MERIT ACT LTD v. CHUBB HONG KONG LTD

DCCJ 2527/2012

[2018] HKDC 717

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2527 OF 2012

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JUDGMENT

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INTRODUCTION

1.  This is an action for breach of a contract for the installation of a fire service system at an office unit in Central.

2.  The plaintiff is a subsidiary of Bright Smart Securities, a listed group engaged in the business of securities brokerage in Hong Kong.  The plaintiff is a vehicle which handles leases and related matters for the group.  It does not have any actual business operation.

3.  The defendant is a well-known company specialising in, amongst other things, fire system and service installations.  It is a fire service installation contractor registered under the Fire Service (Installation Contractors) Regulations, Cap 95A.

4.  In early March 2011, one of the Bright Smart group companies (the “tenant company”) entered into a lease in respect of an office unit on 27/F., Wing On House, Des Voeux Road Central (the “27/F unit”).  It is about 7,000 square feet in size and was to be used as a back office for the group.  The plaintiff was responsible for handling the lease and the renovation for the tenant company.  A number of contractors were hired for the renovation of the unit.  The defendant was one of them. 

5.  Pursuant to a written agreement dated about 18 March 2011, the defendant agreed to supply and install a fire service system at the 27/F unit for the price of $140,000.

6.  The defendant completed the installation in late April.  In late May, it submitted a Form FSI/314A to the Fire Services Department (the “FSD”).  Enclosed with the form was a set of drawings of the 27/F unit showing the fire service system as installed by the defendant.  It was to be approved by the FSD as required under the relevant fire service regulations.  However, in June, the drawings were rejected by the FSD on the ground that the sprinkler system for the server room was deleted.  

7.  The plaintiff and the defendant then entered into discussion trying to resolve the issue from September onwards.  But the efforts were in vain.  The communication ended with a letter from the plaintiff’s solicitors to the defendant on 7 January 2012 claiming that the defendant was in breach of the agreement.  In the end, the plaintiff engaged another fire services contractor, Wylam’s Services Ltd, to install a gas-based fire extinguishing system known as the “FM200” system in the server room.  The installation was completed in July 2012. 

8.  In the same month, the plaintiff issued a writ in the present action.  The plaintiff contends that the defendant was in breach of the agreement as it failed to ensure that the plaintiff would obtain the necessary certification from the FSD in respect of the 27/F unit, ie the approval of the FSI/314A drawings.  In opening, Ms Christine Leung, who appeared for the plaintiff, revised the damages claim downwards to $866,320.  The two main items of claims are the price of the FM200 System installed by Wylam’s together with relevant charges ($126,000) and compensation for the delay on the part of the defendant to complete the work ($736,000).

9.  The defendant denies that it was in breach.  In gist, its primary defence is that it was only responsible for the items of work as specified in the written agreement. As it did not expressly provide for the installation of any fire extinguishing system in the server room, there was no breach on its part in failing to install it.  It makes a counterclaim for the balance of the price for the system installed in the sum of $56,000, which the plaintiff has refused to pay to date.  If the defendant is found to be in breach, however, it raises a number of defences on quantum, namely that (a) it would not in any event be liable for the price of the FM200 System; (b) the clause providing for compensation in case of delay is a penalty clause and thus not enforceable; (c) the plaintiff failed to mitigate its loss by reason of its delay in engaging Wylam’s to rectify the breach; and (d) the defendant’s liability is limited to the contract sum, as provided for in the agreement.

10.  The issue of liability turns on the scope of the defendant’s obligation under the agreement. In essence, was it under an obligation to supply and install a fire extinguishing system in the server room (such as the FM200 System) so as to ensure that the fire service system as a whole, when installed, met the applicable fire service regulations, even though the FM200 System itself (or an equivalent extinguishing system) was not expressly included as one of the items to be supplied and installed?  It is a mixed question of facts and law. 

11.  On the facts, disputes revolve around what was being discussed and communicated between the parties in June to August 2010 and, subsequently, from March 2011 to late 2011.  Initially, it was Mr Remus Keung who handled the negotiations of the contract on behalf of the plaintiff and liaised with the defendant.  After he resigned, Mr Ivan Au Yeung took over and handled the matter on behalf of the plaintiff from about September 2011 onwards.  On the defendant’s side, it was Mr Matthew Ng, a sales engineer, who liaised with the plaintiff throughout.

12.  On the law, it was accepted at the trial by both Ms Leung and Mr Victor Lui, counsel for the defendant, that the relevant issue is whether an implied term arose imposing the alleged obligation on the defendant.

13.  At the trial, the plaintiff called Mr Yip Mow Lum as its only witness.  Yip confirmed in evidence that at the relevant time, he was the most senior person within the plaintiff’s organisation and had oversight of its operation.  It is immediately of note that neither Remus Keung nor Ivan Au Yeung was called by the plaintiff to testify, notwithstanding that they would appear to have first-hand knowledge of the discussion and the communication made with the defendant.  I shall have to return to this point shortly.  The defendant called Matthew Ng as its only witness.

FACTUAL BACKGROUND

14.  Set out below are background facts which are either common ground or not in any serious dispute. 

15.  Renovation of the 27/F unit took place after the signing of the lease on 8 March 2011.  (The lease took effect from 1 March 2011 and was for a term of two years.)  The plaintiff appointed Space Interior Solutions Ltd (“SIS”) as the central co-ordinator for the renovation.  The renovation was completed within about two months and the tenant company moved into the 27/F unit in May 2011 and commenced operation.

16.  The contract for the installation of the fire service system was made between the plaintiff and the defendant on 18 March 2011, when the plaintiff accepted the written agreement.  The contract comprised four documents:-

(a)   A one-page cover on which both parties signed, which was referred to as the “Particulars of the Agreement”.  It primarily provided that the agreement comprised four parts, the one-page document itself being “Part I”.

(b)   “Part II” was a Quotation dated 15 March 2011, which was on the defendant’s letterhead.

