FORCE WAY ENGINEERING LTD v. THE INCORPORATED OWNERS OF GRAND COURT

DCCJ 3216/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3216 OF 2016

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JUDGMENT

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INTRODUCTION

1.  This dispute arises out of the renovation of Grand Court from 2011 to 2012.  It is a residential block of 24 flats in Kowloon City (the “Building”).

2.  In April 2011, the defendant, which is the owners’ incorporation of the Building, employed the plaintiff, a building contractor, to conduct renovation works to the Building at the price of $3,508,050.  In this judgment, I shall refer to the parties as the “IO” and the “Contractor” respectively.  Another key party is the consultant of the project.  By an agreement dated 17 May 2010, the IO had engaged Universal Housing Engineering Consultants Ltd (the “Consultant”) to act as consultant in the renovation project.

3.  Works commenced in June 2011.  The Contractor says that practical completion of the renovation took place on 24 June 2012, as certified by the Consultant.  The IO has failed to pay to the Contractor (a) the outstanding amount for the fourth (and final) stage of the completed works, as certified by the Consultant in the sum of $1,109,803.50, and (b) retention money in the sum of $342,447.  In December 2012, the Contractor commenced an action in the Court of First Instance to recover the two sums.  Subsequently, on 17 September 2013, the IO made a payment of $563,073, thus reducing the sum owed in (a) to $546,730.50.  The Contractor now claims against the IO a total sum of $889,177.50.

4.  On the other hand, the IO contends that the Contractor has never completed the works and that some of the works were defective.  The certificates issued by the Consultant, and now relied on by the Contractor, are invalid.  The IO terminated the contract on 16 October 2012 and hired replacement contractors to rectify the defects and complete the outstanding works. The IO now makes a counterclaim against the Contractor for (a) $414,883.50 as damages for breach of contract, and (b) $150,000 as liquidated damages for the delay.  The total claim amounts to $564,883.50.

5.  The action was initially designated as HCA 2334 of 2012.  It was transferred to the Construction and Arbitration List and re-numbered as HCCT 13/2014 in February 2014.  At the second pre-trial review in June 2016, given the amounts of the claim and the counterclaim and the Chinese documents involved, the case was transferred to the District Court.

6.  Two witnesses testified at trial.  The IO called its chairperson, Ms Choy Wing Kam Christin (“Choy”) whereas the Contractor called its director, Mr Wong Yiu Wah (“Wong”).

7.  It is perhaps convenient to note at this juncture that notwithstanding the key role it played in the project, neither the IO nor the Contractor called anyone from the Consultant to give evidence. 

8.  In his closing submissions, Mr Vincent Lung, counsel for the Contractor, described it as a “curious feature in this trial” but stressed that it would serve no real purpose for the Contractor to call the Consultant since it primarily relies on the various certificates issued by the Consultant to substantiate its claim.  The Contractor says that the certificates are valid, binding and conclusive.  On the other hand, the IO, represented by Mr Adrian Leung, counsel, has not sought to explain why it did not call the Consultant. Mr Lung invited the court to draw an adverse inference against the IO on issues that it might be expected to call the Consultant. 

9.  This issue can be quickly dealt with at the outset. 

10.  Generally speaking, if a prima facie case is made out, and if there is evidence available to the party against whom the case is established which could displace the prima facie case, and he omits to call such evidence, an inference can be drawn against him: see, eg, Ip Man Shan Henry v Ching Hing Construction Co Ltd [2003] HKC 256 at paragraph 155(a).

11.  As will be seen below, the IO’s case primarily revolves round challenging the validity and conclusiveness of the certificates issued by the Consultant.  It invites the court to go behind them to evaluate the works actually done by the Contractor.  It says that these certificates are liable to be set aside for various reasons.  One can therefore expect that any evidence that may be offered by the Consultant, being the issuer of these certificates, is likely to be adverse to the IO.  I therefore fail to see what inference can be drawn against the IO for failing to call the Consultant.

THE CONTRACT

12.  The renovation contract between the IO and the Contractor was concluded on 9 April 2011 and subsequently amended on 11 May 2011.  In its amended (and final) form, the contract comprised the following documents:-

(1)  the Contractor’s official tender dated 2 August 2010, which included, amongst other things, a set of general terms applicable to the project (「工程普通合約條款」) (the “General Terms”) and a bill of quantities;

(2)  the Contractor’s revised bill of quantities dated 22 November 2010;

(3)  the Contractor’s letter to the Consultant dated 31 January 2011;

(4)  the Contractor’s further revised bill of quantities dated 14 March 2011 (the “BoQ”);

(5)  the formal agreement dated 9 April 2011 (the “Formal Agreement”); and

(6)  the amendment agreement dated 11 May 2011 in which the parties agreed to amend the payment provision contained in clause 15 of the Formal Agreement (the “Amendment Agreement”).

13.  Below is an outline of the material terms of the contract.

14.  It is a lump sum contract.  The Contractor would carry out renovation works to the Building, in the scope as spelt out in the BoQ, for the price of $3,508,050.

15.  According to clause 10 of the Formal Agreement, the works should be completed within 120 working days after commencement, subject to any extension of time which is allowed under clause 12.

16.  Clause 12 of the Formal Agreement provides that the Contractor may apply in writing to the Consultant for an extension of time in certain reasonable cases, such as when the related construction professions and the supply of materials are affected by riot, labour strike and rainy days etc.  The Consultant should certify in writing to the IO that the delay is reasonable. If the IO is satisfied and accepts that to be the case and the Contractor has tried to avoid delay, the Consultant may grant a reasonable extension of time.

17.  The contract is in Chinese.  In its original form, clause 12 reads as follows.  (In the contract, 「乙方」is the Contractor and 「甲方」the IO).

「(十二) 申請延期：

               如因騷動、聯合罷工，以致影響工程受顧行業及材料之供應及雨水天等合理情況下，乙方可以書面向甲方工程顧問申請作出延期。而有關申請經甲方工程顧問書面向甲方指明延期之合理，並得到甲方滿意及接受，而乙方亦盡力防止阻誤，方可獲甲方工程顧問之合理延期。」

18.  Clause 13 of the Formal Agreement provides that in executing the works, the Contractor must comply with the instructions of the IO and the Consultant and must complete the works within three working days of the issue of the instruction.  Any failure to complete would be regarded as non-compliance.  If that happens more than three times, the IO, through the Consultant, has the right to terminate the contract immediately without having to pay any compensation to the Contractor and may reserve any right to claim the Contractor for any damages.  If the Contractor delays the works without any reasonable explanation and the delay exceeds the scheduled date by more than 30 days, the IO and the Consultant may appoint another person to complete that item and the associated costs will be deducted from the retention money.  If such costs exceed the retention money, the IO and the Consultant may make a claim against the Contractor under legal proceedings.

19.  Clause 13 reads as follows in Chinese:-

「(十三) 違反指令：

              乙方在施工期間，必須遵守甲方及甲方工程顧問之工程指示，並於發出工程指示後之三個工作天內完成、修繕該指示要求，若乙方未能依期完成，則被視為違反甲方或甲方工程顧問指令，如超過三次者，甲方有權透過甲方工程顧問即時終止本合約及毋須作出任何賠償給予乙方，並有權保留向乙方追究因此所引起的損失賠償。若乙方無合理解釋拖延工程，而進度比原來之預定日期超越30天，僱主及甲方工程顧問可委派他人完成該項修繕工程，相關之費用將在保固金內扣除，如保固金不足以支付其相關費用，僱主及工程顧問將依循法律途經向承建商追討。」

20.  Clause 25 of the General Terms provides that if the Contractor fails to complete part or whole of the works within the prescribed time, the IO is entitled to engage another person to complete the works instead.  In that case, the IO will charge an administrative fee of 10% of the actual expenses incurred.

21.  Clause 25 reads as follows in Chinese:-

「所有合約工程，如承建商在指定時間內未能依時完成該部份或全部工程，僱主有權另判他人代做該工程或以代工型式替承建商完成該部份或全部工程，僱主將收取實際支出另加10%作為行政費用。」

22.  Clause 14 of the Formal Agreement provides that if the Contractor does not complete the works on or before the scheduled completion date, as extended by the Consultant, it is liable to pay a sum of $5,000 for each day of delay, capped by a maximum of 30 working days.  In such a case, the IO may terminate the contract and employ another contractor to complete the project and the associated costs will be deducted from the total contract sum and the Contractor may not object.  Clause 5 of the General Terms makes similar provisions.

23.  Clause 14 reads as follows in Chinese:-

「(十四) 工程延誤的賠償：

              乙方未能在規定之完工日完成整項工程便算逾期(包括甲方工程顧問所批核之延期申請)，則需要每天罰款港幣伍仟圓正給予甲方，另每天罰款港幣壹仟圓正給予甲方工程顧問作為額外監督費用，但逾期亦以三十個工作天為限，如超越此期限仍未能完工時，甲方則有權中止其承判權，及可另聘承建商繼續未完成之工程，而相關費用將會在合約工程總金額內扣除，乙方則不得異議。」

24.  Clause 15 makes provision for payment.  It was subsequently amended by the Amendment Agreement.  The amended clause provides that the Contractor may apply for payment from the IO in four stages according to the actual work progress of each stage.  The Contractor should submit an application to the Consultant for approval.  The IO should make payment to the Contractor within 14 working days of the approval.  For each stage:-

(1)  90% of the approved sum would be payable and the balance of 10% would be the retention money for that stage;

(2)  95% of the total approved sums would be payable upon issuance of the certificate of practical completion by the Consultant and the balance of 5% would be the retention money for the one-year warranty period; and

(3)  The retention money equal to the last 5% of the total approved sums would be payable upon issuance of the certificate of warranty completion by the Consultant.

25.  The amended clause 15 reads as follows in Chinese:-

「工程展開後，乙方必須根據工程進度之完成比率，分四期向甲方要求發交該期之工程費(而每期工程費按照實際工程進度發放，承建商可根據進度申請發放工程費，但不可超過四期)。每次申請發放工程費時必須呈交該期之「工程費申請書」並交由甲方工程顧問審核，在審批完成後交由甲方於十四個工作天內支付該期款額給予乙方，批核之款項付款方式為：

1.  每期發放完成之工程費90%，餘下10%為該期之保固金；

2.  由甲方工程顧問發出完工證書後，發放相等總完成工程費之95%，餘下5%為一年保固期之保固金；

3.  由甲方工程顧問發出保固期完結證書後，發放餘下之5%保固金。

4.  另如有任何後加工程項目，付款方法則由甲方及乙方再另行商議決定；… 」

26.  Clause 4 of the General Terms provides, amongst other things, that the date of practical completion is the date set out as such in the certificate of practical completion issued by the Consultant after the acceptance by the Consultant and the IO.

