GREATWORTH INDUSTRIAL LTD v. CHEVALIER (CONSTRUCTION) CO LTD

HCA41/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.41 OF 2002

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J U D G M E N T

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1. The defendant, Chevalier, was the main contractor for the construction of housing blocks at Tin Shui Wai, Area 110 Phase 2, for the Housing Authority.  Chevalier had to build two housing blocks called Concord blocks, each containing 320 domestic flats.  Originally the Housing Authority wanted stainless steel gates fitted at the entrances of the flats.  Chevalier entered into a sub-contract with the plaintiff, Greatworth, for the supply and installation of 640 such gates.  However, before the gates could be supplied and fitted, the Housing Authority decided not to have gates fitted, and so instructed Chevalier.  Chevalier cancelled the sub-contract with Greatworth, which now sues primarily for the loss of its profits, and also for abortive costs in maintaining staff in expectation of doing the work, and for the cost of five sample gates which it delivered.

The case on the pleadings

2. It is not in dispute that by contract no.1042-123/98 in writing, made between Chevalier as main contractor and Greatworth as sub-contractor, Greatworth agreed to supply and install 640 stainless steel gates at unit price of $6,100 per gate.  The works were scheduled to commence in about June 2000 and the commencement date was subject to three days’ prior notice from Chevalier. 

3. Greatworth says that it was an implied term of the sub-contract that Chevalier would not hinder or prevent Greatworth from carrying out the works.  This Chevalier denies.

4. Greatworth says that in pursuance of the sub-contract, it ordered materials on 10 August 1999 from one Tien Shan Engineering Ltd for the 640 gates.  Chevalier denies this, and disputes the authenticity of the contract document.  It also says that pursuant to the sub-contract, Greatworth had to obtain approval before starting manufacture; and that Chevalier warned Greatworth not to buy materials unless expressly instructed, or on the contract manager’s approval.  No approval was ever given.  Therefore, if Greatworth ordered materials, it did so at its own risk.

5. Greatworth claims for five sample gates delivered; Chevalier admits receipt of them but says that under the sub-contract these were to be free of charge.  Alternatively, they were delivered for the approval of the contract manager of the main contract, which approval was never given.  Chevalier denies liability for the cost of these gates.

6. Greatworth pleads that Chevalier unilaterally cancelled the sub-contract, as confirmed by a letter dated 29 May 2000.  In doing so, Chevalier was in repudiatory breach of the sub-contract, which repudiation Chevalier accepted by ceasing to proceed with further work, and/or by not making delivery, and/or by its solicitor’s letter of 25 April 2001.

Chevalier denies repudiatory breach or acceptance thereof.  It says that the cancellation was made pursuant to the contract manager’s instruction of deletion on 10 December 1999, and that pursuant to Clause 4 of the conditions of the sub-contract, Chevalier was entitled to pass the same to Greatworth and adjust the contract sum to that effect. 

7. As to quantum, Greatworth claims abortive costs in maintaining staff for the fabrication of the gates from 21 July 1999 to 20 February 2000.  It claims loss of profits on 635 gates, at $3,611 per gate; and it claims $30,500 for the five gates delivered.  Chevalier denies liability for any of these claims but says that if it is found liable for loss of profits, the reasonable figure therefore is no more than $212,988.05. 

Background

8. I set out the background, mainly taken from the correspondence in the document bundle before me.  As indicated, Chevalier was the main contractor to the Housing Authority.  The contract manager for the main contract was an architect firm named Design 2 Consultant Architects.  On 1 March 1999 Chevalier put out to tender the job of supplying and installing the domestic gates.  Greatworth had expended considerable time and money in obtaining approval as a domestic supplier of gates and this approval was granted in early March 1999.  Greatworth put in its tender, which was later amended, and ultimately the tender was accepted.  This led to the execution of the sub-contract between Chevalier and Greatworth for the supply and installation of the gates, on 26 July 1999. 

9. Under the sub-contract, Greatworth had to supply one sample gate set for the contract manager’s approval, and that was done at this stage.  Shop drawings were submitted and at first disapproved but finally the contract manager approved them on 15 September 1999.  On 24 September, Chevalier passed on the approval to Greatworth, and asked for information about performance tests, installation method statements and a finishes sample.  In this letter Chevalier requested Greatworth not to secure raw material for bulk quantity before Chevalier gave its approval.

