GOLDEN PHOENIX DEVELOPMENT CO. LTD. v. SANO ENGINEERING LTD.

DCCJ 15764/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIC ACTION NO. 15764 OF 2000

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JUDGMENT

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INTRODUCTION

(1) In August 1997, the Defendant was engaged by the Plaintiff to carry out renovation works (the "Renovation") at the Plaintiff's premises. The Defendant prepared a draft contract and sent it to the Plaintiff on 19th August 1997 (the "19th Contract"). The original contract price was $277,000 payable by 4 instalments. The Plaintiff paid to the Defendant $56,750, being 25% of the contract price of the 19th Contract.

(2) Although the parties signed the 19th Contract, further amendments were made and after the Plaintiff approved plans and drawings, the Defendant prepared a second draft contract. The second draft contract was sent to the Plaintiff on 22nd August 1997(the "22nd Contract"). The Plaintiff made further amendments to it, but did not sign the 22nd Contract.

(3) A final contract was prepared and signed by the Plaintiff on 28th August 1997 (the "28th Contract"). Amendments were made to some items of the Renovation, some items were added and the contract price was revised to $226,460. The terms of payment were as follows:

(a) 25% as deposit upon execution;

(b) 35% to be payable in accordance with progress;

(c) 30% to be payable in accordance with progress; and

(d) the balance 10%, payable upon completion.

(4) On 9th September 1997, the Plaintiff paid the Defendant a further sum of $79,261 being the second payment under the 28th Contract.

(5) On 18th September 1997, the Defendant issued an invoice for a sum of $67,938, being the third payment under the 28th Contract. Plaintiff refused to pay on the grounds of poor workmanship and the Defendant had not yet completed 90% of the Renovation.

(6) On 20th September 1997, the Defendant packed up its tools and abandoned the premises.

PLAINTIFF'S CASE

(7) The Plaintiff alleged that the Defendant commenced the Renovation on 23rd August 1997.

(8) The terms of all three agreements provided that the Renovation was to be completed within 30 days from the commencement day. As the Defendant commenced demolition work on 23rd August 1997, the Renovation should have been completed on 23rd September 1997.

(9) However, there was substantial delay by the Defendant. As of 13th September 1997, not a single item in the Renovation had been completed. The Plaintiff then send a letter reminding the Defendant of the delay and demanded the Renovation be expedited. The Defendant failed or refused to remedy the situation.

(10) Furthermore, works completed by the Defendant were defective, material used were of poor quality and were unfit for its purposes.

(11) By 20th September 1997, the day the Defendant abandoned the premises, it would have been impossible for the Defendant to complete the Renovation on or before 23rd September 1997.

(12) On advice of its solicitors, on 21st or 22nd of September 1997, the Plaintiff took photographs to document the condition of the Renovation.

(13) The Plaintiff had to hire substitute contractors to complete the Renovation after the Defendant abandoned the premises. The substitute contractors found numerous defaults in the Renovation done by the Defendant. Leaks were found in the water pipes. Electrical works also failed to satisfy the minimum standard set by the government. The costs of correcting these defaults and to complete the Renovation far exceeded the balance of the contract sum. The Plaintiff then commenced this action for the recovery of the same.

THE DEFENDANT'S CASE

(14) The Defendant stated that it began the Renovation a day or two after the 22nd of August. In any event, the 28th Contract did not specify that the Renovation must be completed within 30 days after commencement. The completion day depended on whether the Defendant could work on Saturdays and Sundays. The agreement was that if the Defendant could not work on Saturdays or Sundays, then completion of the Renovation would be delayed.

(15) The Plaintiff had caused delays in the Renovation by requesting a number of variations. For example, the ceiling height of the toilet was changed by an agreement between the Plaintiff and the Defendant's subcontractor, without the Defendant's consent.

(16) The only item that the Plaintiff had ever complained of was that the custom build cabinets were made with second-hand wood panels, because the inside wood panels were of different colours. In fact, the cabinets were made from mixed plywood panels. The colours of the inside wood panels were different because these were natural colours of the various types of wood used.