27.  Clause 4 reads as follows in Chinese:-

「4. 計算竣工日 ---

竣工日為工程顧問及僱主驗收後，由工程顧問所發出的『完工證明書』所示之完成日期為實。...」

28.  Clause 7 of the General Terms provides that the warranty period will be the date which is 12 months from the date of practical completion as shown in the certificate of practical completion.  The Contractor should make good any defect during the warranty period.  At the end of the period, the IO and the Consultant should issue a certificate of warranty completion.

29.  Clause 7 reads as follows in Chinese:-

「7. 保固期 ---

工程保固期根據由僱主同意及由工程顧問發出的 『完工證明書』所示之完成日期起計十二個月(12 months from date of Practical Completion)。期間除人為破壞外，如有任何損毀、失效或質量等問題，承建商必須根據僱主及工程顧問的指示，於七個工作天內提供免費修葺、整改或更換(所需之材料、棚架、人工等及其他因而引起之一切損失，均需由承建商負責)，直至僱主及工程顧問發出完成通知書為準。...」

30.  The BoQ sets out 14 heads of works.  Broadly speaking, they cover a wide and extensive range of renovation works to different parts of the Building, including renovation and painting works to the external and internal walls and common areas, replacement and improvement works of the water pipes and sewage pipes, waterproofing works, refurbishment and improvements works to the carpark and other common facilities of the Building.

PROGRESS OF THE PROJECT

31.  There is a dispute on the exact commencement date of the works.  The Contractor says it was 27 June 2011 whereas the IO says it was more than a week earlier, on 18 June 2011. 

32.  As the project proceeded, the following certifications and payments were made:-

Stage	1st	2nd	3rd (superseded)	3rd (revised )	4th
Date of certificate		10 October 2011	10 January 2012	15 February 2012	3 October 2012
Amount certified by Contractor	$519,260	$1,047,375	$1,342,745	$624,720 (excluding items 3, 4, 5 and 11.2a)	$1,233,115
Date of payment	14 July 2011	12 October 2011	-	18 February 2012	Not paid
Amount paid by the IO	$467,334	$942,637.50	-	$562,248	Contractor says IO should have paid $1,109,803.50
Retention money kept by the IO	$51,926	$104,737.50	-	$62,472	Contractor says IO should have kept $123,311.50

33.  The project was fairly uneventful for the first few months.  The Contractor submitted applications for payment for the first and second stages, which were certified by the Consultant and payments were made by the IO.

34.  Substantial disputes then began to emerge between the IO and the Contractor over the quality and progress of the works. 

35.  The payment certificate for the third stage was issued on 10 January 2012.  However, by letter dated 8 February 2012, the Consultant informed the Contractor that at the request of the IO, the payment for items 3, 4, 5 and 11.2a as certified in that certificate would be withheld until they are satisfactorily completed.  A revised payment certificate for the third stage was subsequently issued on 15 February 2012, in which these items were taken out.  Payment of the reduced amount was then made by the IO for the third stage.

36.  In this action, it is common ground that the parties agreed to take out two items of works from the contract.  It means that the Contractor was no longer required to complete the works.  They are item 11.2a relating to the main gate and item 11.2b relating to the flowerbed.  However, the parties disagree on whether the IO is liable to pay for the works already carried out by the Contractor on these two items.  The Contractor claims that the total value of such works is $115,640.  This amount has been certified in the fourth stage certificate.

THE CONTRACTOR’S CASE

37.  The nature of the Contractor’s claim is straightforward.  It is essentially a claim in contract for materials supplied and works done. 

38.  It relies on the certificates issued by the Consultant as follows.

39.  First, the Consultant issued the fourth stage certificate on 3 October 2012 – see the table in paragraph 32 above.  Pursuant to clause 15 of the Formal Agreement (as amended), the Contractor says that accordingly the IO became liable to pay the sum as certified upon such issuance.

40.  Secondly, the Consultant issued the certificate of practical completion dated 4 October 2012 certifying to the effect that practical completion took place on 24 June 2012.  According to the same clause, the IO should release to the Contractor half of the retention money, which the IO did not do; and the other half should be released upon the issuance of the certificate of warranty completion by the Consultant, which should take place on 24 June 2013. However, the IO terminated the engagement of the Consultant on 10 June 2013. As a result, no such certificate was ever issued.  The Contractor contends that the IO is not entitled to self-generate a position to prevent the Contractor from claiming the retention money.

41.  Thirdly, the Contractor relies on the Consultant’s certificate approving an extension of time for the completion of the works by 200 working days (the “EOT certificate”).  As the Contractor contends that the works commenced on 27 June 2011, they should be completed by 19 July 2012 at the latest, under the contract as extended by the EOT certificate.  Given that practical completion took place on 24 June 2012, the Contractor avers that there was no delay in the completion of the works.

42.  The Contractor now claims $889,177.50.  Below is the breakdown:-

(1)    The balance of the outstanding sum for the fourth stage works of $546,730.50 (ie $1,109,803.50 – 563,073); and

(2)    The retention money of the four stages in the sum of $342,447 (ie $51,926 + $104,737.50 + $62,472 + $123,311.50).

THE IO’S CASE

43.  As indicated at the outset, the IO challenges the validity and conclusiveness of the certificates and says that they are liable to be reviewed and opened up by the court.  It is therefore necessary to set out the IO’s factual case in detail.  To the extent possible, I shall seek to recount the events in chronological order.  However, at times, it will be more convenient to deal with discrete issues, eg the main gate and the flowerbed, separately on their own. 

Summary of the IO’s case

44.  In gist, the IO’s primary position is as follows:-

(1)  The fourth stage certificate, like the previous three certificates, is an interim payment certificate issued on a temporary basis subject to the final assessment and decision of the IO.  The IO never authorised the issue of the fourth stage certificate and hence would not be liable for the sum certified there.

(2)  The certificate of practical completion purportedly issued by the Consultant is invalid because it was not made in accordance with the terms of the contract. 

(3)  By letter dated 22 May 2012, the Consultant issued a list of 62 defects, with photographs enclosed.  That was followed by some correspondence from the Contractor to the effect that insofar as they fell within the scope of the contract, the defects had all been rectified.  The IO’s case is that the defects remained outstanding and the Contractor had never completed the works.

(4)  Accordingly, no practical completion ever took place and the Contractor is not entitled to the return of the retention money.

(5)  The IO claims that it is not liable to pay for works done by the Contractor on items 11.2a and 11.2b before these items were agreed to be “deleted” from the contract as those works had been executed either in breach of the contract or without the authorisation of the IO.

(6)  In respect of the retention money, the IO says that the correct figure should be $330,883 instead of the Contractor’s figure of $342,447.  The difference is $11,564, which is 10% of the value of the works done over items 11.2a and 11.2b, as claimed by the Contractor.

(7)  The IO says that the Contractor failed to complete the works and rectify the defects during the currency of the contract thus evincing an intention no longer to be bound by the contract and that amounted to a repudiatory breach. By letter dated 16 October 2012, the IO accepted the repudiation and the contract came to an end on that day. 

(8)  No certificate of warranty completion was ever issued to the Contractor.  Hence the IO is not liable to release any of the retention money.

(9)  In order to complete the works and rectify the defects, the IO had engaged replacement contractors and incurred a total sum of $779,580.  Pursuant to clause 25 of the General Terms, the IO is entitled to charge an administrative fee of 10%.  The IO therefore has suffered a loss of $857,538.

(10)  The IO claims that the works should have been completed by 10 November 2011, as the Contractor is not entitled to any time extension under the contract.  They were never completed and the IO is entitled to claim liquidated damages in the sum of $150,000 (ie $5,000 per day x 30 days) under clause 14 of the Formal Agreement.

45.  The IO counterclaims general damages as follows:-  

Original contract price	$3,508,050.00
Less: deletion of works	($254,000.00)
Add: additional works (agreed)	$54,780.00
Revised contract sum	$3,308,830.00
Less: 10% retention money	($330,883.00)
Less: amounts already paid	($2,535,292.50)
Net amount	$442,654.50
Less:  loss suffered by the IO	($857,538.00)
Amount owed to the IO	$414,883.50

46.  Having set out a summary of the IO’s position, I now turn to recount its case.

IO’s chronology of events

47.  Works commenced on 18 June 2011.

48.  By letter dated 22 May 2012, the Consultant pointed out to the Contractor that the works should have been completed within 120 working days but were as yet to be completed.  Further, it attached a list of defects containing 62 items (the “Defects List”).  It requested the Contractor to complete the works as soon as possible and rectify the defects.

49.  In its reply letter dated 2 June 2012, the Contractor claimed that the works to the external wall had been completed on 30 May 2012 and invited the Consultant to inspect the works.  Photographs were enclosed showing the alleged completed works.

50.  The Consultant then sent a letter dated 15 June 2012 to the IO stating that the renovation project was coming to an end and inviting the IO to conduct a joint inspection with the Contractor on 20 June 2012, which was a Wednesday. The Consultant stated in the letter that at the inspection, it would assess each project item in accordance with the contractual requirements and that it would also accept and reflect the opinions of the IO, issue a list of defects and uncompleted items and instruct the Contractor to complete the rectification works within a reasonable time.

51.  The IO replied to that letter through its former solicitors, Lim & Lok.  By their letter dated 19 June 2012, the IO’s solicitors strongly objected to the Consultant’s statement that the renovation project was coming to an end and pointed out that:-

(1)  There were over 20 items of works which had not been done.

(2)  The IO had never received any notification from the Contractor that the whole of the contract works had been completed.

(3)  The IO had never requested and would not request the Consultant to represent the IO to inspect and accept the works.

(4)  The request to inspect on 20 June 2012 was in conflict with the Consultant’s letter dated 22 May 2012.

(5)  The committee members of the IO had to go to work and any inspection should be arranged on a Saturday.

52.  As disclosed by subsequent correspondence, the Consultant and the Contractor participated in a joint inspection of the works on 20 June 2012.  No representative of the IO was present.

53.  By letter dated 5 July 2012 from the Consultant to the Contractor, the Consultant issued a list of outstanding defects following the inspection and requested the Contractor to rectify them within seven working days.  The Consultant also issued another list of uncompleted items and informed the Contractor that if it did not complete these works within 14 working days, the Consultant would engage other contractors to execute the works and the costs of doing so would be deducted from the contract amount.