10. Meanwhile, in early September 1999, the Housing Authority in a draft Development and Construction Management Board Instruction proposed amendments to the standard of fittings in the blocks which Chevalier was building.  The draft Instruction was to be put to the Building Committee for approval.  The amendments included the deletion of the gates in the Concord blocks.  Design 2 communicated the draft to Chevalier on 8 September 1999.  Chevalier replied on 29 September, notifying Design 2 that sub-contracts, including that for the gates had already been awarded, confirming discussions to the effect that the extent of the implementation of the draft instruction would be advised later, and reminding Design 2 that Chevalier would be entitled to claim loss of profits and/or damage for substantial omissions to contract works. 

11. It is not clear from the documents that Chevalier gave Greatworth any instruction about the cancellation of the gates at this time, but Greatworth got wind of what was going on in early October, and on 8 October it wrote to Chevalier to the effect that it had already placed an order for the bulk purchase of stainless steel materials, because cost of stainless steel in the market was rising.  Greatworth said that it would lose profits on the cancellation of the order but was prepared to cancel on Chevalier’s confirmation.  Chevalier wrote to Greatworth on 12 October in these terms :

“We refer to your letter … as would like to remind you that you can only secure material and commence your manufacturing after Architect’s approval to your material samples, shopdrawings and HKHA’s approval to your works at the sample wings and sample flats.  This is already stipulated in the Main Contract and your Subcontract document.  Should you insist to secure materials before the approval, you may run your own risk.  However, you must be aware of the possibility that HKHA may delete the stainless steel gates after their inspection to the sample wings and sample flats.”

12. On 1 November 1999, Chevalier instructed Greatworth to supply four gates for the sample flats.  Greatworth delivered these on 23 November 1999. 

13. Then on 10 December 1999, Design 2 issued an architect’s instruction with drawing amendments, which included the deletion of the gates, by which Chevalier was instructed to delete the gates.  It passed on the instruction to Greatworth, which wrote to Chevalier, referring to their meeting on the same day, and advising that it had spent a lot of money on obtain approval as a supplier, had entered into a binding contract for the supply of material and saying, in effect, that if the sub-contract was cancelled it would have heavy losses which it could only recover from Chevalier.  The latter replied on 14 December, in effect saying that Greatworth’s claims were unfounded, but asking for evidence of loss of profit on a without prejudice basis.  Greatworth on 22 December submitted a copy of its contract with Tien Shan, along with a breakdown of its costs, to a total of $3,904,000 which included “operation setting-up and standby costs”.  It put the loss of profit as a result of termination of the gate supply sub-contract at $2,624,000.

14. In January 2000, Greatworth contracted to supply 1280 gates to another contractor, named Main Kind Industrial Ltd which was building Concord blocks at Tung Chung for the Housing Authority.  The price was $5,500 per gate including installation.  Production commenced on 21 February 2000; hence the cessation of Greatworth’s claim for abortive costs at 20 February. 

15. As between Greatworth and Chevalier, however, there was no more correspondence until 12 May 2000 when Greatworth told Chevalier it was prepared to go ahead with production of the gates under the sub-contract, and asked Chevalier to issue its notice under the sub-contract.  It also applied for payment for the five gates delivered.  On 29 May 2000 Chevalier replied to the effect that the deletion of the gates had been confirmed by the architect, and this had been passed on to Greatworth at the meeting on 10 December 1999. 

Issues

16. There is little dispute on the facts, save for whether or not Greatworth actually ordered the materials for making the gates from Tien Shan. 

17. The primary issue on liability is whether Chevalier was in breach of the sub-contract or whether Clause 4 of the sub-contract, which is essentially a variation clause, permitted Chevalier to vary the number of gates ordered down to none.  There is also an issue on the implied term for which Greatworth contends; is the term to be implied, and did Chevalier breach it?

18. There is an issue on the construction of the sub-contract regarding liability for the sample gates delivered; whether the contract price is payable for them, they were an extra, free of charge.  As to liability for abortive staff costs claimed, the issue is whether these were caused by the breach of the sub-contract, if proved.

