HONG KONG HOUSING AUTHORITY v. ROTEGEAR CORPORATION LTD

HCCT 26/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 26 OF 2008

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  The Authority was the Employer and Rotegear the Nominated Sub-Contractor (NSC) for an Aldrich Bay construction project. The project (which started in 2005) involved the building of a Domestic Block (containing flats) and Market Complex (containing shops). Nishimatsu was the Main Contractor. Rotegear was responsible for certain electrical works.

2.  By this action the Authority claims damages against Rotegear for breach of contract.

3.  The Authority’s case is that, contrary to what Rotegear warranted to the Authority, Rotegear failed to carry out its electrical works with due diligence and without delay. As a result of Rotegear’s dilatory progress, Nishimatsu terminated Rotegear’s sub-contract on 28 September 2007. This meant that substitute sub-contractors had to be engaged to finish Rotegear’s uncompleted work. It is alleged that this led to the Authority having to pay more for the relevant electrical works than it should have.

4.  There are 3 principal issues for this Court to determine.

5.  First, Rotegear argues that there was no direct contractual relationship between itself and the Authority. Accordingly, Rotegear contends that the Authority has no standing to bring the present proceedings.

6.  Second, Rotegear denies that it was in breach of any contract that there may have been between itself and the Authority. If loss was caused to the Authority by having to engage replacement sub-contractors, this was because (according to Rotegear) Nishimatsu wrongly terminated Rotegear’s sub-contract.

7.  Third, Rotegear says that, even if it were in breach of some contract, the damages of over $9 million claimed by the Authority are excessive.

II. DISCUSSION

A. Was there a contract between the Authority and Rotegear?

8.  By letter dated 10 June 2005 the Authority invited Rotegear to tender for the electrical works associated with the project. The letter did not identify a main contractor. The tender documents accompanying the letter made it clear that the relevant works would be carried out under an NSC and the tender would be evaluated by the Authority.

9.  By a mandatory Form of Tender addressed to the Authority. Rotegear confirmed that it had inspected the Site, the Main Contract, the drawings, and the Sub-Contract Specification for the relevant electrical works. The Form is dated 16 February 2005. But this seems to be an error and the Form was likely sent to the Authority on 21 July 2005.

10.  In the Form, Rotegear generally offered “to execute, complete and maintain the whole of the above-named Sub-contract Works in conformity with the said Main Contract (insofar as it apply to Nominated Sub-contractors)”. More specifically, by the Form, Rotegear undertook to the Authority:-

“to complete the whole of the Sub-contract Works without delay to the Main Works and to complete the whole of the Sub-contract Works and any Section thereof in accordance with the Contractor’s progress of the Main Works provided always the Sub-contractor is allowed any time specified in the Main Contract.”

11.  The Form further stipulated (by cl.4):-

“Unless and until a formal Agreement is prepared and executed this Tender, together with the written acceptance thereof by the Contractor ... shall constitute a building contract between me/us and the Contractor”.

12.  By letter dated 23 August 2005, at the Authority’s request, Rotegear confirmed its tender of $11.85 million for the electrical works. It stated that “there would be no compromise to the standard of materials & workmanship”. It also assured the Authority that “we can mobilize all necessary resources for carrying out the Works to meet with the specified programme if the project was awarded to us”.

13.  The Authority requested the letter because it was concerned that Rotegear’s tender was significantly lower than all the tenders received. The Authority was worried that Rotegear could not realistically perform its obligations under an NSC at such a low tender.

14.  On 22 September 2005 the Authority informed Rotegear that it had been nominated for the electrical works. The Authority’s letter identified Nishimatsu as Main Contractor and stated:-

“On receipt of the written acceptance of your tender from [Nishimatsu] you will be deemed to be a Nominated Sub-contractor within the Conditions of Contract and will be required to enter into a Sub-Contract with [Nishimatsu]”.

15.  Mr. John Bleach SC (appearing for the Authority) submits that the Form constituted an offer by Rotegear to the Authority which the Authority accepted. By the Form, Rotegear promised to progress the relevant works in compliance with the Main Contractor’s programme, in return for being nominated by the Authority as sub-contractor. Rotegear’s offer to carry out the electrical works on time was buttressed by its letter of 23 August 2005. The Authority accepted Rotegear’s offer by nominating Rotegear for the electrical works and requiring Nishimatsu to engage Rotegear as a sub-contractor.

