PHILIPS HONG KONG LTD v. ATTORNEY GENERAL

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JUDGMENT

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Kempster, JA (giving the judgment of the Court) :

1. This is an appeal from a judgment of Mayo J given on 3rd July 1990 whereby he found and declared that certain sums specified in the appendix to the conditions of tender incorporated in an agreement in writing between Philips Hong Kong Ltd ("the contractors") and the Hong Kong Government and expressed as liquidated damages for delay "were capable of amounting to a penalty", that clause 29 of the conditions of the agreement was void for uncertainty and, in consequence, that the Hong Kong Government was not entitled to credit for such sums even on the footing that the contractors were in breach. Whether or not they were is not an issue before us.

2. By the agreement in question, dated 24th November 1986, identified as HY/85/09 and in a form specially prepared for the overall project, the contractors undertook, for reward, to provide for Government a computerised supervisory and control system including closed-circuit television to facilitate the operation of the twin road tunnels between Shatin and Tsuen Wan, in the New Territories, then in course of construction pursuant to a number of agreements made between them and other contractors and the Hong Kong Government. As is usual in construction contracts provision was made, by the appendix to the form of tender and conditions 27 and 29, for the consequences of delay on the part of the contractors.

3. The material parts of the appendix and of those conditions read as follows:

"Appendix

Conditions of Contract:

Clause No.

.......

27	Time for Completion .................................. 160 weeks
29	Amount of Liquidated Damages on
	the whole of the Works .............................. $74,104 per day
29	Liquidated Damages for delay to
	Sections of the Works and Specified
	Degree of Completion	Ref.No.09/2	$60,655 per day
		Ref. No. 09/3	$62,568 per day
		Ref. No. 09/4	$60,665 per day
		Ref. No. 09/5	$60,665 per day
		Ref. No. 09/6	$60,665 per day
		Ref. No. 09/8	$60,665 per day
		Ref. No. 09/9	$60,665 per day
		Ref. No. 09/10	$60,665 per day
		Ref. No. 09/11	$77,818 per day
		Ref. No. 09/14	$73,017 per day
29	Minimum Amount of Liquidated Damage ..... $20,997 per day

........

27. TIME FOR COMPLETION

27.1	The whole of the works or any Section thereof for which earlier completion is required in the Contract shall be completed within the time stated in the Contract calculated from the date of commencement notified by the Engineer in accordance with the provisions of Clause 26 (Commencement of Works) or such extended time as may be determined in accordance with the provision of Clause 28 (Extension of Time for Completion).
27.2	Where in the Contract a Section of the Work is to be completed to a Specified Degree of Completion before the completion of the whole of the Works then it shall be completed within the time stated in the Contract calculated from the date for commencement notified by the Engineer in accordance with the provisions of Clause 26 (Commencement of works). Extended time determined in accordance with the provision of Clause 28 (Extension of Time for Completion) shall not apply to the completion of a Section or Sections of the Work to a Specified Degree of Completion unless specifically stated by the Engineer to so apply.
27.3	Where in the Contract a reference is made to a Key Date it shall include a reference to the date upon which an event shall commence or, as the case may be, shall be completed in whole or in part or the date upon which an event which has been completed to a Specified Degree of Completion shall re-commence.

......

29.    LIQUIDATED DAMAGES FOR DELAY

29.1	If the Contractor shall fail to complete the Works or any Section thereof or shall fail to achieve a Specified Degree of Completion within the time prescribed by Clause 27 or extended time, or shall fail to complete or shall unduly delay the Tests on Completion then the Contractor shall pay to the Employer the sum or sums stated in the Appendix to the Form of Tender as liquidated damages for such default and not as a penalty for every day or part of a day which shall elapse between the time prescribed by Clause 27 or extended time, as the case may be, and the date of completion of the Works or the relevant Section thereof or the relevant Specified Degree of Completion.
29.2	The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due or which may become due to the Contractor whether under this or any other Contract with the Employer.
29.3	The payment or deduction of such damages shall not relieve the Contractor from his obligation to complete the works or from any other of his obligations and liabilities under the Contract.
29.4	If before completion of the Works, any Section of the Works is required by the Employer and capable of occupation or use by the Employer and has been confirmed by the Engineer as completed pursuant to Clause 31 (Taking Over), the liquidated damages (if any) prescribed for delay to the whole of the Works shall for any period of delay after such certification be reduced in the proportion which the value of the Section so certified bears to the whole of the works.

