KONE ELEVATOR (HK) LTD v. SENFIELD LTD

DCCJ 4544/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4544 OF 2001

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J U D G M E N T

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1. The whole incident began when the Defendant ordered a lift from the Plaintiff to be installed at "Tsui Wah Restaurant", a business of the Defendant at Wellington Street. The lift ordered is called "Monospace" lift. The "Monospace" lift is space saving and could be installed in smaller building.

2. The Plaintiff and the Defendant signed a contract appearing at p. 51 of the agreed bundle. By this contract, the Plaintiff was to sell a "Monospace" lift to the Defendant and to arrange the installation. The total price is HK$600,000 to be paid at 6 stages : -

(a) 10% upon the signing of the agreement;

(b) 10% upon approval of shop drawings;

(c) 15% upon production of shipment advice;

(d) 30% upon delivery of equipment to Hong Kong;

(e) 30% upon submission of Form 5;

(f) 5% 12 months after issuance of Form 6;

3. The Plaintiff has successfully arranged for the equipment, namely the said Monospace lift to arrive in Hong Kong. According to the said agreement, they had been paid 65% of the total contract price. According to the evidence of PW2, the lift was in fact installed at the premises of the Defendant around July 1999, and all works completed except for the submission of Form 5 of the Electrical and Mechanical Services Department ("EMSD").

4. Now we have to go back a bit on time. Before any construction work could be carried out at the site, including building of the lift shaft, plans have to be submitted by the authorized person of the site to the Building Department for approval. In this site, the authorized person is DW1. In the approval letter from the Building Department to DW1 at page 66-67 of the agreed bundle, it was mentioned as a reminder to DW1 that a lift machine room should be provided for the proposed lift. While no machine room was provided in the plans then submitted, the building plans were approved by the Building Department on what they called a curtailed check system.

5. The curtailed check system was explained by PW1. It was meant to check the fundamental aspect of a building proposal. The authorized person under the Building Ordinance should ensure that the non-fundamental aspect should be complied with. And all contraventions of the Building Ordinance shall be rectified before completion of the work.

6. The requirement of a machine room is strictly speaking, not a statutory requirement. However, according to Regulation 9A of the Building (Construction) Regulations, the authorized person shall ensure that the lift is safe to operate. It is sufficient to set out Regulation 9A(1):-

1) Where a building is to have a lift or escalator installed in it-

(a) the building shall be designed and constructed; or

(b) where the building already exists, it shall be altered,

so as to provide adequate-

(i) structural strength;

(ii) space;

(iii) protection;

(iv) access; and

(v) ventilation,

for the safe operation, maintenance and inspection of the lift or escalator, as

the case may be.

7. For the public to understand what is required in order to comply with Regulation 9A, the Director of Building Department has issued a Code of Practice, P1. If the builder complied with all requirements of the Code of Practice, he is deemed to have complied with Regulation 9A. But he may prove compliance by other means. The "Foreword" of the Code said:-

As a general rule, compliance with the provisions promulgated herein may be deemed to be satisfied the requirements of Building (Construction) Regulation 9A. The Building Authority may, however, accept other standards or provisions if he is satisfied that they are capable of equivalent performance.

8. Under this Code of Practice, the provision of a machine room is required to house the lift machines, their associated equipment and pulley and only person authorized should have access to that room. One of the characteristics of a "Monospace" lift is that it does not require a machine room. The lift does not have exposable pulley and machines. Accordingly no machine room is required and it is space saving.

9. The Plaintiff made an application by filing a Form 25 under Lifts and Escalators (Safety) Ordinance to EMSD for exemption from the provision of Clauses 2.1, 5.12.8 and 8.5.1 of Part I section E of the said Code of Practice. In a letter dated 4 April 1999, EMSD replied to the Defendant and listed out a number of requirements for them to assess whether they should allow the exemption. They commented that since the "Monospace" lift installation has no machine room, this is obviously not in compliance with the relevant requirement of the Code of Practice on building work for lift and escalator. They suggested that the authorized person should apply for the modification from the Building Authority.

10. Pausing here, this requirement is on the face of it reasonable. DW1 in giving evidence said EMSD and Building Department are two different departments. They are "in charge" of two different sets of ordinance. And the two government departments should exercise their power under the respective ordinance and should not transgress into each other's jurisdiction. To this comment, I disagreed. It is surely wrong for EMSD to turn a blind eye to a breach of Regulation 9A. Regulation 9A turns on the building requirement to ensure the safe operation and inspection of the lift. It is having the same purpose as the Lifts and Escalators (Safety) Ordinance, Cap. 327. They should be considered side by side. Hence, there is nothing wrong for EMSD to raise a request.

