RYODEN LIFT SERVICES LTD v. THE INCORPORATED OWNERS OF RIALTO MANSION

DCCJ 36/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 36 OF 2005

____________

____________

JUDGMENT

1.  Rialto Mansion is at King’s Road, North Point, Hong Kong.  It has 4 passenger lifts.  Ryoden, the Plaintiff, is a company providing, among other things, lift and escalator maintenance services.  By a written agreement dated 30 October 2002 with the Incorporated Owners of Rialto Mansion (“IO”), the Defendant, Ryoden agreed to provide maintenance service to the 4 lifts at the building (“the Agreement”).

2.  In July 2003 and during the currency of the Agreement, the IO resolved to dismantle and to replace the lifts with new ones and therefore sought to terminate the Agreement.  Ryoden now claims for breach of the Agreement.  The IO raises the defence of frustration and waiver/estoppel.

THE BACKGROUND

3.  The personnel, former and current, of Ryoden and the former chairperson of the IO gave evidence.  However, the really relevant facts are largely not in dispute.

4.  The Agreement contains the following terms:

Clause 2

“This Agreement shall commence on 01/12/2002 and subject as hereinafter provided shall continue for a period of Two (2) year(s) (hereinafter called “the Initial Period”) and thereafter until terminated by one month’ notice in writing given by either party to the other party and expiring at or at any time after the end of the Initial Period.”

Clause 3

“In consideration of the said services the Owners shall pay to the Contractors the sum of $13,000.00 Hong Kong currency per calendar month being the service fee for the maintenance of the equipment covered by the Agreement.  Such payment shall be made in advance, failing which the Contractors shall have the right to suspend their maintenance services without giving previous notice to the Owners until such payment has been settled (without prejudice to the Contractors’ right of recovery as aforesaid).  Overdue interest shall be charged at 2% per calendar month for each month or part thereof.”

5.  By a letter dated the same date of the Agreement, Ryoden agreed to reduce the service fee for the months of December 2002 and December 2003 by effectively 50%.

6.  At about the end of May 2003, the IO advertised for invitation to tender for the work of replacing the lifts at the building.  Aware of this, Ryoden also submitted a tender for the work on 10 June 2003.

7.  At the general meeting on 7 July 2003, the owners passed various resolutions concerning the major renovation of the building.  One of them was the replacement of the passenger lifts.  It was resolved that the work and subsequent maintenance would be contracted to a company other than Ryoden.

8.  By letter dated 20 August 2003, the IO, through its surveyor, informed Ryoden of the decision to dismantle and to replace the 4 lifts of the building: lifts nos. 1 and 2 on 1 October 2003 and lifts nos. 3 and 4 on 1 January 2004.  The IO sought to terminate the Agreement by virtue of alleged frustration.

9.  Ryoden wrote back on 15 September 2003 stating that Ryoden would hold the IO liable for damages if the IO chose to terminate the Agreement prematurely.  Ryoden requested the IO to reconsider its decision.

10.  The IO proceeded with the dismantling and replacement of the lifts.  Ryoden provided maintenance service to lifts nos. 1 and 2 until the end of September 2003.  Since 1 October 2003, Ryoden continued to provide maintenance to lifts nos. 3 and 4 until about July or August 2004 when these remaining lifts were also dismantled.

11.  Finally, Ryoden, through its then solicitors, wrote to the IO on 9 October 2003 holding the IO liable for repudiatory breach of the Agreement and accepting such repudiation.  Ryoden demanded the IO to settle the balance of the contractual service fees in arrears and damages for early termination of the Agreement.

12.  I find the above background to be the facts.

FRUSTRATION

13.  The IO pleaded the alleged frustration as follows:

“8.   In particular, the Defendant contends that the performance of the Agreement became impossible of performance without any fault on the part of the Defendant and the Agreement was thereby frustrated.  In the premises, the Defendant was discharged from further performance of the Agreement.

…..

9.     Further or in the alternative, the Agreement was subject to a condition, which is to be implied from the nature thereof, that the Lifts should continue to exist at the time when the said maintenance of the Lifts was to be given by the Plaintiff.  Since the Lifts ceased to exist without any fault on the part of the Defendant, the performance of the Agreement between the parties was rendered impossible.”

14.  Mr Ng for Ryoden referred to the following propositions that LJ Bingham (as he then was) set out in J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at 8:

(1) The doctrine of frustration was evolved to mitigate the rigour of the common law’s insistence on literal performance of absolute promises.

(2) Since the effect of frustration is to kill the contract and to discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended.

(3) Frustration brings the contract to an end forthwith, without more and automatically.

(4) The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it.

(5) A frustrating event must take place without the blame or fault on the side of the party seeking to rely on it.

15.  In the circumstances of the present case, Mr Ng rightly emphasized propositions (4) and (5) above.  A contracting party cannot rely on frustration that is due to his own conduct or to the conduct of those for whom he is responsible: see Chitty on Contracts (29^th ed) at 23-59.

