BORDON CONSTRUCTION CO., LTD. v. CHI LIK WINDOW WORKS CO. LTD.

HCCT15/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.15 OF 2001

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J U D G M E N T

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1. The plaintiff was the main contractor for a residential development on the Peak. The defendant was the sub-contractor to the plaintiff for the installation of windows, doors, louvres, sky light and canopy works. The sub-contract was dated 23 September 2000. Approximately three months later, on 21 December 2000 it was terminated by the plaintiff. The case turns on whether the plaintiff was entitled to terminate at the time it did so, in the manner it did so and for the reasons given.

2. The plaintiff called four witnesses, Mr Victor Kwan (a project manager of Jadespring, the employer), Mr Leung Sing (a director of the plaintiff), Mr Otto Chong (an assistant co-ordinating officer of the plaintiff) and Mr Vincent Chow (the plaintiff's construction manager). Much of the plaintiff's case depended on contemporaneous documents, correspondence and technical drawings. The witnesses, in addition, gave important evidence on key issues of disputed fact. Unless otherwise specifically stated in this judgment, I found their evidence to be accurate and reliable.

3. The defence called one witness, Mr Lee Chun Kong, a director of the defendant company. His manager at the time, Mr Edwin Kam, had been more involved with the project on a day-to-day basis, but had since left the defendant's employ and did not give evidence either by affirmation or in court. Mr Lee was not impressive as a witness. Having given all the evidence a careful evaluation, where there were factual disputes I preferred and adopted the plaintiff's version of events.

THE PLAINTIFF'S RIGHT TO TERMINATE

4. The contractual right was contained in clause 8.3(a) and supplementary condition clause 11 :

"The main contractor shall directly terminate this contract without further notice if the sub-contractor :

(a) is financially, technically or managerially unable to complete the entire sub-contract works;"

And

"The Main Contractor reserves the rights to terminate this Sub-Contract at any time should the Sub-Contractor fail to obtain within a reasonable time the required approvals by the Architect or should the Sub-Contractor fail or refuse to comply with any of the Architect's comments and/or instructions in respect of the shop drawings."

5. The defendant's specific obligations in respect of the preparation of shop drawings and samples were contained also in the supplementary conditions :

"The sub-contractor shall hold responsibility for design appropriate aluminum section design calculation in accordance with specification requirement for Architect Approval. There shall be no claim for extra payments in case any amendment for the sectional detail or member size is required by the Architect due to Sub-contractor's failure to fulfil any specified design criteria."

"It shall be the onus of the Aluminum Window Sub-Contractor to obtain the approval(s) to his shop drawings and samples of materials by Architect and the Developer in order to give effect to this Sub-Contract (Submissions through the main Contractor)."

"The Sub-Contractor shall also comply with the Architect's comments in respect of the shop drawings, inclusive of all technical aspects."

6. In my judgment, the evidence clearly shows that the defendant was in actual breach of these clauses. From September 2000 to 4 December 2000, the defendant made six submissions for approval by the architect and/or the developer, none of which were approved. The state of affairs between the parties between the final submission on 4 December and termination on 21 December can be summarized as follows :

(i) On 5 December, the architect wrote to the plaintiff a letter which was copied to the defendant. In five instances it stated that the latest drawings did not conform with the architect's design intent. In particular, it re-stated that certain doors "shall be sliding and folding". The letter concluded :

"Once again we believe the submitted drawings are substandard. Many of our previous comments ... have not been addressed and details and elevations do not correspond. In view of that, you and your subcontractor are reminded again that any delay and time/cost claims caused due to substandard submission would not be entertained by this office."

(ii) On 7 December, a meeting was held at the defendant's office. Mr E. Kam was present representing the defendant. The architect recorded its comments made at the meeting to Mr E. Kam, by letter on 13 December. It recorded nine significant matters which were either "unacceptable", "incomplete" or "outstanding". The most important were the first two :

"(a) We reiterate that the use of sliding doors as an alternative to the folding/sliding doors specified for this development is not acceptable.