54.  To this, the Contractor replied by a letter dated 11 July 2012.  Amongst other things, it informed the Consultant that the remedial works required for the list of outstanding defects would be completed by 13 July.  It requested the Consultant to arrange for a date on which to inspect and accept the works.

55.  The next important event is the project meeting held on 28 July 2012. It was attended by, amongst others, Choy, a Mr Chung and a Mr Leung representing the Contractor and a Mr Lee of the Consultant.  Wong was not present.

56.  According to the minutes of the meeting:-

(1)  The Contractor stressed that if the IO did not pay the balance of the third stage works, ie the items taken out from the original third stage certificate, the project would not continue and the Contractor would not do anything.  According to the Contractor, the outstanding works included the main gate, the flowerbed, the water leakage at the external wall and the connection of the toilet pipes.  (It would be recalled that four items were taken out from the original third stage certificate – see paragraph 35 above.  The reference to the balance of the third stage works in the minutes is in relation to this.)

(2)  The IO claimed that the Contractor should comply with the request made in the letter of 22 May 2012 and that once done it could claim the amount due.

(3)  However, the representative of the Contractor indicated that the outstanding works could be completed within 21 days but it was Wong’s instruction that the Contractor would only carry on upon payment of the third stage balance.

(4)  The IO also pointed out that there were great discrepancies between the Defects List (ie the list attached to the letter of 22 May 2012) and the lists attached to the letter of 5 July 2012.  But the representative from the Consultant did not make any substantive reply.

57.  It is the IO’s case that after the 28 July 2012 meeting, there was no further work carried out at the Building by the Contractor, save for the connection of the toilet pipes in late September 2012.

58.  By letter dated 21 September 2012 sent to the Consultant and copied to the IO, the Contractor stated that the six outstanding items in the project had been completed on 18 September, enclosing photographs of the completed works.

59.  The Consultant replied by a letter dated 25 September 2012.  It said that it was satisfied upon inspection that the defects had been properly rectified and that it would issue the fourth stage certificate shortly.

60.  The fourth stage certificate, bearing the date of 3 October 2012, was issued.  It certified the value of the works done for the fourth and final stage to be $1,233,115.  It should be noted that the certificate included a sum of $103,260 for item 11.2a and a sum of $12,380 for item 11.2b.  The IO’s case on whether it is liable for these two sums (totaling $115,640) will be set out separately below.

61.  The Contractor then sent a letter to the IO dated 3 October 2012, applying for payment under the fourth stage certificate.  It is the sum as certified in this certificate which the Contractor now claims (with credit to be given for the subsequent payment made by the IO in September 2013).

62.  The IO did not pay the certified sum.  It took the position that there were still outstanding items and defective works.  By letter dated 16 October 2012, the IO notified the Contractor that:-

(1)  The IO would terminate the contract given that the Contractor had failed to comply with its obligations.

(2)  The Contractor should take away all its tools from the Building within ten days.

(3)  The Contractor should also within ten days dismantle and remove the main gate and the flowerbed which did not comply with the IO’s requirements. Otherwise the IO would hire contractors to do so and the costs would be deducted from the contract.

(4)  The IO would itself arrange for the completion of the outstanding items within 60 days.

63.  While the certificate of practical completion was dated 4 October 2012, the IO claims that it was only on or about 23 April 2013 that the Consultant passed on a copy to the IO without any explanation as to why the IO had not been consulted in the first place and why it was only passed to the IO at such a late stage.  It had been issued without the IO’s approval.  The certificate had also wrongly stated that it was issued after a joint inspection of the Contractor, the IO and the Consultant.

64.  Through its solicitors, the IO complained to the Consultant by letter dated 20 May 2013 that notwithstanding that the items in the Defects List remained unresolved, the Consultant had gone ahead to issue the certificate of practical completion in the absence of any approval from the IO.

65.  The IO’s solicitors wrote to the Consultant again on 10 June 2013, terminating their contract with immediate effect for the above reasons.

66.  In such circumstances, the IO denies that it is liable to pay the retention money to the Contractor because:-

(1)  The certificate of practical completion purportedly issued by the Consultant is invalid and liable to be set aside.

(2)  No certificate of warranty completion has ever been issued.

67.  The IO contends that the certificate of practical completion is invalid because it was not made in accordance with the terms of the contract.  Clause 4 of the General Terms provides that the certificate was to be granted after a joint inspection by the Consultant and the IO.  However, the IO had never participated in any such inspection, whether on 20 June 2012 or otherwise.  The IO had never authorised or approved the issue of such certificate.

68.  The IO also argues that it is not liable to release the retention money since the release is conditional upon the issue of certificate of warranty completion, which was never issued.  The IO denies that it was a “self-generated” position.  Instead it has rightly terminated the Consultant’s appointment on 10 June 2013.

Defective works

69.  At the trial, the IO has grouped the 62 defects, as spelt out in the Defects List, into ten broad categories:-

(1)  Water leakage on the roof of Block 41A;

(2)  External walls painting and repairing;

(3)  Debris removal;

(4)  Drainage blockage;

(5)  Piping works;

(6)  Main gate;

(7)  Car park kiosk replacement;

(8)  Public steel wares and fire safety works;

(9)  Main lobby repairs and decoration works; and

(10)  Miscellaneous defects.

70.  As directed by the court, Mr Leung and Mr Lung jointly compiled a Scott Schedule setting out in detail the description of the alleged defects, the corresponding replacement works and the costs, and the Contractor’s responses by the above categories.  Cross-references to the related documents and photographs in the trial bundles are also included.

71.  Choy testified to the defects at trial.  She resided at the Building and, as chairperson of the IO, she had actively participated in the project from the outset and throughout.  She attended and chaired all the IO meetings with the Contractor and the Consultant.  She was in regular contact and communication with them.  Other owners would approach her for complaints and she would follow up on the problems and defects personally.  In other words, she has direct, first-hand knowledge of how the project had proceeded and the problems.

72.  Apart from the photographs enclosed with various letters sent to the Contractor in mid-2012, the IO also relies on photographs allegedly taken on 9 November 2012 and January 2013 showing, respectively, the existence and extent of the defective works and the same areas after completion of the works by the replacement contractors.

73.  As one of the major issues in this case is whether the works executed by the Contractor were in fact defective, it is necessary to set out the IO’s allegations of defects and the Contractor’s responses in some detail.

First category

74.  This category concerns water leakage.  It is one of the more serious categories of defects.

75.  Under BoQ item 7, the Contractor should install new toilet tanks on the roof and the flushing system connected to it.  Under BoQ item 10, it should carry out water proofing works.

76.  After the Contractor carried out the works, the owners from 6/F of Block 41A and the top floor of Block 43 complained to Choy that there was water leakage into and around their flats.  Choy personally attended their flats for inspection. 

(1)  She found in one of the flats water marks and mold and the wall was wet and swollen.  The affected area was located beneath the new toilet tanks installed by the Contractor on the roof. 

(2)  There was also water dripping on the external wall of the other flat forming some tear-line water marks.

(3)  There had been no water leakage complaints prior to the renovation works.

77.  Photographs taken on 9 November 2012 show the moldy condition of the inside of some flats.

78.  In around December 2012, the IO engaged Pop Art, a replacement contractor, to rectify the defective works on the roof top by, amongst other things, replacing the waterproof layer above the water tanks.  The IO incurred expenses in the total sum of $176,000.  Choy confirmed that there was no further complaint after such rectification works.

79.  In response, Wong accepted in cross-examination that the photographs show cracks in the waterproof layers on the roof top but suggested that since everyone could go up to the roof top, he was not sure who had in fact damaged the waterproof layer.

Second category

80.  Under BoQ item 3, the Contractor should carry out steel bar concrete and plaster repairing works, including both external wall and indoor areas.  Under BoQ item 4, it should carry out external wall painting and repairing work, including not only external walls of the Building but also other surfaces.

81.  The IO has identified as many as 41 defects under this category.

82.  Photographs taken on 9 November 2012 show that paint works on the boundary walls were defective as there were patches of paint, large and irregular in shape, which showed visible and significant colour difference.

83.  Wong alleged that the patches were not caused by poor workmanship but rather by difference in texture of the paint.  He stressed that under the contract, the Contractor’s obligation was only to fix those parts which required fixing (「見爛補爛」).

84.  The IO counter-argues that it must be part and parcel of the Contractor’s obligations to make sure that the whole wall was painted evenly in the same colour, with no visible and significant colour difference.

85.  In addition, the photographs also show that as at 9 November 2012, there was a leftover “dog-arm” structure, which the Contractor failed to remove from the external wall.  Other defects included a hole on the staircase wall which should have been filled up, water marks on the external wall which should have been painted and a pipe with rust which should also have been painted.

86.  In around November and December 2012, the IO engaged Pop Art to rectify the defective painting works on the external front walls, the external side and rear walls, the boundary walls and the cark park walls and ceiling.  The IO incurred expenses in the total sum of $269,250.

Third category

87.  Under BoQ item 1.4, the Contractor should remove construction debris within a reasonable time.  Under BoQ item 3.2, it should demolish and remove illegal and wasted objects from external walls, roof, platform and public areas.

88.  The IO now complains that as many as 15 defects could be identified. For instance, photographs taken on 9 November 2012 show that there was debris remaining on the roof top of Block 43A and around the flowerbed.  There was also an unused pipe left unfixed on the ceiling of the roof top.

89.  Wong asserted that the defects had been fixed, or else the Contractor had no authority to do anything because the defects concerned private property.

90.  The IO engaged a cleaning company to rectify these defects by carrying out cleaning works after the completion of the renovation.  The IO incurred expenses in the sum of $4,280.

Fourth category

91.  Under BoQ item 6, the Contractor should carry out drainage replacement works.

92.  The IO now complains of three defects, including leakage of sewage water onto the external wall, as shown in the photographs taken on 9 November 2012.

93.  The IO engaged a replacement contractor to rectify the defective works and incurred expenses in the sum of $4,800. 

Fifth category

94.  Under BoQ item 7, the Contractor should carry out toilet piping works.

95.  The IO now complains that due to the Contractor’s defective work, there was water leakage from the pipe on the roof top of Block 43A, as shown in the photographs taken on 9 November 2012.  The Contractor also failed to re-install the door of the pumping room after carrying out works around the room.

96.  In around January 2013, the IO engaged Pop Art to carry out a number of works, including fixing the above defects, at a total cost of $52,000.

Sixth category

97.  Under BoQ item 11.2a, the Contractor should install a new electric main gate.

98.  The IO’s complaint is as follows.

(1)  The gate was installed on 6 January 2012.

