Golden Concept Development Ltd v. Sun Deco Contracting Ltd and Another

HCCT 30/2020

[2023] HKCFI 68

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 30 OF 2020

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Before: Hon Anthony Chan J in Court

Date of Hearing: 24 – 25 and 28 – 30 November 2022, 2 and 8 December 2022

Date of Judgment: 6 January 2023

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JUDGMENT

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1.This is a construction dispute.  The project in question was a residential development situated at Area 56A, Kau To Shan, Shatin, which is now known as “The Cavaridge”.  The Plaintiff was the developer and Employer of the Project.  Paul Y Construction & Engineering Co Ltd (“PY”) was the Main Contractor and the 1^st Defendant was the Nominated Sub-Contractor (“NSC”) for interior fitting out works (there is a dispute as to who contracted with the 1^st Defendant).  The 2^nd Defendant was (and is) a director and shareholder of the 1^st Defendant. 

2.The facts of this case were unexceptional.  The 1^st Defendant’s contract was terminated by reason of alleged breaches of contract based on defective quality of work and failure to meet the programme for completion.  As a result, the Plaintiff is seeking damages based on (i) a Warranty provided by the 1^st Defendant and (ii) a Personal Guarantee given by the 2^nd Defendant. 

3.There is a Statement of Agreed Facts filed pursuant to the directions of this court wherein a reasonably comprehensive “Agreed Chronology” as well as “Other Agreed Facts” can be found.  In light of this document, this Judgment will focus on the issues and the factual disputes which have to be resolved to enable the adjudication of the issues. 

Issues

4.There is a List of Agreed Issues filed pursuant to the directions of this court.  The issues can be boiled down to :

(1)  Whether there was a contract between PY and the 1^st Defendant or whether the contact was one made between the Plaintiff and the 1^st Defendant;

(2)  Whether there was a collateral contract between the Plaintiff and the 1^st Defendant in relation to the payment for the 1^st Defendant’s work;

(3)  If there was a contract between PY and the 1^st Defendant, whether there was variation, waiver and estoppel applicable in respect of the payment term as contended by the Defendants;

(4)  Whether there were breaches of contract by the 1^st Defendant, and whether the termination of the contract with the 1^st Defendant was valid;

(5)  Whether the Warranty and the Guarantee are enforceable by the Plaintiff;

(6)  The quantum of damages suffered by the Plaintiff;

(7)  If the contract of the 1^st Defendant was one made with the Plaintiff instead, the Counterclaim for damages of the 1^st Defendant.

Contracting parties

5.It was common ground that no Nominated Sub-Contract (“NSCtt”) was executed by PY or the 1^st Defendant.  The Plaintiff’s case is that, notwithstanding the absence of an executed NSCtt, PY and the 1^st Defendant had conducted themselves in accordance therewith so that an implied contract between them in the terms of the NSCtt was in existence at all material times.

6.On the other hand, the Defendants’ case is that the Plaintiff and 1^st Defendant entered into various agreements concerning the Project, namely, the Letter of Nomination dated 29 March 2018, the Supplemental Agreement signed on 4 May 2018 and the “HK$60 Million Agreement” (so described by the Defendants) reached on 5 July 2019, whereby the Plaintiff agreed to pay the 1^st Defendant directly for work done throughout the Project.

7.There was no dispute over the law on implied contract by conduct. The principles were helpfully encapsulated in Honour State Ltd v Gorgeous Textile Co Ltd [2022] HKCA 472 at [19], per G Lam JA, referring to the CFA decision in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at [38]-[39] & [48] :

“As is established by the authorities, the court will not imply a contract from conduct lightly. It is necessary that the conduct relied upon is unequivocally referable to the contract contended for, in the sense that it is consistent only with there being the contract sought to be implied and inconsistent with there being no such contract …”.

8.It was not in dispute that the 1^st Defendant was chosen by the Plaintiff after tender as the NSC for the fitting out work in respect of the Clubhouse of the Project, and a Letter of Nomination was accordingly issued to the 1^st Defendant by the Architect, Andrew Lee King Fun & Associates Architects Ltd, dated 29 March 2018 (“L/N”).  It was provided under the L/N that a NSCtt would be entered into by the 1^st Defendant with PY (Cl. 5).  The following paragraphs on p. 8 of the L/N were relied upon by the Defendants :

“Pending the execution of the formal Sub-Contract Documents between you and the Main Contractor, your tender and the documents/ correspondences as listed in item 17 above and this Letter of Nomination shall form a binding agreement on the Employer’s part to nominate you as the Sub-Contractor for the captioned Sub-Contract works and on your part to accept such nomination. You should proceed with all necessary preparatory work including shop drawings and material submission, so as not to cause any delay to the completion of the project.”

“You shall perform your obligations under this Sub-Contract as if the same has been entered into and has taken effect from the date of this Letter of Nomination. It is agreed that the Employer shall be entitled to enforce your performance of such obligations as if the Employer were the Main Contractor. Upon execution of the Sub-Contract between you and the Main Contractor, you shall release and discharge the Employer from all claims and demand whatsoever in respect of this Letter of Nomination and such liability shall be transferred to the Main Contractor as if the Main Contractor had accepted this tender in place of the Employer.”

[emphasis added]

9.Mr Khaw SC, who appeared with Mr Chan for the Defendants, accepted in the course of his Opening that the above reference to “[u]pon execution of the Sub-Contract” would not exclude the application of the principles of implied contract by conduct.

10.The resolution of this issue depends largely on the evidence before the court.  Before turning to the same, I agree with Mr Clayton SC, who appeared with Mr Tsang for the Plaintiff, that the Defendants’ case that the contract for the fitting out of the Clubhouse was governed by the L/N (the Supplemental Agreement and the HK$60 Million Agreement were made later) would not work for the simple reason that many of the essential contractual provisions were absent in that document and could only be found in the NSCtt, eg, payments, variation work and extension of time.  That must be an important fact which has to be taken into consideration in resolving the present issue. 

11.The contemporaneous documents strongly, if not overwhelmingly, suggested that the 1^st Defendant and PY had conducted themselves as NSC and Main Contractor (“MC”) in accordance with the terms of the NSCtt.  Indeed, those parties had in the course of the work referred to the provisions of the NSCtt.

12.The first contemporaneous document I should refer to was the Supplemental Agreement signed by the 1^st Defendant not long after the L/N on 4 May 2018.  By that Agreement, the 1^st Defendant’s scope of fitting out work for the Project was extended to 2 Towers of apartments and the Houses.  Cl. 1 and 2 of the Supplemental Agreement provided as follows :

“1.   This Agreement is supplemental to the Original Sub-Contract between [PY] (hereinafter called “the Main Contractor”) and [1^st Defendant], except as otherwise altered by this Supplemental Agreement, the provisions of the Original Sub-Contract shall remain in full force and effect.  Words and expressions appearing in this Supplemental Agreement and that defined in the Original Sub-Contract shall have the same meaning for the purposes of this Supplemental Agreement as they have for the purposes of the Original Sub-Contract.