16.  There being offer and acceptance, it follows (Mr. Bleach reasons) that there was an actionable contract between the Authority and Rotegear. If Rotegear failed to comply with Nishimatsu’s timetable for the project and caused delay, there would be a breach of Rotegear’s promise to the Authority. The Authority could sue Rotegear (Mr. Bleach concludes) for the consequences of such breach of promise.

17.  Mr. Bleach notes that Form cl.4 is consistent with this analysis. That clause provides that, in the event of Rotegear being nominated by the Authority and upon written acceptance by the Main Contractor of Rotegear’s tender in consequence of such nomination, the Form would stand as a contract between Rotegear and the Main Contractor until superseded by a formal sub-contract. The Form would perform such function between Rotegear and the Main Contractor in addition to evidencing an agreement between Rotegear and the Authority.

18.  I think that Mr. Bleach’s analysis is correct. In my view, the Form coupled with Rotegear’s letter of 23 August 2005 constitutes an offer to the Authority. The Authority accepted that offer by its letter of 22 September 2005. That acceptance gave rise to a direct contractual relationship between the Authority and Rotegear.

19.  Mr. Hugh Wong (a director of Rotegear appearing on its behalf) submits that in an NSC situation “no sub-contractor ... would intend that any promise or assurance made at a tender meeting would be enforced by the employer”. He stresses that, when he himself discussed the tender with the Authority prior to Rotegear’s nomination, he did not contemplate that he would be entering into a direct contractual relationship with the Authority.

20.  Mr. Wong suggests that the Form contains merely standard wording that is insufficiently specific to be enforceable as a contract between an Employer and a nominated sub-contractor. He contends that, if Mr. Bleach is right, there should have been a statement in the Form that the Employer would have the legal right to enforce a tenderer’s promise if not performed.

21.  Mr. Wong adds that, if Mr. Bleach is right, one would have the unfair situation where the Authority could sue Rotegear for breach of promise, but Rotegear could not sue the Authority.

22.  I am unable to accept Mr. Wong’s arguments.

23.  First, the civil law construes parties’ intentions objectively by reference to their overt acts. In determining whether or not parties intended to enter into a legally binding agreement, the law pays no regard to their unexpressed subjective intentions or thoughts.

24.  This means that the law cannot take account of Mr. Wong’s personal understanding as to whether or not Rotegear was entering into a direct contract with the Authority in the course of tendering for the electrical works. Such understanding is irrelevant. The Court can only take into account the overt acts which one party to the transaction manifested to the other.

25.  For the purposes of this case, such overt acts would include: the fact that the invitation to tender emanated from the Authority without identifying a specific main contractor; the fact that the Form and the 23 August letter were specifically addressed by Rotegear to the Authority; the fact that Rotegear’s tender was evaluated by the Authority; and the fact that tender acceptance was communicated to Rotegear by the Authority. In none of the above was Nishimatsu involved. In none of the above is there any suggestion that the Authority was simply acting as Nishimatsu’s agent.

26.  Second, the wording of the Form seems to me sufficient to give rise to a contractual arrangement. There is no legal requirement that there be an express sentence acknowledging the Authority’s entitlement to sue a nominated sub-contractor directly.

27.  Third, the asymmetry in ability to sue which Mr. Wong identifies is not a basis at law for concluding that there is no enforceable legal relationship between 2 persons.

28.  It is commonplace in contract and tort law for one party to warrant something in consideration for another party engaging in some conduct. A typical example is where an agent warrants to a third party that the agent has authority to act for a principal. The mere fact that the agent cannot sue the third party if the warranty of authority turns out to have been wrongly made, does not prevent the third party from suing the agent for breaching the warranty.

29.  Accordingly, for the reasons discussed above, I conclude that there was an enforceable contractual relationship between the Authority and Rotegear.

B. Was there a breach of contract?

30.  There is ample evidence that by August 2007, in relation to the electrical works in both the Domestic Block and the Market Complex, Rotegear was significantly behind schedule.

31.  For example, according to the minutes of a site meeting on 22 August 2007 which Mr. Wong had specifically been required to attend, the Housing Department identified the following problems with Rotegear’s performance:-

“-- Manpower level was inadequate with respect to site work and paper work.

