AJAX PONG MACHINERY LEASING LTD. v. REDLAND CONCRETE LTD.

HCA 1418 of 1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1418 OF 1999

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Assessment of Damages

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1. This assessment of damages arises out of the Interlocutory Judgment entered on 10th May 1999. The Notice of Appointment issued on 3rd August 1999.

2. The plaintiff claims for damages arising out of the loss of a machine on hire to the defendant under a hire agreement dated 22nd June 1998.

3. The machine is described as a Mitsubishi Silent Type Generator Model No. MGP 680 in the Statement of Claim. The hiring period was for one month from 23rd June to 22nd July 1998, and the agreed hiring charge of $59,500 was paid by the defendant. The defendant failed to return the machine on the expiry of the hire agreement and reported that the machine was stolen on the 18th July 1998.

4. The plaintiff claims the replacement value of the machine at the 22nd July 1998, being the date of the breach, loss of hire income for the period 22nd July 1998 to the date of assessment of damages, together with interest and costs.

5. The plaintiff sought to amend the statement of claim at the hearing by adding to the particulars of the claim under paragraph 9 a new clause (c) claiming loss of hire income since 22nd July 1998. I refused to give leave to amend the statement of claim.

6. The plaintiff called one witness, Ms. Cheung chau fung, whose statement is at page 70-74 of the plaintiff's bundle. Ms. Cheung confirmed the contents of her statement. Under paragraph 3 she confirmed that Ajax is a company specialising in the leasing of construction machinery and that her role was supervision of the sales administration and delivery arrangements. As to paragraph 5, she confirmed that on or about 10th June 1997, Ajax entered into an agreement to purchase the generator referred to in the statement of claim. The machine was not delivered until late September or October due to the time required to manufacture the machine and arrange for delivery in Hong Kong. She then confirmed that the machine was hired to Biwater Man Lee Limited on the 2nd December 1997 - paragraph 6 of her statement. She identified the hire agreement at page 2 of the documents bundle which stated that the value of the machine was $830,000, with a minimum hire charge of $34,500. The machine was hired to Hop Hing Marine Industrial (HK) Limited on 6th February 1998, and she confirmed the hire agreement at page 6 of the bundle which shows the value of the machine to be $880,000 on 7th February 1998, with a minimum hire charge of $49,000.

7. Paragraph 11 of her statement relates to the hire to the defendant on 22nd June 1998 and the hire agreement at page 12 of the bundle states that the machine value is $830,000, with a minimum hire charge for one month of $59,500. The company operated on the basis of a standard rate of hire charge with the normal range for hiring being $60,000. The company owns other generators of the same model as this one. For the past three years the average frequency of hire of these machines was 78%. Prior to the hiring on 22nd June 1998, the defendant had dealt with the Company previously for 1-2 years on and off. She said that she understood that the defendant knew that the major business of the company was the hire of machinery.

8. In cross examination, she said that she only dealt with the rental side of the business. Sales were handled by another company. She was in charge of everything to do with rentals of the machinery. At present the company has more than 400 generators of all models. Excluding the lost one, the company has under ten machines of the model MGP 680, but she does not have an exact figure. The lost one was bought in mid June 1997. The frequency of 78% rental for the past three years relates to all the generators belonging to the company. She does not have the past record of the % of rentals of the MGP 680 model, but at the moment they are all rented out.

9. The period of rental with Biwater was 12 days and with Hop Hing it was three months. The defendant entered into the rental agreement in June 1998 almost a year after Ajax ordered the generator. During that year it was only hired out twice with a total rental period of 3-1/2 months. When it was put to her that the frequency of this model was around 25 to 30% rental, she said that during this particular period that was so, but when contracting work is at its peak the frequency of hire would be very high. Based on her experience, during that particular period the construction work at the airport was nearing its end and the construction work for the Western Rail had not yet started. It was the driest season. Since mid July 1998, the Western Rail project was awarded in September 1998 and, intermittently, more projects were awarded, for instance Tseung Kwan O, so-called Junk Bay, and work has started and gradually all other contracts are being carried out. The two projects mentioned are bigger than the airport project.

10. The witness was referred to the maintenance of the lost generator at page 116 to page 119. The plaintiff has not purchased a replacement generator because of the cost.

11. In re-examination, the witness said that on receipt of the machine from the manufacturer, it was necessary to test and examine the generator and arrange for insurance which explains why it was not hired out until 2nd December 1997 and the meter showed 5 hours. It was hired to Biwater from 6/12/97 to 17/12/97 and to Hop Hing from 7/2/98 to 4/5/98, then to the defendant from 23/6/98 to 22/7/98. So for the 8 months from December 1997 to July 1998 the generator had been hired out for about 4-1/2 months, which is more than 50% frequency. That was considered to be a slow period for hiring because the airport project was nearing its end. Now, all the generators of this model are rented out.