19. If breach of the sub-contract is proved, Greatworth should be entitled to loss of profits.  The quantum of those profits is in issue, as is the question whether Greatworth could have made them, given that, at the time of the expected performance, it was engaged in production of gates for its contract with Main Kind. 

Evidence

20. Evidence for Greatworth came from its director and, in effect, alter ego, Mr Yau Yiu Chin.  In fact he was not the author of most of the documents emanating from Greatworth; that was Greatworth’s manager, Mr Wilson Yu.  In particular it appears that Mr Yu signed the contract with Tien Shan.  Mr Yau did not participate in most of the meetings with Chevalier’s people; again, that was Mr Yu.  He is no longer with Greatworth.

21. Evidence for Chevalier came from its senior quantity surveyor, Mr Chan Chuen Sun, who, it appears, did not take any active part in the Tin Shui Wai construction.  His evidence was mainly on quantum.  In addition, Chevalier called, on sub-poena, a director and an employee of Tien Shan.

22. Most of the evidence, at any rate on liability, comes from the documents.  I do not propose to set out the evidence of the witnesses here, but will refer to it as necessary in dealing with the issues.

Greatworth’s order for materials from Tien Shan

23. Greatworth says that it ordered semi-fabricated materials for 640 stainless steel swing gatesets from Tien Shan, by a contract dated 10 August 1999.  The contract has been produced.  It provides for a price of $2,000 per set.  The date of delivery was to be negotiated.  Goods were to be delivered in batches after payment of a deposit of $192,000 and paid for within one month of delivery of each batch. 

24. Chevalier called two witnesses on sub-poena, Mr Hui Shun Tang, a director of Tien Shan and Mr Chuk Wing Yin, an employee.  Mr Hui had, it seems, been one of the defendants in criminal proceedings for conspiracy to defraud the Housing Authority by forming a cartel of listed suppliers qualified to supply gates to the Housing Authority, fixing the prices and sharing the profits.  He was acquitted, as were the others; the judge considered that dishonesty had not been proved to the requisite standard.  It appears from his evidence that there was such a system in operation, but he could not remember anything about the specific contract to supply materials to Greatworth. 

25. I pause here to note that I do not see the fact of the cartel as being of any relevance in this case.  No doubt the prices of stainless steel gates were inflated at all levels, but this case is concerned with agreed prices and expected profits based on those prices. 

26. Mr Chuk was a signatory to the contract, though he had little or no independent recollection of it.  It appears from his evidence that Greatworth did indeed enter into the contract with Tien Shan for the materials, but the contract never proceeded.  Greatworth had never paid the deposit, and no materials were ever delivered.  According to Mr Chuk the price of $2,000 per set would be good for about two months, but he would expect a deposit within one or two weeks.  He had, at Greatworth’s request issued a quotation in December 1999 for the materials at $3,500 per set.  He said that the market was rising, and Tien Shan would have supplied gate material sets in December 1999 at that price; the price went up with the price of the nickel required to make the steel, and that, it appears, was going up; but he was unable to give any clear indication of what a gate set would have cost by May or June 2000.  

27. Really all that can be established from this evidence was that, if Greatworth had bought its semi-fabricated gate sets from Tien Shan in or about July 1999, they would have cost $2,000 per set, and if it had bought them in December, they would have cost $3,500 per set.  But Greatworth never did buy any sets from Tien Shan; as appears from the evidence of Mr Yau, when it was making gates for Main Kind, it had another supplier which supplied raw materials and Greatworth itself made up the sets to the semi-fabricated stage through its Mainland factory, Hengfa Panyu.  I will return to this later.

Did Chevalier breach the sub-contract?

28. The relevant clause is Clause 4, which Chevalier relies on as allowing it to pass on the employer’s cancellation of the gates to Greatworth, and adjust the contract sum to that effect.  However this cannot be viewed on its own.  It has to be viewed in the light of the rest of the sub-contract, the main contract insofar as relevant, and, for the purposes of construction, the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.  See Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896 at 912.

29. The contract documents consist of a set of articles of agreement, with appended thereto the Form of Tender and a set of “Terms of the Main Contract (Including the Materials and Labour)”.  Clause 4 appears in the latter document.