(2)  Upon inspection, the Consultant commented that the gate did not work because owing to its design, the space between the horizontal bars of the gate was in fact wide enough for a person to squeeze through.  In other words, one could actually enter the Building area without having to open the gate.  Choy said that the gate was facing the street and was installed for security purposes.  Clearly, the defect was not acceptable.

(3)  The IO therefore rejected the gate.

(4)  On the other hand, the Contractor argued that the gate was installed in accordance with a drawing which had been approved by the IO in advance.  It relied on a fax dated 20 September 2011.

(5)  At the IO meeting on 18 February 2012, the IO resolved that in the absence of any alternative, it would look for a replacement contractor to rebuild and reinstall the main gate while the existing one would be removed by the Contractor.  The costs of installation of the new gate would be set off from the contract.  The Contractor did not object to the IO’s decision.

(6)  The Contractor later provided a new design in April 2012.  Although the IO gave approval for the new design on 8 May 2012, the Contractor never removed the existing gate or installed a new one.

(7)  At the IO meeting on 28 July 2012, the representatives from the Contractor acknowledged that the main gate works were still outstanding.

(8)  By letter dated 16 August 2012, the Contractor made proposals for the completion of the outstanding works on the main gate.

(9)  By email dated 4 October 2012, the proposals were rejected by the IO.

(10)  The IO’s case is that the main gate item has been deleted from the contract by consent.  But the Contractor should still be liable for the damaged grounds and removal of the debris, as shown in the photographs taken on 9 November 2012.  The IO can also set off the contract sum by the extra costs of the replacement gate.

99.  In around December 2012, the IO engaged Pop Art to polish and rectify the ground work of the entrance and pavement area located nearby and underneath the main gate.  The IO incurred a cost of $84,000.  Further, the IO engaged Regent Steel Gate Products & Construction Co and Tong Chi Stainless Steel Engineering to supply and put up a replacement gate at a total cost of $125,800.

Seventh category

100.  Under BoQ item 11.4, the Contractor should replace the car park kiosk.

101.  The IO now complains that the Contractor failed to install the air-conditioner at the kiosk.

102.  However, Mr Leung confirmed in his closing submissions that the IO would no longer pursue any counterclaim under this category.

Eighth category

103.  Under BoQ item 12, the Contractor should repair and replace public steel wares and carry out fire safety works.

104.  Seven defects were identified in this category.  Photographs taken on 9 November 2012 show that there were two outdoor steel structures which had not been properly painted.  One of the structures was a supporting frame for an adjacent building and, as shown in the photographs, was a sizable one.

105.  Wong seemed to be suggesting that outdoor steel structures were outside the scope of the contract, notwithstanding explicit wording in the BoQ to the contrary.

106.  In around October 2012, the IO engaged a contractor, Fai Kee, to rectify the defects by carrying out steel ware polishing works at a cost of $17,000.

Ninth category

107.  Under BoQ item 13, the Contractor should carry out main lobby repair and decoration works, including installation of intercom and CCTV.

108.  The IO now complains of a number of defects.  Relative to the other categories, these defects are minor in nature and include, eg, the Contractor’s failure to remove a roll of electric wire hanging loosely in an indoor area on the 1/F.

109.  The IO claims that it incurred a total cost of $1,450 to rectify these defects.

Tenth category

110.  In the course of carrying out the works, the IO says that the Contractor had damaged plants in various places.  As a result, the IO had to engage Wai Keung Florist to replace the damaged plants at a cost of $45,000, as set out in the Scott Schedule.

111.  The total loss suffered by the IO in engaging replacement contractors to rectify the defective works and complete the outstanding items left by the Contractor amounts to $779,580 in total.  The IO says that by virtue of clause 25 of the General Terms, it is entitled to charge the Contractor an administrative fee of 10% of such sum.

112.  Given the above extensive list of defects, the IO’s position is that there was no practical completion of the project.  Thus the IO is not liable to release the retention money to the Contractor at all as it is entitled to forfeit it in total.  The IO’s primary position is that it is entitled to counterclaim damages against the Contractor in the sum of $857,539, without giving any credit to the retention money.

Deletion of items 11.2a and 11.2b

113.  Item 11.2a concerns the main gate.  The dispute between the parties is set out in paragraph 98 above.  In gist, the IO contends that the main gate installed by the Contractor was not in compliance with the contractual requirement and that, the item having been deleted from the contract, the whole contract sum under item 11.2a of $172,100 should be deducted from the contract price.  On the other hand, the Contractor says that the IO remains liable to pay for the works already done.  That includes the sum as certified in the fourth stage certificate, namely $103,260.

114.  Item 11.2b concerns the flowerbed.  The IO’s complaint is as follows.

115.  The Contractor submitted a design for flowerbed on 5 August 2011.  It was subsequently revised.  By letter dated 15 August 2011, the Consultant approved the revised design.  However, Choy testified that the IO did not consent to the revised design.  She mentioned to the Contractor and the Consultant that:-

(1)  There was a gas pipe beneath the flowerbed, which needed to be replaced pursuant to Towngas’s request.

(2)  Also, since the flowerbed is adjacent to the pedestrian walkway, the IO needed to consult the gardener about the position of the water drains.

(3)  Given the above and given that the works were not urgent, the Contractor should hold off the flowerbed works.

116.  In fact, at the meeting on 17 September 2011, the IO requested further revision to the design which was to be further voted on by the owners.  The Contractor then submitted a handwritten revised design on 20 September 2011, which the IO still did not find satisfactory.

117.  In late September 2011, the IO discovered that the Contractor had already started the flowerbed works without its approval.  It instructed the Contractor to cease those works.  These matters were noted in the meeting between the IO, the Contractor and the Consultant on 8 October 2011.

118.  In the premises, the IO says that the Contractor has acted in breach of the contract when proceeding to commence the flowerbed works without its approval.

119.  By letter dated 16 August 2012, the Contractor made various proposals for the completion of the flowerbed works.

120.  By email dated 4 October 2012, the IO made clear that it would not accept any of those proposals and reiterated that the Contractor had wrongly proceeded to commence the flowerbed works without the approval of the IO.

121.  The IO’s case is that the flowerbed item has been deleted from the contract. 

122.  Accordingly, the IO contends that the whole contract sum under item 11.2b of $61,900 should be deducted from the contract price.  On the other hand, the Contractor says that the IO remains liable to pay for the works already done, namely the sum of $12,380, as certified in the fourth stage certificate.

Delay

123.  The IO’s case is that the Contractor started work on 18 June 2011.  Choy gave evidence that the date was picked for good luck.  She recalled that there was a work commencement ritual and after that a work shed was built.

124.  In the Gantt chart provided by the Contractor at that time, in the “remarks” table, the first day of work was stated to be 18 June 2011, although in the chart itself, the first day of work was stated to be 27 June 2011, which is the date now contended to be the commencement date by the Contractor.

125.  Wong explained that the date stated in the chart was the correct date and that his staff had simply forgotten to amend the date of 18 June 2011 in the “remarks” table.  The Contractor also relies on a Form BA 10 filed at that time, which stated that the commencement date of the “building works” was 27 June 2011.  It is however not clear whether such date is necessarily the same as the commencement date of the project under the contract.

126.  Mr Eric Lam, surveyor, is the single joint expert appointed in this action to opine on two issues, one of which is the causes of delay of the renovation works and its impact on the progress.  Notwithstanding the date stated in Form BA 10, he is of the view that the commencement date was 18 June 2011. 

127.  In any event, the IO’s primary position is that the Contractor never completed the works and is therefore liable to pay liquidated damages capped at $150,000, ie $5,000 for each day of delay subject to a maximum of 30 days, pursuant to clause 14 of the Formal Agreement.

128.  Further, the IO contends that the EOT certificate issued by the Consultant is invalid and liable to be aside because:-

(1)  There is no mechanism or provisions for granting the EOT.

(2)  Alternatively, the Consultant had never sought the IO’s comments and approval before issuing the EOT certificate dated 14 December 2012.  As such, the EOT certificate was not issued in accordance with the express terms of the contract and is thus invalid.

129.  On the other hand, the Contractor’s case is that practical completion took place on 24 June 2012. 

130.  By letter dated 25 June 2012 addressed to the Consultant, the Contractor applied for a time extension relying on six bases.  In the EOT certificate, the Consultant accepted four out of the six bases and granted a total time extension of 200 working days.  This would mean that the project should be completed by 9 July 2012, on the basis that the commencement date was 27 June 2011, as the Contractor alleges.

131.  In this action, the Contractor relies on the EOT certificate and claims that there was therefore no delay in its execution of the works.

132.  The Consultant agreed to extend time on four bases:-

(1)  There was delay on the part of the IO in selecting the colour scheme for the external wall.

(2)  There was a dispute on the external wall workmanship between 10 January 2012 and 18 February 2012, causing a delay in the external wall painting works.

(3)  There was another dispute over the external wall workmanship between 18 February 2012 and 18 April 2012.

(4)  Inclement weather.

133.  The Contractor alleges that each of these bases gave rise to a sufficient factual basis for extension to be granted.

134.  The expert’s assessment is that a shorter time extension of 151 working days would be appropriate.  On this basis and taking 27 June 2011 as the commencement date, the project should be completed by 29 May 2012 and the Contractor would therefore be in delay by 21 working days.

135.  Mr Lung submitted that the Consultant would be in the best position to assess the appropriate length of the time extension because it had been on site throughout and had inside knowledge of the progress of the project.  In fact, the expert, when asked in his oral evidence, accepted that it would generally be the case.  Further, it was submitted by the Contractor that the expert’s assessment is in fact not far off from that of the Consultant and the former should therefore be seen as independently corroborating the appropriateness of the time extension as certified by the latter.

DISCUSSION

136.  The issues to be resolved have been agreed between the parties at the beginning of the trial and set out in the “Agreed List of Issues”.  I shall deal with them in a slightly different order from that list.

The factual disputes

137.  Logically speaking, the court’s first task should be to evaluate the factual evidence and determine, insofar as the issues in dispute between the parties are concerned, what had in fact happened in the project, in particular the progress and the state of the works.  After finding the relevant facts, the court should then rule on the rights and obligations of the parties, applying the relevant legal principles.

138.  A lot of the background facts relating to the contract and the progress of the project are common ground.  Also, a lot of the discussion and communication amongst the IO, the Contractor and the Consultant are documented in the form of, for instance, minutes of meetings, letters and emails between the parties.  The major factual disputes primarily concern whether the works were defective as alleged by the IO and whether, to the extent that it was accepted that there were defects, they were subsequently rectified by the Contractor.  It is also incumbent on the IO to prove as facts that it in fact hired replacement contractors to rectify the defects at the costs alleged.