Provided that -

(a)	If there is stated in the Appendix to the Form of Tender in respect of the completion of a Section of the Works a lesser sum than that calculated in accordance with sub-clause 4 of this Clause then the liquidated damages prescribed for delay to the whole of the Works shall for any period of delay after certification in accordance with sub-clause 4 of this Clause be reduced by such lesser sum.
(b)	If there is stated in the Appendix to the Form of Tender in respect of the completion of a Section of the Works a greater sum than that calculated in accordance with sub-clause 4 of this Clause then the liquidated damages fordelay to the whole of the works shall for any period of delay after certification in accordance with sub-clause 4 of this Clause be reduced by such sum as calculated in accordance with sub-clause 4 of this Clause and not by such greater sum.
(c)	If there is stated in the Appendix to the Form of Tender in respect of the completion of a Section of the Works to a Specified Degree of Completion a sum for liquidated damages, the achievment of such a Specified Degree of Completion shall not be considered as a Section of the works to which sub-clause 4 of this Clause applies and no reduction in the amount of liquidated damages in respect of the Section of the works or to the works in respect of such Degree of Completion shall be made.
(d)	The sum or sums stated in the Form of Tender as liquidated damages for delay to Sections of the Works or to Specified Degrees of completion are listed against the Reference Number (Ref. No.) of the portion of the works detailed in Appendix 2 of the Particular Specification to which reference should be made for full details and descriptions of the portion of the works.

Notwithstanding any provisions of this Clause or of the Contract providing for the reduction in liquidated damages for the early completion of any Section of the Works the resulting amount of liquidated damages shall not be less than the minimum amount of liquidated damages as stated is the Form of Tender."

4. Properly looking at the position when the agreement was concluded the judge sought to determine whether the foregoing provisions were in truth liquidated damages or a penalty; a genuine covenanted pre-estimate of the Government's loss in the event of failure by the contractors to meet "key dates" as defined by clause 1.10 of the Particular Specification or, to use a term of art, sums fixed in terrorem of the contractors. He was satisfied that they fell into the latter category. The Attorney General,by Mr Mumford for the Hong Kong Government, contends that he was wrong. He refers to the individual provisions made in the appendix for specific breaches and relies upon a passage from the opinion of the Privy Council given by Lord Merest in Webster v Bosanquet [1912] AC 359 at p.398:

"When making the contract it was impossible to foresee the extent to the injury which might be sustained by the plaintiff ... the very uncertainty of the loss likely to arise made it most reasonable for the parties to agree beforehand as to what the damages should be. And, furthermore, it is well-known that damages of this kind, though very real, may be difficult of proof, and that the proof may entail considerable expense. This consideration also afforded a reason for fixing the amount beforehand."

He also relies upon part of the speech of Lord Davie in Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos [1905] AC 6 at p 16:

"My Lords, I therefore conceive that it may be taken as an established principle in the law of Scotland that, if you find a sum of money made payable for the breach, not of an agreement generally which might result in either a trifling or a serious breach, but a breach of one particular stipulation in an agreement, and when . you find that the sum payable is proportioned to the amount if I may so call it, or the rate of the non-performance of the agreement - for instance, if you find that it is so much per acre for ground which has been spoilt by mining operations, or it you find, as in the present case, that it is so much per week during the whole time for which the non-delivery of vessels beyond the contract time is delayed - then you infer that prima facie the parties intended the amount to be liquidate damages and not penalty I say 'prima facie' because it is always open to the parties to shew that the amount named in the clause is so exorbitant and extravagant that it could not possibly have been regarded as damages for any possible breach which was in the contemplation of the parties, and that is a. reason for. holding it to be a penalty and not liquidate damages notwithstanding the considerations to which I have alluded."It is not submitted on behalf of the contractors that the figures above set out come within the parameters of exorbitance or extravagance.

5. The first consideration relied upon by Mayo J was the provision for the payment of a minimum sum of $20,997 per day for delay in meeting a "key" date regardless of the effect of the particular failure and of the degree of mitigation provided by condition 29.4. As was explained by Lord Watson in Lord Elphinstone v Monkland Iron & Coal Co [1886] 11 App Cas 332 at p 342 and endorsed by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1951] AC 79 at p 87:

"There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage."