(c)   “Part III” was entitled the “Terms and Conditions”, which appeared in small prints and was also on the defendant’s letterhead.

(d)   “Part IV” was a Rider, which is in Chinese.

17.  As regards the Quotation, the following provisions are relevant:-

(a)   A total price of $140,000 was quoted under the section entitled “Sprinkler Systems”.  It was for the supply and installation charges comprising 13 items.

(b)   For instance, Item 1 read “Dismantle existing sprinkler Head c/w range pipework” and the quoted price was $12,000.  Item 2 read “Supply & Install Sprinkler Head c/w range pipe” and the quoted price was $40,950, based on a unit price of $650 and 63 units.

(c)   There was an express reference to the server room in Item 8.  It read “Supply & inmstall heat detector (Server room & A/C room)” and the quoted price was $2,850.

(d)   Item 13 read “Government submission c/w FS251, F314A of 1 x A2 size as-fitted drawing” and the quoted price was $1,000.

(e)   The Quotation specified that 60% of the contract sum was payable upon confirmation of order and the balance was to be settled “upon system handover and submission of invoice”.

(f)   It was stated under a section entitled “Delivery”: “Approximately 4 calendar weeks upon receipt of your firm order.”

(g)   Lastly, at the end of the Quotation was added the following words, “This contract is subject to the terms of the Rider”.  (The words are in Chinese.)  I shall refer to it as the “Rider clause” below.

18.  As regards the Terms and Conditions, I quote below the provisions which are relevant to the present dispute:-

(a)   “Chubb’s obligations are limited to the provision of the Services described in the Scope of Services and the Equipment described in the Equipment Schedule, within a reasonable time.”

(b)   “Chubb warrants that the Services shall correspond with the specification in the Schedule and that Chubb will perform the Services with reasonable care and diligence.”

(c)   There was also a clause entitled “Liability of Chubb”.  It provided, amongst other things, “[s]hould any liability attach to Chubb, under this Agreement or otherwise, Chubb’s total aggregate liability shall not under any circumstances exceed the Price.”

(d)   On late payment by the customer: “If the Customer fails to pay in accordance with this Agreement, Chubb shall, without prejudice to its other rights, be entitled to charge interest at the prime lending rate of the Hong Kong & Shanghai Banking Corporation Limited plus 2% such interest to be compound, calculated on a day to day basis on the balance outstanding until payment is made in full.”

19.  The document would appear to be a standard set of terms and conditions adopted by the defendant in general.  Although the words “Services”, “Equipment” and “Scope of Services” were in capitals which would suggest they were defined terms, there was no definition stated anywhere in the agreement itself.

20.  It is notable that the Rider clause appeared again at the end of the Terms and Conditions.

21.  As regards the Rider, it was a document prepared by the plaintiff.  The following provisions are relevant:-

(a)   Clause 4 provided that as the project involved many contractors in different areas, eg, main contractors, sub-contractors, SIS had been designated as the co-ordinator for all the renovation and related matters.  The defendant should seek to reach consensus in advance with SIS and other contractors.

(b)   Clause 9 provided that the defendant should properly complete the installation by 21 April 2011.  If it failed to do so due to its own problem, the defendant should pay to the plaintiff a sum of $2,000 per day as compensation until the work was completed to the satisfaction of the plaintiff.

(c)   Clause 11 provided that the defendant must ensure that the installation would fully comply with all relevant laws and if it was in breach, it should bear full responsibility.

(d)   Clause 13 provided that if there was any conflict between the Rider and the terms in the Quotation, the Rider should prevail.

(e)   Clause 14 provided that time for observing the contract would be of essence.

22.  I should add that the Rider clause appeared in the Particulars of the Agreement as well.

23.  In addition to the above four documents, there was also a layout plan of the 27/F unit, to which handwritten markings were added showing the locations of the different equipment to be installed, including, eg, 63 sprinkler heads, 33 emergency lights and three detectors.  Although the plan was not expressly included as part of the agreement, the plan bore the company chops of the plaintiff and the defendant and the markings corresponded with the item references in the Quotation.  At trial, it was confirmed that the markings were drawn by Matthew Ng.

24.  The plaintiff paid a sum of $84,000 to the defendant on 18 March 2011.  The defendant then commenced the installation works.  On 27 April 2011, the defendant informed the plaintiff that the works were completed.  The defendant submitted Form FSI/314A together with the installation drawings to the FSD, first, on 31 May 2011 and then, subsequently, on 6 October 2011.  On both occasions, the FSD rejected the drawings.  In its rejection letter dated 14 October 2011, it stated the following reason:-

“Approved general building plans/approval letter from this Department on the deletion of sprinkler system for the server room on the subject locations under full justification shall be obtained before the submission of Fire Service Installation drawings” (emphasis added)

25.  In other words, the FSD rejected the drawings because there was no sprinkler system in the server room.

THE PLAINTIFF’S CASE

26.  The crux of the dispute turns on the contractual obligation of the defendant with regard to the fire service system which should be installed at the server room, if any.  The plaintiff’s pleaded case is as follows:-

(a)   The defendant was under an obligation “to provide fire system design and installation services” (emphasis added) to the plaintiff in respect of the 27/F unit pursuant to the agreement. 

(b)   When the agreement was signed, the plaintiff expressly made known to the defendant that there was a server room in the unit and that the server room could not have a water-based sprinkler system present. 

(c)   If a water-based sprinkler system was installed and activated in the server room, serious and substantial damage would be caused to the servers, potentially resulting in the loss of valuable client records and data.

(d)   The defendant has held itself out as an expert in the field of fire services installation. 

(e)   The plaintiff is not in the business of fire system installation and design and does not have the relevant expertise.  It had relied on the defendant’s skill and expertise “in designing, implementing and installing the fire services installation system” (emphasis added) in the 27/F unit. 