2.   The Sub-Contractor has confirmed that, while he is the Sub-Contractor of the Original Sub-Contract, the execution of the Additional Works will not have any effect to the execution of the remaining works of the Original Sub-Contract.  The execution of the Additional Works therefore shall not be grounds for Extension of Time or loss and expense under the Original Sub-Contract.”

13.Self-evidently, by signing the Supplemental Agreement, the 1^st Defendant accepted the existence of a contract between it and PY.

14.To give a few further examples of the conduct of PY and the 1^st Defendant :

(1)  On 29 June 2018, PY wrote to the 1^st Defendant as NSC about the Revised Master Programme by which the completion date for the Main Contract was extended from 11 September 2018 to 30 April 2019, and the 1^st Defendant was asked to attend a Master Programme Meeting and present its installation programme to suit the revised schedule;

(2)  On 18 July 2018, PY submitted a Confirmation of Instruction (“COI”) to the Architect in respect of verbal instruction given by the Plaintiff to the 1^st Defendant on variations which had resulted in additional cost;

(3)  On 23 November 2018, the 1^st Defendant submitted an invoice to PY in respect of its Payment Application No 9, which was then included in the latter’s application for payment under the Main Contract.  The 1^st Defendant’s payment application was subsequently assessed by the Quantity Surveyor (“QS”), Arcadis Hong Kong Ltd.  In the QS’s Notice of Payment issued to the 1^st Defendant, the 1^st Defendant was identified as the NSC for fitting out works with PY as the MC.  It was common ground that payments were made directly by the Plaintiff to the 1^st Defendant.  I shall return to this point below;

(4)  By a letter dated 28 January 2019, the 1^st Defendant submitted Notice of Delay (“NOD”) No 1 to PY concerning various matters which were said to delay the completion of its work and applied for extension of time.  In response, on 18 February 2019, pursuant to provisions under the Main Contract, PY submitted a NOD to the Architect based upon the 1^st Defendant’s NOD No 1;

(5)  By a letter from PY to the 1^st Defendant dated 23 September 2019, the MC complained against the non-completion of the fitting out works and provided various details of the 1^st Defendant’s delay.  A number of provisions under the NSCtt were referred to, and the letter ended by reserving PY’s right to claim liquidated damages against the 1^st Defendant;

(6)  The 1^st Defendant responded by its letter dated 25 September 2019 in which various exculpatory explanations were advanced, but there was no suggestion of absence of contract with PY;

(7)  By a letter from its solicitors dated 6 November 2019 to PY, the 1^st Defendant protested against the suggestion of the Plaintiff to employ another sub-contractor to complete the remedial work to the fitting out at the Clubhouse.  In particular, it was asserted that any engagement of sub-contractor without the 1^st Defendant’s consent would be a breach of the NSCtt and in respect of which the 1^st Defendant reserved its right of action. 

15.Further examples where PY and the 1^st Defendant referred to the provisions of the NSCtt could be found in (a) the 1^st Defendant’s email in respect of “NSC Payment Application (MC IP No 30)” dated 6 June 2019[1] and (b) a Notice of Default dated 8 November 2019 from PY to the 1^st Defendant[2].

16.From the contemporaneous documents, the first time where the 1^st Defendant asserted that there was no contract between itself and PY was by way of a letter dated 16 December 2019 to PY responding to its Notice of Termination dated 11 December 2019 (“N/T”).  This letter carried little significance in light of the totality of contemporaneous documents.

17.In cross-examination, the 2^nd Defendant (the first of 2 witnesses of the Defendants) admitted that the 1^st Defendant applied to PY for interim payments as its sub-contractor, and that PY in turn made its interim payment applications (which included the 1^st Defendant’s payment applications) to the Architect as MC.  The 2^nd Defendant agreed that such process was normal, and the only difference with the normal process in this case was that the Plaintiff was paying the 1^st Defendant and other NSCs directly.

18.When asked about the absence of an executed NSCtt, the 2^nd Defendant agreed that PY and the 1^st Defendant just got on with the work in accordance with the NSCtt.  Further, the 2^nd Defendant agreed that the 1^st Defendant’s NODs were given to PY pursuant to the NSCtt.  It was also accepted that PY did not merely conveyed messages between the 1^st Defendant and the Plaintiff as suggested in the 2^nd Defendant’s witness statement. 

19.There were two points of substance advanced on behalf of the Defendants to contradict the case of implied contract.  Firstly, it was said the PY had consistently refused to sign a NSCtt.  The only relevant document in this regard was a letter from PY to the Architect dated 4 June 2018[3] in which PY advanced a “reasonable objection to [the 1^st Defendant’s] nomination” because of concern that the “late nomination” would hinder the completion of work according to the Master Programme (by 11 September 2018).  Therefore, PY would require an extension of time “[f]ailing receipt of which we must reluctantly refuse to continue the execution of a sub-contract with [the 1^st Defendant]”.

20.It is plain from the letter that PY was asking for an extension of time before it would agree to enter into a NSCtt with the 1^st Defendant.  As a matter of agreed fact, soon after PY’s letter to the Architect, the Master Programme was revised with the completion date extended by about 7½ months to 30 April 2019[4].  The very fact that PY wrote to the 1^st Defendant as a NSC about the Revised Master Programme (see para 14(1) above) strongly suggested that its concern about entering into a NSCtt with the same had been resolved.

21.Further, there was only 1 document in support of this point.  Assessed against the entirety of the contemporaneous documents which evidenced the conduct of the 1^st Defendant and PY, it could not be said that PY had acted consistently in refusing to sign a NSCtt.  Mr Richie Lui, PY’s Deputy Project Manager who was in charge of this Project (the 3^rd of the Plaintiff’s 7 witnesses), said that there was no pressing need for the NSCtt to be signed. 

22.By an email from the QS to the 1^st Defendant dated 18 July 2018, a draft NSCtt was sent to the latter for “checking”.  On 31 July 2018, the 1^st Defendant replied that it had no comment on the draft contract but only the completion date stated on the same.  The QS was asked to advise “if there is any updated completion dated (sic) or there will be EOT granded (sic) for the project”.  The completion date stated in the draft NSCtt was 11 September 2018, which was rendered out of date by the Revised Master Programme (see para 14(1) above).

23.According to the QS’s email and the 2^nd Defendant’s evidence, the draft NSCtt sent by the QS only covered the Clubhouse fitting out work but not the Towers and Houses subsequently added by the Supplemental Agreement.  I believe that the totality of the evidence suggested that the issue of signing a NSCtt for the 1^st Defendant’s fitting out work was overlooked or put aside in the course of events.