30. The articles of agreement provide that the work is to be the supply and installation of stainless steel gates at Tin Shui Wai, for a contract sum of $3,904,000.  Commencement is in about June 2000 and Chevalier is to give Greatworth three days’ notice in advance.  Completion is to be on the date specified by the person in charge of the site.  There are provisions for payment , retention, penalties for delay and so on.  The conditions of contract are said to be found in the requirements in Pages 3 to 10 attached, i.e. the Form of Tender the “Terms of the Main Contract (Including the Materials and Labour)”. 

31. Supplementary conditions provide that the sub-contract is based on actual measurement and the contract sum is based on tender price in the Form of Tender.  The value of any variation works and the volume of works completed is to be determined by the schedule of rates of the Bill of Quantities.

32. Clause 1 of the “Terms of the Main Contract (Including the Materials and Labour)” provides that the quantity of works to be completed is measured by the Contract Drawings (to be deducted by the quantity of works not yet completed at sight).  Clause 2 provides that Greatworth is to complete the whole of the works :

“… in conformity with each specification of the Main Contract (Preliminaries, General Specification – General Specification of material and workmanship for Hong Kong Housing Authority Contracts 1998 Edition, Particular Specification, Preambles and Bill of Quantities, the Drawings and Specification…”

33. Clause 4 provides :

“The measurement of the quantity of works shall be done by the Quantity Surveyor according to the Standard Method of Measurement.  When the works are in progress, if there is any amendment made to the Contract Drawings or if Party A so instructs, Party B shall complete all the works in accordance with the Contract no matter what scale of works is involved.  The value of variation works shall be ascertained by reference to the rates and prices specified in the Schedule of Rates in the original contract, but if there is no applicable rate and price in the schedule of rates in the original contact, party A shall determine the rates on the basis of the rates for works of similar nature in the original contract.  The works so completed shall not be valued at daywork rates or at new quoted price.  If there are any provisional items in the B.Q., the works so completed shall be valued in accordance with the quantity measured by the Quantity Surveyor.

34. In brief, the argument put forward by Ms Cruden for Chevalier is that this variation clause has to be read in the light of the rest of the sub-contract and the background matrix of fact including the knowledge of the parties, particularly that of Mr Yau who is a civil engineer of great experience.  A variation clause may contemplate omissions.  Clause 4 is clear and it refers to “any” amendments to the contract drawings.  It is not limited to increases; it could include reductions.  A reasonable man in the construction field, with the background knowledge of the parties, would take it that the performance of the works was subject to any amendment to the contract drawings or any variation made under an architect’s instruction in the main contract.  Greatworth must have know that the Housing Authority could delete items that it did not want, for whatever purposes.  That was a risk Greatworth accepted in entering into the sub-contract. 

35. The variation clause is, therefore, effective to allow the Housing Authority to omit the gates, and to allow Chevalier to cancel the order from Greatworth.  There is no limit to its effectiveness in this regard.  No implied term restricting it is pleaded.  As to the implied term for which Greatworth contends, this might prevent Chevalier from preventing completion but it did not do so of its own motion.  It was the Housing Authority which deleted the gates.  The implied term pleaded is not so wide as to require Chevalier to prevent the Housing Authority from amending the Contract Drawings save within specified parameters. 

36. Mr Houghton, for Greatworth, argues that a contract for the execution of work gives the contractor not only the duty to carry out the work but the right to complete it.  To take away or vary the work is an infringement of that right and a breach of contract.  Particular reliance is placed on the judgments in Abbey Developments Ltd v. PP Brickwork Ltd(2003) CILL 2033, and Chandler Bros Ltd v. Boswell [1936] CA 179. 

37. Abbey Developments seems to have been concerned mainly with the proposition that in order to let a contractor terminate a sub-contract to give the work to another sub-contractor, the variation clause relied on must be clear.  Chandler Bros Ltdwas a case in which the contractor attempted to rely on an implied term in the sub-contract, which would enable it to terminate the sub-contract if the employer’s engineers, as they were entitled to, required the main contractor to remove the sub-contractor; and the court held that such a term could not be implied. 

38. Primarily these authorities are cited in support of the contractor’s right to complete the work, and I do not think that is in dispute.  Otherwise I do not think they assist, because each case has to be dealt with on its own facts, and each contract on its own terms.