11. The only mistake, if I may call it, is that EMSD had been over-cautious. Clearly, EMSD is in the best position to evaluate whether the lift could operate safely without the provision of a machine room. If it could, the non-existing of a machine room would not render the Plaintiff or the Defendant in breach of Regulation 9A because it is still safe. Hence, in such a situation, all that they needed to do is to forward a message to the Director of Building Department and alert them of the matter. Then it is for the Director of Building Department to follow up if they are of a different view.

12. If the breach is a serious matter and is endangering the safety of the lift, I can see there is a very good reason for EMSD to refuse exemption or in this case the issuance of the Form 26.

13. However, the matter doesn't end there. According to PW2, on receipt of this requirement, he approached the representative of Bing Choy & Associate, the firm of DW1, one Mr. Tsoi ("Mr. Tsoi"). He requested Mr. Tsoi to ask DW1, to write to the Director of Building Department for an exemption as suggested by EMSD.

14. There are some discrepancies in evidence on what happened next. According to PW2, Mr. Tsoi faxed to him a letter suggesting that DW1 made an application to the Director of Building Department for exemption from the said Code of Practice (p.105-109 of the agreed bundle).

15. But DW1 denies that he had signed and/or issued the letter. According to PW1, the Building Department never received this letter.

16. PW2 in his evidence continued to say that on receipt of this letter, he was waiting for the response from the Director of Building Department. He did not immediate reply to the requisition raised by EMSD in their said letter dated 4th April 1999 as he had to give all the required information at one go. He had followed up with Mr. Tsoi on numerous occasions about the response from Building Department but with no result. He was later told that the letter had been withdrawn from the Building Department.

17. Mr. Tsoi did not give evidence.

18. In giving evidence, DW1 stated that this is not his duty to apply for exemption. He said, on this issue of machine room, both EMSD and the Building Department are at fault. They should never have raised that. This "Monospace" lift does not require a machine room and a machine room cannot be relevant. He used the word “廢話”to describe the opinion of EMSD and the Building Department. And as an authorized person, he had to follow the law and not the opinion of the government departments.

19. Assuming that these two departments have been doing something unnecessary or unreasonable, it seems against common sense that the authorized person would not respond to them earlier by telling them that they have made a mistake. Or to say the least, he should tell PW2 that the opinion of EMSD is "廢話" and that he would not issue the letter. He is not saying that he did not know at the material time in 1999 that the Plaintiff did request for assistance and he mentioned in his evidence that he told Mr. Tsoi not to be stupid.

20. It is not disputed that in February 2000, DW1 finally issued a letter dated 16 February 2000 to the Director of Building Department telling them their "mistake"(p.122 of the agreed bundle). As a result, matter was resolved in months and the Plaintiff got the Form 26 in or about 27 June 2000.

21. I see no reason why DW1 did not take some action earlier than February 2000. It is just good common sense and makes good commercial sense that the employer and the builder should cooperate. All that PW2 was asking is to pass on a message to the Director of Building Department. In his capacity as an authorized person, DW1 may seek a modification, or if he thinks that that was not permissible in law, send a letter telling them of his view. Had he done so, possibly the matter had been resolved and this litigation could have been avoided.

22. It is the Plaintiff's case that the Defendant had failed to perform its implied obligation "to do all that is necessary on its part to bring about completion of the works." Counsel for the Plaintiff relied on a passage of Keating on Building Contracts (7th ed.) and submitted further that the Defendant is also liable for any breach of his authorized person in doing what is necessary on his part to bring about completion. There is no objection to this point of law from the Defendant.

23. Anyway, very strangely, the Plaintiff waited and waited until DW1 finally wrote the letter in February 2000. PW2 said he had orally requested Mr. Tsoi for the response from Building Department. And the Defendant waited without any action. They had a lift in their restaurant that could not be used and it seems that they were not eager to use it. This strange background take me to evaluate on the issue whether there had been a delay on the part of the Plaintiff on completion amounting to a repudiation that the Defendant may accept and terminate the contract.

24. In July 2000, the Defendant through their agent, DW1, issued a letter of termination to the Plaintiff and demanded them to remove the lift. In the letter, the 2nd paragraph read:-

Due to the long delay in completion of the said lift by you, I now notify you that you have repudiated and breached the contract by failing to complete the works within 26 weeks after 24/11/98, as expressly provided in the Contract. By reason of the same, your continuing repudiation can no longer be tolerated and is hereby accepted.

25. As rightly conceded by the Defence Counsel, if they cannot prove that they are entitled to terminate the contract by this letter, they are in breach.

26. The contention of repudiation is originally based on time is of the essence. However, at the final submission, the Defence Counsel conceded that they could not really argue the time is of the essence, as it is not provided in the contract. He then proceeded to argue that there had been unreasonable delay on the part of the Plaintiff which justified the termination. Unfortunately, this alternative claim had never been pleaded in the defence. Parties are bound by their pleading and I see no reason how the Defendant could begin to argue that there is an unreasonable delay. If I understand the Defence Counsel correctly, he is trying to suggest that time is of the essence from the back door.

