (revising up from his original figure of HK$1,156,966.75).  He did not say that the parties had already agreed on 15 August 2013 that this sum should be HK$1,360,606.72. Mr Niehorster also did not put to him in cross-examination that there was the alleged agreement.  When Wan gave evidence on quantum for the defendant in the afternoon, he said the loss of profit for the uncompleted works was at HK$1,513,979.42.  He also did not mention the alleged agreement.  It is thus not fair play for Mr Niehorster to suggest in his closing submissions and emphatically maintain in his reply submissions that there was such an agreement and ask the court to act on it.

311.  Regarding Wan’s valuation of loss of profit at HK$1,513,979.42, Wan agreed in cross-examination that the defendant would have made a loss of HK$122,500 for the underground drainage works.  Hence, he reduced his valuation by HK$122,500 (D-1001). 

312.  Wan also agreed in cross-examination that the profit for the pre-cast concrete block (schedule 5), roofer-plasterer (schedule 7) and plasterer (schedule 11) all under appendix K1 should be reduced from HK$601,428.55 by HK$451,246 to HK$150,182.55 (D-937, 939, 950, 961-963, 998-999).  That brought his valuation of loss of profit down to HK$940,233.42.

313.  Wan also agreed in cross-examination that there was 2.5% of the contract sum or HK$1.2 million that would be retained by the plaintiff until the expiry of the defects liability period to cater for the making good of defects by the defendant.

314.  Mr Chan suggested in his closing submissions that half of this sum at HK$600,000 should be taken for rectification of defects.  I think this is a reasonable estimate.

315.  After further deducting HK$600,000 from HK$940,233.42 for making good defects, Wan’s valuation of the loss of profit for the uncompleted works would be at HK$340,233.42.

316.  Mr Chan suggested to further reduce this sum to HK$300,000 for other losses that Wan had not taken into account and the possible unreliability of the figures in the sub-contracts produced by the defendant.  I decline this suggestion as I would not want to make any further reduction that Wan had not agreed to.  Regarding the sub-contracts, Mr Chan’s point is that they had not been signed by the defendant. But the experts had accepted them as reasonable.  I would therefore not make any further reduction as suggested by Mr Chan.

317.  Mr Chan further submitted that I should make the same deductions from Lui’s valuation of the defendant’s loss of profit so that the net valuation of Lui will become a negative sum.  I again decline this suggestion as Lui had not been questioned on whether such deductions should be made.  In the premises, I accept Wan’s smaller figure of HK$340,233.42 as the profit for the uncompleted works.

THE DEFENDANT’S LOSS AND DAMAGE

318.  If my finding that the contract was lawfully determined should be wrong, then the defendant’s loss and damage from the wrongful determination should be the sum total of items (1) to (5) below less item (6):

1.	Value of contract works done by the defendant	HK$32,677,292.67
2.	Value of variation works done	HK$1,167,667.14
3.	The defendant’s loss of profit from determination of employment (for uncompleted works)	HK$340,233.42
4.	The defendant’s other losses (i.e. scaffolding materials, E-Mix tile fix 303 grey, deposit for electricity & water supply)	HK$138,114.75
5.	The defendant’s office and site overhead costs	HK$356,854.74
6.	Amount the plaintiff had paid to the defendant before determination	HK$29,345,311.61

319.  The defendant’s loss and damage would thus be at HK$5,334,851.11.

JUDGMENT

320.  Since I have decided that the contract was lawfully determined by the plaintiff, I therefore order the defendant to pay the plaintiff HK$10,014,177.50 under the 2nd Action.  I also dismiss the counterclaim in the 2nd Action. 

321.  The plaintiff has indicated that it is not pursuing any injunction under the 1st Action, I therefore make no further order in that action.

322.  I further make a costs order nisi that the defendant do pay the plaintiff the costs of both actions to be taxed.