39. It seems to me that one must look at the substance of the sub-contract here.  It was for the supply of a fixed number of gates at a fixed price.  Although this is a building contract, and technically a measurement contract, it is not really concerned with supply or construction according to measurements, of some building material or process like concrete or formwork.  The only building involved is fixing the gates on to the walls.  Although the sub-contract provides that it is to be based on actual measurement and the contract sum is based on tender price in the Form of Tender, and the measurements and specifications are given in the Bill of Quantities and the drawings, the sub-contract itself appears in reality to be a lump sum contract, with provision for instalment payments, rather than a contract truly based on measurements. 

40. What is to be supplied is 640 identical gates and once the design, finish and other matters set out in the Bill of Quantities and drawings have been established, it is difficult to see what variation there might be.  I expect that there might be variations in design and finish but one would have expected them to come in right at the outset, as indeed in fact they did, rather than half way through, although no doubt it would be possible for the employer to specify a different design or finish for the gates, between November 1999 when the samples were delivered and June 2000 when installation was expected.  

41. What I cannot see is that there would ever be any variation in the number of gates.  There were 640 flats and no more.  There is no evidence that the Housing Authority might have decided to fit some, and not others with gates.  Nor is there any evidence that it would have had them fitted to only one block instead of two.  In the normal way this is not to be expected; the Authority was making public housing flats and it could be expected that all the Concord blocks, and all the flats in them, would be identical.  So inevitably, as long as gates were to be supplied, Greatworth would supply Chevalier and Chevalier would supply the Housing Authority with 640 gates. 

42. It is difficult, therefore, to see that Clause 4 is to be interpreted, in the circumstances of this sub-contract, as allowing variations other than to design and finish.  It does not, on the face of it, allow for omissions as such.  The sub-contract is Chevalier’s document, and as such it is to be construed contra proferentem. 

43. I accept that it would have been easy enough, if the parties had thought of it, to make the sub-contract provisional or conditional, so as to place the risk firmly on Greatworth.  But they did not.  The only provision that Chevalier might rely on is Clause 4.  However, I do not see that that clause can be regarded as enabling Chevalier to cancel the sub-contract, even if the Housing Authority decided, and the architect issued an instruction or amended to the Contract Drawings, to provide for the deletion of the gates.  I do not see that it can be seen to provide that with sufficient clarity. 

44. I turn to the implied term pleaded.  The conditions for a term to be implied are set out in B.P. Refinery (Westernport) Pty Ltd v. President, Councillors and Ratepayers of Shire of Hastings[1978] 52 ALJR 20, by Lord Simon, at page 26, and they are :

“(1)   it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

45. The term for which Greatworth contends meets those conditions, in my view.  I do not see that it is to be regarded as contradicting Clause 4, which is, I think, the only reason put forward for finding that it is not to be implied.  A similar term was implied in Jardine Engineering Corporation Ltd v. Shimizu Corporation [1992] 2 HKC 271.

46. It follows that, although it was the Housing Authority which deleted the gates, Chevalier did not have the right to cancel the sub-contract.  Like the main contractor in the Jardine case, it was put into involuntary breach of contract by the actions of the Housing Authority. 

47. I accept that Chevalier was in repudiatory breach of the sub-contract.  The repudiation obviously came on 10 December 1999 at the meeting when Chevalier’s people told Mr Yu of Greatworth of the architect’s instruction.  Such breach occurred when it notified the cancellation of the gates to Greatworth on 10 December 1999.  I do not need, at this stage, to decide when Greatworth accepted the repudiation, but it must be said that once the architect had issued its instruction, the gates were never going to be required.  Greatworth could not reasonably keep the contract open.  It was a dead letter.

Liability for sample gates

48. Greatworth claims $30,500 for these, and loss of profit on the other 635 gates.  Chevalier says that they were free of charge.  In the Amended Reply Greatworth pleads that if the gates were free of charge, it should have loss of profit on all 640 gates. 

49. Chevalier relies on Clause 19 of the “Terms of the Main Contract (Including the Materials and Labour)” which provides:

“All mock-up flats and sample flats required by the Architect or Party A shall be duly completed by Party B in accordance with the instructions, free of charge within the time limit as specified.  This shall include all amendments made to the mock-up flats until the completion thereof.”