-- Achieved progress in Market Complex was unacceptable.

-- Submission and re-submission of external lighting material was outstanding.

-- Ordering of critical materials was delayed and outstanding. (in particular the armoured/ pre-fab. Cable, single core cables, main switch board, many accessories for domestic flats, etc.).

-- Submission of shop drawings was outstanding for external lighting layout and switchgears arrangement of meter rooms, ELV-PA/ security systems.”

32.  At the meeting, the same minutes record that “Rotegear was urged again to improve on the situation without further delay”.

33.  Nishimatsu, in particular, pointed out that “delay in delivery and installation of critical Electrical materials would likely cause late completion of the domestic block beyond the contract completion day”. This message “was made known to Rotegear repeatedly, clearly and specifically in the meeting”. Mr. Wong on behalf of Rotegear “acknowledged and understood the aforesaid message”.

34.  On 24 August 2007, Nishimatsu followed up on the meeting with a warning letter. That stated:-

“Despite to our numerous letters urging you the progress of works in domestic block and market, we are very disappointed to note that there has been no improvement to the electrical installation at meter rooms and corridor lighting installed at 3 floors, the electrical installation at domestic blocks was suspended since June of 2007. For market, the Contract completion date was 30 July 2007 but the ELV [Extra Low Voltage] installation was still incomplete and continues to be in delay.

For the domestic block, the F [Floor] 40 concrete structure was completed on February 2007 but the wiring within domestic flats has only been installed from F1 to F32. The wiring within the domestic flat has now been suspended since June 2007 while wiring of other communal area has not yet commenced. We understand that all such suspension of works has been caused by your inability to deliver cabling materials to site. Since the cable materials require 6-8 weeks delivery, if those cables are not procured now, the project completion will not be achieved due to your delay in achieving the energisation date of 15 Oct 2007.

In addition, you reported in the previous BS meeting in July that the LV main switch will be delivered to site around end of September 2007 but we replied in the meeting that such late delivery shall cause delay in achieving the energisation date of 15 Oct 2007 as the installation of LV main switch usually requires 3-4 weeks at least. To date your have still not confirmed the expected delivery date of the LV main switch to achieve the energisation date.

....

We have chased you for the above via numerous letters, memos, ad-hoc meetings, special meeting with [the Authority] as listed below.

[List of 10 items]

Despite our letters, meeting etc there has been no response or improvement to the progress of your Sub-Contract Works. The progress of electrical installation at domestic block in last 2 months is zero except for some minor works.

....

We would remind you of your Contractual obligation to proceed with the Sub-Contract Works with due diligence and not to be in persistent breach of your obligations under the Sub-Contract.”

35.  On 29 August 2007 the Authority itself wrote to Nishimatsu (cc. to Rotegear) expressing alarm. This was because the Authority had “not observed any significant improvement on Electrical NSC’s performance”. The letter identified the following as requiring “immediate attention”:-

“1. Slow progress of ELV installation in the Market Complex.

2. Slippage of T & C [Testing & Commissioning] works in Market Complex.

3. Late ordering of major materials (armoured and pre-fab cables for Domestic Block).

4. Slow or non-progress of installation works in Domestic Block (such as wiring accessories for domestic flats, cable riser installation, lateral sub-mains installation and main switchboard installation).”

36.  The Authority concluded its letter:-

“We are deeply concerned that any further non-performance of your Electrical NSC could undermine the progress and the quality of the works to such an extent that you will fail to fulfil your contractual obligation in this project. Therefore I urge you to step up your supervision and control of Electrical NSC and request you to propose an action plan to show us how you would contain and rectify this unsatisfactory situation.”

37.  The situation was still bad on 10 September 2007 as evidenced by the following letter of that date from Nishimatsu to Rotegear:-

“As we concerned that your performance in this project is not satisfactory, while the revised Contract completion date for Market Complex will be 21 September 2007 but the ELV installation is still incomplete and continues to be in delay. We would have no choice to hold your company responsible for all the losses and damages due to your delay to this work section as resulted.