Plaintiff's case

12. Counsel for the Plaintiff submitted that there is no question of causation in this case since the machine was not returned. In accordance with Clause 3(3) the defendant is responsible for the damages due to theft. It is a clear contractual obligation.

13. As to the issue of valuation. The Plaintiff submits that it should be at the date of breach, being 22nd July 1998, when the machine should have been returned.

14. The machine was purchased new in June 1997, it was less than a year old at 22nd July 1998, but the defendant's expert has valued the machine as a second hand machine as at the date of the report on 15th July 1999. The plaintiff's expert report should be given weight since it was given at the time of the theft.

15. As to loss of hire charges, the pleadings in the statement of claim encompass this claim. Loss of hire rental is a continuing breach since the machine was never returned. Hiring income should be assessed from 22nd July 1998 until the date of the assessment. The basis for this should be $60,000 per month, as found in the Plaintiff's evidence, for 15.4 months, based on more than a 50% frequency of rental. The period of hire was a slow period but now all generators of this model are rented out. The calculation should be $60,000 x 15.4 months x at least 50% = $460,000 + together with interest.

16. Such a claim in damages is not too remote. The defendant knew the defendant's business, having dealt with the defendant previously. It was reasonably foreseeable and within the contemplation of both parties when the contract was entered into.

17. As to mitigation - this does not arise since it would require the Plaintiff purchasing another machine which is very costly. Chitty on Contracts (28th Edition) at paragraph 27-087 and 088 sets out the principles as to avoidable loss, in particular that the onus of proof is on the defendant to show that the claimant ought as a reasonable man to have taken certain steps to mitigate his loss and that a plaintiff is not under an obligation to do anything other than in the ordinary course of business. The standard is not high since the defendant is the wrongdoer. All the plaintiff could do was to proceed as promptly as possible with the claim.

18. At page 4 of the valuation of Messrs. Lawrence & Wong, under the heading 'Valuation based on hour-meter reading' reference is made to their enquiries with Mitsubishi Heavy Industries (HK) Ltd., which revealed that Mitsubishi estimated the market value of the generator as at 18th July 1998 to be in the region of $750,000. The valuer also states that "It appears merely from the hour-meter reading of the said Generator that the machinery had below average use. However, taking into account the mechanical problem of the machinery as reported by the previous hirer, the condition may not be satisfactory as reflected from its usage. Nevertheless, a moderate deduction of 5% to 6% depreciation was adopted in our estimation based on the said reading. This resulted in the market value of the said Generator as at l8 July, 1998 being estimated in the region of $750,000." The defendant's expert adopted a different approach in assessing the value. The plaintiff's expert should be preferred because the machine was not second hand at that time.

The Defendant's case

19. The defendant submitted that on the claim for loss of hire income, the application to amend the pleadings was dismissed. The plaintiff proceeded with the claim under paragraph 9(b) of the statement of claim, being the claim for loss of use of the sum of $800,000. The suggested new claim (which the Plaintiff says is not new) is inconsistent with the judgment as entered. If the pleadings are not defective, as is suggested by the Plaintiff, it was not necessary for the plaintiff to seek to amend the pleadings.

20. Counsel for the defence submits that the plaintiff claims $460,000 + with interest for a continuing breach and that it was not reasonable for the plaintiff to buy another generator because it would be too burdensome. There is no evidence as to scale of Plaintiff's business. Ms. Cheung said the company had 400 odd electric generators which it hired. It is hard to accept that the plaintiff did its best to mitigate its loss because the generator was too expensive.

21. As to the frequency of hire, the 78% figure given in evidence related to all the generators. There is no evidence before the court as to the frequency of hire of the model MGP 680.

22. The loss of hire income should not be granted in this assessment.

23. As to the replacement cost, the Associated Surveyors & Auctioneers valuation sets out the assumptions for the assessed value but arrives at what can only be described as an astonishing figure of $800,000. The valuation of Messrs. Lawrence & Wong refers to the replacement cost of a brand new generator of the same type and model in mid July 1998 in the region of $800,000. There were some problems with this generator since it required maintenance after only one year. It was not brand new when it was lost. Even after one year, there is depreciation and Messrs. Lawrence & Wong use 9% depreciation for one year of use.