50. There is evidence that the first sample gate was delivered in July 1999 or thereabouts but it is not clear whether it was approved.  The other four were delivered on site in November.  There seems to be no evidence that Greatworth fitted them and it is not clear what was intended for them; whether they were to be fitted to sample rooms, which would then become part of the 640 domestic flats, or whether these sample rooms were some other structure, or what.  Mr Yau said that “sometimes they would use the sample gates in the real construction project”, in explanation of his reasons for having invoiced Chevalier for the gates delivered, but there is nothing more concrete than that.

51. It seems to me more likely that the sample gates were to be used as part of the 640 gates contracted for, because the sub-contract and the Bill of Quantities provide for exactly 640 gates.  There is no specific provision for extra gates as samples.  Clause 19 is an import from the main contract dealing with sample rooms, which would be a matter between the Housing Authority and Chevalier.  It does not say whether the sample rooms are to be something in addition to the 640 flats to be built and it does not mention gates.  It is difficult therefore to see that Clause 19 can be taken as requiring five sample gates in addition to the 640 shown in the Bill of Quantities.  It follows that the gates delivered were part of the 640 required and Chevalier should be liable to pay the contract price for them.

Abortive labour costs

52. Mr Yau says that he had to build up a team, at the Panyu Hengfa factory on the Mainland where Greatworth’s gates were built, for the purpose of this sub-contract.  He also had to have them even before that, in order to get the approval as sub-contractor.  While they were waiting for the work to start he had to pay them a basic wage, but they were idle.  However, the documentary evidence showed varying wage payments which did not suggest that the workers were simply paid a basic wage.  When asked to explain this, Mr Yau said that in order to let the workers have their living he had to make arrangements for them to earn more than the basic by doing other work, although he says that at the same time he had to take away wages from other colleagues.  He also said that some had taken unpaid leave.

53. I find it difficult to understand why, in principle, the cost of these workers should be charged against this sub-contract as abortive costs.  If Greatworth was holding itself out as an approved gate supplier, it obviously had to have the manpower to do the work, if any work came its way.  So the employment of the workers, when no actual work was coming in, would be an overhead.  Gross loss of profit is claimed.  I do not see how overheads can be claimed as well. 

54. It is also difficult to see how the cost of keeping the workers can have resulted from the breach of contract.  The breach occurred in December 1999 but the performance of the sub-contract was not scheduled to commence until about June 2000.  The workers were certainly not needed to do the work in December or before, except perhaps for making up the five sample gates.  According to Mr Chan, the witness for Chevalier, a period of two months would have been reasonable to have the workers in place to start the fabrication, if delivery had had to commence in June 2000.  But the workers were, in February, already engaged on work for the Main Kind contract.  So I cannot see that the breach caused any direct loss in respect of abortive costs of keeping workers. 

55. The evidence of what the workers were paid, and what they were doing, is also unsatisfactory.  As I have indicated above, Mr Yau had to admit that they were doing other work of some sort.  It is difficult for this reason also to see why their wages could be charged against this sub-contract. 

56. For these reasons, I do not see that Greatworth is entitled to its claim for abortive costs. 

Conclusion on liability

57. Chevalier is liable to pay the contract price of the delivered gates.  It was in breach of the sub-contract and is liable for losses caused thereby.  It is not liable for abortive labour costs, which do not flow from the breach.  It is liable for Greatworth’s loss of expected profits on the 635 gates, provided that Greatworth can prove that it would have made that profit if the sub-contract had been performed. 

Quantum of loss of profit

58. Greatworth’s claim is based on a loss of $3,611 per gate.  The unit price was $6,100.  From this falls to be deducted the price of the sets of semi-fabricated parts to be supplied by Tien Shan, i.e. $2,000 per set; installation costs of $180, transport costs of $29 and fabrication costs of $290.

59. Tien Shan never supplied any sets of semi-fabricated parts, and, on the only available evidence, i.e. that of Mr Chuk, would not have been supplying them at $2,000 by the time Greatworth needed them, if it ever did.  So the main foundation for Greatworth’s figure is unsupported by the evidence.  It is necessary to try to estimate the expected loss of profit in June 2000 from other sources.