16.  Mr Lee for the IO submitted that where the subject matter of the contract is destroyed, one cannot implement his promise and is therefore excused unless he is in fault, for instance, by having induced the frustration.  He submitted that the onus of proving “self-induced frustration” lies on the party who asserts that this is the case.

17.  Mr Lee sought support from Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1941] 2 All ER 165 where an explosion on board a vessel prevented it from undertaking a charter voyage.  The cause of the explosion could not be definitely ascertained.

18.  I do not agree what Mr Lee submitted happened in the present case.  To begin with, this is not a case where the subject matter was found destroyed one day apparently out of no one’s fault.  The dismantling and replacement of the lifts as well as their timing were the direct results of the conscious decision of the owners.  The owners then sought to terminate the Agreement on the basis of such decision.

19.  In my view, the plea of frustration is a simply non-point in the present case.

WAIVER/ESTOPPEL

20.  The principles regarding waiver or estoppel should not be in dispute.  Mr Ng summarised the following factors that are discussed in Chitty on Contracts (above) at 3-086 to 3-094:

(1) a legal relationship giving rise to rights and duties between the parties;

(2) a promise or a representation by one party that he will not enforce against the other his strict legal rights arising out of that relationship;

(3) an intention on the part of the former party that the latter will rely on the representation; and

(4) reliance by the latter party.

21.  It must be inequitable for the promisor to go back on the promise.  This is so when the promisee can no longer be restored to the position in which he was before he acted in reliance on the promise: see Chitty on Contracts (above) at 3-095.

22.  The IO pleaded the waiver/estoppel as follows:

“10(1)    The waiver is contained in or is to be inferred from the letter of the plaintiff dated 10 June 2003 or alternatively from the conduct of the Plaintiff, in that the replacement of the Lifts were with the knowledge of the Plaintiff advertised and were put up for tender, and a tender for replacement of the Lifts was submitted by the Plaintiff who never made any claim to perform or to carry out the Plaintiff’s obligation under the Agreement but by his silence and his participation in the tender for the replacement of the Lifts permitted and induced the Defendant to believe that the Plaintiff did not intend to perform or carry out the Plaintiff’s obligation under the Agreement and the Plaintiff has waived the condition of the Agreement.

(2)   By reason of the matters set out in the above paragraph……the Defendant is estopped from saying that the Plaintiff intended to perform or to carry out the Plaintiff’s obligation under the Agreement and the Defendant thereby did not have to pay for the performance of the Plaintiff’s obligation under the Agreement.”

23.  By the 10 June 2003 letter, Ryoden submitted its tender for the replacement of the lifts at the building.  By the time of the tender, the initial 2-year term of the Agreement (until the end of November 2004) still had a substantial part to run.  The Agreement was then subsisting and operative.

24.  Ryoden’s letter or tender was silent as to the continuing operation of, and Ryoden’s rights under, the Agreement when it participated in the tender process.  But in my view, Ryoden’s tender per se was not conduct inconsistent with the subsistence of the Agreement or its intention to perform its obligations under the Agreement.

25.  Upon receipt of the tenders, including that submitted by Ryoden, it would be for the owners of the building as whole to decide whether and, if yes, to which tendering contractor the IO should offer the lift replacement work.  Ryoden’s tender might not be successful.

26.  The tender was silent as to when the replacement work was supposed to commence.  In Ryoden’s case, I notice from its tender that a period of about 180 days would be required for the lifts components to be manufactured and shipped.  Therefore even if Ryoden’s tender had been successful, the Agreement would nevertheless have remained operative until the existing lifts were actually going to be dismantled at a time unknown by then.  The fact was that the existing lifts were not dismantled until October 2003 and July 2004.

27.  If Ryoden had been contracted for the replacement work and the performance of the new contract had entailed the early termination of the Agreement, I have no doubt that this would have had to be resolved as a matter of necessity by Ryoden and the IO.  Lee, the then Administrative Officer of Ryoden, also gave evidence to that effect.

28.  In the circumstances, the 10 June 2003 letter or the submission of tender per se could not be an unequivocal representation that Ryoden did not intend to perform the Agreement or to insist on its rights under the Agreement.

29.  Likewise, I do not find the alleged inducement to the owners to make their decisions.  There is no suggestion that the IO had formed the alleged belief that Ryoden would be forgoing its rights under the Agreement by the time when the IO formed the idea of replacing the lifts or when the IO decided to invite for tender.

30.  The minutes of the owners’ meeting on 7 July 2003 also contains no suggestion that before the resolution was put to vote, the owners had discussed or considered Ryoden’s stance in respect of the Agreement, not to mention the alleged belief that Ryoden would not insist on its rights under the Agreement.