(17) As to progress, the Renovation was at 90% completion on 18th September 1997. There were only small details to be completed in each item. This was a common tactic used by subcontractors to ensure that they would be paid balance of their contract fees.

(18) On 22nd September 1997, the parties reached an agreement for the Defendant to complete the ceiling of the toilet and the Plaintiff to pay the third installment payment. However, when a written notice of this agreement was send to the Plaintiff, the Plaintiff refused to endorse the same. Irrespective of this, the Defendant sent its subcontractor to the premises. The Plaintiff refused to let the subcontractor into the premises.

(19) The Defendant counter-claimed for balance of the contract price, in the sum of $107,147.

PRELIMINARY MATTERS

(20) Prior to commencement of hearing, Counsel for the Defendant, Mr. Dawes applied to reduce the counter-claim from $107,147 to $84,546. Plaintiff's Counsel, Mr. Wong, had no objection and I made the following orders:

(1) Total sum of the counter-claim be amended to $84,546;

(2) Service be dispensed with; and

(3) Costs of and occasioned by the amendment be to the Plaintiff in any event.

(21) Mr. Dawes and Mr. Wong agreed that this hearing would be limited to liability only. Counsels further agreed that quantum could be decided by consent, once liability has been decided. This hearing was accordingly conducted solely on liability.

ISSUE:

(22) The parties agreed that the Plaintiff had refused to pay the third instalment payment upon receipt of the Defendant's invoice on 18th September 1997. The Defendant then abandoned the premises on 20th September 1997. The only issue was: Who was in breach of the contract on 20th September 1997?

LAW:

(23) The learned authors of Chitty on Contract, stated the relevant law (in paragraph 25-014), as follows:

"...Where both parties are alleged to have committed a breach of contract, and it is asserted that each breach (taken independently) gives rise to a right to terminate further performance of the contract, regard must be had to the order in which the beaches occurred. Where party (A) breaches the contract and that breach is followed by a breach by the other party (B) then, assuming that both breaches are repudiatory, the breach by party A will give party B the right to terminate future performance of the contract. If B exercises that right and accepted the repudiation his subsequent failure to perform his obligations under the contract will not constitute a breach of contract."

(24) During trial, Counsels spend much time on the workmanship and fitness for purpose of the cabinets. Unfortunately, condition of the cabinets was not relevant to the issue of liability, because the Defendant was never given a chance to remedy the defects, if any.

(25) Counsels also spend a great deal of time on whether time was "of the essence" of the contract and on determining on which day the Renovation had commenced. However, since the Defendant had abandoned the premises on 20th September 1997, 3 days prior to the earliest possible completion day, whether time was "of the essence" or what was the actual commencement day of the Renovation were all irrelevant to the issue: Who was in breach of the contract on 20th September 1997?

(26) The first possible act of a repudiatory nature occurred when the Plaintiff refused to pay the third payment on 18th September 1997. If the Defendant was entitled to demand the third payment, the Plaintiff's refusal to pay this sum was clearly repudiatory and the Defendant's abandonment of the premises on 20th September 1997 was justified as a legitimate exercise of its right to accept the Plaintiff's repudiation. The Defendant's refusal to complete its obligations under the contract would not constitute a breach of contract.

(27) On the other hand, if the Defendant was not entitled to the third payment, the Plaintiff would not have been in breach of contract when it refused to pay the same; but the Defendant would have been in breach by abandoning the premises on 20th September 1997. The Plaintiff would then have been entitled to accept the Defendant's breach and treated the contract as ended.

(28) During the hearing, parties agreed that the Defendant was only entitled to demand the third payment when the Renovation was 90% completed. The question accordingly was whether the Renovation was 90% completed on 18th September 2000?

THE EVIDENCE

(29) The most important evidence on the condition of the Renovation as of 18th September 1997, were two sets of photographs attached to the supplemental affirmation of the first Plaintiff witness, Mr. Yeung Kam Kwok ("Mr. Yeung").

(30) The first set consisted of photographs 1 to 31. The condition depicted in these photographs clearly showed that much was yet to be completed. Plumbing, wiring, wallpapering, trimming, lighting, paneling, ceiling and curtain works were all incomplete. The premises was in complete chaos. Wiring was hanging from the ceilings, walls and switches. Ceiling panels were missing. Ceiling railings were not yet installed in the toilet. Water supply to the toilet and washbasin were not connected. The walls were bare in several areas. Doors were unfinished. Corridors, which were supposed to have been covered in marble panels, were bare.