(f)   It was “an express and/or implied term of the Agreement that the design of the fire services installation would be fit for the purpose and of satisfactory quality” (emphasis added).  It would require that the system, as designed and installed, should satisfy all legal regulations and requirements, including the FSD requirements and that the plaintiff should be able to obtain all proper and necessary certifications from the FSD, including the FSI/314A certificate of compliance. (In its re-amended reply and defence to counterclaim, the plaintiff also pleads a duty to advise.)

27.  I pause here to record that notwithstanding the plea in the alternative of an express or implied term, the agreement indeed contained no express provision to that effect.  Ms Leung accepted in opening that such term would have to arise by implication.   

28.  Yip gave oral evidence to the effect that on about 12 March 2011, around one week before the conclusion of the agreement, he attended a meeting with the defendant in which the plaintiff made it clear to the defendant the special requirements for the server room and that the defendant must obtain all the necessary certifications from the FSD.

29.  In his witness statement, Yip stated that after the defendant notified the plaintiff of the completion of the installation on about 27 April 2011, he found out from his staff that the Form FSI/314A was rejected by the FSD.  He did not specify when he found out. 

30.  The plaintiff says that as the FSD rejected the installation of the drawings, the defendant was in breach of the agreement as the fire system, as designed and installed, did not meet the FSD requirements and was therefore not fit for the purpose for which it was installed.

31.  On 15 November 2011, the plaintiff issued a letter to the defendant complaining about the latter’s failure to obtain the FSI/314A certification and demanding that the problem be resolved by 31 December 2011.  Then, on 7 January 2012, a demand letter was sent by the plaintiff’s former solicitors stating that the defendant was in breach of the agreement and that the plaintiff had engaged another contractor to complete the installation works.  The plaintiff demanded a sum of about $200,000 as compensation.

32.  Notwithstanding what was stated in the demand letter, the plaintiff only obtained a quotation from Wylam’s in March 2012 and appointed it on 11 April 2012 to rectify the problem.  Wylam’s completed the installation of the FM200 System at the server room on 14 July 2012. 

33.  In its pleadings, the plaintiff claims damages under the following three heads:-

(a)   Contract price with Wylam’s of $259,750.

(b)   Overtime payments to employees of a Bright Smart subsidiary who attended the unit during the weekends when Wylam’s carried out the installation works in June and July 2012 in the sum of $10,080.

(c)   Compensation for the delay of 451 days (counting from 21 April 2011 to 14 July 2012) pursuant to clause 9 of the Rider, which amounts to $902,000 (ie $2,000 x 451 days).

34.  The amounts of the three claims were reduced to $126,000, $4,320 and $736,000 respectively, when Ms Leung opened the plaintiff’s case.  The plaintiff concedes that acting reasonably, it should have had the work completed by Wylam’s one month after its solicitors’ letter dated 7 January 2012.  The relevant period for clause 9 of the Rider should therefore be from 21 April 2011 to 6 February 2012 and come to 368 days.  The plaintiff’s three heads of claims amount to $866,320 in total.

35.  I shall return to the plaintiff’s case below as I deal with its reply to the positive factual allegations made by the defendant.   

THE DEFENDANT’S CASE

36.  In about June 2010, the plaintiff, acting through Remus Keung, approached the defendant for a quotation for the supply and installation of a fire service system at 23/F of Wing On House (the “23/F unit”), which is a few floors below the 27/F unit.  Remus Keung gave a layout plan to Matthew Ng. 

37.  At that time, Remus Keung expressly informed Matthew Ng that a non-water based firefighting system should be used in the server room of the 23/F unit.

38.  On about 30 June 2010, the defendant provided a quotation to the plaintiff by email (the “23/F Quotation”).  The total price quoted was $305,380.  It included the FM200 System, which (it would be recalled) is a gas extinguishing fire system, for the server room.  The quoted price for that item was $118,000.  A copy of the 23/F Quotation has been disclosed in these proceedings.

39.  However, the FM200 System was rejected by Remus Keung in about August 2010.  He said it was too expensive and exceeded the plaintiff’s budget.  He asked Matthew Ng to wait for his further instructions.  Matthew Ng reminded Remus Keung that in order to comply with the relevant fire regulations, the plaintiff should have in place a firefighting system for the server room, regardless of whether the system was water-based, ie a sprinkler system, or non-water based, eg, a gas extinguishing system such as the FM200 System.

40.  It would seem that after that conversation, the defendant did not hear from the plaintiff and it was not until about March 2011 when Remus Keung approached Matthew Ng again for an updated quotation but this time for the 27/F unit.  He gave Matthew Ng a layout plan for the unit, which was similar to that of the 23/F unit.   

41.  At that time, Matthew Ng orally reminded Remus Keung that in order to comply with the fire regulations, the plaintiff should arrange for a firefighting system within the server room, whether it was water-based or not.  Remus Keung took note of that.  But he specifically requested and confirmed that the defendant’s new quotation should exclude the FM200 System.

42.  Given Remus Keung’s specific request and instructions, the defendant provided the Quotation, ie the one which later formed the contract between the parties.  The Quotation did not include the FM200 System. 

43.  As far as the server room was concerned, the defendant’s scope of work was the supply and installation of detectors, as provided for in Item 8.  At all times, the defendant took the view that the plaintiff would have engaged other contactors to deal with the design and provision of the necessary firefighting system for the server room.

44.  On 18 March 2011, Matthew Ng visited the plaintiff’s office at 10/F, Wing On House and met Remus Keung to discuss the Quotation and the agreement.  Remus Keung confirmed that the plaintiff accepted the Quotation and the agreement but requested that the plaintiff’s standard terms, ie the Rider, be incorporated as part of the agreement between the parties.  The Rider was later accepted by the defendant.

45.  In the premises, as to the terms of the agreement, the defendant denies that it agreed to provide any fire system design service.  What it agreed was to provide and supply installation services for sprinklers, piping work, emergency lights, exit signs, directional signs, heat detectors, remote indicators, “Precept” 2 zone panel, alarm bells and GI conduits, all as stated in the Quotation.  The agreement did not include design service and therefore the defendant was not required to provide any. 