139.  On a number of matters, Choy and Wong gave different accounts.  Having considered the evidence as a whole against the undisputed or indisputable background, I am of the view that in general Choy is a credible witness and her evidence is reliable. By comparison, Wong’s evidence is not as reliable and is, in some respects, open to doubt.  I have come to this view for the following reasons.

140.  It is plain and clear from the contemporaneous documents, such as the minutes of the project meetings, that Choy, as chairperson of the IO, was closely involved in the project.  She actively and regularly participated in it on behalf of the IO and therefore gained first-hand and close knowledge of what had been going on in the entire project.  As submitted by Mr Leung, given her position in the IO and her personal participation, she was able to give direct evidence as to the actual instructions given by her to the Contractor and as to her observations and recollection of the defects as she saw them after the Contractor executed the works.  I accept that submission.  There is also no material or inexplicable inconsistency or discrepancy, either within her own evidence or when her evidence is viewed against the undisputed factual background or contemporaneous documents.  Her testimony is coherent and inherently plausible. The photographs allegedly taken on 9 November 2012 showing the various defective items of work bear the date on their face.  There is no reason to doubt that they were taken on another date.  (The photographs included in the trial bundles are not of very good quality.  However, when cross-examining Wong, Mr Leung, with the consent of Mr Lung, was able to make use of re-prints of some of those photographs which were of better quality and higher resolution.)

141.  On the other hand, the same cannot be said of Wong’s evidence.  As submitted by Mr Leung, unlike Choy, Wong did not seem to have first-hand knowledge on all aspects of the project.  He only attended two of the many project meetings held with the IO and the Consultant.  The project seems to have been taken care of mainly by his subordinates or other staff of the Contractor and Wong would receive reports from them from time to time.  For that reason, I would conclude that Wong’s knowledge of what was going on in the project and what had in fact been communicated between the IO, the Contractor and the Consultant was bound to be more limited than Choy’s. 

142.  Further, there are also a number of discrepancies or inexplicable features in Wong’s evidence, as highlighted by Mr Leung in his closing submissions, which cast doubt on its reliability as a whole.  At times, he appeared to be evasive in his oral testimony.  I set out below some of the more significant and obvious ones as examples.

143.  First, in cross-examination, Wong initially said and repeated a few times that he could not recall whether any of the representatives of the IO attended the joint inspection on 20 June 2012.  Yet, when he was referred to the letter from the Contractor regarding time extension which stated that the IO did not attend the inspection, he conceded and said that he remembered no one from the IO was present.  The discrepancy is notable since the joint inspection on 20 June 2012 forms the basis of the certificate of practical completion and is thus an important occasion in the project.

144.  Secondly, Wong was shown some photographs taken on 9 November 2012 of the painting on the boundary wall.  The photographs show visible patches of paints of a different colour from the rest of the wall.  When asked about the colour difference, Wong initially said that he could not be sure just by looking at the photographs.  Then he said that the patches were caused by the difference in texture of those parts which the Contractor had repaired.  That difference would affect how light is reflected from those parts.  The patches would appear in different colour or shading depending on the direction of the light.  But he eventually had to accept that a person standing right in front of the wall would actually notice the patches.  He seemed to be unwilling to accept the plain fact that the photographs do show patches of a different colour.  In that regard, he was not forthcoming in his evidence.

145.  Thirdly, also in cross-examination, he was asked to look at some photographs taken on 9 November 2012 showing a “dog-arm” structure on the external wall.  Initially there had been two such structures but only one was subsequently removed.  That is one of the alleged defects identified in the second category of defects concerning external wall.  Both “dog-arm” structures were clearly leftover structures which were no longer of any use.  They ought to have been removed as part of the project.  When asked why only one, but not both, were dismantled, Wong initially said he did not know why.  And then he suggested that someone might have told his staff to remove one but not the other.  However, he did not know the reason.  Nor did he know who gave that instruction.  This allegation is simply incredible.  There is no plausible reason why the IO or any of the owners would want to retain one of these useless “dog-arm” structures on the external wall.  Wong’s evidence is vague and does not make sense.

146.  To sum up, I accept that Choy’s evidence is a truthful and accurate account of the events that took place in the project.  I also accept as true the documentary evidence produced by the IO in support in its case, including, in particular, the photographs taken on 9 November 2012 and January 2013.  I would prefer Choy’s evidence to Wong’s, in case of conflict.

147.  Based on this conclusion, I make the following factual findings on the material issues.

148.  The works commenced on 18 June 2011.  I accept Choy’s evidence that the date was picked as it was a lucky number.  I reject Wong’s evidence regarding the typo in the Gantt chart.  It is difficult to make any sense of the Gantt chart.  It clearly contains some mistakes on its face.  It is not possible to tell which part was affected by the mistake and which was not.  Wong’s evidence is not convincing as it is unknown how he could simply tell from the document itself where the mistake lies.

149.  The IO did not participate in the joint inspection which took place on 20 June 2012.  Before that, the IO had objected to an inspection when there were still outstanding items of work and the IO did request that any inspection should be arranged on a Saturday.

150.  Since 28 July 2012, the Contractor had not engaged in any works at the Building, apart from the connection of the toilet pipes in late September 2012.

151.  The defects as identified in the ten categories did exist as described and were never rectified by the Contractor.  It is not easy to trace through the photographs attached to the letters exchanged between the parties from May 2012 onwards regarding the defects.  However, the photographs taken on 9 November 2012 really speak for themselves.  Mr Lung sought to make the point that the IO has not adduced expert evidence to prove the existence and extent of the alleged defects.  In the present case, in my view, the factual evidence, including Choy’s evidence and the photographs, in support of the IO’s case are quite overwhelming.  Further, many of the defects are of such a nature, eg, patches of walls of a different colour, rusty pipes, unpainted structures etc, that they would be obvious even to an untrained eye.

152.  Lastly, in late 2012 and early 2013, based on Choy’s evidence, I find as facts that the IO engaged replacement contractors to carry out rectification works in the alleged scope.  I shall deal with the actual quantum in a separate section below.

153.  Based on the above factual findings, I now proceed to consider the rights and obligations of the parties under the contract.

Did practical completion ever take place on the facts as found (leaving aside the issue of validity and effect of the certificate of practical completion)?

154.  It is convenient to first deal with the question of whether, purely based on the above factual findings (ie ignoring for the time being the existence of the certificate of practical completion), practical completion of the project ever took place as a matter of law.

155.  The law in this regard is not in dispute.  The term “practical completion” refers to a state of affairs in which the works have been completed free from patent defects other than ones to be ignored as trifling: Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 at paragraphs 13 to 14.

156.  In his closing submissions, Mr Lung described these defects (if existed) as “relatively minor” and “cosmetic” in nature.  He said caution should be exercised against placing undue emphasis on the photographs as they are close-up shots of the defects.  By zooming in too close to each individual defect, the defect might have been exaggerated and one might lose sight of the overall picture.  Therefore, the court must take a step back and view these defects against the overall background of the project.

157.  I have found above that there existed defects as at 9 November 2012 as alleged by the IO.  There are altogether ten categories.  Some defects are highly visible and serious in nature, such as the first and second categories concerning water leakage and external walls respectively.  Others are relatively minor, such as the failure to remove debris (the third category) and the failure to remove a roll of loose electric wire hanging on the 1/F (the ninth category). 

158.  However, when all the defects are considered together, there is, in my view, an overwhelming case that practical completion never took place, as there were extensive patent defects left unrectified by the Contractor when they effectively left the site after the 28 July 2012 meeting.  I think Mr Lung raised a valid point about the importance of not “zooming in” too close to the individual defects.  However, even bearing that in mind, these defects as a whole cannot be described as “trifling”, whether in terms of quality or quantity.  That much is clear from the photographs taken by the IO.

159.  Further, it ought to be borne in mind that the project was a renovation project.  It was not a project for constructing a brand new building.  It may be said broadly that the whole point of renovation was to give a “refreshed” look to the Building.  When viewed against this background, the defects as found can hardly be regarded as “trifling”.

160.  Leaving aside for the time being the validity and conclusiveness of the certificate of practical completion, I hold that no practical completion of the project ever took place. 

Is the IO liable to pay the sum as certified in the fourth stage certificate?  If so, is it barred from setting up the defects and delay as defences in diminution or extinction of the certified sum?

161.  Shortly put, the IO contends that the fourth stage certificate was issued by the Consultant without its consent or approval.  Hence it was not bound by it. 

162.  On the other hand, the Contractor argues that the fourth stage certificate is final, binding and conclusive on the IO, as it was issued in accordance with the terms of the contract.  Even where there were defects in the works executed by the Contractor and certified by the Consultant, the IO is, argues the Contractor, nonetheless bound to pay the certified amount in full, without any deduction or set-off.  If the IO has suffered any loss or damage as a result of the Contractor’s defective works, its recourse would be to the Consultant instead.

163.  As Mr Lung put it in his opening submissions:-

“It would appear that the main battlefield between the parties would be whether the Consultant’s instructions and certificates are binding on D. In this regard, P submits that the Consultant was clearly D’s agent in the course of carrying out the project works. Accordingly it had apparent authority when it gave the various instructions and certificates and P reasonably relied on such apparent authority. The fact that those certifications were in fact unauthorized by D as principal (which D seeks to contend) is a matter solely between D and the Consultant but does not affect P’s position.”

164.  In other words, notwithstanding my factual findings above to the effect that there were incomplete and defective works, the Contractor’s position remains to be that the IO is still obliged to pay the certified sum in full because the fourth stage certificate is binding and conclusive.

165.  The issue here is therefore a familiar one in the construction context. It is this – where the consultant certifies a sum to be payable for works done by the contractor under the terms of the contract but where the employer claims that there are defects or delay, is the employer liable to pay the certified sum in full nonetheless?  Or is it open to the employer to set up the contractor’s breaches as a defence to the price (or, alternatively, raise a cross-claim to the same effect)?  The question often turns on, first, whether the certificate has been issued in accordance with the terms of the contract and, secondly, if it is final, binding and conclusive on the employer.

166.  As to the first issue, the law is relatively straightforward. 

167.  A certificate is invalid if it is not properly made in accordance with the contract: Keating on Construction Contracts (10^th ed) at paragraph 5-054.

168.  The IO contends that its prior approval was required before the Contractor issued the fourth stage certificate.  Mr Leung said that the certificate “was issued by the Consultant on a frolic of its own without obtaining [the IO’s] approval”. 