(b) The use of mullions/transoms comprising of small components in particular at the windows at the typical lift lobbies of tower blocks would be vulnerable to water leakage and therefore unacceptable."

(iii) The architect sent a final warning letter to the plaintiff on 18 December 2000. It contained the following remarks :

"We are very concerned at the continued unacceptable performance by you/your sub-contractor with regards to shop drawing submissions and fulfillment of contractual obligations for the captioned Works. These include but are not limited to the following :-

(i) Contractual requirements for provision of folding/sliding doors (our letter ref. CAL-263-A794 also refers) have not been fulfilled nor are there any indication of intention on your/your sub-contractor's part to do so.

(ii) Our comments on the various shop drawings submissions have not been fully addressed nor are there any indication of intention on your/your sub-contractor's part to do so."

7. The two major problems were those referred to at (ii)(a) and (b) above. Firstly, the contract always required certain folding and sliding doors made of aluminum. The simple truth is that Mr Lee, for the defendant, discovered that he could not manufacture such doors in Hong Kong within time and within cost, until it was too late. His efforts to substitute "steel" for aluminum and "sliding only" instead of "sliding and folding" was unsuccessful both with the plaintiff in December 2000 and with the court during trial. Secondly, the contract required the mullions and transoms in the windows to be a single piece of metal. Mr Lee persisted, in his submissions, with drawings and samples which were made of a number of pieces fitting together. They were never accepted or approved.

THE IMPORTANCE OF THE BREACHES IN THE CONTEXT OF THE WHOLE SUB-CONTRACT

8. In a nutshell, the defendant's breach was its failure to respond to the architect's comments and rejections and the resulting failure to obtain the architect's approval. It is a breach which went to the root of the sub-contract for the following reasons :

(a) Approval had to be obtained before materials could be ordered. This was not only accepted by Mr Lee but was also an express term of the contract :

"all relevant material samples, construction drawings (shop drawings) and structural calculations should be approved by the Employer or Architect (before ordering materials and installation)"

(b) The programme of works had allocated one month for the approval of shop drawings prior to materials being ordered. The defendant's own programme had scheduled 10 November as the date by which approval should have been obtained. The defendant's argument that the plaintiff's termination was premature is simply not made out.

(c) Mullions and transoms comprising of several pieces were unacceptable because such a design was less effective in keeping out wind and water. These were important consideration as this was a luxury development on the Peak. From the 1st submission by the defendant, the "split" mullion design was rejected by the plaintiff, the architect and the developer.

(d) Similarly, the architect never faltered in their insistence on aluminum folding and sliding doors. All the main windows were to be aluminum. The folding feature was required from the outset because the developer wanted a "colonial" feel to the units, in keeping with the style of building that had been demolished on this particular site. Mr Victor Kwan, the plaintiff's project manager, stated :

"At this meeting, the Defendant proposed the use of 'sliding' doors to substitute 'folding and sliding' doors as required in the Sub-Contract drawings. The Architect opposed the Defendant's proposal. I recalled that the construction site was previously occupied by buildings bearing colonial features. It was the intention of the employer to design the Project with colonial flavour. The folding and sliding door is one of the essential colonial features of the Project."

Similarly, Mr Leung Sing's evidence was :

"It was the intention of the Employer to design the project with colonial flavour since the construction site was previously occupied by buildings bearing colonial features. The folding and sliding door is one of the essential colonial features of the Project. As a result, I was particularly concerned about whether the Defendant would be able to provide the folding and sliding doors."

9. The nature of the defendant's actual breach clearly therefore goes to the root of the contract and is of the particular type described by Lord Wilberforce in Federal Commerce v. Moleng Alpha [1979] AC at p.778 :

"I do not say that it is necessary to show that the party alleged to have repudiated should have an actual intention not to fulfill the contract. He may intend in fact to fulfill it but may be determined to do so only in a manner substantially inconsistent with his obligations, and not in any other way ..."