46.  It is further the defendant’s case that the Quotation contained an exhaustive list of work to be done by the defendant.  The defendant was not responsible for advising on the overall firefighting system design of the 27/F unit as it is common practice within the industry that the customer may engage different contractors at the same time to deal with different sections of the same premises.  In fact, the defendant took the view that the plaintiff would have engaged other contractors to deal with the design and provision of the firefighting system for the server room in order to comply with the relevant fire regulations.

47.  In cross-examination, Matthew Ng was questioned why he did not put down in writing that he had specifically reminded Remus Keung of the need for a firefighting system in the server room.  He replied that he only dealt with Remus Keung in the negotiation of the agreement and in any event the terms of the contract would be the foundation of what was required of the parties.

48.  The defendant completed the work on 27 April 2011.  Remus Keung, acting on behalf of the plaintiff, signed on a “Fire System Service Report” dated the same date.  It appeared to be a standard form issued by the defendant.  A handwritten remark was inserted stating that the work set out in the Quotation had been completed.

49.  On 3 May 2011, the defendant issued a Certificate of Fire Service Installations and Equipment in accordance with the Fire Service (Installation and Equipment) Regulations, which is also known as the FS251 certificate, certifying that the work as stipulated under the Quotation was in accordance with the relevant Fire Service Regulations.

50.  On 31 May 2011, the defendant submitted Form FSI/314A together with the installation drawings to the FSD and certified that the fire service installations under the Quotation were as prescribed by the FSD and in accordance with the Rules of the Fire Offices’ Committee for Automatic Sprinkler Installation (29^th Edition).

51.  As stated above, the drawings were rejected in about June or July 2011 because the sprinkler system for the server room was deleted.  In cross-examination, Matthew Ng stressed that where different fire service contractors are engaged to undertake work at the same premises, it is common practice that the contractors would submit the drawings of their respective works to the FSD for approval separately and the FSD would allow that arrangement.

52.  After learning of the rejection, Matthew Ng immediately informed Remus Keung about it.  Remus Keung then asked for a copy of the FSD letter.  However, Matthew Ng could not find it as it had gone astray.  At that time, Remus Keung insisted that the plaintiff needed to see the rejection letter in order to consider what to do next.

53.  When Matthew Ng later tried to contact Remus Keung again on this matter, he learnt that Remus had resigned.  He left a message but no one returned his call.  It was not until 22 September 2011 that he received a call from Ivan Au Yeung saying that he would take over the role of Remus Keung.  Matthew Ng told him about the FSD rejection letter and proposed that the defendant should re-submit the FSI/314A drawings to the FSD again in order to obtain another rejection letter.  Ivan Au Yeung agreed.

54.  The defendant proceeded with the proposal and the FSD issued its second rejection letter dated 14 October 2011 – see para 24 above.

55.  Upon receipt of that letter, Matthew Ng immediately contacted Ivan Au Yeung to see what the plaintiff wanted to do.  On 31 October 2011, the two of them had a telephone conversation, in which Ivan Au Yeung requested a meeting with the defendant to address the issue.  The meeting took place on 2 November 2011.  Matthew Ng proposed two options.  First, the defendant was to install the FM200 System in the server room at the same price as previously quoted.  Second, as an alternative, for the purpose of maintaining an amicable business relationship, the defendant would install a sprinkler system in the server room free of charge.

56.  Matthew Ng tried to follow up with Ivan Au Yeung in about November 2011.  But the plaintiff never came back with a reply. 

57.  In the circumstances, the defendant contends that it was not in breach of the agreement.  Furthermore, as it completed the works as required on 27 April 2011, the plaintiff is liable to pay the outstanding balance of the contract price in the sum of $56,000.  An invoice dated 18 May 2011 was sent to the plaintiff by post.  The due date was 17 June 2011.  That forms the counterclaim of the defendant.

58.  If liability is established, the defendant disputes quantum on four main grounds.

59.  First, the plaintiff’s claim in respect of Wylam’s work is grossly excessive.  In particular, the claim includes the price for the FM200 System, which was outside of the ambit of the agreement between the parties in the first place. 

60.  Second, clause 9 of the Rider is a penalty clause and thus unenforceable.  The defendant is therefore not liable to pay any compensation by reason of delay under that clause.

61.  Third, in any event, the plaintiff failed to mitigate its loss as it did not act in a timely manner.  The defendant highlights that there was inaction on the plaintiff’s part during the period from about June to September 2011, which was probably due to the resignation of Remus Keung.  Further, notwithstanding that the meeting between Ivan Au Yeung and Matthew Ng took place on 2 November 2011, the plaintiff only managed to obtain a quotation from Wylam’s on 6 March 2012.  And it had taken Wylam’s more than four months to complete the works.  This, the defendant says, should be contrasted with the one-month timeframe given to the defendant to complete the work in 2011 under the agreement.

62.  Fourth, the defendant relies on the limitation clause in the Terms and Conditions.  Mr Lui argued that there is no conflict between that limitation clause, which sought to cap the defendant’s liability to the contract price of $140,000, and clause 9 of the Rider, which provided for compensation to be calculated based on a daily rate of $2,000.  They should be read in conjunction with one another and the proper interpretation is that while compensation would accrue at the daily rate of $2,000, the total amount is subject to a ceiling of $140,000.

THE PLAINTIFF’S REPLY TO THE DEFENDANT’S CASE

63.  In respect of the positive allegations made by the defendant concerning the conversations between Remus Keung and Matthew Ng which led to the 23/F Quotation and the Quotation respectively, it is important to note, first of all, the plaintiff’s pleaded case:-

(a)   The plaintiff admits that Remus Keung expressly informed the defendant that a non-water based firefighting system should be used in the server room.

(b)   Subject to the above admission, the plaintiff does not admit to the allegations set out in paras 39 to 41 above.  In other words, the plaintiff is not putting forward any positive case to rebut those allegations.