169.  However, the express wording used in clause 15 of the Formal Agreement is plain and clear.  It stipulates that the Consultant was to certify the amount in respect of the work done for each stage upon approving the work.  It does not require the Consultant to seek the consent or approval of the IO first.  For that reason, I reject the IO’s contention here and hold that the fourth stage certificate was issued in accordance with clause 15 and was therefore valid.  As a matter of general law, the IO is prima facie liable to pay the sum certified.  The next question is whether the fourth stage certificate is final, binding and conclusive on the IO. 

170.  But, first of all, what does it mean for a certificate to be final, binding and conclusive? 

171.  It is so “if there is no possibility of an appeal on the merits, in any proceedings, against the matters determined in that certificate”: Keating at paragraph 5-039.

172.  More specifically, it is sometimes said that a certificate is “binding” so that the employer cannot deduct claims for damages from the payment to be made to the contractor (and, conversely, the contractor cannot claim more than the certified sum); and, that a certificate is “final” so that the certificate cannot be challenged in any legal or other dispute resolution process: Hudson’s Building and Engineering Contracts (13^th ed) at paragraph 4-004.

173.  The following passage in Hudson’s at paragraph 4-008 elaborates further on this theme:-

“At its most basic level, the question of conclusiveness can be characterised as a choice open to the contracting parties, either: (1) that the certificates can be mere machinery, or (2) that they should be events which redefine the rights of the parties. If they choose the second option, then any error in the certificates will thereafter exclude or limit (temporarily or permanently) the normal rights of one or both of the parties – in particular the most fundamental rights in contracts for work and materials; the right of the Contractor to be paid the correct amount, and the right of the Employer to completion of the Project on time and without defects.” (emphasis added)

174.  Earlier on at paragraph 4-007, the learned authors explain what is sometimes described as “machinery”.  The passage refers to, as an example, contractual clauses which provide that a certificate is simply a device whereby an issue such as a payment is facilitated and, if established at all, the rights and obligations of the parties are established purely on an interim basis and subject to immediate and unrestricted challenge. 

175.  It is trite that whether a certificate is final, binding and conclusive is a question of construction of the contract in each case.  The purpose and effect of any certificate can vary greatly.  But the fundamental principle is that the purpose and effect of a certificate must depend on the terms of the individual contract: Hudson’s at paragraph 4-007. 

176.  This general principle is so well-established and entrenched that no case law is required to be cited in support of it.  However, one ought to take note of two points when reviewing authorities in this area.  They may appear at first blush to be diverging points.  However, they in effect reflect common sense approaches which a court should always follow.

177.  On the one hand, we are reminded time and again that while decisions made in other cases on the conclusiveness of a certificate of a similar nature or of comparable wording may provide guidance to the question at hand, they are in no way binding.  For instance, see:-

(1)  “Cases which have decided whether or not a certificate is binding and conclusive should be treated with caution.  The question is one of construction and depends on the particular terms of the contract and the judicial approach to such clauses.” Keating at paragraph 5-045; and

(2)  “When parties enter into a detailed building contract there are, however, no overriding rules or principles covering their contractual relationship beyond those which generally apply to the construction of contracts.  The particular wording of a particular contract may have to be considered in relation to particular facts.  A decision in some one particular case as to the meaning and application of words in a contract will not have governing force as to the meaning of different words in a different contract.”: Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689 at 699G-H (emphasis added)

178.  On the other hand, that is not to say that we should not give weight to earlier decisions on the construction of particular clauses.  This is particularly so in the context of standard form building contracts.  In Beaufort Developments Ltd v Gilbert-Ash Ltd [1999] 1 AC 266, Lord Hoffmann made the following remarks on the proper approach (at 274C-D):-

“In the case of a contract which has been periodically renegotiated, amended and added to over many years, it is unreasonable to expect that there will be no redundancies or loose ends. It is therefore necessary to make a careful examination of the contract as a whole in order to discover whether upon its true construction it does confer binding power upon the decisions of the architect or whether there is some other explanation for the "open up, review and revise" power in clause 41.4. It is also important to have regard to the course of earlier judicial authority and practice on the construction of similar contracts. The evolution of standard forms is often the result of interaction between the draftsmen and the courts and the efforts of the draftsman cannot be properly understood without reference to the meaning which the judges have given to the language used by his predecessors.” (emphasis added)

179.  Bearing in mind the above general points, I now turn to the two leading cases in this area – Gilbert-Ash and Beaufort.

180.  A building contract is generally considered as an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work is done.  When the employer is sued for the price for goods sold and work done but he claims that the goods sold and the work done by the contractor were defective, it is open to the employer to raise the defence of breach of warranty in diminution or extinction of the price.  This is a common law remedy available to the employer as of right.  It is “a substantive defence at common law”: see Gilbert-Ash at 717B-G. 

181.  In other words, where the loss and damage suffered by him exceeds the contract price, he has a complete defence to the contractor’s claim.  Where such loss and damage is less than the contract price, the employer is liable to pay the contract price less the value of the loss.

182.  That being the general legal position, it is however open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law.  However, in construing such a contract, one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law and clear express words must be used in order to rebut that presumption: Gilbert-Ash at 717G-H.

183.  Applying this general principle to a building contract, Lord Diplock said:-

“So when one is concerned with a building contract one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law, including the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract. To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract.” (emphasis added) (at 718D-E)

184.  In that case, the sub-contractors claimed against the contractors for work done, the value of which was certified by the architect.  The contractors paid a lesser sum.  On the sub-contractors’ claim for the balance, the contractors counterclaimed for delays and defective work.  Lord Salmon formulated the question as follows:-

“The question is, have the contractors lost their common law right to set off [the sum representing the loss and damage suffered by them] against the amount claimed by the sub-contractors?” (at 723B)

185.  The principle expressed above by Lord Diplock was quoted by Lord Hope in Beaufort at 286G-287A.  Lord Hope further said (at 291G-292A):-

“On the one hand there is the principle … by which clear unequivocal words must be used to deprive a party to a contract of recourse to the court for the ordinary exercise of its powers and the granting of the ordinary remedies. On the other there is the principle that the court must give effect to the contract which the parties have made for themselves. If the contract provides that the sole means of establishing the facts is the expression of opinion in an architect’s certificate, that provision must be given effect to by the court. But in all other aspects, where a party comes to the court in the search of an ordinary remedy under the contract or for a remedy in respect of an alleged breach of it, the court is entitled to examine the facts and to form its own opinion upon them in the light of the evidence. The fact that the architect has formed an opinion on the matter will be part of the evidence. But, as it will not be conclusive evidence, the court can disregard his opinion if he does not agree with it.” (emphasis added)

186.  Lord Hoffmann explained (at 275H-276F) that where, as a matter of construction, the certificates are not conclusive, they may have some form of provisional validity and are part of the machinery by which the rights and duties of the parties at any given moment can be at least provisionally determined with some precision.

187.  The present state of the law is succinctly summarised in Hudson’s at paragraph 4-010:-

“It follows therefore from both Gilbert-Ash and Beaufort that the presumption (where conclusiveness is not stated in clear words or by necessary implication), is that a certificate is not conclusive against either the Employer or the Contractor. Each party retains all its rights to dispute the underlying facts and the inferences to be drawn from them.

However, that is only a presumption.  Conclusiveness has its uses, for both sides, in various different contexts, and they may agree to it.  The cardinal consideration is that the effect of certificates upon the rights and obligations of the parties [both] in relation to conclusiveness and other matters, is determined by the terms of the contract that provides for them.”

188.  For a certificate to be conclusive upon the matter with which it purports to deal, “very clear words are necessary for a certificate to have that effect”.  The words “final”, “binding” and “conclusive” have been used singly or in combination to describe such a certificate.  However, it is ultimately a question of construction in each cases: Keating at paragraphs 5-039 to 5-040.

189.  In the present case, I have found the Contractor’s works to be defective.  The question is whether the IO remains nonetheless obliged to pay the amount stated in the fourth stage certificate in full, without any deduction or set-off of the loss and damage that it suffered as a result of the Contractor’s breach.  It is a matter of construction of the contract as to whether the parties intended that the payment certificates contemplated in clause 15 of the Formal Agreement would be final, binding and conclusive in the sense that the IO would be barred from pursuing its claim (or counterclaim) for breach of warranty and setting off the value of such claim against the amount certified. 

190.  The authorities require the court to start off with a presumption that the IO and the Contractor did not intend to exclude the former’s common law remedy of setting up a breach of warranty in diminution or extinction of the price.  It is for the Contractor to point to “clear unequivocal words” in the contract which have the effect of excluding that remedy.

191.  However, neither clause 15 nor any other contractual provision contains any words or language to that effect, such as “final”, “binding”, “conclusive” or any other words or phrases bearing a similar meaning.

192.  Mr Lung’s written submissions (whether opening or closing) have not directly addressed these points of construction.  Nor has he at any time pointed to any specific clause or provision in the contract which has the effect of displacing the presumption of non-conclusiveness.  As such, the Contractor has failed to establish that the fourth stage certificate is final, binding and conclusive on the IO.

193.  Instead, Mr Lung relied on two points on this issue. 

194.  First, in his closing submissions, he drew a distinction between the fourth stage certificate and the previous three certificates.  In essence, he said that the former is a final certificate whereas the latter are interim and that the fourth stage certificate certifies the amount finally payable to the Contractor under the contract, or the satisfaction of the Consultant that the works did conform with the contract, or both.  He relied on a passage from Keating at paragraph 5-020 which states that “in respect of both the final amount payable and conformity of the work with the contract, the architect’s decision embodied in their certificate is often binding and conclusive on the parties.”

195.  Insofar as Mr Lung was relying on the above passage to make good the point that the fourth stage certificate is, or should be treated as, final, binding and conclusive, that submission must be rejected. 

196.  As noted above, caution must be exercised when reviewing previous court decisions on the interpretation of similarly worded clauses concerning conclusiveness.  This must apply with equal, if not more, force when general statements from practitioners’ textbooks are relied upon.  The term “final certificates” used in textbooks does not bear one single meaning. 

(1)  In the present case, Mr Lung referred to the fourth stage certificate as the “final certificate” merely because it was issued at the fourth of the four stages of works.

(2)  Clause 15 of the Formal Agreement makes no such distinction at all.

(3)  In fact, where the term “final certificates” is used in textbooks, it often refers to the last or final certificate issued under the project after the defects liability period has expired and when the last portion of the retention money ought to be released, see, eg, Hudson’s at paragraph 4-026, Construction Law and Practice in Hong Kong by Cheng and Soo (3^rd ed) at paragraph 14.006.