24.Finally, the 2^nd Defendant said that between August and December 2018, he continued to make enquiry with both PY and the Plaintiff about when the formal sub-contract could be executed, and he was told that the execution would be “very problematic”.  Plainly, such evidence must be carefully scrutinised in light of the totality of the contemporaneous documents (see Eu Asia Engineering Ltd v Wing Hong Contractors Ltd, unrep, HCCT 16/1990, 23 December 1991, per Kaplan J at p. 9 (3^rd para)). I do not believe that the 2^nd Defendant’s evidence was consistent with the contemporaneous documents or the conduct of the parties, and it does not sway me from the belief that the matter was in fact overlooked or put aside. 

25.In respect of the second point, it was said that the direct payment by the Plaintiff to the 1^st Defendant (after assessment by the QS as aforesaid) was inconsistent with the existence of a contract between PY and the 1^st Defendant, and consistent with a contract between the Plaintiff and the 1^st Defendant.  I am unable to agree. 

26.That issue was specifically addressed in Cl. 10 of the L/N (see also SCC-23(8) of Appendix ‘A’ to Special Conditions of Sub-Contract[5]) which provided that :

“The Employer shall notwithstanding anything in this Contract be entitled to pay directly the amounts stated as due to you concerned in any certificate issued under clause 30 of the Conditions of Contract and deduct the same from any sums due or to become due to the Main Contractor under the Contract. Neither the existence nor the exercise of the foregoing powers nor anything else contained in the Conditions of Contract shall render the Employer in any way liable to you.”

27.By the Acknowledgement at the end of the L/N and signed by the 1^st Defendant, the 1^st Defendant (acting via the 2^nd Defendant) “confirm the acceptance of the terms and conditions stipulated in this Letter of Nomination”.

28.It is very difficult to see any real scope for argument that the direct payment arrangement was inconsistent with a contract between PY and the 1^st Defendant.

29.One final point which should be made on this issue was the requirements of the Warranty and Guarantee from the Defendants (see further below).  Such requirements fit with the usual contractual arrangement whereby the NSC would contract with the MC, and those documents were required to give the Employer a cause of action against the NSC (and its director) which it would not otherwise have due to the absence of a contractual relationship.  

30.In the premises, I hold that there was an implied contract between PY and the 1^st Defendant in accordance with the terms of the NSCtt which was not executed.

Collateral contract and related arguments

31.It is convenient at this juncture to deal with the Defendants’ case of a collateral contract between the Plaintiff and the 1^st Defendant based on a pre-contract discussion about direct payment. 

32.The 1^st Defendant’s evidence was that there was a meeting on 25 August 2017 attended by, inter alia, representatives of the Plaintiff, including the Plaintiff’s first witness Mr Chang Wing Yu (“Chang”).  The purpose of the meeting was a pre-tender inspection by the Plaintiff of the quality of the previous projects undertaken by the 1^st Defendant.  During the course of the meeting the Plaintiff said to the 1^st Defendant that it would make direct payment to the 1^st Defendant for the fitting out work, thus bypassing PY in respect of whom the 1^st Defendant was concerned about getting paid on time.  The 1^st Defendant was induced by the promise to enter into contracts with the Plaintiff, which it would otherwise have refused.

33.Chang agreed that he did discuss the issue of payment with the 2^nd Defendant at a meeting (the date of which he could not recall) during which the 2^nd Defendant asked the Plaintiff to pay the 1^st Defendant directly.  In response and “to alleviate [the 1^st Defendant’s] concern”, the Plaintiff agreed.  However, Chang emphasised that it would not make the Plaintiff liable to the 1^st Defendant.  The Plaintiff subsequently informed the Architect of the terms agreed, which were then incorporated into the L/N and accepted by the 1^st Defendant. 

34.The best guide to the reliability of the witnesses’ evidence was the contemporaneous documents.  The L/N was in line with the evidence of Chang and not consistent with that of the 2^nd Defendant or the Defendants’ case of a collateral contract.  I believe that the 2^nd Defendant would not have signed the L/N if its terms (in particular, Cl. 10) were inconsistent with what was agreed. 

35.Indeed, in cross-examination, the 2^nd Defendant agreed that the terms of the L/N reflected what was agreed in August 2017.  The 2^nd Defendant’s attempt to water down that answer in re-examination by saying that the L/N “… stated perhaps [the Plaintiff] would pay or not pay [directly].  So I signed [the L/N] without paying particular attention to this sentence.”  Such explanation could not be taken seriously. 

36.In the premises, I reject the Defendants’ case of a collateral contract that the Plaintiff was bound to make direct payment to the 1^st Defendant for the fitting out works. 

37.The forgoing analysis applies equally to the Defendants’ case on variation, estoppel and waiver.  In light of Cl. 10 of the L/N and the 2^nd Defendant’s own evidence, these arguments could not get off the ground. 

38.For completeness, I am unable to accept the Defendants’ arguments based on unjust enrichment either.  The 1^st Defendant was entitled to be paid pursuant to the terms of the NSCtt.  If it was dissatisfied with the payments made, there were provisions under the NSCtt for recourse. 

Enforceability of the Warranty and the Guarantee

39.The arguments here were purely legal, turning upon the proper construction of the two documents. 

Warranty

40.The Deed of Warranty provided that the 1^st Defendant “will carry out complete and maintain the Sub-Contract Works in accordance with the terms of the Sub-Contract.” 

41.The Sub-Contracts Works were the “Interior Fitting Out Works to Clubhouse” which was “intended to form part of the Main Contract Works as a Nominated Sub-Contract”.  Further, the Warranty was given by the 1^st Defendant “in consideration of [the Plaintiff] nominating us as Sub-Contractor for the Sub-Contract Works”. 

42.Clause 13 of the L/N referred to the Deed of Warranty and required the 1^st Defendant to execute it.  The Defendants submitted that it was obvious from the L/N that both the Plaintiff and the 1^st Defendant envisaged that the latter and PY would actually sign a NSCtt.

43.It followed, the Defendants argued, that at the material time both the Plaintiff and the 1^st Defendant agreed the Deed of Warranty would not take effect except on the signing of a NSCtt between the 1^st Defendant and PY. 

44.Given that the 1^st Defendant and PY never signed any agreement let alone a NSCtt, the condition precedent for the Deed of Warranty was never satisfied and therefore the Deed of Warranty was a conditional and unenforceable contract: Chitty on Contracts, 34^th edn, [4-197].