(c)   Further, the plaintiff did not engage any other contractor to deal with the different sections of the same premises and the defendant “was fully aware” of that at that time.

64.  Although the plaintiff’s pleaded reply is in the form of a non-admission, Yip made a number of new revelations regarding the plaintiff’s communication with the defendant at that time in cross-examination.

65.  He accepted that Remus Keung was the key person liaising directly with the defendant.  He disagreed that he himself was not involved in the negotiation of the agreement.  He said that Remus Keung would report back to him after discussion with the defendant.  He also mentioned a meeting which he had attended with the contractors.  He expressly set out all the requirements of the plaintiff.  Notwithstanding that it is fairly apparent that Remus Keung and, later, Ivan Au Yeung were the key contact persons liaising with the defendant and Yip was the senior person who was not involved in the day-to-day handling of the agreement, Yip maintained his position that he had knowledge of the whole process.  It was for that reason that the plaintiff did not even attempt to ask either Remus Keung or Ivan Au Yeung to testify in this action. 

66.  When the plaintiff approached the defendant for a quotation in June 2010, the plaintiff was considering to lease the 23/F unit.  Yip revealed in cross-examination that he was in fact the owner of that unit. 

67.  Given that there is an obvious difference between the 23/F Quotation and the Quotation, namely the deletion of the FM200 System from the latter, it was not surprising that Yip was cross-examined at some length on whether he himself was aware of the content of the 23/F Quotation.  It is indeed one of the primary submissions made on behalf of the defendant that the deletion of the FM200 System in the Quotation corroborates its case that the system was explicitly rejected by Remus Keung and that he specifically asked for an updated quotation with the system taken out.

68.  When Yip was asked whether he had read the 23/F Quotation, he replied that he had never read it.  His explanation was that at that time the plaintiff had not yet decided whether to take up the lease for the 23/F unit or not.  He said that that being the case, it would be a waste of time for him to read the 23/F Quotation and hence he would not have read it.  He was further asked whether Remus Keung had read it.  He replied that he did not know and could not make a guess but, when asked again, admitted that it is possible that Remus Keung had read it. 

69.  In view of the above answers, Mr Lui immediately followed up by asking Yip when the plaintiff eventually decided not to take up the 23/F unit.  Rather surprisingly, under this line of questioning, Yip gave a few different answers:-

(a)   Initially, he said that the plaintiff made the decision in around February to March 2011.

(b)   Shortly afterwards, Mr Lui put the defendant’s case to him, namely that Remus Keung said to the defendant in August 2010 that the FM200 System was too expensive and the plaintiff would not have it.  Yip disagreed.  He explained that at that time he already decided that he would keep the 23/F unit for his own personal use and that Remus Keung already knew about his decision and would not therefore have made that comment.

(c)   Given the glaring inconsistencies, he was further pressed to address the same question again.  This time, he answered December 2010 and added that the plaintiff started to look for new premises in January 2011.

(d)   When Mr Lui recited back the above three inconsistent answers to him, Yip then said he could not remember the dates and reiterated that when the plaintiff received the 23/F Quotation in June 2010, there was no decision made yet as to whether to take up the 23/F unit, and hence the 23/F Quotation was simply put to one side.  In the end, he made the decision to lease the 23/F unit to someone else at the end of 2010.

70.  Apart from the above inconsistencies, the following replies of Yip when different aspects of the defendant’s case were put to him are also of note:-

(a)   In response to the defendant’s case that Matthew Ng had mentioned to the plaintiff that either a sprinkler system or a gas extinguishing fire system must be in place in the 23/F unit in order to meet the fire regulations, Yip’s reply was not a denial.  He simply said he did not know.

(b)   In response to the defendant’s case that in March 2011, Remus Keung said to Matthew Ng that the FM200 System should be excluded because it was too expensive, Yip initially disagreed and emphasised that the plaintiff had no expertise in fire regulations.  But when pressed as to whether he knew of such a conversation, Yip’s answer was that he was not aware of it.  He was further asked whether Remus Keung had ever reported about the gas extinguishing fire system, he said he could not remember clearly.

71.  In view of the oral evidence of Yip, Ms Leung stated in her oral closing submissions that Yip in fact did not know whether the conversations between Remus Keung and Matthew Ng, as alleged by the defendant, in fact took place or not.

72.  In respect of the positive allegations made by the defendant concerning the discussion between the parties after the FSD rejected the FSI/314A drawings, the gist of the plaintiff’s submission is that contemporaneous documents would suggest that throughout that time, the defendant did not deny its responsibility to ensure compliance with the fire regulations.

73.  In this regard, I should point out further new revelations which emerged in Yip’s oral evidence.  He confirmed that in June or July 2011, he knew about the FSD rejection.  And he instructed Remus Keung to immediately follow up on that with the defendant.  He denied that the plaintiff sat on the matter and did nothing for four months from June to September 2011.  On the contrary, his staff chased up the defendant continuously during that period by letter or email and by phone.  He actually said at one point in his answer that his staff chased up “daily” but Matthew Ng kept stalling for four months.  However, this evidence about chasing and stalling during this period was not mentioned at all in his witness statement.

74.  The plaintiff relies heavily on an email from Ivan Au Yeung to, amongst others, Matthew Ng, dated 28 September 2011.  On its face, it recorded that Matthew Ng had advised that the defendant would re-submit the FSI/314A drawings to the FSD and once it received the comments from the FSD, the defendant would “carry out all necessary corrective actions immediately and re-submit the FS 314A again”. Also the defendant would bear all the costs for obtaining the Form FSI/314A. It would appear that there was no reply or response from Matthew Ng or others from the defendant.  And the plaintiff says that this is a contemporaneous document showing that the defendant could not have previously reminded the plaintiff of the need for a firefighting system in the server room, as otherwise it would not have agreed to bear all the costs for obtaining the FSD certification, as recorded in the email.