197.  Secondly, Mr Lung submitted that the Consultant was acting with apparent authority of the IO in its certifying function and was thus the IO’s agent. Based on ordinary agency principles, the IO would be bound by the certification. 

198.  I do not think that this point assists the Contractor’s case in determining the conclusiveness of the fourth stage certificate.  There is some debate as to whether, in the discharge of its certifying function, an architect or consultant is acting as the agent of the employer or not: see, eg, Keating at paragraph 5-033; cf Hudson’s at paragraphs 4-048 to 4-049.  Assuming for present purposes that the Consultant was the IO’s agent when issuing the fourth stage certificate, it merely follows that the IO became prima facie liable to pay the certified sum in accordance with the payment terms of clause 15.  (Just like a buyer of goods is liable to pay the price if he has accepted the goods.)  It is “bound” only in the sense that it is not open to it to dispute that the certificate was issued without its authority.  That is as far as the agency principle can take the Contractor’s case.

199.  However, the next (and the pertinent) question as to whether the IO is then prevented altogether from disputing the quality of the works is a separate question.  Applying the well-established legal principles as I have sought to do above, it remains to be the case that, in the absence of any clear language in the contract excluding the IO’s right to dispute the quality of the Contractor’s works, the IO may pursue a claim for breach of warranty against the Contractor and based on that claim may set off its loss against the amount of the sum payable under the certificate.

200.  Accordingly, I reject these two submissions made by Mr Lung.

201.  Here, as I have held above, the IO does have a valid claim against the Contractor for both defective works and delay, it may set off its loss from the balance of the fourth stage certificate.  I shall return to the issue of quantum below.

Is the certificate of practical completion valid?

202.  Clause 4 of the General Terms expressly provides that the certificate of practical completion is to be issued by the Consultant after the acceptance of work by the Consultant and the IO.  I have found above that the IO did not participate in the joint inspection which took place on 20 June 2012 or any other date.  The certificate of practical completion dated 4 October 2012 stated wrongly that it was issued after a joint inspection by the IO, the Contractor and the Consultant. 

203.  It is plain and clear that the certificate was not issued in accordance with the terms of the contract and is therefore invalid.  It has no legal effect as between the IO and the Contractor as to the fact or date of practical completion.

204.  Given my conclusion in paragraph 160 above, there was, as a matter of fact and law, no practical completion of the project, notwithstanding the many chasers of the IO.  In the circumstances, the IO had rightly treated the non-completion as a repudiatory breach of the contract.  I hold that the contract was lawfully terminated by the IO accepting such repudiation in writing on 16 October 2012.

Given that there was no practical completion, what should happen to the retention money?  Is the IO correct in saying that it is entitled to forfeit the retention money, without giving credit to it at all when assessing damages for its loss?

205.  The IO’s position has been set out in paragraph 112 above.  That is, not only does it not have to release any part of the retention money to the Contractor, it is also entitled to forfeit it entirely without giving any credit to it to offset its losses.

206.  Applying the general principles as discussed above, the treatment of retention money must be a matter of construction of the particular contract.  However, the court may look at previous judicial decisions on how retention money has been dealt with although they would not have any governing force as such – see paragraph 177(2) above.  In this exercise, it is also proper to examine the general nature and purpose of retention money as it would form the relevant background which the court should take into account when construing the contract in question.

207.  The purpose of retention money is to provide partial security to the employer if the work is not complete in accordance with the contract.  It represents the value of the work which has already been executed by the contractor but which has been retained by the employer to secure the contractor’s obligation to complete the works and make good any defects.  Very often, retention money is only released in full at the end of the warranty expiry period.  It therefore also acts as an inducement to the contractor to remedy any defect during that period.  See, eg, Keating at paragraph 4-012; Cheng and Soo at paragraphs 15.111 to 15.112.

208.  Mr Leung relied on Hoenig v Issacs [1959] 2 All ER 176 in support of the IO’s position.  There, Denning LJ explained in general terms why retention money would normally only be payable by the employer upon the entire completion of the works. 

“It is, of course, always open to the parties by express words to make entire performance a condition precedent. A familiar instance is when the contract provides for progress payments to be made as the work proceeds, but for retention money to be held until completion. Then entire performance is usually a condition precedent to payment of the retention money, but not, of course, to the progress payments. The contractor is entitled to payment pro rata as the work proceeds, less a deduction for retention money. But he is not entitled to the retention money until the work is entirely finished, without defects or omissions.” (emphasis added) (at 181B-D)

209.  Relying on this passage, Mr Leung submitted that in the present case, the retention money is only payable where there is practical completion.  In his closing submissions, he wrote “[s]ince there was no practical completion, P is not entitled to the retention money and the same should be forfeited by D”.

210.  While I agree that up to the date of the termination of the contract, the Contractor was not entitled to ask for the return of any part of the retention money since no practical completion ever took place, I do not think that it necessarily follows that the retention money should be forfeited in the way the IO contends.  The above quoted passage in Hoenig v Issacs does not say that.

211.  In resolving this issue, one should always examine the actual provisions of the contract between the IO and the Contractor.

212.  There are express provisions which deal with retention money in cases of non-compliance by the Contractor.  For instance:-

(1)  Clause 13 of the Formal Agreement expressly provides that in the case of delay in completing the works exceeding 30 days, the IO and the Consultant may appoint another person to complete the works and the associated costs should be deducted from the retention money. 

(2)  Clause 21 of the General Terms also provides that where the Contractor fails to complete the works as required and certain other conditions are satisfied, the IO may take back the site and appoint another contractor to execute the works.  In such a situation, the clause provides that the Contractor is liable for all losses of the IO and the retention money kept by the IO would be considered as part of the compensation and if that, together with other amounts kept by the IO, are insufficient, the IO is entitled to claim against the Contractor.

213.  It seems to me sufficiently clear from these express provisions that the intention of the parties was that the retention money should be applied by the IO to offset any replacement costs which it might incur in such circumstances.

214.  This accords with the general purpose of retention money, which is to provide security to the employer, as discussed above.  That is in fact how generally security in the form of money payment works in a default situation. The forfeiture right which is now contended for by the IO goes much further than this.  One would reasonably expect that explicit language to that effect would have been used in the contract.  Mr Leung did not point to any in support of the IO’s position.  In the absence of any express provision, I do not consider that, as a matter of construction, the IO’s contention is tenable.

215.  Mr Leung also relied on the decision in Lai Ting Kwong v Wui Loong Scaffolding Works Company Ltd DCCJ 1748/2014, 17 February 2017 in which it was ruled that the retention money was to be forfeited in the way the IO contends – see paragraphs 76 to 81, 92, 122 to 123.  However, the relevant contractual provisions on retention money, if any, are not disclosed or referred to in the judgment.  Therefore I do not consider that the decision takes the IO’s case any further.

216.  Accordingly, I hold that the retention money is not forfeitable in the way contended for by the IO.  It is however entitled to apply the retention money in satisfaction of any damages awarded on its counterclaim raised in respect of the defective and incomplete works. 

Should the IO be liable to pay for the works already executed by the Contractor under items 11.2a and 11.2b?

217.  On the facts as found, the IO has not accepted the proposals made by the Contractor in its letter dated 16 August 2012 in respect of the works done on the main gate (item 11.2a) and the flowerbed (item 11.2b).

218.  In the circumstances, I consider that the legal position in relation to the main gate is this.

219.  “The contractor must do the work with all proper skill and care.  This duty is often expressed as one to do the work in a good and workmanlike manner. … Breach of duty includes the use of materials containing patent defects, even though the source of such materials has been chosen by the employer.  It may also include relying uncritically and without due precautions on an incorrect plan supplied by the employer where an ordinarily competent builder should have had grave doubts about the plan’s correctness.” (emphasis added): Keating at paragraph 3-071, citing, with respect to the last sentence, Lindenberg v Canning (1992) 62 BLR 147 in footnote 227.

220.  In producing a main gate which failed blatantly to function as a main gate, the Contractor clearly fell short in its duty to execute its work in a good and workmanlike manner.  This is so notwithstanding that the IO had in fact approved a drawing.  The Contractor was the party with the expertise in these matters and it should not be allowed to shift the blame on to the IO.  It was reasonable for the IO to reject the gate altogether as it was worthless.  I therefore hold that the IO is not liable to pay for the works done on the main gate by the Contractor and would uphold the IO’s counterclaim in respect of the damaged grounds and the debris as these flow directly from the breach of the Contractor’s duty.

221.  As regards the flowerbed, the works were carried out by the Contractor even though it had been specifically asked by the IO to hold off the works. The Contractor is in breach of clause 13 of the Formal Agreement in that it failed to comply with the IO’s express instruction.  There is no basis for the Contractor to claim for the works done on the flowerbed, which were unauthorised in the first place.  I hold that the IO is not liable to pay for such works.

Given that the works were defective, how much damages is the Contractor liable for?

222.  Following on from the conclusions reached in paragraphs 151, 152 and 201 above, I now turn to deal with the IO’s counterclaim in respect of the defective works.

223.  On the whole, given that the Contractor had failed to complete the works at the Building, the IO, through Choy, was entitled to engage replacement contractors in late 2012 and early 2013 to complete the outstanding works and rectify the defective items of works.  As a matter of general principle, the IO is entitled to be compensated by the Contractor for the expenses incurred so long as it has taken reasonable steps to minimise its loss. 

224.  In the Scott Schedule, Mr Leung set out in detail in respect of each category of defects the amount claimed, the documents relied on (mainly quotations and cheques) and, in respect of some categories, photographs taken in January 2013 showing the completed works.  Against each category, Mr Lung listed the Contractor’s objection to the amount claimed.

225.  There are two issues in dispute here.  First, the Contractor raises doubts as to whether the expenses had in fact been incurred.  Secondly, if in fact incurred, it says that the IO fails to show that they are reasonable.

226.  On the first issue, Mr Lung made a general observation, which applies across all categories of defects, that there is no documentary evidence of acceptance of the quotations or payment of some of the quotations, if accepted.  In other words, the IO’s claim is not fully supported by documentary evidence.

227.  To this, Choy’s explanation is that at that time the IO issued some of the cheques to Homechant Limited, which was its management company at that time, and that Homechant would pay the replacement contractors.  Choy recalled that some of the receipts were issued directly to Homechant.  Homechant has since ceased to be the management company of the Building and the IO does not have in its possession copies of these receipts.