45.I am unable to agree with the Defendants’ submissions.  The 1^st Defendant was nominated by the Plaintiff as the NSC for the fitting out of the Clubhouse, the 1^st Defendant in fact carried out such work and, as found by this court, there was an implied contract between PY and the 1^st Defendant in accordance with the terms of the NSCtt. 

46.I agree with the Plaintiff’s submission that there was no requirement stated in the Deed of Warranty to the effect that it would only take effect upon the execution of a NSCtt.  There is no reason or logic for the 1^st Defendant to be bound by the NSCtt, having conducted itself on that basis, and then be able to avoid the effect of the Warranty entered into due to its nomination by the Plaintiff, because no NSCtt was actually signed. 

47.In the premises, I hold that the 1^st Defendant is bound by the Warranty.

Guarantee

48.Turning to the Personal Guarantee of the 2^nd Defendant, the relevant provisions were as follows :

Clause 1.1

“In consideration of [PY] agreeing to enter into the Nominated Sub-Contract with [the 1^st Defendant], the [2^nd Defendant] as primary obligator and not merely as surety irrevocably and unconditionally agrees with [PY] and, without the need of any express assignment with all its successors in title, such agreement to take effect from 14^th October 2016 (the “Commencement Date”), that [the 1^st Defendant] shall duly perform and observe all the terms, provisions, conditions, obligations, stipulations and specification of the Nominated Sub-Contract according to the true purport intent and meaning thereof and to the reasonable satisfaction of the Architect appointed by the [Plaintiff] in respect of the Works or if on default by the Nominated Sub-Contractor[6] the [2^nd Defendant] shall satisfy and discharge the damages sustained by the [Plaintiff] thereby as certified by the Architect, then his obligation shall be null and void but otherwise his obligation shall be and remain in full force and effect.”

Clause 1.2

“If [the 1^st Defendant] shall be unable to pay on the [Plaintiff’s] demand, the [Plaintiff] can claim the [2^nd Defendant] in the maximum amount of Hong Kong Dollars Twenty-Eight Million Six Hundred Thousand Only (HK$28,600,000.00) during the terms of the Nominated Sub-Contract to make good the [Plaintiff] on demand and indemnify the [Plaintiff] against all losses, damages, costs and expenses.”

Clause 1.4

“The [Plaintiff] is (sic) agreed that the personal guarantee made by the [2^nd Defendant] is limited to the amount of Hong Kong Dollars Twenty-Eight Million Six Hundred Thousand Only (HK$28,600,000.00) under the period of Nominated Sub-Contract (i.e. from the Commencement Date until the issue the Certificate of Practical Completion or until the obligations of [the 1^st Defendant] under the Nominated Sub-Contract shall have been discharged in full whichever is earlier).”

49.Four arguments were advanced by the Defendants in their Opening submissions against the Guarantee :

(1)  The Guarantee was unsupported by consideration because PY never agreed and had refused to sign the NSCtt;

(2)  The Guarantee would not take effect except on the signing of the NSCtt between PY and the 1^st Defendant;

(3)  The Plaintiff is barred from making any claim on the Guarantee by virtue of Cls. 1.1 and 1.4 because such claim had to be made during the term of the NSCtt, which had been terminated.  At any rate, the Certificate of Practical Completion (“CPC”) was issued on 28 August 2020;

(4)  The Architect had not certified the damages sustained by the Plaintiff, and according to Cl. 1.1 the 2^nd Defendant’s obligation to pay remains untriggered.

50.The first point is difficult to understand.  The Guarantee was made between the Plaintiff and the 2^nd Defendant and it took the form of a deed.  It was “signed, sealed and delivered” by the 2^nd Defendant on 29 March 2018, the same date as the L/N. 

51.Clause 14 of the L/N provided that the 1^st Defendant was to provide a Personal Guarantee to the Plaintiff.  Preamble (C) of the Guarantee referred to the L/N and “[the 1^st Defendant] entered into a [NSCtt] with [PY] to carry out the Sub-Contracts Works … as described in the [NSCtt]”.  Preamble (D) went on to refer to the 2^nd Defendant as the substantial shareholder of the 1^st Defendant and “is willing to provide personal guarantee to the [Plaintiff] for [the 1^st Defendant] …”.  It is thus quite clear that, if needed, consideration was provided by the Plaintiff for the Guarantee by agreeing to appoint the 1^st Defendant as the NSC for the fitting out work.

52.The same analysis set out in paras 45 and 46 above applies equally to the Defendant’s condition precedent argument for the Guarantee, and it is rejected.

53.In respect of the time barred argument, the documents showed that the NSCtt between PY and the 1^st Defendant was terminated on 11 December 2019 by the N/T.  The Plaintiff’s demand under the Guarantee was made on 3 July 2020 after its demand dated 13 June 2020 on the Warranty was rejected by the 1^st Defendant on 18 June 2020. 

54.There appears to be 2 aspects of the time barred argument: (i) the time of claim (Cl. 1.2) and (ii) the duration of the Guarantee (Cl. 1.4).

55.In my view, despite the use of different words under Cls. 1.2 and 1.4, “the terms of the [NSCtt]” and “the period of [NSCtt]” referred, on proper construction, to the same thing, ie, the duration of the NSCtt.  There is thus a strong argument that the “terms” or “period” had been specifically stipulated under Cl. 1.4.  I therefore agree with Mr Clayton that the time of claim argument ignored the Plaintiff’s case that the 1^st Defendant had not discharged its obligations under the NSCtt and the CPC was issued only on 28 August 2020.  Assuming that the Plaintiff’s claim had to be made within the duration of the NSCtt, both its letter of 3 July 2020 and the Writ[7] in this action preceded the CPC and were issued in time.  This deals with argument (i).

56.The suggestion that, based on the terms of Cl. 1.4, the Guarantee had expired upon the issuance of the CPC is not a proper construction of the Guarantee as a whole.  I agree with Mr Clayton that the “period” referred to in Cl. 4 was a reference to the time of breach by the 1^st Defendant of the NSCtt – against which the 2^nd Defendant had agreed to indemnify the Plaintiff for the resulting loss and damage.  In other words, the Guarantee did not cover a breach committed by the 1^st Defendant during defects liability period after Practical Completion.  Such construction is the only sensible one, otherwise a claim made in time (before practical completion) but had not been resolved when the CPC was issued would become void. 

57.Further, if the Plaintiff is right about the 1^st Defendant’s breach of the NSCtt (see below), there can be no argument that the Guarantee had expired by reason of the Termination of the NSCtt because the 1^st Defendant had not discharged its obligation under the NSCtt in full by paying damages.

58.Finally, I also agree with Mr Clayton that although the Architect had not certified the loss suffered by the Plaintiff, there was no stipulation in the Guarantee that such a certificate was a condition precedent to give rise to the Plaintiff’s entitlement to indemnity under Cl. 1.2: see Keating on Construction Contracts, 11^th edn, [5-023]-[5-025], [5-028] and [5-036] to [5-038].

