ATELIER ENGINEERING LTD v. HONG KONG INTERIOR DESIGN & ENGINEERING CO LTD

HCA 3049/2016

[2021] HKCFI 1526

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3049 OF 2016

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J U D G M E N T

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A. INTRODUCTION

1.  The Defendant and Rosy Acme Venture Ltd (“Rosy Acme”) entered into renovation agreements for residential premises in South Bay (“the Project Premises”).

2.  The Defendant entered into back-to-back contracts with the Plaintiff for the design, provision of items, engineering and installation at the Project Premises (“Subject Contracts”)

3.  There is some dispute as to what the Subject Contracts were but the undisputed fee structure thereunder was as follows:

(1)  50% of the contract sum as non-refundable deposit to secure the contract;

(2)  30% upon delivery of the facilities to the Project Premises;

(3)  10% after testing of the installed system; and

(4)  10% upon completion of the project.

4.  The Plaintiff had received $9,174,863 from the Defendant as 50% deposit.

5.  The Plaintiff claims that the Defendant has failed to pay the balance of the 50% deposit.  Eventually, the quantum was agreed on the second day of trial to be $188,425.  The Defendant’s case is that the Plaintiff had agreed to waive the balance of the deposit.

6.  On the other hand, the Defendant counterclaims for damages against the Plaintiff.  What happened was that the Defendant’s contracts with Rosy Acme were terminated and the Defendant was expelled from the Project Premises (“the Termination”).  About 9 months later, the Defendant requested the Plaintiff to deliver the contract goods to the Defendant’s warehouse.  The Plaintiff refused, claiming that there was frustration and repudiation of the Subject Contracts by the Defendant due to the Termination.  In fact, in the meantime, the Plaintiff had entered into new contracts with Rosy Acme (P-RA Contracts) and delivered part of the goods under the Subject Contracts to Rosy Acme without letting the Defendant know.

7.  The Plaintiff claims that the Defendant was the agent of the Rosy Acme, who was the ultimate owner of the goods.  The Defendant denies and says that it was the Plaintiff who had repudiated the Subject Contracts.  The damages sought were the deposits paid, less the value of goods already delivered by the Plaintiff before the Termination.

B.  ISSUES

8.  The following are the issues:

(1)  Which were the governing contracts?

(2)  Had the Plaintiff agreed to or waived the balance of deposit?

(3)  Was the counterclaim properly formulated?

(4)  Which party was in repudiation? Had the innocent party accepted the repudiation?

(5)  Was the Defendant an agent of Rosy Acme under the Subject Contracts (“Agency Point”)?

(6)  Were the Subject Contracts frustrated by the Termination (“Frustration Point”)?

C.  THE WITNESSES

9.  There were 2 witnesses, Mr Kevin Tong for the Plaintiff and Ms Ophelia Lee for the Defendant.  They were both truthful witnesses.  However, I disagree with Mr Tong’s view on the legal effect of the Termination and the Plaintiff’s delivery of items to Rosy Acme behind the back of the Defendant.

D.  WHICH WERE THE GOVERNING CONTRACTS?

10.  From December 2014 onwards, 2 Sales Contracts were entered into between the parties and 3 quotations have been agreed upon and formed part of the Subject Contracts.  Only Contracts 1 and 2 are in dispute:

Contract	Description	P’s version	D’s version
1	Sales Contract re home automation system, etc Q140123	C136-152, 245-247	C245-247, C255-267 plus Invoice [1] at C272
2	Sales Contract re lighting Q140119	C156-158	C156, C248-250 plus invoice C274
3	Quotation for CABD item & engineering Q150042	C163	Same, plus invoice C276
4	Quotation re Meijac items Q150021R2	C254	Same, plus invoice C279
5	Quotation Q150007R7	C252-253	Same, plus invoice C278

11.  With regard to Contract 1, I find that:

(1)  The initial Contract 1 was in pages C136-152.  It was dated 27 December 2014 and was signed by the Defendant.  The grand total was $12,740,516.  No deposit was paid then.

(2)  Contract 1 was revised on 6 January 2015 such that the grand total became to $10,499,716.  On 7 January 2015, a deposit of $5,249,858 (C/272) was paid to the Plaintiff, based on 50% of the revised grand total.  Contract 1 was made then.

12.  With regard to Contract 2, I accept the Defendant’s version because it was the 9^th revision whereas the Plaintiff’s version was the 3^rd.