Mr Lee's persistent attempts to carry out the works in the way he wanted to is a classic example of Lord Wilberforce's remark.

THE REASONABLENESS OF THE TERMINATION

10. In determining whether the plaintiff was entitled to terminate the test to be applied is that of the reasonable contractor in the particular contract in issue.

"Where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring the contract to be performed within a reasonable time. Notice can be served at the moment of breach : it is not necessary to wait until there has been an unreasonable delay by the party in breach before serving the notice. The period of notice given must, however, be reasonable and what is reasonable will depend upon all the facts and circumstances of the case,"

(Chitty on Contract, 28th Edition)

In our case, the plaintiff made time of the essence by the giving of two notices on 6 and 9 December.

11. On 6 December, after the 6th submission had been rejected, the plaintiff requested the defendant to resubmit by 13 December. On 9 December the plaintiff instructed the defendant to comply with the architect's requirement within seven days, failing which the plaintiff would consider terminating the contract. Prior to termination on 21 December, the defendant made no response to either letter.

12. In all the circumstances, the only conclusion that this court can come to is that the termination was reasonable. The evidence from the concerned parties, in the critical period during December 2000, was :

(a) The developer :

"I, on behalf of the Employer, expressed grave concerns to the Architect by a letter dated 16/12/2000 that over 50% of the superstructural frames had been completed at that time, any further delay in obtaining the Architect's approval of the shop drawings by the Defendant would have adverse effect of delaying the delivery of materials for installation of windows to the site."

(Mr Victor Kwan's evidence)

(b) The architect, by letter on 13 December :

"Please be advised that as many of our previous comments on previous submissions have not been addressed/clarified in this submission, we would not comment on the above shop drawings any further; this submission is therefore unacceptable. We trust that you would take appropriate measures to remedy this unsatisfactory situation."

and by letter on 18 December :

".... refusal to provide folding/sliding doors for this development per design intent and our specifications nor are they willing to submit and equivalent system from other manufacturers to fulfil the contractual requirements as per their verbal advice given at the aforesaid meetings and as have been evident in their shop drawings submission...."

"We would remind that thus far, no shop drawing submissions for the captioned Works have been found acceptable by this office. We trust that you would take appropriate actions to remedy this unsatisfactory situation last progress of work be further compromised."

(c) The totality of the evidence pointed clearly to the fact that Mr Lee was unable to produce aluminum folding and sliding doors within time and budget and was unwilling to produce one piece mullions. The defendant's difficulties in providing the aluminum folding and sliding doors was recognized by the other parties involved over a month before determination and they made such reasonable suggestions as they could to find a solution. At a meeting in November (attended by Mr E. Kam, but not Mr Lee), the defendant was encouraged to find alternative manufacturers. The defendant's inflexible response was recorded in a subsequent letter from the architect :

"... nor are they willing to submit any equivalent system from other manufacturers to fulfil the contractual requirements as per their verbal advice given at the aforesaid meetings and as have been evident in their shop drawings submission."

THE REASONS FOR REJECTING THE DEFENDANT'S DEFENCES

13. Mr James Lee, for the plaintiff, complained, in the course of his final submission, that the defendant had "moved the goalposts" by introducing new defences as time went on. The final defence emerged in the course of Mr Keith Mok's final submission for the defence. Whilst there is some merit in Mr Lee's complaint, a better analogy would be that the goalposts were widened rather than moved. It was, however, only the "final" defence (see (d) below) which took Mr Lee by surprise. In all, four defences were advanced. I permitted all to be argued. In my judgment, none were made out. I will deal with each of them briefly in the order that they emerged.

(a) "No adverse comment" defence

14. In a letter to the defendant dated 8 November 2002, the plaintiff stated :

"Please be informed that CAL (the Architect) have no adverse comment on your proposed aluminium window and door sections for the captioned site."

15. The defendant also relies on a fax from the structural engineer dated 17 October 2000 which contained the remark that "we generally have no adverse comments". Only the letter from the architect is pleaded in the defence. However, neither are of any real substance when further analysed.