59.In their Final Submissions, the Defendants made an additional argument in respect of the coverage of the Guarantee, ie, it only covered the Clubhouse fitting out works.  I agree.  At the time of the Guarantee, the Supplemental Agreement had not come into existence.  Indeed, Recital (C) of the Guarantee referred to the L/N and the amount of the Guarantee was based on the contract sum for the Clubhouse works. 

60.Mr Clayton argued that the Guarantee was for the NSCtt works which were later enlarged by the Supplemental Agreement.  The problem with that argument was that the 2^nd Defendant was not a party to the Supplemental Agreement[8] and there was no basis for suggesting that he had agreed to extend the Guarantee to the additional works.

61.Although the additional argument would not entirely release the 2^nd Defendant of liability under the Guarantee should this court finds that the 1^st Defendant had breached the NSCtt, quite fairly Mr Clayton accepted that the Plaintiff was unable to identify the damages attributable to the breach in respect of the Clubhouse works. 

62.In the premises, notwithstanding that the 2^nd Defendant remains bound by the Guarantee.  This part of the Plaintiff’s claim must fail.   

Breaches of the NSCtt

63.The breaches on which the Plaintiff relied upon to justify PY’s termination of the NSCtt on 11 December 2019 were delay and defective works.  On both issues, the court had the evidence of Single Joint Expert (“SJE”).  Ms Wong was the SJE on programming, and Mr Cock was the one for Defects.

The HK$60 Million Agreement

64.It is relevant to say a few words about the HK$60 Million Agreement before dealing with the issue of delay in completion of the fitting out works. 

65.In early July 2019, arrangements were agreed between the Plaintiff and the 1^st Defendant, whereby the former agreed to a payment timetable of a total sum of HK$60 Million subject to the latter meeting labour resource commitments and achieving promised site progress, with the completion of all the 1^st Defendant’s works by 31 October 2019.

66.There is an undated document from the 1^st Defendant (signed by the 2^nd Defendant) addressed to the Plaintiff which recorded the “preliminary agreement” reached between the parties on 5 July 2019 (“5 July Letter”) wherein the abovementioned terms could be found.

67.There was no issue that the first 4 instalments, in the total sum of HK$40 million were paid by the Plaintiff to the 1^st Defendant pursuant to the 5 July Letter.  The Plaintiff refused to make further payment thereunder due to, it said, the failure by the 1^st Defendant to meet the labour resource commitments and progress promised. 

Delay

68.It is uncontroversial that the completion of the 1^st Defendant’s work was delayed.  The extended completion date of 30 April 2019 was not met.  Neither was (a) the completion date of 15 August 2019 based on a verbal confirmation by the Plaintiff and recorded in PY’s letter to the 1^st Defendant dated 3 June 2019[9] or (b) the completion date of 31 October 2019 stated in the 5 July Letter.  However, the parties differed on the cause of the delay.

69.The Plaintiff had identified the causes of delay as the 1^st Defendant’s: (i) failure to proceed regularly and diligently; and (ii) failure to rectify defects.  On the other hand, the 1^st Defendant alleged that the delay was caused by the Plaintiff’s: (i) failure to make adequate payments, which resulted in the 1^st Defendant’s shortage of cash flow and such shortage prevented it from engaging enough workers; (ii) failure to ensure other trades completed their works on time, which led to late handover of Site to the 1^st Defendant; and (iii) causing or permitting frequent changes of design.

70.The SJE on Programming, Ms Wong, had addressed these alleged causes of delay, and also considered the extent of delay at various critical points, namely, when Notices of Default and the N/T were issued. 

Failure to rectify defects

71.In respect of a major defect of water leakage at the Houses (see also the evidence of the SJE on defects below), Ms Wong’s opinion were :

(1)   “This kind of issues would have caused critical delay to subsequent fitting out works and immediate remedial works to be required”[10];

(2)   “Should the [1^st] Defendant be responsible for the delay on water leakage, the issuance of the 2^nd Notice of Default by the Plaintiff[11] dated 22 November 2019 would be justified”[12].

72.In the premises, subject to the issue of liability over the water leakage, it was a cause of delay to the completion of the 1^st Defendant’s work.  Although there were general allegations of poor quality of work in PY’s 1^st Notice of Default[13] and 2^nd Notice of Default[14] to the 1^st Defendant, the water leakage appeared to be the only specific issue on quality relied upon in the N/T.

Failure to proceed regularly and diligently

73.Ms Wong’s opinion regarding the 1^st Defendant’s resource deployment level from July to December 2019 and its lack of intention to proceed diligently were :

(1)   “… average number of work[ers] dropped gradually from October to December ”[15];

(2)   “… Up to 31 October 2019, only ~50% of committed numbers of workers were provided by the Defendants on site from July to October 2019”[16];

(3)   “Since the issue of 1^st Notice of Default through issue of Notice of Termination, the numbers of workers have decreased and hence, the [1^st] Defendant had not been able to improve site progress”[17];

(4)   “Since the progress of fitting out mostly rely on manpower, with drop of resources deployed during November 2019, it would be difficult to support the intention of the Defendant to act diligently on improvement for site progress from the record that I have reviewed”[18].

74.In light of the 1^st Defendant’s alternative case that its failure to deploy adequate workers was caused by payment problems for which the Plaintiff was responsible, the opinion of Ms Wong was not surprising.

75.I agree with Mr Clayton that the 1^st Defendant’s failure to deploy adequate manpower was a key factor to take into account when deciding whether it failed to proceed with works regularly and diligently.

Alleged payment problems

76.Ms Wong stated that she was “not able to assess the liability on payment issues”, but she went on to note that “in my experience, there is no mechanism for contractors or sub-contractors to slow down the progress of the Work in the event of non-payment.”[19]

77.In respect of the Defendants’ suggestion that the Plaintiff had failed to meet its obligation to pay for work done by the 1^st Defendant, I do not believe that it was made out in the evidence. 

78.The high-water mark of this allegation was the draft assessment of the 1^st Defendant’s Interim Payment Application (“IPA”) No 13.  IPA 13 was submitted by the 1^st Defendant to PY on 25 March 2019, which was included in IPA 30 of the latter.  On about 7 May 2019, the QS made its 3^rd draft assessment of IPA 13 with a Net Amount Due at HK$11.245 million. 

79.By its email dated 4 June 2019 to the 1^st Defendant, the QS stated that: “[we] are informed that there are issues of progress, workmanship and document submissions in regard to the Interior Fitting Out Nominated Sub-Contract Works and need to be further verified by Kingboard[20], LWK[21] and Steve Leung Designers[22].  In order not to jeopardize the Main Contract Interim Payment No. 30 certification process, the payment valuation for [the 1^st Defendant’s works] will be dealt with and included in the next IP after receiving final comments …”.