60. Mr Houghton says that there are four possible pieces of evidence on the cost of semi-fabricated parts, namely that of $2,000 per set, from the Tien Shan contract; that given by Mr Yau in respect of the Main Kind contract, i.e. $1,773.18 per set; a figure of $2,500 calculated back from the figures given in Mr Chan’s first supplementary statement; and the rate of $3,500 per set quoted by Tien Shan in December.  

61. Obviously the figure of $2,000 cannot be used, because it never was used in fact.  Tien Shan never supplied sets at that price, and by the time June 2000 came, it would not have been supplying them at that price, if Greatworth had wanted them.

62. Ms Cruden argues for a figure, marked up by 10% or 20% from Tien Shan’s December quotation to allow for the further increases in the cost of nickel.  The December quotation would have had to be taken up in a week or two, and delivery would have come after about three months, according to Mr Chuk.  Both parties accept that the cost of nickel, which is used to make stainless steel, was going up, and a graph has been produced, so it seems likely that semi-fabricated sets would have cost even more by say March or April 2000.  Unfortunately, however, I have not heard any evidence that the cost of stainless steel rises or falls exactly with the cost of nickel.  So any figure based on this evidence would be guesswork.

63. It is difficult to place any reliance on the figure given in Mr Chan’s first supplementary statement, because he specifically did not adopt that statement as evidence.  He was cross-examined on it; and what he said in cross-examination is admissible; but he did not adopt the figure given in the first supplementary statement.  In fact that figure would probably not be accurate, because it is obtained by working back from what the cost would be to a main contractor to supply and fit a single gate using the Government Schedule of Rates, to what Mr Chan says would be a reasonable figure for a sub-contractor to charge.  Counsel then works it back further on Mr Chan’s percentages to get a figure for the set of semi-fabricated parts.  But in any event, it would necessarily cost less to mass-produce gates than to make up a single gate according to the Schedule of Rates, particularly if the mass-production took place on the Mainland.

64. In fact there is one major problem in using as a starting point the cost of a set of semi-fabricated parts purchased by Greatworth and then fabricated, because according to Mr Yau, by the time Greatworth made gates for Main Kind, it did not buy in semi-fabricated parts.  By then it had its presses made and operational.  There was no longer a need to buy semi-fabricated parts.  Hengfa Panyu used the presses — or at any rate some related factory did — to make up the semi-fabricated parts.  So even Mr Yau’s figure for the cost of semi-fabricated sets is based on a wrong assumption, although it is probably the best of the available figures.

65. If the figure of $1,773.18 is taken as the right figure for making up the raw materials to the semi-fabricated state, the costs of fabrication, transport and installation fall to be added.  Mr Chan takes issue with Mr Yau’s figures for these.  He says that transport should cost $39.06 as against $29 per gate.  Installation should be $187.50 as against Mr Yau’s $180.  Mr Chan does not give a figure for fabrication but simply says that Mr Yau’s figure of $280 is not supported by documents.  It is not surprising that there should be little difference, because once there is a scheduled figure, everyone is going to pitch his prices more or less around it. 

66. However, Mr Chan also adds a large number of other costs which, he says, ought to be charged against the production.  On his evidence, a figure of $724.41 for the extra production costs, plus $915 for overheads, should be added to the cost of each gate.  Mr Yau’s answer to many of the figures is that he cannot remember whether they were covered by the costs charged by Greatworth’s sub-contractors who did the transport and installation.

67. I have to say that some of Mr Chan’s figures seem unlikely; for instance, the building of storage sheds and the provision of a site representative.  Mr Yau said that Mr Yu would not have remained on site and I can see no reason why he should.  In any event his cost would be considered an overhead.  Apart from this, leaving aside the question of whether these figures should have been pleaded, they are all estimates, and not based on actuality but on opinion of what the main contract and the Schedule of Rates require.  At the same time, other figures, such as those for carrying the gates up to the floors, removal of debris and plastic sheets and cleaning would not necessarily be expected to be included in transportation and installation, as Mr Yau says they might have been, although he cannot now remember. 

68. I agree that Mr Chan’s figure for overheads is irrelevant, because what is claimed is gross profits.  So even if some allowance for extra charges were made, not including the storage shed, site representative or shop drawings and insurances (which should be part of overheads) I would put that at no more than a round figure of $400 per gate. 