In addition, please pay special attention that the construction progress in Domestic Block are going to the final stage, in which all trades of work progress will become critical in accordance with the said Master Programme. Since you have suspended the cabling work in domestic block since June of 2007 by your inability to deliver cabling material to site. As advised by the cable supplier that the cable materials require 8-12 weeks for fabrication, if those cables are not procured before 15 Sept 2007. While you are seriously reminded that the failure of procurement/ delivery of said power cables on time will cause the delay in achieving the mentioned energisation date of 18 Dec 2007, and will extend to cause the late in Project completion accordingly. Therefore, you are instructed to procure all necessary material and arrange adequate manpower to complete your works on time, which the milestone dates for the domestic block are as follows:-

a. Power-on the public area -- 18 Dec 2007

....”

38.  By letter dated 14 September 2007 to Rotegear, Nishimatsu observed that there still had been no improvement in the situation at the project site:-

“The following is a brief summary of thee current status of your Sub-Contract Works:-

a) There has been no progress of the Extra Low Voltage (ELV) works at the market complex since 16th August 2007. The ELV works are critical to the completion and handover of the markets complex, which is currently scheduled for 21st September 2007. Your failure to proceed with due diligence with the ELV works will affect the issue of the Completion Certificate for Section 3 of the Works.

b) There has been no progress on the testing and commissioning works for the electrical installation to the market complex. To date you have only completed approximately 60% of the testing and commissioning. The testing and commissioning is critical to the completion and handover of the market complex. Your failure to proceed with due diligence with the testing and commissioning for the market complex will affect the issue of the Completion Certificate for Section 3 of the Works.

c) For the residential block you have only installed wiring within the flats up to 32nd floor. The wiring to the remaining eight floors has not progressed since 3rd April 2007. You have not installed the cabling from the individual flats to meter room. The energisation date for residential block is 18th December 2007. Your failure to proceed with due diligence with the wiring/ cabling installation to the residential block will affect the energisation of the block and thus delay the completion of the Works.

d) Without the wiring installation you cannot install the wiring accessories to the flats. Thus the surrounding making good works by our finishes sub-contractor cannot be progressed. Your failure to proceed with due diligence with the wiring installation to the residential block will affect the works of our other sub-contractors.

e) You have not ordered the armour cable for the residential block. We understand from your supplier, Keystone, that if you do not order the armour cable on or before 15 Sep 07 the delivery period will increase from 6 to 8 weeks to 8 to 12 weeks. You are urgently requested to confirm your order of armour cable before 15th September 2007 so as not to delay the energisation of the residential block. We believe that your failure to order the armour cable amounts to a further failure to proceed with due diligence with the Sub-Contract Works.

You have had only 5 labour working on Site. Moreover this labour is only undertaking non-critical defect rectification to the market complex and residential block is not progressing the Sub-contract Works. We believe that this amounts to a further failure to proceed with due diligence with the Sub-Contract Works. In respect of this labour we have recently become aware that you have not paid your labour since middle of July 2007. We would remind you of your legal obligation to pay your labour promptly and urge you so to do.

We hereby give you notice, pursuant to clause 27 of the General Conditions of Sub-Contract, that you are failing to proceed with the Sub-Contract Works with due diligence. You are hereby requested to proceed with the Sub-Contract Works with due diligence and to remedy your defaults as detailed above.”

39.  Finally, by letter dated 28 September 2007, Nishimatsu terminated Rotegear’s NSC. That letter reads (in part) as follows:-

“Despite our letter to you informing you or your failure to proceed with due diligence with the Sub-Contract Works you have not remedied such default. We hereby terminate your Sub-Contract pursuant to Clause 27(1) of the Sub-Contract....

We would also advise you that the Contract Manager has now written to us stating that Section 3 of the Works (Market Complex) cannot be considered substantially complete as at 21 September 2007 as in her opinion the electrical installation works are incomplete. The Contract Manager specifically identified the following works as requiring to be completed before a certificate of completion for Section 3 of the Works can be issued:-

-- ELV installation - (light control system, Door Monitoring system, Emergency Call Bell system, CCTV surveillance system);

-- T & C of entire ELV system not yet done;

-- T & C of Electrical Installation of public areas: Not yet completed;

-- T & C of Electrical Installation for stalls (Completed but revealing some major defects);

-- Facade lighting;

-- LED message display board;

-- LCD TV installation with the signal distribution system; and

-- Submission of Form WR1.”