75.  In response to that, Matthew Ng said in cross-examination that he did not reply to that email as the defendant was still considering what to do.

76.  The plaintiff further contends that even after receipt of the second rejection letter from the FSD, the defendant still did not claim that it was not responsible for the firefighting system in the server room.  On the contrary, Matthew Ng agreed to meet with the plaintiff to discuss a solution. 

77.  The gist of the plaintiff’s contention is that if Matthew Ng had in fact reminded Remus Keung of the need of a firefighting system in the server room twice as alleged, he would have taken the first opportunity to say that he had done so when things started to go wrong.  But there was, submitted Ms Leung, a complete lack of documentary evidence in favour of the defendant in this regard.  The most obvious instance was the lack of response to the 28 September 2011 email.  Ms Leung pointed out that there was similarly no reply to the plaintiff’s complaint letter dated 15 November 2011 and that even in the correspondence between the parties’ solicitors shortly afterwards, no mention was made of the reminders.  This goes to contradict the defendant’s factual case.

DISCUSSION

78.  As noted at the outset, the issue of liability involves both questions of facts and law.  The primary factual issue is whether Matthew Ng informed Remus Keung of the need of installing a firefighting system in the server room in August 2010 and then again in March 2011 and whether in reply to that Remus Keung confirmed to him that the FM200 System should be excluded for the quotation for the 27/F unit.  I have already highlighted above that the plaintiff has not put forward any direct positive case on this issue.  My task is therefore not to choose two competing cases but to see whether the defendant has proved its case on a balance of probabilities.  I should evaluate the evidence against the backdrop of undisputed and indisputable facts.  I am to weigh the inherent probabilities of the allegations.  Contemporaneous documents should be given due weight in the assessment exercise. 

Evaluation of the evidence

79.  In my evaluation of the evidence, I consider that the following matters are material and relevant.

80.  First, the defendant’s case, as related by Matthew Ng from his first-hand knowledge, is straightforward and inherently plausible.  The factual allegations put forward by the defendant have been consistently made throughout the course of these proceedings.  Matthew Ng’s oral evidence is consistent and borne out by contemporaneous documents.  The difference between the 23/F Quotation and the Quotation, namely the deletion of the FM200 System in the latter, is very telling.  The quote for that was $118,000, which was a significant amount in the context of the 23/F Quotation.  There must have been a reason for its deletion in the Quotation.  Matthew Ng’s account of events makes sense and provides a plausible reason for the deletion.

81.  In closing, Ms Leung said that the plaintiff does not have any theory why the defendant would take out the system from the Quotation.  Its position is that it did not care so long as the system installed by the defendant would secure the proper certification from the FSD. 

82.  Mr Lui submitted that it does not make sense to suggest that the defendant took out the item out of its own initiative or for no reason since as a business enterprise it should want to do more business rather than less.  I find that a forceful argument in favour of the defendant.

83.  Furthermore, I reject Ms Leung’s submission that the defendant was ignorant of the need for a firefighting system in the server room and that was the reason why it only put in detectors in the server room.  This submission simply does not accord with the fact that in the 23/F Quotation, the defendant did put in the FM200 System in the first place.

84.  Second, I find Matthew Ng’s evidence that it was all along the defendant’s belief that the plaintiff would engage other contractors to provide for a firefighting system in the server room to be credible, particularly when it is viewed against the undisputed background fact that the 27/F unit was undergoing a large-scale renovation at the time of the agreement.  Matthew Ng testified that it is common practice in the industry that a customer may engage different contractors to deal with different sections of the same premises and it is also common practice for the contractors to submit drawings separately to the FSD.  There is no reason for me to doubt the veracity of this piece of evidence, in particular Matthew Ng’s own belief in the common practice as described.  He was a sales engineer with the defendant.  It is something which he would be able to speak about based on his experience in the field.

85.  Third, notwithstanding the positive allegations made by Matthew Ng on the key factual dispute in this action, the plaintiff chose not to ask Remus Keung to come forward to give evidence in this action.  There is therefore effectively no direct rebuttal to Matthew Ng’s account of events.

86.  Yip’s evidence on whether the alleged conversations between Remus Keung and Matthew Ng took place or not is largely irrelevant as he admitted in cross-examination that he did not even know whether Remus Keung had read the 23/F Quotation or whether Matthew Ng had mentioned the need for a firefighting system in the server room.  Although he stressed that Remus Keung would report back to him on the renovation of the 27/F unit, Yip was not himself privy to the conversations between Remus Keung and Matthew Ng.  He was the most senior person within the plaintiff’s organisation.  It is fairly apparent that he did not have hands-on involvement or detailed knowledge of the renovation project as it progressed.  That may account for the inconsistent and alternating answers which Yip gave in the course of his oral evidence.

87.  Yip said that Remus Keung would not have said to Matthew Ng in August 2010 that the FM200 System was too expensive and the plaintiff would not have it since at that time Remus already knew that the 23/F unit would not be taken up by the plaintiff.  This seems to be mere speculation on Yip’s part.

88.  Yip’s oral evidence that the plaintiff chased up the defendant from June to September 2011 regarding the FSD rejection is, as already noted above, a new revelation.  It is rather inexplicable why this was not mentioned at all previously in these proceedings.  It should be apparent from early on that the information would be relevant to the claim for liquidated damages.  I am not prepared to give much weight to this new revelation.

89.  Overall speaking, not much weight, if any, can be given to Yip’s evidence.

90.  Fourth, the plaintiff places heavy reliance on the lack of written reply by the defendant from September 2011 onwards when Ivan Au Yeung followed up on the FSI/314A certification with Matthew Ng – see para 74 above.  I find the lack of reply to be an equivocal fact in itself.  The fact is potentially consistent with the suggestion that Matthew Ng did not previously inform the plaintiff of the need for a firefighting system in the server room.  And that could account for why Matthew Ng did not say anything about his reminders.  On the other hand, it is equally and potentially consistent with Matthew Ng’s own account of events.  He said he did not reply to Ivan Au Yeung’s email of 28 September 2011 because the defendant was still considering what to do.  I find that explanation a plausible one.  One should bear in mind that at that time, and at least up to November 2011, the defendant was still trying to maintain an amicable business relationship with the plaintiff. 