E.  HAD THE PLAINTIFF AGREED TO OR WAIVED THE BALANCE OF DEPOSIT?

13.  The Plaintiff initially claimed for $311,945 as the balance of deposit. It is now agreed between the parties that the balance of deposit should be $188,425, as the lighting for swimming pool floor had been deleted from the Subject Contracts and there were discounts.

14.  The re-amended defence (§14) pleaded that the shortage in deposit had been “agreed to or waived by the Plaintiff by conduct of never making any further demand for the short payment, never giving any reminder to the Defendant for the same, and never making any complaint to the Defendant on the same issue.”

15.  With respect, the defence has not pleaded particulars of the agreement – eg when it was made, between who of the Plaintiff and who of the Defendant. Nor did the evidence disclose such an agreement. 

16.  As to waiver, it arises when the innocent party (Plaintiff, in this case) agrees with the party in default (Defendant, in this case) that he will not exercise his right to treat the contract as repudiated or so conducts himself as to lead the party in default to believe that he will not exercise that right: Chitty on Contracts, 33^rd ed, §24-007.

17.  The plea of waiver was contrary to the evidence.  The Plaintiff had issued an invoice for the “remaining deposit” of $311,945 on 28 September 2015, 3 days after receipt of the last payment of deposit from the Defendant.  The Plaintiff had also issued to the Defendant a letter before action dated 15 November 2016 (“P’s 1^st Letter”), expressly claiming for that $311,945.  The fact that the Plaintiff had asked for more than it was entitled to could not amount to waiver.

18.  Mr Chang, counsel for the Defendant, points out that the original statement of claim omitted to seek recovery of the balance of deposit.  With respect, such omission could not undermine the fact that there was no evidence of agreement or waiver.  Further, there has been no objection to the addition of a prayer for the balance of deposit in the amended statement of claim.

19.  The defence has no merits and the Plaintiff is entitled to judgment in the sum of $188,425 being the balance of deposit.

F.  WAS THE COUNTERCLAIM PROPERLY FORMULATED?

F(1).  The pleaded counterclaim

20.  Damages for breach of contract are to put the innocent party in the same position as if the contract had been performed.

21.  Assuming the Plaintiff was liable, the only pleaded damages were return of the deposit of $9,174,863 less $1,607,638 for goods already delivered by the Plaintiff to the Defendant.  Although the counterclaim stated that further particulars of damages for breach of contract would be supplied, none had in fact been supplied.

22.  In using the deposit as a starting point to claim damages, the counterclaim was not properly formulated because:

(1)  The purpose of the 50% deposit was expressly stated to be to secure the Subject Contracts (which was achieved) and was non-refundable.

(2)  The Defendant had received deposits from Rosy Acme before paying the deposit to the Plaintiff.  In other words, not only had the Defendant not suffered loss but had earned its profit from Rosy Acme’s deposits.

F(2).  The attempt to amend the counterclaim to seek loss of profit

23.  On the second day of trial, Mr Chang has produced a supplemental opening purporting to show that the Defendant had suffered loss of profit to the value of $2.8 million, although the counterclaim has not pleaded such loss. On the 3^rd day of trial, Mr Chang sought an adjournment in order to amend the counterclaim (without a draft counterclaim in hand).  The adjournment was sought at a time when cross-examination of Mr Tong had finished already.  The application was dismissed as being far too late.

24.  Further, it transpired in the course of evidence of Mr Tong that: (a) the Plaintiff had only delivered part of the goods under the Subject Contracts to Rosy Acme under the P-RA Contracts; (b) some items in the P-RA Contracts were different to those of the Subject Contracts.  Mr Tong was not able to identify the goods under (a), and the differences in (b). 

25.  On the other hand, Ms Lee, confirmed that at the time of entering into the Subject Contracts, she had told the Plaintiff only to order goods when the Defendant instructed the Plaintiff to.  If the Plaintiff ordered more than instructed, the Defendant would not bear the costs.  Similar to Mr Tong, Ms Lee was not able to tell how much goods were in the possession of the Plaintiff after the Termination Date which could have been delivered to the Defendant.

26.  In view of paragraphs 24 and 25 above, the failure to plead loss of profit was not just a mere technicality.  Without proper pleading of loss of profit in the counterclaim, there was no chance for the Plaintiff to investigate and see if the loss was genuine and whether the Defendant had reasonably mitigated.

F(3).  That the Plaintiff had appropriated goods to the Defendant

27.  The Defendant relies on an email from the Plaintiff dated 18 January 2016 which showed that part of the items under the Subject Contracts had arrived at the Plaintiff’s warehouse.  The Defendant claims that the goods mentioned in that email had been unconditionally appropriated to the Subject Contracts.