40.  In my view, the litany of complaints in the correspondence summarised above paint an accurate picture of a substantial lack of progress on site. Thus, as a result of Rotegear’s failure to progress critical electrical works in a timely fashion, the completion of the Domestic Block and Market Complex by 21 September 2007 (that is, the completion date envisaged at the time of Nishimatsu’s termination letter) had been put into jeopardy.

41.  I reach this conclusion especially in the absence of any contemporaneous letters from Rotegear to Nishimatsu or the Authority refuting the matters of which complaint was made prior to 28 September 2007.

42.  It was Mr. Wong’s evidence that no such refutation letter was sent, in order to maintain the “good relationship” between Rotegear on the one hand and Nishimatsu and the Authority on the other.

43.  According to Mr. Wong, at the time, Rotegear was having to put up with a “financial burden”. By this I understand that Rotegear was having cashflow difficulties. This meant that it could not pay for the more expensive of the electrical equipment (such as main LV switchboard) which it had to supply in order to complete its work. On occasion, Mr. Wong had to request financial assistance from Nishimatsu or the Authority in the form of one or other of the latter ordering such electrical equipment on Rotegear’s behalf and Rotegear paying for the same in instalments or by deduction from interim payments becoming due to it.

44.  I find this evidence of Mr. Wong on maintaining a “good relationship” hard to believe. It seems to me that, if the correspondence from the Authority and Nishimatsu painted the wrong picture about Rotegear’s actual progress on the project, Rotegear would have been saying so in writing in no uncertain terms. I doubt that Rotegear would have been holding back its fire on some forlorn hope of maintaining a “good relationship” with Nishimatsu and the Authority. Any relationship between Rotegear and the latter two would have already been in a deteriorated condition as a result of the complaints being levied. It would have been evident to Rotegear that, unless it refuted the complaints or improved its progress, there would be no “good relation” to preserve.

45.  If anything, the “financial burden” which Mr. Wong candidly accepts that Rotegear was then facing, goes a long way towards explaining why progress on the electrical works was slow.

46.  In this connection, consider, for instance, the ELV works for the Market Complex.

47.  Rotegear sub-contracted those works to MegaTech Engineering Ltd. MegaTech refused to proceed with the works because it was not being paid by Rotegear. On 23 August 2007 MegaTech agreed, however, to deliver certain necessary equipment in return for an immediate cheque payment of $29,5000 and a 45 days post-dated cheque for $177,091.25. Both amounts represented monies long overdue to Megatech.

48.  In the event, following delivery of the equipment, MegaTech instead received a 60 days post-dated cheque from Rotegear contrary to the understanding reached between the two. As a result, MegaTech by letter dated 17 September 2007 refused to do any further work “unless and until a new mutual agreement regarding the payment and work progress has been established”. The outcome was that Rotegear could not complete the ELV works in the Market Complex as scheduled.

49.  In my view, Rotegear was silent in the face of so many complaints about its progress from Nishimatsu and the Authority for the simple reason that it had no good answer to those criticisms. Lacking the necessary resources, especially financial resources, Rotegear could not keep in step with Nishimatsu’s programme. On the contrary, its lack of progress on site cast doubt on its ability to perform its obligations and repeatedly placed Nishimatsu’s programme in jeopardy.

50.  In those circumstances, I am unable to say that Nishimatsu wrongly terminated Rotegear’s NSC on 28 September 2007.

51.  I conclude from all this that Rotegear breached its warranty to the Authority to perform its obligations in accordance with the Main Contractor’s programme.

52.  Mr. Wong, however, submits that such a conclusion would not be right.

53.  First, Mr. Wong says that Nishimatsu was constantly sending to Rotegear advance drawings incorporating variations to the electrical works. Rotegear acted upon these drawings. But it requested that the Authority and Nishimatsu provide it with formal site instructions incorporating the relevant variations. It was not until those variations were received (Mr. Wong claims) that Rotegear could apply for Extensions of Time (EOTs). Such EOTs as it might have applied for by reason of the advanced drawings, would have enabled Rotegear (Mr. Wong asserts) to finish its works on time.