27. Further on, if it is conceded that time of the essence is not a term of the contract, then delay will normally entitle the Defendant only to damages and not to termination of the contract. I asked the Defence Counsel if he had any authority to show that when a contract has not provided for time to be of the essence, delay could amount to fundamental breach. No authority had been submitted.

28. And in any event, given the background I have analyzed above, one cannot interpret the delay as unreasonable. The undisputed evidence of PW2 is that he did go after Mr. Tsoi, the representative of DW1's firm in this project for the response from the Building Department. There is no response from DW1 or Mr. Tsoi from the evidence of the Defendant. There is a duty on DW1 as the agent of the Defendant to co-operate with the Plaintiff to bring about completion of the works. The delay is on the part of DW1.

29. That being the case, I come to one and only one conclusion that the Plaintiff is not in fundamental breach of the contract. The Defendant by the issuance of their said letter expressed a clear intention not to be bound by the said contract and was accepted by the Plaintiff when they removed the lift. The Defendant is in breach and the Plaintiff is therefore entitled to recover damages from the Defendant.

30. Although there are other grounds relied upon by the Plaintiff that the Defendant had repudiated the contract, I do not need to make any other findings. That left behind only the issue of damages. Had the Defendant made their point clear at the beginning, I believe the length of the trial could be substantially shortened.

31. Now I turn to the assessment of damages. The way how damages have been pleaded was expressed in paragraph 19 of the statement of claim. The Plaintiff basically claims the original price, and the costs of removing the lift, less a sum of $30,000. I shall deal with the additional work of erecting a metal scaffolding later.

32. The Defence Counsel submitted that the quantum is the contract price less what the Plaintiff can sell in the market. He relied upon a quotation from McGregor on Damages (15th ed.) para. 836. He also submitted that the Plaintiff has the burden of proving both the fact and the amount of damages before he can recover substantial damages.

33. He also relied upon the case of Wayfoong Credit Ltd. v. Cheung Wai Wah Samuel [1990] 1 HKC 367. This case is an assessment of damages suffered by the plaintiff as a result of the breach of the defendant to perform a sale and purchase agreement. The subject matter is a van costing $134,722.00 when newly purchased. The van was repossessed and resold in 6 months' time at $64,300.00. The plaintiff took out an Order 84A summons for judgment against the defendant. The defendant did not attend the hearing. As a result, the Court took the view that the plaintiff has not discharged its duty of mitigation and awarded a less sum of damages to the plaintiff.

34. The Defence Counsel said the Plaintiff in our case has not called evidence to show that action has been taken to get a reasonable resale price for the lift. He then further relied upon the case of Born Chief Co. (trading as Beijing Restaurant) v. George Tsai and Another [1996] 2 HKLR 188. This is a case where the defendant was found liable for damages to the plaintiff. But there was nothing in the plaintiff's witness statements or in the evidence to relate its documents to the damages. The Court of Appeal rule that the plaintiff is entitled to nothing but nominal damages. It is not right for the trial judge to take upon herself to order damages to be assessed by the master, thus providing a further opportunity for proving damages to the plaintiff at the expenses of and to the prejudice of defendants. The Defence Counsel here submitted that if I found that the Plaintiff had not exercised reasonable care to resale at a reasonable price, I should not assess the damages but to award nominal damages only.

35. The Plaintiff's Counsel argued that the correct formula for assessment of damages in construction case is set out in para. 1154, 1155 of McGregor on Damages:-

"General principles would put the normal measure at the contract price less the cost to the builder of executing or completing the work. In calculating the builder's costs the indirect as well as the direct costs must be included, especially "overheads"...This is analogous to the cases of manufacturing and erecting machinery dealt with under sale of goods."

"Two other measures, alternative to this basic measure, may be suggested. They are (1) the net profit which the builder could have made on the whole contract plus his expenditure in part performance; and (2) for the work done, such proportion of the contract price as the cost of the work done bears to the total cost of the whole contract, plus for the work remaining, the profit that would have been made upon it."

36. He submitted that the Plaintiff adopted the formula of para. 1154 in calculating its damages. He further submitted that what the Defendant now seeks to argue is that the Plaintiff has failed to mitigate its loss. He objected that the Defendant might argue on mitigation, as this has not been pleaded in the Defence at all. And the case of Wayfoong Credit Ltd. is a case on mitigation.

37. In the presence case, it is both a construction contract and a sale of goods contract. By a modified formula, the damages should be contract price less value of work undone and less value of the lift on disposition, plus the expenses of removing the lift.