28.  With respect, assuming the Subject Contracts were partly for the sale of goods, there was no basis for the Defendant’s view because:

(1)  Both Mr Tong and Ms Lee testified that if the goods were damaged on the way from the Plaintiff’s warehouse to, say, the Project Premises, the Plaintiff would be responsible for the replacement.  In other words, the risk was with the Plaintiff.

(2)  The price of the goods was not covered by the 50% deposit but the 30% payment after delivery.  There was no delivery of the goods and the Defendant had not paid for them.  No property could have passed.

29.  Even if the property in the goods had passed to the Defendant, there was no evidence as to the value of those goods to enable the Court to assess the damages.

30.  The counterclaim was not properly formulated, I just deal with the rest of the arguments for the sake of completeness.

G.  WHICH PARTY WAS IN REPUDIATION AND WHETHER THE INNOCENT PARTY HAD ACCEPTED THE REPUDIATION?

31.  By P’s 1^st Letter, the Plaintiff claimed that the Defendant was in breach in failing to pay the balance of deposit and was in anticipatory-breach due to the Termination.  By the same letter, the Plaintiff expressly stated that “despite your breach and anticipatory-breach”, the Plaintiff was pleased to deliver the purchased items to the Defendant on condition that:

(a)  Upon delivery of the purchased items to the Defendant, the Defendant shall settle the balance of 20% payment within 14 days thereafter; and

(b)  “To avoid doubt, the sale and purchase of the purchased items between the Plaintiff and the Defendant were independent sale and purchase transaction from the Project Premises and there was no relevance or connection with [Rosy Acme] at all.”

32.  The Plaintiff made no reservation of rights.  It even stated that if those terms were agreeable to the Defendant, the Defendant should confirm by revert “together with the address for the purchased items for delivery and [the Plaintiff] considered that the delivery of purchased items to Project Premises [was] not appropriate and ought not to be”.

33.  By another letter dated 16 November 2016 to the Defendant (“P’s 2^nd Letter”), the Plaintiff claimed that the Defendant was the agent or otherwise contractor of Rosy Acme.  There was no point in delivering the purchased items to the Defendant as the ultimate beneficial owner was Rosy Acme.  The Plaintiff further stated:

“However, as stated [in] our letter dated 15 November 2016, if your Company confirms that the Sales Contract and Quotation entered between your Company and our Company are separate and independent from the Project Premises, ie Rosy Acme Ventures Limited is not the ultimate beneficial owner of the purchased items, we are pleased to send or otherwise deliver all the remaining purchased items to you to your warehouse … upon your settlement of the sums of HK$311,945 and $5,766,304.80 and settlement of the balance payment at 20% within 14 days upon delivery.”

34.  On the other hand, the Defendant had made no less than 6 requests for delivery to the Plaintiff in the month of November 2016.  The Defendant also waived installation work whilst agreeing to pay the installation fees to the Plaintiff as evidenced by the transcript of a telephone conversation on 9 November 2016.

35.  Despite all these, the Plaintiff had refused delivery of the purchased items in its possession to the Defendant.  The Plaintiff even imposed a condition that there be payment of 20% of the contract price before delivery.

36.  By a letter dated 17 November 2016, the Defendant accepted the Plaintiff’s repudiation (“D’s Letter”).

37.  The Plaintiff’s claim of anticipatory-breach, as conceded by Mr Yip, counsel for the Plaintiff, has no merits.  This is because even if the Defendant was in anticipatory-breach, the Plaintiff had never exercised the right to terminate the Subject Contracts.  To the contrary, P’s 1^st and 2^nd Letters actually affirmed the Subject Contracts by offering to deliver the goods to the Defendant’s warehouse. 

38.  Mr Tong explained that the words cited in paragraph 31(b) above meant that the Plaintiff and the Defendant would enter into fresh contracts in respect of the purchased goods.  With respect, on its plain and ordinary meaning, that was not the message that those words conveyed.

39.  Further, the Plaintiff was not ready and able to perform the Subject Contracts because it had entered into the P-RA Contracts between May and October 2016 behind the back of the Defendant and wrongly delivered part of the purchased items under the Subject Contracts to Rosy Acme direct.

40.  I find that it was the Plaintiff who was in anticipatory breach and the Defendant had accepted its breach by D’s Letter.

H.  THE AGENCY POINT

41.  The Agency Point has no merits for the following reasons:

(1)  It disregards the concept of privity of contract as Rosy Acme was not a party to the Subject Contracts.  Any obligation to deliver to the Project Premises was to the Defendant, regardless who at the Project Premises acknowledged receipt.