54.  I am unable to accept this argument.

55.  Rotegear never in fact applied (whether formally or informally) for an EOT.

56.  The NSC did stipulate that, where an act or omission of the Main Contractor has delayed relevant Sub-Contract works, the Sub-Contractor will be entitled to an EOT. But this is provided that the Sub-Contractor “gives notice in writing to the Contractor as soon as practicable but in any event within 30 days of the cause and probable extent of any delay ... becoming apparent”.

57.  Mr. Wong admitted in evidence that he was fully aware of this proviso.

58.  The NSC did not require a site instruction before an EOT could be granted to Rotegear. If Rotegear truly believed that (by reason of some variation contained in some drawing) it was entitled to an EOT, it was incumbent upon Rotegear to give written notice to Nishimatsu accordingly, within the time stipulated by the NSC. No notice having actually been given by Rotegear, it is difficult to see why it should be entitled after the event to the benefit of EOTs which it might have received had it applied for the same.

59.  Mr. Wong claims not to have applied for EOTs because of an understanding reached with Mr. Patrick Yu of the Authority. That understanding (according to Mr. Wong) was to the effect that Rotegear could apply for any EOTs at the end of the project and everything would be sorted out at the time of a final account. Mr. Yu denies that there ever was such an understanding.

60.  On this, I do not accept that there was an understanding between Mr. Wong and Mr. Yu.

61.  I do not think that the allegation of an understanding is credible. Mr. Wong never raised the existence of such understanding until his second witness statement in this action. There is no hint of the understanding in any contemporaneous document. One would have expected the matter to have been mentioned at some point before 28 September 2007, if there truly had been some understanding.

62.  Nor do I see how the supposed understanding could be workable. It would have been necessary at any moment for everyone involved in the project to know whether or not Rotegear was entitled to an EOT. Rotegear’s entitlement or not to an EOT would have an effect on the overall programming for the project, since installation of electrical equipment would impact on other sub-contract works. If entitlement to EOTs was only to await a final reckoning at the end of the day, it would have been impossible to assess at a given moment whether the project as a whole was or was not on time.

63.  Second, Mr. Wong argues that Nishimatsu’s termination of the NSC was premature. Nishimatsu being entitled to 60 days EOT for inclement weather, Rotegear should have had the benefit of the same. That would have meant (it is suggested) that Rotegear could have finished its works within the 60 days’ allowed to Nishimatsu.

64.  But Mr. Bleach rightly points out that it does not follow from the fact that, under the Main Contract, Nishimatsu became entitled to 60 days extension for inclement weather, that Rotegear should automatically enjoy the same benefit. The Domestic Block and Market Complex were enclosed by February and December 2006 respectively. Thus, inclement weather should not have had a delaying effect upon the electrical works which Rotegear largely had to carry out indoors.

65.  Nor is it apparent from the evidence that Rotegear would have had sufficient financial and manpower resources to complete the project within any extended period of 60 days. This is especially doubtful given the “financial burden” admitted by Mr. Wong and the fact that for several months prior to the termination of the NSC in September 2007 Rotegear’s progress had been very slow.

66.  There is evidence that, between 17 September and 10 October 2007, Mr. Wong injected $2 million into Rotegear by 6 payments of between $100,000 and $300,000. But (as Mr. Bleach observes) this must be viewed against the background that in the same period Rotegear still owed Nishimatsu about $1 million for electric cables and had to find funding of about $2.2 million for a cable riser, about $600,000 for a main LV switchboard, and about $350,000 for ELV equipment. Thus, despite the $2 million injected, Rotegear still required substantially more to comply with its obligations.

67.  Third, Mr. Wong argues that, if Nishimatsu had been delayed, it would have had to pay the Authority liquidated damages of about $45,000 per day. Even on a generous assumption of (say) 60 days’ delay, Nishimatsu would only be liable to the Authority for liquidated damages of about $2.7 million. Nishimatsu could then (Mr. Wong says) recover this last amount from Rotegear by way of compensation for breach of the NSC.

68.  $2.7 million is nothing like the sum of over $9 million now being claimed by the Authority from Rotegear. It is unfair (Mr. Wong asserts) for the Authority to have a claim in breach of warranty against Rotegear that is wholly disproportionate to the amount that Nishimatsu could claim from Rotegear by way of consequential damages.