31.  The contemporaneous document suggests that the IO’s belief at the time was quite the opposite of what it now alleges.  The letter from the IO’s solicitors to the IO dated 26 July 2003 was once subject to debate as to whether it was covered by legal professional privilege.  No such issue was any more taken at the trial.  In the letter, the solicitors gave the following background:

“On 7 July 2003, the IO resolved in an owners’ meeting that the lifts nos. 1-4 …… are to be replaced and the contractor undertaking the said replacement of lifts was chosen which was not Ryoden.

IO is worrying about the potential litigation which is likely to be ensued because Ryoden is likely to sue IO for breach of the Agreement.  IO is particularly inclining to raise a defence of frustration and our instructions are to advise IO on the defence of frustration.”

32.  As the IO still had such concern a few weeks after the 7 July 2003 meeting, I do not see how the IO can say that it had ever been induced by Ryoden to believe that Ryoden would not be insisting on its rights under the Agreement.  Clearly there was no reliance either.  I am therefore not surprised that no mention of waiver or estoppel was made at all in this letter.  As Mr Ng pointed out, no mention of waiver/estoppel has been made in any other contemporaneous documents until the IO’s pleading.

33.  The IO decided to inform Ryoden of the termination of the Agreement in August 2003.  Ryoden’s reply dated 15 September 2003 mentioned above should have left the owners with no doubt about Ryoden’s position.  Notwithstanding that, the IO decided to proceed with the dismantling of the lifts and termination of the Agreement.  That led to the IO’s alteration of position.

34.  In the circumstances, I reject Mr Lee’s submission in its entirety.  I do not find that it is inequitable for Ryoden to claim against the IO for breach of the Agreement.

QUANTUM

35.  Ryoden claims for the balance of the service fees in arrears plus contractual interest until July 2004.

36.  The IO terminated Ryoden’s service in respect of lifts nos. 1 and 2 with effect from October 2003.  Accordingly, Ryoden became unable to provide maintenance service to these 2 lifts.  Ryoden duly notified the Electrical and Mechanical Service Department of the same.  The IO also started to pay half of the contractual monthly service fee, i.e., HK$6,500, to Ryoden, purportedly for its service to lifts nos. 3 and 4 until July 2004.

37.  However, all these did not change the fact that the Agreement was a lump sum agreement for service to the 4 lifts.  It was not divisible depending on the number of lifts actually serviced by Ryoden.  Ryoden was under no obligation to accept service fee less than the contractual amount simply because the IO decided to prevent Ryoden from servicing any one of the 4 lifts.

38.  Unless and until Ryoden accepted the repudation and terminated the Agreement as a whole, Ryoden was entitled and the IO was liable strictly in accordance with the terms of the Agreement.  There is no issue of mitigation prior to the termination of the Agreement.

39.  Ryoden continued to perform the Agreement until July 2004, though servicing only the available 2 lifts.  Ryoden should be entitled to the balance of the contractual service fees payable under the Agreement until then in the sum of HK$60,017 together with the contractual overdue interest in the sum of HK$12,042.38 as claimed.

40.  Ryoden claims damages for the wrongful termination of the Agreement in the sum equivalent to the remaining service fees payable under the Agreement until the end of the initial period, i.e., end of November 2004.

41.  The prima facie measure of damages for wrongful termination of a contract for professional service is the contract price.  Upon termination of the contract, the duty of mitigation arises and the claimant is therefore obliged to place his service on the market, but the onus is on the defendant to show that the claimant has or should have obtained an alternative employment: see McGregor on Damages (17^th ed) at 28-002.

42.  Mitigation has not been put in issue by pleading by the IO.  In any event, Lee (above) stated, and I accept, that the lift maintenance business in Hong Kong is carried out usually by way of contracts for service for a certain period of time.  If it is prematurely terminated, it is difficult for Ryoden to immediately secure another similar contract as a replacement in mitigation of its loss.  There is also no suggestion or evidence that Ryoden would have saved any expenses as a result of the early termination of the Agreement.

43.  In my view, Ryoden should be entitled to damages that is effectively what it should have received, had the Agreement not been terminated prematurely.  That would be 4 months’ service fees in the sum of HK$52,000 as claimed.

44.  The damages will be HK$(60,017 + 12,042.38 + 52,000) = HK$124,059.38.

INTEREST

45.  There was a substantial period of inaction in this case during the entire year of 2007.  Mr Ng acknowledged that.  I see no justification to hold the IO responsible for interest during this period.

ORDER

46.  I give judgment in favour of Ryoden.  The IO shall pay damages in the sum of HK$124,059.38.  From the date of writ until full payment, but excluding year 2007, there will be interest on the sum of HK$60,017 at the rate of 2% per calendar month and on the sum of HK$52,000 at the judgment rate.

47.  I make a nisi order that Ryoden shall have costs of this action, including any costs reserved.  Costs shall be taxed, if not agreed.  For clarity, I certify the engagement of counsel.  Unless an appointment is made in 14 days to argue costs, the nisi costs order shall become absolute.