91.  Fifth, I should add that I find Matthew Ng a credible and reliable witness in general.  He gave evidence in a straightforward manner.  His evidence would have been an outright fabrication if he in fact had not reminded Remus Keung of the server room requirement.  However, his testimony has not revealed any notable or significant discrepancies or inconsistencies. 

92.  He was questioned why he did not make a written note of the reminders which he had given to Remus Keung at the time.  Ms Leung relied on the absence of any written record to contend that no reminders had indeed been given.  However, I find Matthew Ng’s explanation in this regard an inherently plausible and credible one – see para 47 above.  I think we should be cautious about applying indiscriminately our lawyers’ mindset or habit of committing everything to paper to people engaged in other professions and assess their behaviour accordingly.  If we cast our mind back to March 2011, if at that time Matthew Ng had indeed reminded Remus Keung of the server room requirement, it would have been quite reasonable for him to expect that parties would abide by the quoted items in the Quotation and nothing more.  There was arguably no pressing need for him to jot down his conversations as he believed that the agreement itself would be the foundation of the contract terms.  Therefore, in my view, the fact that Matthew Ng did not make a contemporaneous record of what he told Remus Keung does not point strongly to the conclusion that he had not reminded Remus. 

93.  Overall speaking, based on the materials before me, I am satisfied that the defendant has succeeded in proving its factual case on a balance of probabilities.  I hold that Matthew Ng’s account of events is a truthful account and find it as facts accordingly.

Implied term pleaded by the plaintiff

94.  In general, there are two broad groups of implied terms, namely terms implied in fact and terms implied in law.  The former gives effect to the intention of the parties to the particular contract.  The test is broadly whether the implied terms is a necessary one which gives to the contract the meaning which the particular parties to the contract intended.  By contrast, terms implied in law are terms implied into a class of contractual relationship where the parties may have left a good deal unsaid but the courts have implied the term as a necessary incident of the relationship concerned, unless the parties have expressly excluded it.  In this category, the courts are not confined to a narrow test of necessity but can draw upon a broader range of factors, such as the reasonableness of the terms, its fairness and a range of competing policy considerations: see Chitty on Contracts (32^nd edition) at para 14-004, citing Societe Generale, London Branch v Geys [2012] UKSC 63, [2013] 1 AC 523, para 55.

95.  Fire service installation is a specialist area.  There is a statutory regime for the registration of fire service contractors.  The defendant is a specialist in this area and is a registered contractor under the regime.  Under the agreement, it agreed to provide to the plaintiff the service of installing the items as quoted in the 27/F unit.  The plaintiff has no expertise in such matters.  In the circumstances, I accept that as a “lay” customer, it was legitimate and reasonable for the plaintiff to place, and it in fact did place, reliance on the expertise and skill of the defendant in the provision of suitable equipment which would meet the applicable fire safety regulations. 

96.  It is a material fact that it was Matthew Ng who marked on the plan of the 27/F unit exactly where the different equipment was to be installed at the unit.  Effectively, it amounted to design of the installations by the defendant.

97.  As Yip put it rather animatedly in cross-examination, if the defendant suggested that the unit would require 65 sprinkler heads, the plaintiff would not and could not possibly counter-suggest 55 would be sufficient.  Also, in re-examination, Yip said that the 13 items listed in the Quotation were all proposed by the defendant.  The plaintiff simply had no expertise to challenge any of the items and it trusted the defendant.  I agree that given the expertise of the defendant and the lack of it on the part of the plaintiff as customer, the latter would defer to the former on the adequacy and suitability of the proposed works.

98.  In my view, therefore, it is clear that the term contended for by the plaintiff, as set out in para 26(f) above, ought to be implied into the agreement as a necessary incident of the contractual relationship between the parties, unless expressly excluded by them. It was only fair and reasonable for the plaintiff to look to the defendant to ensure that the fire service installation put in place by the defendant would be fit for purpose and satisfy the relevant fire regulations and would enable the plaintiff to secure the FSI/314A certification from the FSD.

99.  In coming to this view, I draw support from some of the authorities cited by counsel where an implied term of fitness for intended purpose was in issue.  The circumstances are of course different in each case but the general theme running through these cases is that where appropriate, an implied term should arise as matter of law as a necessary incident of the parties’ relationship.  See, eg, The Incorporated Owners of Greenville Gardens of Shiu Fai Terrace v Win-Tech Engineering Company Ltd DCCJ 21789/2001, 28 July 2004, para 21 (security system installed at a residential building); Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd [1968] HCA 64, (1968) 120 CLR 516, paras 9 and 11 (burglar-proof door installed at a retail shop).

100.  On the facts as found, Matthew Ng informed Remus Keung at least on two occasions that a firefighting system ought to be installed in the server room.  What Matthew did is clearly consistent with what was expected of the defendant as a specialist in fire service installations.  However, Remus specifically instructed Matthew to take out the FM200 System from the Quotation after being reminded of the server room requirement in March 2011.  In the circumstances, the implied term as pleaded by the plaintiff, which should have arisen given the relationship between the parties, was displaced by that express instruction insofar as the server room was concerned and did not form part of the contract.

101.  I would add that in view of the express instruction given by Remus Keung, clause 11 of the Rider would not advance the plaintiff’s case either.

102.  As such, the failure to install a firefighting system in the server room did not amount to a breach of the agreement on the part of the defendant.  It has performed its contractual obligation.  The plaintiff’s claim for breach of contract fails.  The defendant is entitled to claim the outstanding balance of the contract sum, namely $56,000, with interest.