80.The writer of the email, Ms Hu, gave evidence for the Plaintiff as its 6^th witness.  She was taxed in cross-examination on the non-payment of IPA 13 in accordance with her 3^rd assessment.  Ms Hu stood by her evidence that there were issues concerning the provision of adequate information by the 1^st Defendant and that the information was provided by the 1^st Defendant in a piecemeal fashion.  She said that the whole assessment process took 1½ to 2 months during which updated information was received by her.  After the 1^st draft assessment, she started to receive notices of workmanship and progress issues, which explained why there were so many draft assessments. 

81.Ms Hu said that the assessment of IPA 13 was later suspended because of defects in the 1^st Defendant’s work and the foreseeable fact that the progress could not be met by the 1^st Defendant.  She denied that she failed to act independently as the QS for the Project or that she simply acted on the instructions of the Plaintiff.     

82.Quite apart from the fact that Ms Hu impressed me as a credible witness, her evidence was consistent with the contemporaneous documents.  In particular, firstly, the terms of the 5 July Letter, written by the 2^nd Defendant on behalf of the 1^st Defendant, suggested that the Plaintiff was dissatisfied with the progress of the 1^st Defendant’s work, which led to the promises of work force, completion dates and of the 2^nd Defendant’s daily attendance on Site to inspect the progress of work. 

83.Secondly, during a meeting held on Site on 6 December 2019[23] (“6 December Meeting”) attended by the representatives of the Plaintiff, QS, PY and the 1^st Defendant, the 1^st Defendant’s representative stated that due to its financial position the 1^st Defendant was unable to pay workers resulting in their departure from Site.  It was further stated that due to lack of capital, no worker was willing to carry out water testing and no proposal for rectification of water leakage could be made by the 1^st Defendant. 

84.Such record should be considered against the fact that after issuing the 1^st Notice of Default on 13 November 2019 (with which were enclosed a letter from the Architect to PY dated 8 November 2019 and a letter from LWK to the 1^st Defendant dated 7 November 2019, both referring to the 1^st Defendant’s persistent poor performance and sub-standard workmanship), PY issued the 2^nd Notice of Default on 22 November 2019 expressing strong dissatisfaction of the 1^st Defendant’s failure to complete the Sub-Contract Works by 31 October 2019 and highlighted the water proofing problems.  PY expressly relied on General Conditions of Sub-Contract, Cl. 20(a), and notified the 1^st Defendant of its failure “to proceed regularly and diligently with the Sub-Contract Works”, and having “persistently neglected after notice in writing from PY to remove defective work or improper material”.

85.Thirdly, by the N/T issued on 11 December 2019, PY terminated the NSCtt with the 1^st Defendant.  I am unable to think of a good reason for PY to have done so if not for the delay and poor workmanship on the part of the 1^st Defendant.  Self-evidently, terminating the contract of a NSC at the final stage of the Project would result in many problems, such as finding a replacement contractor.  In this case, the replacement contractor was only able to complete the works on 31 March 2020.

86.Contrary to the suggestion that the Plaintiff was underpaying the 1^st Defendant, Ms Hu’s evidence, which I accept, was that the HK$40 million paid to the 1^st Defendant under the HK$60 Million Agreement were booked as “on account” payments by the Plaintiff because based on site inspection and other information available to the QS, the payment actually due to the 1^st Defendant would be in the negative.

87.Finally, Mr Clayton’s submission that there was no provision in the NSCtt which permitted the 1^st Defendant to slow down its progress due to a payment dispute was not disputed by the Defendants.  Any such dispute (there were of course contractual provisions for the resolution of payment disputes), could not justify the 1^st Defendant’s failure to proceed regularly and diligently with its works (see West Faulkner Associates v London Borough of Newham (1994) 71 BLR 1, at 14F and Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd [2013] EWJC 4030 (TCC), [402]).

Alleged obstruction by other trades & late handover

88.Ms Wong had considered in detail the evidence of the 2^nd Defendant regarding obstruction by other trades.  She summarized her opinion as follows :

“… as mentioned in previous section, fitting out work is the last major step of the project, all above obstructions may or may not have affected completion. … Fitting out relies much on coordination and with this type of project, high level of skilful labours is demanded to meet tight completion deadlines. … Base on the information I have reviewed, I understand that there were issues on site by other trades. However, I am not able to assess if the Defendant could have completed other critical areas while waiting for other trades to complete specific problematic areas. … This would be an unknown as the Defendant did not provide the effects of the delays due to these issues alleged.”[24]

89.Similar opinion was expressed by Ms Wong in respect of the effect of late handover of the Clubhouse to the 1^st Defendant. Her opinion was set out in §§10.80 to 10.90 of her Report and summarized in §10.90 as follows :

“For what I have reviewed, the Defendants have not provided with evidence to justify reasonable ground for its delays in this Contract.”

90.Hence, Ms Wong was unable to ascertain any critical delay caused to the 1^st Defendant’s works due to the late handover of the Clubhouse.

91.Ms Wong was cross-examined by Mr Khaw on the above matters.  She was taken to various documents by which the 1^st Defendant had referred to alleged causes of delay.  However, she remained unshaken on her evidence that without evidence on how those alleged causes had impacted upon the critical path of the 1^st Defendant’s works, no assessment of delay could be made.  I see no reason to doubt Ms Wong’s evidence.

92.On the late handover of the Site.  Ms Wong pointed out that there were IPAs made by the 1^st Defendant prior to the handover indicating that some of the works were carried out.  Further, I note that in its memo to PY dated 17 December 2018 (shortly before the alleged late handover on 27 December 2018[25]), the 1^st Defendant submitted a programme which provided for completion on 23 April 2019 (consistent with the Revised Master Programme). 

93.Finally, on 24 June 2019, the 1^st Defendant issued its NOD No 2 to PY stating that its works had been delayed for 30 days by the late installations by E&M NSC.  Photos of the whiteboard of lunchbox meetings on 8 January, 26 February, 19 March, 2 and 9 April 2019 were attached evidencing that the delay had been discussed previously and that the Plaintiff, PY and all the contractors knew about it. 

94.In this regard, Ms Wong stated that: “… EOT shall be granted if the Judge decides that the ‘$60M Agreement’ has not already covered the delays entitlement”.  In light of the timing of the 5 July Letter, and the completion dates promised by the 1^st Defendant contained therein, I take the view that this NOD No 2 must have been fully taken into account by the 1^st Defendant.