(31) When these photographs were compared with the second set, photographs A to I, which showed the premises after the Renovation had been completed, the difference could clearly be seen. After the two sets of photographs were compared, the inescapable conclusion was that the condition depicted in photographs 1 to 32, were nowhere near 90% completion. Even if I accepted that the corridor marble panel had been ordered and were ready to be installed, I would estimate (at the time photographs 1 to 32 were taken) the Renovation was somewhere between 60 to 65% completed.

(32) Mr. Tong Wai Tak ("Mr. Tong"), the Defendant witness, testified that on 20th September 1997, when he abandoned the premises, majority of the wallpaper had been installed. The far wall in photograph 23 would have been covered in wallpaper. The rolls of wallpaper shown in photograph 21 would have been used, proving that photographs 1 to 32 were in fact taken days before 20th September 1997.

(33) Mr. Hung Tin Fung ("Mr. Fung"), the cabinet subcontractor, testified that the cabinets were delivered on 16th September 1997 and installed on the following day. Mr. Hung however, testified that due to complaints received from the Plaintiff, two to three days after delivery of the cabinets he went to the premises to adjust the cabinets. The adjustments included leveling the doors, putting in the horizontal boards in the cabinets, etc.

(34) Mr. Dawes, for the Defendant, argued that photographs 1 to 32 were taken sometime between delivery of the cabinet on 16th September 1997 and 17th September 1997 when the cabinet were installed and substantial work of the Renovation was done before 20th September 1997.

(35) Close examination of photographs 5, 9, 15, 17, 18, 19 and 32, however, revealed that the horizontal boards had been installed and photographs 10 showed that the doors were relatively leveled. When these photographs were taken, Mr. Hung must have already completed his adjustments to the cabinets. The inescapable conclusion was that photographs 1 to 32 could not have been taken before 18th September 1997.

(36) This conclusion was supported by the testimony of the Plaintiff's second witness, Mr. Chan Sze Cheung ("Mr. Chan"). Mr. Chan testified that the condition of the premises when he took over the electrical and plumbing part of the Renovation, in October 1997, was the same as depicted in photographs 1 to 32.

(37) Although Mr. Dawes argued that Mr. Chan's testimony must not be believed, because he wanted to justify the sum he charged to complete the Renovation. I found that Mr. Chan was a truthful witness, even though the event occurred over 3 1/2 years ago. I also found Mr. Chan's testimony to be truthful, because it confirmed the testimony of Mr. Hung. The combined evidence was incontrovertible proof that photographs 1 to 32 showed the condition of the premises, when the Defendant abandoned it, on 20th September 1997.

THE FINDING

(38) Based on the above, I found:

(a) photographs 1 to 31 were taken sometime after 18th September 1997;

(b) as of 20th September 1997, the Renovation was somewhere between 60 to 65% completed;

(c) when the Defendant issued the invoice for the third payment, on 18th September 1997, the Defendant was not entitled to the third payment;

(d) Plaintiff's refusal to pay the third payment was not a breach of their contract;

(e) the Defendant's abandonment of the premises on 20th September 1997 was a repudiatory breach of contract; and

(f) therefore the Plaintiff had a right to accept the Defendant's breach and was excused from all further performance of the contract terms.

(39) So far as the Defendant's allegation that it attempted to resume work on 22nd September 1997, I found that the Plaintiff's refusal to sign the acknowledgement agreement proved that there was no agreement to revive the contract. As the Plaintiff had already accepted the breach, the Defendant could not unilaterally revive the contract by resuming work after having abandoned the Renovation two days earlier.

JUDGMENT

(1) Judgment on liability is for the Plaintiff.

(2) The Defendant's counter-claim is dismissed.

(3) Damages are to be agreed between the parties by consent. Failing agreement, to be determined in a hearing to be set-down before me.

(4) Costs of the hearing, including all costs reserved, be to the Plaintiff with certificate for counsel.