38. I have considered the other 2 formulas suggested by McGregor in para. 1155. They could be more conveniently used when the contract is partly performed. In a case like ours when the work is completed substantively, the formula in para.1154 of McGregor on Damages is more direct. But all formulas should end with the same result.

39. Now I come to the issue of mitigation. It is settled law that the burden rest on the Defendant to prove that the Plaintiff has not mitigate its loss. If the Defendant fails to show that the Plaintiff ought reasonably to have taken certain mitigation steps, then the normal measure will apply. It must therefore be necessary for the Defendant to have pleaded this in the Defence. There is no such pleading and there is no evidence which suggest that the Plaintiff has failed to mitigate its loss.

40. On the issue of obtaining a reasonable resale price, Defence Counsel relied on the case of Wayfoong Credit Ltd. which is a case of mitigation of loss. And what's more, this is a test case. The plaintiff there is well aware that the question of mitigation is raised and is the sole issue in the hearing. But in the present case, where is the suggestion that the Plaintiff has failed to mitigate its loss or to obtain a reasonable resale price? The question was not even put to PW2.

41. The Plaintiff relied on the evidence of PW2 to prove the damages suffered. PW2 is a senior project engineer of the Plaintiff. He joined the Plaintiff in 1993 and has been working in the lift industry for more than 20 years. He explained in Court that the said $30,000 represented:-

a. the final stage of work, namely the submission of Form 5,

b. The 2 small machine parts in the lift that could be used again.

42. It is his evidence that the machine cannot be used except for the control panel and the lift motor. He therefore assesses $30,000 as an amount to be deducted from the damages. It is the evidence of PW2 that the Plaintiff had basically completed all the installation work of the said lift. I accept his evidence.

43. He also claimed for the costs to dismantle and cast away the lift equipment. He claimed a sum of $60,000.00 including the charges of the sub-contractor for $18,000.00 to dismantle the lift. The Defendant's staff was responsible for cast-away work and the balance of the claim represented the wages of safety officer, supervision, administration and transportation costs. And the street where the Defendant's restaurant was located required loading and unloading after office hours, and hence more expensive transportation. The sum also represented their administration costs. PW2 confirmed all these figures are correct.

44. Interesting enough, this assessment by the Plaintiff's witness has never been cross-examined by the Defence's Counsel. It was only at the final submission when this point was raised. In the final submission, the Defence's Counsel suggested that these are only bare assessment and there is nothing to support the assessment. There is no explanation as to why only 2 pieces of machinery could be restored for use that none of these had been put to the witness. If such material facts have not been put, the Plaintiff is legitimately entitled to treat these as being accepted by the Defendant.

45. Further on, since it is a civil trial, I am going to make a ruling on the balance of probability. On the Plaintiff's side, I have PW2 who is an engineer in the employ of the Plaintiff's company and is experienced in the lift industry. He has been handling this contract. He has made an assessment that has not been cross-examined. And I have no evidence to challenge or dispute his assessment from the Defendant. On the balance, I accept his evidence.

46. In conclusion, I found in favour of the Plaintiff in that the damages suffered in $240,000.00 as claimed.

47. Now I come to the last matter, the claim for the workdone in erecting the scaffolding.

48. Paragraph 14 and 15 of the Statement of Claim read as follows:-

14. At the request of the Architect on 1 April 1999 by issuing Architect's Instruction No.1/99, the Plaintiff erected metal scaffold inside the lift shaft, the cost of which was not included in the price of the "MonoSpace" lift under Agreement

15. The Defendant did not pay to the Plaintiff the sum of HK$16,250.00 being the cost of erecting the metal scaffold inside the lift shaft.

49. It is not pleaded on what basis that sum of $16,250.00 is claimed - whether it is a contractual claim, or on quantum merit. But the sum is claimed under paragraph 19 of the Statement of Claim for loss and damages. If not for loss on quantum merit, what else? I rule that the pleading is sufficiently clear. And the main defence is only that the Plaintiff failed to prove the loss.

50. The Plaintiff again relied upon the evidence of PW2. The sum of $16,250.00 included the $12,000.00 paid to the sub-contractor, the profit and administration work of the Plaintiff. Again, his evidence was not challenged during cross examination. The Defence Counsel only queried the reliability at his summing up. I do not need to repeat myself on the weakness of this argument.

51. I found that PW1 had satisfied me on the balance that the erection of the metal scaffolding was ordered by the Defendant and the loss to Plaintiff is $16,250.00. I therefore award this sum to the Plaintiff.

52. Both judgment sums is to carry interest from date of writ to today at 8.72% per annum and thereafter at judgment rate until payment. I give an order nisi for costs to the Plaintiff to be taxed if not agreed with certificate for counsel, such order nisi to be made absolute within 14 days of today.