69. It follows that the cost per gate would be something of the order of $1,733 + $400 + $489, or a loss of profit of $3,558 which is very close to Greatworth’s own figure. 

Could Greatworth have made the profit?

70. Greatworth must prove that it could have made the profit.  It is argued for Chevalier that Greatworth could not.  If called upon in June 2000 to make the gates, it could not have done so, because it was engaged in making gates for Main Kind.  The Main Kind contract made Greatworth more profit than the Chevalier sub-contract would have made.  In fact, therefore Greatworth mitigated all its loss and is entitled to no more than nominal damages.

71. This seems reasonable enough.  If a supplier loses one contract, but then gets another which makes more profit, it should not complain.  However, where a contract for the supply or supply and installation of goods is breached, but the supplier later succeeds in supplying the goods to someone else at a similar profit, it cannot simply be assumed that the second contract is in substitution of the first.  There must be evidence that the supplier could not have performed both contracts.  See In re Vic Mill Ltd[1913] 1 Ch 465. 

72. Here Mr Yau’s evidence is that Greatworth could have made gates for both Chevalier and Main Kind.  It is argued that that is the end of the matter, because there is nothing to contradict what he says.

73. Greatworth opened negotiations with Main Kind in January 2000, and thereafter entered into an undated agreement for the supply of 1,280 gates at Tung Chung.  Delivery was to be “in batches to the site before 15 May 2000”.  On the face of it, that should not have prevented Greatworth from supplying gates to Chevalier in June 2000 if called on to do so. 

74. Mr Yau says that Greatworth could have performed both contracts.  He repeatedly insisted on that, under cross-examination, although his evidence had all along been that he had to build up a trained workforce sufficient to make the gates for Chevalier.  He further said that although earlier he had made preparations to get semi-fabricated sets from Tien Shan, if Chevalier had insisted on waiting till June to start, he hoped that he would by then be capable of mass production so that he could produce gates for both Chevalier and Main Kind.  It appears that Greatworth was indeed capable of its own mass production, or production from the raw material to the semi-fabricated state, by the time production started for Main Kind.

75. There is, however, a basic inconsistency in Mr Yau’s own evidence as it appears in his second supplemental witness statement, adopted as evidence-in-chief, that it took seven months from 21 February to 21 September 2000 to fabricate the 1,280 gates for Main Kind, working to a very tight schedule.  If that is right, any extra work would have needed extra workers, and maybe extra plant and machinery as well.  Given that, on Mr Yau’s evidence, he had to build up a skilled labour force to do this work, he could not simply have gone out and hired more workers. 

76. It is not enough simply to say that because Mr Yau says Greatworth could have performed both contracts, that is an end of the matter.  What he says has to be credible.  Because of the inconsistency, it is not credible.  I do not believe, therefore, that Greatworth could have performed this sub-contract with Chevalier if called on to do so. 

77. It may also be said that there was factual mitigation of Greatworth’s loss.  But I need not go into abstruse questions of whether the requirement to mitigate should have been pleaded, or when the repudiation was accepted and when the duty to mitigate arose.  In fact, Greatworth’s own evidence is insufficient to prove that it could have made the profit it claims.  It follows that it is only entitled to nominal damages for the breach of contract.

Result

78. In the result, there will be judgment in favour of Greatworth for $30,500 for the five gates, plus nominal damages of $100 for breach of the sub-contract.  Interest is awarded at 1% above prime rate from the date of the Writ to the date of judgment and thereafter at the judgment rate until payment. 

Costs

79. These should normally follow the event.  Technically, Greatworth has won; it has proved its case on the five gates and for breach of contract, and got damages, albeit nominal.  Practically, it has lost, except to the extent of $30,600; a figure which could have been awarded in the Small Claims Tribunal.  When Greatworth wrote to Chevalier in May 2000, holding itself out as ready and able to perform the sub-contract, it must have known that Chevalier would never call on it to do so, and that if called on, it could not perform anyway.  So the letter of 12 May 2000 may be seen as disingenuous and intended to set up a speculative claim, which has failed. 

80. In the circumstances, I will make no order as to costs, so that each party will bear its own costs.  In the expectation that this will please neither party, I make this order nisi.