69.  In my view, there is nothing in this argument. Rotegear’s liability to the Authority for breach of warranty is a separate matter from Rotegear’s liability (if any) to Nishimatsu under the NSC. As a matter of law, one cannot infer anything about the legitimacy of the Authority’s action by reference to the compensation which Rotegear may have had to pay Nishimatsu.

70.  Mr. Wong’s arguments therefore do not alter my conclusion that Rotegear breached its warranty to the Authority. Rotegear could not keep to Nishimatsu’s schedule for the project works. This led to Nishimatsu terminating Rotegear’s NSC. In consequence, the Authority had to pay more to get Rotegear’s electrical works done. Rotegear is thus liable for such additional cost which the Authority reasonably and foreseeably had to expend in order to finish off Rotegear’s uncompleted work.

C. Are the damages being claimed excessive?

71.  Following Rotegear’s termination in September 2007, the remaining electrical works in the Domestic Block were tendered out. The works were awarded to Pekko Engineering Ltd. which had put in the lowest tender ($7,325,000).

72.  The works were let out to Pekko as a domestic sub-contractor to Nishimatsu and not as a nominated sub-contractor. The Authority calculated (and I accept) that it would be more costly and time-consuming if the works were let out under an NSC. Nishimatsu charged the Authority a mark-up of 25% over Pekko’s tender to take account of the risk of supervising Pekko at a late stage in the project.

73.  The Market Complex was taken out of the Main Contract by agreement between the Authority and Nishimatsu. The remaining electrical works there were carried out by Newton Engineering Co. Ltd. Newton was the Authority’s Term Maintenance Contractor.

74.  As Employer, the Authority would ultimately have to bear any additional cost to the project resulting from Rotegear’s termination. In engaging replacement sub-contractors for the Domestic Block and Market Complex, the Authority was mitigating its loss. It is entitled to be compensated for all reasonable steps taken in mitigation.

75.  At trial, the parties each called a quantum expert. The Authority relied on the evidence of Mr. John Battersby and Rotegear on the evidence of Mr. Paul Mallon.

76.  The formula agreed between the experts for computing Rotegear’s damage may be summarised as follows:-

“Amount A (Work done by Rotegear prior to termination)

PLUS

Amount B (Cost of completing Sub-Contract Works for Market Complex)

PLUS

Amount C (Cost of supplying cabling material and LV switchboard for Domestic Block)

PLUS

Amount D (Cost of completing Sub-Contract Works for External Works and Domestic Block other than supply of cable materials and LV switchboards for Domestic Block)

PLUS

Amount E (Additional staff costs and professional fees)

MINUS

Amount F (Estimated cost of Sub-Contract Works pursuant to the Sub-Contract)

EQUALS

Amount G (Total Damages)”

77.  Before going through Amounts A to G, I note that I have generally (but not always) preferred the evidence of Mr. Battersby to that of Mr. Mallon where the two have been in conflict. Mr. Battersby has had long experience as a QS in Hong Kong. On the other hand, although Mr. Mallon worked as an engineer in various Hong Kong companies between 1997 and 2004, he is not actually a QS. Further, it does not appear that Mr. Mallon had sufficient access to relevant documents in this case. As a result, Mr. Mallon’s report has made a number of assertions (such as the existence of arithmetical and other errors) which have appeared unjustified on a closer inspection of the documents. To put it bluntly, it seems to me that Mr. Battersby was more careful than Mr. Mallon in the preparation of an expert report.

78.  The experts are agreed that Amount A should be assessed at $8,461,000.

79.  Mr. Battersby assesses Amount B at $1,049,256.49, while Mr. Mallon puts the amount at $434,185. The difference between them is mainly attributable to an omission by Mr. Battersby of a maintenance cost of $200,000 and to Mr. Mallon’s deduction of supposed overpricing in relation to Newton’s works.

80.  Here I prefer Mr. Battersby’s figures. Mr. Bleach’s cross-examination of Mr. Mallon has (I believe) demonstrated that there were quotations from suppliers supporting the prices claimed by Newton.

81.  The experts both assess Amount C at $3,058,549.

82.  Mr. Battersby assesses Amount D at $9,136,000. Mr. Mallon’s assessment is $6,032,166. The difference between them is mainly attributable to supposed arithmetic and duplication errors in Pekko’s tender price and the mark-up applied to Pekko’s tender price.