16. The letter of 8 November 2000 from the plaintiff, referred to above, goes on to say :

"The 1st production and fabrication of aluminium window, door and louver should be complied with architect's requirement and used to withstand a wind load calculated in accordance with COP on Wind Effects in Hong Kong with a minimum of 3.5 kPa and with permissible maximum def(1)ection of less than 1/180th the length of the particular member."

17. On the next day, the architect confirmed with the plaintiff that it had not made the alleged remark in connection with the defendant's submission for the aluminium windows and doors. Consequently, the plaintiff immediately informed Mr E. Kam of the defendant, both by phone and letter, not to proceed with production pending further instructions.

18. The unpleaded comment from the structural engineer was contained in a fax headed "Canopy and skylight". The work done in respect of the canopy and skylight is not an issue in this case.

(b) "Change of design intent" defence

19. The defendant contends that the requirement for "one piece" mullions and aluminium folding and sliding doors arose after the commencement of the contract. The defendant contends that the original intent was for split mullions and steel doors. These defences are not pleaded. In spite of the lack of pleading, they are, once again, not made out on the evidence.

(i) Mullions

20. I find there to be no documentary support for the contention that the original intent was for split mullions. The submissions of drawings of split mullions were consistently rejected from the outset. The plaintiff's witness from whom the alleged oral instruction for split mullions came, Mr Otto Chong, specifically denied it in cross-examination. There is no evidence of a split mullion ever being approved.

(ii) Doors

21. The defendant relies on a drawing dated September 1999 which was headed "for information" which refers to "steel" doors. It is plain that this was an outdated document which, in any event, did not form part of the contract. All the contract drawings were for aluminium doors of a sliding and folding design. The defendant had quoted a price based on aluminium not steel. None of the many submissions of drawings contained steel doors. Quite simply, the defendant realised too late that finding a Hong Kong manufacturer for aluminium doors was going to be a problem. The problem had been discussed at a meeting on 11 November 2000. The defendant always knew that he was contractually obliged to provide aluminium. Even after the notice of termination had been served on him, his letter of 28 December 2000 to the plaintiff shows his state of knowledge :

"In particular, we are not refuse to supply folding and sliding aluminium door, but at the present moment, none of the local fabricator can locally design and built for the said product. Hence, we have asked the architect to change for the design or revise material from aluminium to steel."

(c) "Ready willing and able" defence

22. It was the defendant's case that, throughout, he was ready willing and able to carry out the sub-contract works. This defence primarily falls down on the contention that the defendant was "able" to perform the contract. There is plentiful evidence pointing the other way, namely to his inability. Shop drawings for folding and sliding doors were never produced. The drawings that were produced and submitted were never approved by either the architect or the employer. A request for yet another submission of drawings after the 6th submission (on 4 December 2000) met with no response.

(d) "Conditional agreement" defence

23. Mr Mok argued, in his closing submissions, that even if the plaintiff was entitled to terminate the contract on 21 December 2000 for failure to respond to the architect's comments and failure to obtain the architect's approval, the plaintiff would not be entitled to any damages because a consequence of the termination was that both parties were discharged from any further liability. In support, he relied on paragraph 4 of Annexure 1 to the contract, which states :

"If the samples, drawings and structural calculations submitted by the Sub-contractor are not approved by the owner of the property or architect, the sub-contract shall become null and void. In such event, the person offering the contract shall not be liable for the fees of all previous work done by the sub-contractor."

24. Mr Mok submits that the effect of this provision was to make the sub-contract a conditional agreement, the condition being the obtaining of approval by the architect or employer. He submits that no approval (reasonably sought) equals no contract. He further relies on the provision that Annexure 1 takes precedence over other terms as follows :

"... The contract document shall consist of Anenxures 1 to 2 (20 pages in total), the tender document and drawings for the project and the correspondence between the Parties during the price negotiation phase. If there is a discrepancy, contradictions or inconsistency between Appendices 1 to 2 (20 pages in total) and the tender document and drawings for the project and the correspondence between the Parties during the price negotiation phase, Appendices 1 to 2 (20 pages in total) shall serve as the primary basis."