The second was the capricious effect of. provisos (a) and (b) which, as demonstrated by examples incorporated in his judgment, would result in greater liability to damages the more of the work entrusted to him the contractor had completed. By analogy such a result has the effect described by Lord Morton in Campbell Discount v Bridge [1962] AC 600 at p 616:

"I find it impossible to regard the sum stipulated in clause 9 as a genuine pre-estimate of the loss which would be suffered by the respondents in the events specified in the same clause. One reason will suffice, though others might be given. This was a second-hand car when the appellant took it over on hire-purchase. The depreciation in its value would naturally become greater the longer it remained in the appellant's hands. Yet the sum to be paid under clause 9(b) is largest when, as in the present case, the car is returned after it has been in the hirer's possession for a very short time, and gets progressively smaller as time goes on. This could not possibly be the result of a genuine pre-estimate of the loss."

To like effect Lord Radcliffe at p 623.

6. However, what Mayo J appears to have overlooked is that by reference to the figures appearing in the appendix the provision for a minimum sum by way of liquidated damages and for mitigation under condition 29.4 can have no application to this contract due to the absence of any express statement allowing for the take-over of sections of the work before final completion. Condition 31 reads:

31.1

As soon as the works have been completed in accordance with tile Contract (except in minor respects that do not affect their use for the purpose for which they are intended and except for the maintenance thereof as provided for in Clause 34 (Defects after Taking Over) and have passed the Tests on Completion as provided for in Clause 30 (Tests on Completion) and the Contractor has supplied the record "as fitted" drawings and the operating and maintenance instruction manuals and the warranties and guarantees as required by the Contract the Engineer shall issue a  certificate (herein called a "taking-over certificate") in which he shall certify the date on which the works have been so completed and have passed the said tests and the Employer shall be deemed to have taken over the works on the date so certified, but the issue of a taking-over certificate shall not operate as an admission that the works have been completed in every respect.

31.2

Unless expressly stated in the Contract no Section, portion or part of the Works shall be taken over by the Employer before the issue of a taking-over certificate for the whole of the Works in accordance with sub-clause 1 of this Clause. If it is expressly stated in the Contract that a Section, portion or part of the Works shall be taken over by the Employer before the issue of a taking-over certificate for the whole of the works in accordance with sub-clause 1 of this Clause then sub-clause 1 of this Clause shall apply to each Section, portion or part as it applies to the works."

7. Mr Scott, who together with Mr Kotewall has addressed us on behalf of the contractors, relies upon condition 16.1 as providing the necessary express statement. It reads:

"Equipment supplied pursuant to the Contract shall become the property of the Employer when by virtue of Clause 14 (Delivery) or Clause 33 (Suspension of works) or Clause 35 (Certificates and Payments) the Contractor becomes entitled to require that the Contract Value of the Equipment be included in a certificate."

While the flow charts show that on a variety of dates it was incumbent upon the contractors to hand over equipment to another contractor, the terms of condition 16.1 fall far short of an express statement that a section, portion or part of the works - including equipment - shall qualify for the issue of such a certificate as is described in condition 31.1 or otherwise be taken over by the employer before the issue of a taking-over certificate for the whole of the works.

8. If we are right the matters relied upon by the contractors before Mayo J, as demonstrating that provisions ostensibly providing for liquidated damages in reality constituted a penalty, fall away. The position is not affected by acceptance, which we believe to be proper, of the evidence of Mr Spoors as to his efforts to produce genuine pre-estimates of damage when drafting this and related agreements. That evidence does not help either party to any extent. As Lord Radcliffe also pointed out in Campbell Discount v Bridge at p 622:

"The intention of the parties themselves is never conclusive and may be overruled or ignored if the court considers that even its clear expression does not represent 'the real nature of the transaction' or what 'in truth' it is to be taken to be."

Further, any question of ambiguity also falls away. But if any such question was thought to arise in circumstances where the form of contract was drafted by Government, which here relies on the terms providing for "liquidated damages", rather than by a professional body, the contra proferentem rule would apply and permit the most favourable construction from the point of view of the contractors. That is not to say that the relevant provisions should so be construed as to produce ridiculous results and, in' consequence, be struck down as penalties.

9. We allow this appeal, quash the declarations made and make an order nisi that the Attorney General should have the costs of the proceedings here and below.