83.  Here I think that Mr. Bleach’s cross-examination of Mr. Mallon has shown that the alleged arithmetic errors were picked up and corrected by Pekko when quoting its tender price. As for the supposed duplication errors, I am not satisfied that there was double-counting as Mr. Mallon asserts. Thus, for instance, entries (such as those in relation to “bonding for water pipe/gas pipe & sink”) which Mr. Mallon says are duplicates do not bear precisely the same description and have different rates ascribed to them. I also bear in mind Mr. Battersby’s evidence that, Pekko having been engaged on a lump sum basis, it is likely that rates were worked out retrospectively after a total tender price had been decided on by Pekko. Thus, “corrections” to rates would probably have had little effect on the lump sum tender price already determined by Pekko.

84.  Insofar as mark-up is concerned, Mr. Mallon thought that Nishimatsu’s mark-up of 25% was too high. He suggested that 2.4% would be more appropriate. That was based on an allowance for attendance of 2.4% in the NSC between Rotegear and Nishimatsu. But that figure strikes me as far too low. As Mr. Battersby pointed out (and Mr. Mallon accepted) an attendance fee is typically charged by a main contractor on sub-contractors to reflect the cost of the latter using general facilities (such as canteen and toilets) made available by the main contractor. Consequently, as a reflection of the increased risk to Nishimatsu in taking on Pekko as a domestic sub-contractor at short notice, a figure of 2.4% would be inadequate.

85.  The evidence is that something like 15% would be the normal mark-up charged by a main contractor for a domestic sub-contractor. By comparison, 25% would seem excessive. But taking account of the fact that Nishimatsu did not charge the 25% mark-up on materials which it supplied for the electrical works, the actual uplift is something more like 17.5%.

86.  Although this figure of 17.5% is slightly higher than the 15% figure commonly used as a starting point, I am not prepared to say that it was excessive or unreasonable. I am mindful, in particular, that Pekko was engaged late in the day and within a short-time frame. Thus, it may not have been possible within the limited time available for Nishimatsu fully to assess the risks inherent in taking on Pekko as a domestic sub-contractor. Not surprisingly then, Nishimatsu may not have been prepared to engage Pekko without an uplift in the mark-up percentage. The evidence is that in fact Nishimatsu strongly insisted on 25%.

87.  Accordingly, on Amount D, I prefer Mr. Battersby’s assessment.

88.  In relation to Amount E, Mr. Battersby assesses additional staff costs at $572,087.90, Mr. Mallon at $421,333. Mr. Mallon suggests that the additional staff deployed by the Authority to supervise Pekko and Newton was excessive. He therefore reduces the amount attributable to such staff by one-third.

89.  Here, I would follow Mr. Mallon. In terms of additional supervisory staff, the authority deployed 5 persons on site and 6 off-site. Off-site staff cost the equivalent of nearly $200,000; site staff cost about $380,000. These figures strike me as excessive, especially given that there would inevitably already be some general supervision by Nishimatsu. Mr. Mallon’s approach of a one-third discount would seem to lead to a more reasonable figure. Mr. Bleach criticises the discount as “arbitrary”. But I believe it is a rough-and-ready approach, doing the best that one can in all the circumstances.

90.  On Amount F, Mr. Battersby comes up with $13,175,402.14 and Mr. Mallon $13,319,599.22. There is in fact little to choose between the two calculations of Amount F. Since quantification cannot be an exact science, I shall err on the side of generosity towards Rotegear and go for Mr. Mallon’s figure.

91.  By reason of the foregoing, Amount G (Total Damages) comes to $8,784,884.72. For ease of handling, this can be rounded down to $8,784,880. This is about $300,000 less than the damages claimed in the Amended Statement of Claim ($9,087,258.84).

III. CONCLUSION

92.  There will be judgment for the Authority against Rotegear in the sum of $8,784,880. Interest is to accrue on the sum at 1% over prime from the date of the Statement of Claim (24 April 2008) until the date of this Judgment. Thereafter interest will run at the judgment rate until payment.

93.  There will be an Order Nisi that Rotegear is to pay the Authority’s costs of this action, such costs to be taxed if not agreed.