25. I reject this defence on two separate grounds. Firstly, it was not pleaded. The Hong Kong White Book states (18/8/5) :

"The defendant must distinctly specify in his pleading any condition precedent, the performance or occurrence of which he intends to contest."

26. In this case, the defence was raised for the first time during Mr Mok's closing submission. The plaintiff had been deprived of any opportunity of dealing with the point through his witnesses.

27. Secondly, a proper construction of paragraph 4 does not afford the defendant the defence he seeks to rely on. The following points militate against the defendant's interpretation and effect of paragraph 4 :

(i) Annexure 1 takes precedence only where a "discrepancy, contradiction or inconsistency" arises.

(ii) When paragraph 4 is read as a whole, its purposive construction is that the main contractor ceases to be liable for fees previously incurred by the sub-contractors should the contract have become invalidated by virtue of the non-approval of drawings, etc.

(iii) In short, it defines fee liability in a given situation. This does not constitute a discrepancy or contradiction or inconsistency with other terms.

(iv) If a party seeks to rely on the conditional nature of a sub-contract, the fact that it is conditional should be expressly stated. It was not so stated in this case.

(v) Common sense dictates that the defendant cannot interpret paragraph 4 in such a way that deprives the plaintiff of any damages for the defendant's repudiation, when the inclusion of paragraph 4 was plainly for the sole benefit of the plaintiff. Its sole purpose is to protect the main contractor from having to pay fees for non-approved designs.

QUANTUM

28. Under the heading of quantum, four issues arise :

(1) Cost of completing the works

29. The defendant was replaced with a new sub-contractor called "Lucking". They completed the sub-contract for $8,063,250.00. This sum exceeds the original contract price by $553,472.00 (or approximately 8%). Bearing in mind that they only came in, in January 2001 and did the work expeditiously, and bearing in mind also that no evidence was adduced concerning the reasonableness or otherwise of the new sub-contractors' costs, I think it should be allowed but with a small discount. The evidence was that Lucking probably started with the advantage of some approved drawings for the canopy and skylight. However, the evidence was not clear about the exact value of this benefit, save that it would not be more than $75,000. I consider a reasonable discount therefore to be one which reduces the amount under this heading to $500,000.

(2) Wasted expenditure

30. $47,708.48 was claimed for the cost of preparing for a new tender. The sum was not challenged and will be allowed.

(3) Indemnity against further liquidated damages claim

31. There is no doubt that (a) the defendant's breach will have caused a delay in progress, and (b) the employer will make a claim against the plaintiff for the liquidated damages provided for in the contract between them. Such a head of damage is "fair and reasonable and arises naturally, according to the usual course of things from the breach of contract". (Hedley v. Baxendale)

32. I am satisfied that Mr Lee Chun Kong, for the defendant, would have been aware that such a clause exists in the main contract and that any delay in progress would make the plaintiff vulnerable to a claim being levied against them. Mr Lee has had over 20 years in the industry and although he was reluctant to admit that he realised the main contract contained a liquidated damages clause, it is safe to impute such knowledge or awareness to him.

(4) Interest

33. The pleadings contain a claim for interest but the issue was not canvassed. I hope the parties can agree a rate and a period. In order to assist I will make a nisi order (infra) .

JUDGMENT

(1) The defendant shall pay $500,000.00 to the plaintiff plus interest (on a nisi basis) at prime + 1% from the date when "Lucking" was paid the contract sum.

(2) The defendant shall pay $47,708.48 plus interest (on a nisi basis) at prime + 1% from 17 February 2001.

(3) The defendant shall indemnify the plaintiff against any claims made by the employer for liquidated damages, for delay caused by the defendant's breach of the sub-contract.

(4) The defendant shall pay the costs of the action, to be taxed if not agreed.