Decision

24. As to the legal principles.

25. Chitty on Contracts at Chapter 27, paragraph 85 ff., sets out the three rules referred to under mitigation of damage. Although familiar, it is worth setting them out here. They are - "First, the claimant cannot recover damages for any part of his loss consequent upon the defendant's breach of contract which the claimant could have avoided by taking reasonable steps. Secondly, if the claimant in fact avoids or mitigates his loss consequent upon the defendant's breach, he cannot recover for such avoided loss, even though the steps he took were more than could be reasonably required of him under the first rule. Thirdly, where the claimant incurs loss or expense in the course of taking reasonable steps to mitigate the loss resulting from the defendant's breach, the claimant may recover this further loss or expense from the defendant." Chitty goes on to refer again to the well known principle that "the onus of proof is on the defendant, who must show that the claimant ought, as a reasonable man, to have taken certain steps to mitigate his loss." And further "The claimant is not 'under any obligation to do anything other than in the ordinary course of business.'; the standard is not a high once, since the defendant is the wrongdoer." In the circumstances of this case, I am satisfied that it would not be reasonable to expect the plaintiff to be able to purchase a replacement machine in the ordinary course of its business in order to mitigate its loss.

26. As to the pleadings point.

27. In its statement of claim the plaintiff identified its loss and damages as (a) $800,000 being the replacement cost of the generator as at 18th July 1998 and (b) loss of use of the said sum of $800,000 since 18th July 1998.

28. I am satisfied that by this pleading the plaintiff is entitled to claim for the loss of income for hire of the machine. The plaintiff made use of its $800,000 to buy a machine which in the course of its business generated a monthly hire charge.

As to the law with regard to remoteness of damage, reference should be made to the detailed consideration of the rule in Hadley v. Baxendale as to remoteness of damage in contract at Chapter 27, paragraphs 40 ff. The modern statement of the rule is set out in paragraph 42 - "A type or kind of loss is not too remote a consequence of a breach of contract if, at the time of contracting (and on the assumption that the parties actually foresaw the breach in question) it was within their reasonable contemplation as a not unlikely result of that breach." There is a discussion of Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. (l949) 2 KB 528 and Koufos v. C. Czarnikow Ltd. (The Heron II) (1969) l A.C. 350. In The Heron II, Lord Reid said "The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation." Applying this test, I am satisfied that at the time of the contract the defendant knew that the plaintiff was in the business of hiring out machinery - he had a course of dealings for a period of 1-2 years with the plaintiff - and that he would have realised that if the machine was lost while in his possession, the loss of hire income would result.

29. As to the quantum. Firstly, as to the value of the generator. There are the two valuations. That of the plaintiff, carried out by Associated Surveyors & Auctioneers, dated 18th December 1998, and giving a market value as at 18th July 1998 of $800,000. This was based on their thorough market research and taking into account the hour meter reading of 1,681 hours. In their report, it is stated that "As per information supplied by Ajax Pong Group, the said machinery was lost on July 18, 1998, at Kwai Chung. We were therefore unable to conduct an operative test of the said machinery. However, the hour meter reading form was under 1,700, we assume the said machinery were in normal condition." That of the defendant, carried out by Lawrence & Wong Ltd., dated 15th July 1999, and giving a market value as at 18th July 1998 of $750,000. This was based on the hour meter reading of l,681 hours. It is said in the valuation that "It appears merely from the hour-meter reading of the said generator that the machinery had below average use. However, taking into account the mechanical problem of the machinery as reported by the previous hirer, the condition may not be satisfactory as reflected from its usage. Nevertheless, a moderate deduction of 5% to 6% depreciation was adopted in our estimation based on the said reading. This resulted in the market value of the said generator as at 18 July 1998 being estimated in the region of $750,000. In fact, our enquiries with Mitsubishi Heavy Industries (HK) Ltd. revealed that they estimated the market value of the generator as at 18 July 1998 to be in the region of $750,000."

30. There is no evidence to suggest that when the machine was hired to the defendant there existed any mechanical problems and no complaints were made about its condition during the hire period. Having considered the two valuations, I am of the view that the figure of $800,000 based on the hour meter reading form and on the assumption that the machine was in normal condition is the appropriate quantum of damages to be awarded to the plaintiff. It is trite law that damages are to be assessed at the date of breach.

31. As to the loss of hire income, as I have said I am satisfied that the plaintiff is entitled to this head of damage. As to the quantum, the hire agreement shows that the defendant was paying a minimum hire charge of $59,500 per month. I accept the plaintiff's submission that for the period of 8 months availability for hire, the machine was hired for approximately 4.5 months out of that time. The plaintiff suggested the use of 50% frequency of hire. On the basis of the evidence before me, and taking into account the contingencies and uncertainties in the circumstances of the plaintiff's business, I am of the view that I should calculate the loss on a 45% frequency of hire. Thus, $59,500 x 15.4 months x 45% = $412,335.

32. I therefore award the following damages: -

Loss of generator	$800,000
Loss of hire income	412,335
Total	1,212,335

33. In this case, since the loss of hire income is calculated until the date of assessment, I award interest at judgment rate to be paid by the defendant on the sum of $1,212,335 from the date of the assessment, that is 4th November, 1999, until payment.

34. Costs of this assessment be to the plaintiff with certificate for counsel.