103.  Counsel did not make any submissions on interest.  I see no reason not to adopt the interest rate stipulated in the Terms and Conditions (see para 18(d) above).  I hold that pre-judgment interest should accrue on the counterclaim amount in accordance with the contractual provision from the due date, ie 17 June 2011, to the date of judgment.  

104.  In view of the above conclusion, it is not necessary for me to rule on the challenges mounted by Mr Lui on quantum.  However, as submissions were made by parties, I shall state my views on them, if possible, with brief reasons, assuming that the implied term contended for by the plaintiff applied.

Claim for the FM200 System installed by Wylam’s

105.  I would not award the contract price of the FM200 System as charged by Wylam’s.  There is simply no basis for me to do so.  The system itself did not form part of the Quotation.  To make the award would be to over-compensate the plaintiff as it would put it in a (much) better position than what the contract provided for when fully performed.  The plaintiff should bear the cost of the system itself but it would be entitled to claim any loss it suffered as a result of the omission of the system in the Quotation, such as the overtime payments it now claims.  Had the works been carried out when the overall renovation was under way in March and April 2011, the plaintiff would not have had to engage staff to work over weekends.

Penalty or liquidated damages?

106.  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 at para 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 para 32.

107.  I am of the view that clause 9 of the Rider is enforceable as a liquidated damages clause. 

108.  The question of whether a damages clause is a liquidated damages clause or a penalty is a matter of construction.  As such, the clause is to be construed by reference to the time when the contract was entered: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 86-87; Cavendish at paras 9 and 243; Chitty at para 26-181C.  Applying the general principle of construction, the court should take into account the relevant background facts which were known or should reasonably have been known to the parties at that time.

109.  Ms Leung submitted that two matters are relevant when considering whether the stipulated compensation at a daily rate of $2,000 is extravagant and unconscionable. 

110.  First, according to the lease in respect of the 27/F unit, the rent, management fee and air-conditioning charge per month amounted to about $363,001 per month, which was about $12,100 per day.  (It must however be borne in mind that the server room forms only a small part of the unit.)

111.  Second, section 5 of the Fire Safety (Commercial Premises) Ordinance, Cap 502, provides that an occupier of commercial premises may be subject to directions to comply with fire safety measures, failing which, it may be convicted and subject to a fine at level 4 and a further fine of $2,500 per day while the failure subsists.

112.  I accept that these are matters which the court may take into account when considering whether the contractual rate is extravagant and unconscionable.  While the parties might not actually know of these figures, these were matters which they would have had the means and could reasonably have found out (in the case of rent, at least a ballpark figure), considering the nature of the businesses they were engaged in.

113.  Mr Lui stressed that as the tenant company had moved into the 27/F unit and commenced operation there in May 2011, the plaintiff in fact suffered no loss at all by reason of the defendant’s breach.  Mr Lui submitted that the distinguishing feature of this case lies in the express admission made by the plaintiff that it had suffered no actual pecuniary loss.  He further submitted that the court cannot simply shut its eye to that reality and should not entertain the plaintiff’s claim for liquidated damages, which would effectively be enriching the plaintiff by a huge amount. 

114.  The plaintiff’s position is, however, that even though the actual operation was not affected, it was taking a risk arising from the non-compliance with the fire regulations every day and if anything happened, the consequence could be very serious. Hence the plaintiff disagrees that it suffered no loss at all.

115.  Again, I would be prepared to accept the plaintiff’s submission.  In any event, it is trite that a liquidated damages clause is enforceable irrespective of the amount of loss actually suffered by the innocent party: see, eg, Chitty at para 26-178. The present case is very different from the situation arising in Apex Engineering & Contracting Ltd v Hong Kong Switchgear Ltd HCA 1188/2010, 20 November 2012.  Mr Lui relied on the remark made by Deputy High Court Judge Woo in para 30.  However, I consider that the remark made there was fact-specific and does not help to advance the defendant’s position on this point.

Delay?

116.  I would hold that there was delay on the part of the plaintiff to mitigate its loss upon finding out the defendant’s breach.  On the facts as found, Matthew Ng informed the plaintiff of the FSD rejection in June 2011.  Nothing was done by the plaintiff from that time till 22 September 2011, apparently due to the resignation of Remus Keung during that period.  I do not think that the plaintiff should be entitled to claim the daily compensation for that period of inaction which lasted three months.  Further, while it was reasonable for the plaintiff to give an opportunity to the defendant to resolve the matter from 22 September 2011 onwards, at the point when the defendant proposed the two options, the plaintiff ought to have acted promptly to engage a third party contractor to complete the works as soon as it decided that neither option was acceptable to it.  For that reason, I would also disallow the daily compensation to accrue after around 15 December 2011.  That is one month after the date of the plaintiff’s demand letter to the defendant.  By the time of the letter, the plaintiff had clearly decided that it would not accept either of the two options.  One month should however be allowed for the replacement contractor to complete the work.  In other words, the period from 15 December 2011 to 6 February 2012 should be disallowed for the purpose of calculating the total liquidated damages payable under clause 9 of the Rider.

Limitation of liability

117.  It is common ground that the issue here turns solely on the proper construction of the agreement. Given the clear and explicit wording expressed in the form of the Rider clause, the Rider would take precedence over any terms in the Terms and Conditions where there is a conflict.  And it seems clear to me that clause 9 of the Rider was indeed in conflict with the limitation of liability clause in the Terms and Conditions.  When interpreted objectively, no maximum amount of liability was contemplated in the former clause at all.  Yet a maximum amount of liability was the very purpose of the latter clause.  That is where the conflict lies.  I accept Ms Leung’s submission that the defendant’s potential liability would not be capped by the contract price.

CONCLUSION

118.  I dismiss the plaintiff’s claim.  On the counterclaim, there be judgment in the sum of $56,000 for the defendant.  Interest shall accrue as set out in para 103 above.

119.  I also make an order nisi that the plaintiff do pay the defendant’s costs of the action and the counterclaim, to be taxed if not agreed, with certificate for counsel.