Alleged design changes

95.On this cause of delay advanced by the 1^st Defendant, Ms Wong had reviewed the supporting documents and expressed her opinion as follows :

“Further to my review on [D/15] containing 1,414 pages, I am not able to assess the magnitude of delay without any particular provided to substantiate the overall delay impact due to any of these events.”[26]

96.Again, similar comment was made by Ms Wong in respect of the variation orders relied upon by the 1^st Defendant :

“Based on the documents that I have reviewed, I have not seen any particulars, expected effects of the delay incurred nor estimation of the delays to the overall completion due to any of the Variation Orders through issued COIs”[27]

Delays at various critical points

97.Ms Wong provided her opinion regarding the extent of delays at 3 critical points of time when the Notices of Default and N/T were issued by PY :

“... as against the $60 million agreement completion dates the critical delay at (sic) of 13 November 2019 could have been 8 months.”[28]

“… In essence, the delay could have been worse at of 22 November 2019 and 11 December 2019 to 8.5 months and 10 months respectively as a rough estimate.”[29]

98.Ms Wong’s evidence was tested under cross-examination by Mr Khaw.  This court has no reason to disagree with the assessment of Ms Wong.  It is trite that a contractor seeking extension of time to complete its work must provide proper support for its claim.  Typically, supporting documents for the delaying event, as well as an analysis of how such event impacted upon the critical path for the contractor work would be provided.  It was quite clear from the cross-examination of Ms Wong that there was no such information provided by the 1^st Defendant.

99.In my view, the evidence of failure to proceed regularly and diligently by the 1^st Defendant was fairly overwhelming.  As pointed out by Mr Clayton, the Notes of the 6 December Meeting[30], §§5, 13, 16 and 18, recorded that the 1^st Defendant made it abundantly clear that it would not further proceed with the works without additional payment, which was not due in accordance with the certified IPCs and not going to be paid.  It appeared that PY had little option but to terminate the NSCtt as it did a few days later. 

Defects

100.The Plaintiff’s evidence was that various defects in the 1^st Defendant’s works were identified and the 1^st Defendant was notified of the same regularly.  Of particular significance were the water leakage problems discovered in early November 2019.  Despite repeated reminders, the 1^st Defendant failed to rectify the water leakage.  It was one of the grounds relied upon by PY in terminating the NSCtt.

101.After termination, through its solicitors the Plaintiff retained a defects consultant, Mr Carmine Siu (the Plaintiff’s 7^th witness) to carry out inspection and prepare “Inspection Records”, which formed the basis of part of the claims in this action by the Plaintiff.  Mr Siu’s evidence was not challenged. 

102.The SJE on defects, Mr Cock, had prepared a report setting out his opinion on, inter alia, the defects at Termination.

103.It should be made clear that “defects” had been given a wide meaning to include both unsatisfactory and outstanding works under two groups: (i) General Defects in Annex 1 to the Plaintiff’s Further and Better Particulars (“FBP”); and (ii) Particular Defects in Annex 2 to the FBP.

General defects

104.As analysed by Mr Cock, there were 1,778 line items of alleged General Defects and over 7,700 instances pleaded (each alleged defect within a particular Unit was referred by Mr Cock as an “instance” of the relevant line item)[31].

105.In respect of Question 1 for Mr Cock: “Identify the Sub-Contract Work and/or the Additional Works and/or Variation Works, which pursuant to the terms of the Nominated Sub-Contract and the Supplemental Agreement, remained outstanding as on 11 December 2019?”, he opined that 880 of the line items were outstanding works, and all 880 line items did in fact remain outstanding on 11 December 2019[32].

106.In response to Question 2: “Whether the Sub-Contract Work and/or the Additional Works and/or Variation Works completed as on 11 December 2019 were defective or non-compliant?”, Mr Cock carried out checking by selecting 1,200 instances (out of 7,772) representing about 945 line items (out of 1,778) for the General Defects pleaded in the FBP[33].

107.Mr Cock summarized his opinion regarding the General Defects in a table (Annex JEC-E to his Report[34]).  The average percentage of Non-Compliant (“NC”) was assessed as 91.3%, which included both outstanding works and defective works (the General Defects included both).    

108.Since all outstanding works pleaded had been accepted by Mr Cock as so (ie, 100% NC), therefore the average percentage of NC items for defective works pleaded should be less than 91.3%.

109.Table 7 of Mr Cock’s Report[35] provided a summary of the NC items.  The vast majority of NC items were incomplete works, most of which were in the Houses, followed by the Flats (about 70% of line items categorized as NC).  Next were snagging items (just under 30% of items categorized as NC).  Only 2 line items were considered serious defects, namely, “Wrong stone material for door threshold” and “Wrong type of toilet door”[36].  However, there were 2 other potential serious defects (“Wong stone material at the threshold of the entrance” and “Single layer gypsum board in ceiling”) depending on this court’s finding on liability for the defects[37].

110.In respect of the 4 categories of Particular Defects (Floor Drains, Toilet Mirror Box Finish, Waterproofing System and Door Heights), Mr Cock expressed his opinion in sections 22 to 25 of his Report respectively.

111.On Category 1: Floor Drains, Mr Cock opined that 2 of the 5 blocked floor drains were shown to be blocked due to cementitious material that had been poured.  He was unable to express a view as to who was responsible for the blockage[38].  Quite properly, Mr Clayton took the view that since this was only a minor defect, it does not merit separate consideration.

112.On Category 2: Toilet Mirror Box Finish, Mr Cock stated that he was not aware of any evidence to support the Plaintiff’s claim[39]. However, he was taken by Mr Clayton to, inter alia, the Inspection Record at G4/34478-34482.  In light of Mr Cock’s evidence after having been shown the Record, I am satisfied that the Plaintiff was entitled to have the Mirror Box defects rectified at the cost of the 1^st Defendant. 

113.On Category 3: Waterproofing System, Mr Cock opined that the evidence did not support defective materials or workmanship in the 1^st Defendant’s waterproofing works as constructed up to the date of the last Floor Test Record on 19 August 2019[40].  On the other hand, whether leakage was caused by subsequent damage and whether that was caused by the 1^st Defendant or others were questions of fact on which Mr Cock expressed no opinion[41].

114.In preparing his Report, Mr Cock had considered the Water Test Inspection Record and Water Test Videos prepared by Mr Siu and observed that the evidence appeared to record failed water testing on 24-27 December 2019 after the 1^st Defendant had left the Site[42].

115.In cross-examination, Mr Cock was referred by Mr Clayton to (a) the Water Leakage Tests and Open-up Inspection Record of Mr Siu; (b) the uncontested evidence of the Plaintiff’s Clerk of Works, Mr Cheung Wai Wing (the Plaintiff’s 2^nd witness), who noticed damage to waterproofing due to the 1^st Defendant drilling holes through the waterproofing for installing the channel for shower tray (which was also the 1^st Defendant’s work); and (c) the contemporaneous correspondence between LWK and the 1^st Defendant on damage to the waterproofing. 