228.  I accept that to be a truthful explanation of the absence of some of the receipts.  It is also Choy’s sworn evidence that the IO had incurred the expenses as pleaded.  Based on Choy’s evidence (which I consider to be generally reliable) and the photographs taken in January 2013 which is clear evidence of the works done by replacement contractors, I find that the IO had in fact incurred costs in the sum of $779,580 in the rectification works.

229.  On the second issue of whether such costs are reasonable, Mr Eric Lam, the single joint expert, was asked to opine on this.

230.  In his written report, he states that the reasonable rectification costs would be $372,604.79.  However, this figure does not include the costs for rectifying a number of defects complained by the IO, including most notably the first category of defects.  At trial, he explained that he was not in a position to come up with any figure for the first category as he did not know the exact area affected by the water leakage. 

231.  Another issue with the assessment is that while as a matter of fact the rectification works were done in late 2012 and early 2013, the expert came up with figures as at 2016.  He has arrived at the figures by assessing the reasonable costs of rectification of each individual item as at 2011 and then projecting the figures for 2016 by applying an inflation rate of 42%.

232.  Given the above limitations, I do not consider that the expert’s assessment is of much use to the determination of the reasonableness of the rectification costs.  (I should make it clear that this is not meant to be a criticism of the expert.  I believe he was somehow constrained by the instructions given to him by the parties.)

233.  In the circumstances, Mr Lung submitted that, in the absence of any expert evidence, the IO has failed to overcome its burden of proof to show the reasonableness of the rectification costs.

234.  I do not think that that is necessarily a correct proposition.  The important issue here is whether the IO acted reasonably in its engagement of replacement contractors for the rectification of the defects.  Choy gave evidence that after the Contractor left the site in July 2012, the IO was rather helpless as the members of the IO did not really have much idea as to what to do and who else to approach to sort out the defective items.  It was Choy who asked around, looked for replacement contractors and compared the quoted prices using the Contractor’s fees as a reference. 

235.  In my view, she acted conscientiously and reasonably.  The quotations appear to be in order and appropriate on their face.  There is nothing to suggest that the prices paid for by the IO are in any way unreasonable or extravagant.

236.  I therefore conclude that on the whole the IO acted in a reasonable manner in having the defects fixed and should be entitled to claim from the Contractor the sums actually incurred, subject to the following items which I would disallow.

(1)  Second category – the IO claims a total sum of $269,250 in the Scott Schedule.  I would deduct $1,250 from it.  It is stated in the schedule that this sum was paid to Wai Keung Florist.  But there is no supporting document at all.  On the face of it, it does not have anything to do with the repairs of the external wall.  This sum of $1,250 should not be allowed.

(2)  Fifth category – the IO claims a total sum of $52,000 in the Scott Schedule.  In his written closing submissions, Mr Leung accepted that the written quotation for this amount included other items not relating to the piping works to be fixed under this category and accordingly he submitted that the sum should be apportioned in a broad brush manner to cover the relevant piping works.  Having considered the description in the quotation, I would allow half of the sum to be the rectification costs under this category.  Accordingly, $26,000 is to be deducted.

(3)  Sixth category – the IO claims a total sum of $209,800 in the Scott Schedule.  I would only allow the sum of $84,000, which is the cost for repairing the damaged ground and the removal of debris – see my ruling in paragraph 220 above.  On the other hand, the costs of obtaining and installing a replacement gate which amount to $125,800 should not be allowed.  This is because item 11.2a has been taken out of the contract by agreement.  The Contractor has no further obligation under this item and should not be held liable to pay for the new main gate. 

(4)  Ninth category – the IO claims a total sum of $1,450 in the Scott Schedule.  I would disallow the entire sum as the related quotation shows that the works done were not related to the defects under this category.

(5)  Tenth category – the IO claims a total sum of $45,000 in the Scott Schedule.  I would also disallow the entire sum as the supporting quotation was for the construction of the flowerbed.  This item has been deleted altogether from the contract and the Contractor should not be held liable for it.

237.  In summary, I would deduct a total sum of $199,500 from the total expended sum of $779,580.  I hold that the IO is entitled to claim $580,080, together with a 10% administrative charge as provided for under the contract, as damages.  (As to the enforceability of the contractual clause providing for the administrative charge, see paragraph 244 below.)  The total figure is $638,088.

Was there delay in the completion of the works?  If so, should the Contractor be liable for the sum of $150,000 as claimed by the IO?

238.  The following discussion is based on a commencement date of 18 June 2011, as found above.

239.  As agreed by the parties at the trial, the original scheduled completion date falls on 9 November 2011.  Under the EOT certificate, the completion date would be extended to 29 June 2012.  If the opinion of the joint expert on time extension is to be preferred to that of the Consultant, the completion date should be extended to 21 May 2012 instead. 

240.  As found above, the Contractor did not complete the work on 24 June 2012 and that remained to be the case when the IO terminated the contract on 16 October 2012.  That being so, whichever extended completion date one adopts, there was a delay in the completion of the works.  The IO now seeks to rely on clause 14 of the Formal Agreement to claim compensation for $150,000, which represents a claim of $5,000 for each day of delay, subject to a maximum of 30 working days.  The question here is whether clause 14 is enforceable as a matter of law.  That turns on whether it is a penalty clause, as argued by the Contractor.

241.  Generally speaking, a clause which provides for payment of a specified sum, in place of common law damages, in the event of breach (“a damages clause”) is enforceable if it does not exceed a genuine attempt to estimate in advance the loss which the claimant would likely suffer from a breach of the obligation in question: see Chitty on Contracts (32^nd ed) at paragraph 26-178.  The court is to consider “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the party in the enforcement of the primary obligation”: Cavendish Square Holding BV v Talal El Makdessit [2016] AC 1172 at paragraph 32.

242.  Mr Leung submitted that the IO had a legitimate interest in seeing the project to be completed in time or as scheduled.  That is of course correct. Further, he submitted that the amount provided for in clause 14 is not extravagant or entirely out of proportion to the IO’s legitimate interest because it has been capped at 30 days of delay and that the maximum amount payable is $150,000, which is not a significant figure when viewed against the overall contract sum of over $3.5 million.  I agree and hold that the clause is enforceable and that the IO is entitled to claim liquidated damages in the sum of $150,000 because the Contractor had left the works unfinished.

243.  On this issue, I reject Mr Lung’s submission that the clause is unenforceable because the specified sum of $5,000 per day is hardly a genuine estimation of the IO’s loss occasioned by delay.  He so submitted because an extra day of delay may or may not lead to any loss on the IO’s part and the delay may have been caused by a very minor defect or a major item of outstanding work.  That observation may be true.  However, it has now been made clear in Cavendish Square that the mere fact that the clause is not a pre-estimate of loss does not by itself mean that it is penal in nature (at paragraph 31).  The true test to apply is the one set out in paragraph 241 above.  That is the only submission made on behalf of the Contractor in arguing that the clause is unenforceable as a penalty.  That argument having failed, I hold that clause 14 is enforceable as a liquidated damages clause.

244.  The same conclusion applies to clause 25 of the General Terms providing for the administrative fee in the event of non-compliance on the part of the Contractor.  The IO clearly had a legitimate interest in seeing that the works were done in conformity with the contract.  It can hardly be said that the 10% charge is extravagant and out of all proportion.   I therefore hold that the clause is also enforceable.

245.  In view of the above findings, it is strictly unnecessary to determine the issues arising under the topic of time extension.  However, as counsel has made detailed submissions, I briefly set out my views as follows:-

(1)    I do not accept the IO’s submission that under clause 12 of the Formal Agreement, the Contractor was not entitled to any time extension at all save in the case of inclement weather.  I accept Mr Lung’s submission that the Contractor was entitled to apply for time extension in this project.

(2)    However, the EOT certificate granted is not valid as it was not issued in accordance with the express terms stipulated in clause 12.  The clause specifically provides that any time extension must first be accepted by the IO before approved by the Consultant.  I accept the IO’s factual case that the EOT certificate was issued without the IO’s knowledge or consent.  As such, the certificate is not valid or binding on the IO. 

(3)    That said, the matters certified in that document carries weight.  I accept Mr Lung’s submission that the Consultant should be in the best position to assess the appropriate length of any time extension.  I would accept the assessment of the Consultant in this regard and hold that there should be a time extension of 200 working days in this project.

Quantum

246.  I turn to the issue of quantum based on the above ruling.

247.  The starting point is that the IO is prima facie liable to pay to the Contractor the sum of $1,109,803.50, which is 90% of the value of the works as certified to be payable in the fourth stage certificate.  Credit should be given to the sum of $563,073 paid by the IO in September 2013.  The sum of 90% of the total value of the works done for items 11.2a and 11.2b, namely $104,076 ($115,640 x 90%), should be deleted from the certified sum.  There is therefore an outstanding balance of $442,654.50 owed by the IO to the Contractor on the certificate.

248.  On the other hand, the IO is entitled to counterclaim the sum of $638,088 as general damages for defective works and $150,000 as liquidated damages for delay.  The retention money in the sum of $330,883 should be applied in full to offset the counterclaim.  This reduces the damages payable by the Contractor to the IO to $457,205. 

249.  Overall speaking, setting off the two figures, the IO is entitled to receive from the Contractor a net sum of 14,550.50 (ie $457,205 - $442,654.50).

250.  The same result can be arrived at by adopting the calculation method used by the IO, as set out in paragraph 45 above, with adjustments made to two line items.  The line item of retention money of $330,883 should be removed (as the IO is not entitled to simply forfeit it) and the line item of loss and damage suffered by the IO should be changed from $857,538 to $638,088.  That would give a credit amount due to the Contractor of $135,449.50.  Offsetting it against the liquidated damages of $150,000 owed to the IO would produce a net sum of $14,550.50 payable by the Contractor to the IO.

ORDERS

251.  Accordingly, the Contractor’s claim is defeated in full by the IO’s defence of set-off and therefore fails.  The IO’s counterclaim succeeds to the extent of the net sum.

252.  I therefore order that the Contractor’s claim be dismissed and that, on the counterclaim, there be judgment in favour of the IO in the sum of $14,550.50.

253.  The IO should be entitled to interest on the awarded sum.   Given that the rectification works were done in late 2012 and early 2013, as a matter of discretion, I apply a broad brush approach and hold that interest should accrue at 1% above prime rate from 1 January 2013 up to the date of this judgment and thereafter at judgment rate until payment in full.

254.  The IO would appear to be the overall winner – both in monetary terms and substantially on the discrete factual and legal issues.  I therefore make an order nisi that the IO do have costs of the action and the counterclaim, to be taxed if not agreed, with certificate for counsel.