(2)  It was the clear evidence of Mr Tong that the employer asked him to use the Defendant as the counterparty.  Although Mr Tong initially sent the quotations to Rosy Acme, Ms Lee told him to send to the Defendant.  Plainly, the Plaintiff was to contract with the Defendant and not Rosy Acme.

(3)  The Defendant had marked up its re-sale price to Rosy Acme without letting the Plaintiff know the level of mark-up.

(4)  If Rosy Acme was the principal under the Subject Contracts, in respect of the items yet to be delivered thereunder, there was simply no need for the Plaintiff to enter into the P-RA Contracts after the Termination. 

(5)  Even if, as the Plaintiff suggests, there had been site meetings in which Rosy Acme was present and oral terms were agreed, it was more likely to be a situation of Rosy Acme coordinating the works and exercising quality control, rather than being the principal under the Subject Contracts.

I.  FRUSTRATION POINT

42.  Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract: Davis Contractors Ltd v Fareham UDC [1956] AC 696, at 729.

43.  The Frustration Point has no merits for the following reasons:

(1)  The Plaintiff claims that there was frustration because the Defendant could no longer supervise the Plaintiff in respect of work at the Project Premises and that delivery and work must be done at the Project Premises. However, as P’s 2^nd Letter showed, the Subject Contracts were separate and independent from Rosy Acme.  The Termination could not frustrate the Subject Contracts.

(2)  In the context of this renovation, delivery of goods to the Project Premises was for convenience, as installation was expected.  However, Contracts 2, 4 and 5 were only for goods, which could be delivered to any premises. 

(3)  P’s 1^st and 2^nd Letters plainly showed that “the purchased items” could be delivered to the Defendant at the warehouse.  The Defendant had already offered to pay for the engineering costs even though no installation was required.  How the Defendant would use the purchased items was none of the concern of the Plaintiff.  As Ms Lee testified, she could in fact have re-sold the goods to Rosy Acme.

(4)  Accordingly, it could not be a fundamental term of the Subject Contracts that delivery of purchased items could only be to the Project Premises.

44.  Having rejected the Agency Point and Frustration Point, the undisputed facts were that the Plaintiff had failed to deliver the goods on demand to the Defendant’s warehouse and the Defendant had accepted the Plaintiff’s anticipatory-breach by D’s Letter.  I hold that the Plaintiff was in breach of the Subject Contracts.

45.  As the Defendant had not properly pleaded damages arising out of the Plaintiff’s breach, I only award nominal damages of $1,000 to the Defendant.

J.  COSTS

46.  The Plaintiff pleaded a substantial case seeking an odd declaration that the ownership of the balance of purchased items stored and kept by the Plaintiff belonged to Rosy Acme and relied on, amongst others, section 4 of the Contracts (Rights of Third Parties) Ordinance, Cap 623. That prayer for declaration was removed on amendment but a claim for damages was added.  At the trial, this part of the claim was not pursued. 

47.  Although the Plaintiff succeeds on part of the claim and should in principle have costs, I would only award part of the costs to them.  Had their lawyers properly put their minds to how the balance of deposit was computed and the Defendant’s defence on quantum, much costs would have been saved.

48.  As for the Defendant, they only got nominal damages.  Needless to say, the costs involved would not have justified an award of $1,000.

49.  I therefore cut down the party-and-party costs as if this were a two-day trial.  Taking into account the relative success/failure of both parties, I order the Defendant to bear only 50% of the Plaintiff’s costs.

K.  CONCLUSION

50.  I order as follows:

(1)  There be judgment to the Plaintiff in the sum of $188,425 with interest at P+1% from the date of the writ to the date of judgment and thereafter at judgment rate until payment.

(2)  There be judgment on liability on the counterclaim with nominal damages of $1,000, to be set off against the judgment sum in sub-paragraph (1).

(3)  There be an order nisi that the Defendant should pay 50% of the Plaintiff’s costs with certificate for Mr Yip on the basis of a two-day trial.  I make an order nisi accordingly.

(4)  Within 7 days, the Plaintiff’s solicitors shall provide to the Court a copy of Mr Yip’s brief and state the proposed hourly rates to be charged by the Plaintiff’s solicitors, copied to the Defendant.  I shall give further directions on costs to aid the taxing master upon perusal of such information.

L.  WASTED COSTS

51.  This is a case where, regrettably, I have to consider making a wasted costs order against legal representations.  I shall separately give directions for showing cause.