116.In answer, Mr Cock accepted that if the water membrane was drilled through and no sealant was applied over the bolts, water leakage was likely to occur.  In light of such evidence and the documents, I accept the Plaintiff’s case that there was damage to the waterproofing and the 1^st Defendant was responsible for the same.

117.Finally, Mr Clayton’s submission that even if the damage to waterproofing had been caused by other sub-contractors, the 1^st Defendant would still have been responsible for making good the damage was supported by Cls. 6.5(a) and 6.14 (c) of Section A – General Preliminaries of the NSCtt.  In short, those provisions required the 1^st Defendant to protect its works against damage and to make good such damage.  Further, the 1^st Defendant remained fully liable for the conditions of its works until the date of Practical Completion.  No contrary submission had been made on behalf of the Defendants.

118.On Category 4: Door Heights, Mr Cock noted that the existence of such defects was admitted and no opinion was required from him. Hence, the 1^st Defendant was responsible for such defects.

119.Mr Cock was also cross-examined by Mr Chan on behalf of the Defendants :

(1)  In respect of any suggestion that the Toilet Mirror Box defects might have been caused by others after the termination of the NSCtt on 11 December 2019, I am not persuaded by it because (a) Mr Siu’s Inspection Record was taken not long after Termination; and (b) there was no evidence of defects caused by others after Termination.

(2)  The same points applied to the suggestion that the stone material for door threshold (see para 109 above) might have been changed by the contractor which replaced the 1^st Defendant.

(3)  In light of the contemporaneous documents which he had been taken to, Mr Cock accepted that the single layer gypsum board in ceiling (see para 109 above) was not a defect.  I also agreed. 

Findings on delay, defects and the Termination

120.In light of the above evidence and analysis on delay, I find that the 1^st Defendant was in breach of the NSCtt in failing to proceed regularly and diligently.  It had failed to meet the proposed completion dates set out in its 5 July Letter. 

121.The unsatisfactory and outstanding works of the 1^st Defendant had been dealt with above.  Given the lack of completion by the time of Termination of the 1^st Defendant’s contract, the existence of outstanding works was unsurprising.  There was ample evidence proving the defective works of the 1^st Defendant.  In particular, the water leakage was a serious defect which the 1^st Defendant had failed to rectify despite PY’s complaints.   

122.In the premises, I hold that the 1^st Defendant was in default under the NSCtt.  The 1^st Defendant continued with those defaults despite having received the 2^nd Notice of Default, and PY’s Termination of the NSCtt on 11 December 2019 was validly made. 

123.For completeness, I do not accept that PY was simply acting under the Plaintiff’s instructions in issuing the N/T as suggested by the Defendants.  Self-evidently, the N/T was issued by PY for which it must be responsible.

Quantum

124.First of all, the Counterclaim does not fall for consideration for obvious reason.  However, I do not believe that the 1^st Defendant would be disadvantaged by not being able to make a claim against the Plaintiff for unpaid work because it will be seen below that the Plaintiff’s claim would take into account the value of all the 1^st Defendant’s works.

125.Due to the 1^st Defendant’s breaches of the NSCtt which led to the termination by PY, the Plaintiff had suffered 2 heads of damage: (a) the additional costs incurred to complete the contract works (including rectifying the 1^st Defendant’s defective works) and (b) the prolongation claim by PY for the period from 11 December 2019 (date of termination) to 31 March 2020 (date of completion of work by the contractors who replaced the 1^st Defendant).

Additional Costs

Costs for completing outstanding works and rectifying defects

126.There are 3 basic components for working out this claim: (a) Total payments made to the 1^st Defendant (agreed at HK$99,886,000); (b) Costs of completing the outstanding works and rectifying the defective works; and (c) Notional final sub-contract sum.  By adding (a) and (b), the total costs incurred by the Plaintiff can be ascertained. Subtracting the notional final sum from the total costs will produce the additional costs incurred by the Plaintiff.  There was no disagreement to this formula.

127.The reasonable costs for completing the outstanding works and for rectifying the defective works had been considered by the SJE for Quantum, Mr Cheung, in sections 9 and 10 of his Final Report on Issue 7 (valuation of the reasonable costs for completing the outstanding works) and Issue 8 (valuation of the reasonable costs for rectifying the defective works).

128.In coming to his valuation, Mr Cheung had considered all the relevant materials, including quotations, payment records, letters of nomination and Architect’s Instructions of nomination for replacement sub-contractors.  Mr Cheung considered that the extent of General Defects (together with outstanding works), the Particular Defects, the extent of remedial works, and the scope and extent of works had been broadly identified.

129.In his summary of assessment (§1282), Mr Cheung allocated the replacement sub-contractors’ costs under 3 main headings: (a) Rectifying Defects at HK$27,423,217.25; (b) Outstanding Works at HK$54,100,477.79 (this was not contentious[43]) and (c) Variation Works at HK$1,265,273.

130.Quite rightly, Mr Clayton did not pursue the costs of Variation Works because they were regarded by Mr Cheung as betterment.

131.The reasonable costs for rectifying the defects (HK$27,423,217.25) could be sub-divided between General Defects (HK$18,373,331.25) and Particular Defects: Waterproofing (HK$3,370,460); Mirror Boxes (HK$1,272,639); and Doors (HK$4,406,787).  This court has found that the 1^st Defendant is liable for all 3 Particular Defects (see paras 112, 116 and 118 above).

132.As regards the General Defects, Mr Clayton adopted a percentage for which the 1^st Defendant is liable (75.66%) based on the Mr Cock’s Report[44].  75.66% of HK$18,373,331.25 is HK$13,901,102.80.

133.The total costs for completing outstanding works and rectifying defects are: Particular Defects (HK$3,370,460 + HK$1,272,639 + HK$4,406,787) + General Defects (HK$13,901,102.80) = HK$22,950,988.80.  Adding it to the Outstanding Works (HK$54,100,477.79) gives the total of HK$77,051,466.59.

134.In my view, the above quantification is properly supported by the evidence, as well as the analysis of Mr Clayton to which Mr Khaw did not offer any valid opposition.  It is right to point out that there was an element of broad brush approach adopted in the quantification, eg, the assessment of the costs of rectifying the General Defects.  However, I believe that the approach is justified and proportionate in light of the very large number of defective items (see Mr Cock’s Report, §20.2[45] and Mr Cheung’s Report, §1234[46]).  I bear in mind also the principles referred to in Chun Wo Building Construction Ltd v Metta Resources Ltd, unrep, HCCT 29/2013, 19 August 2016, [255].

Notional final sub-contract sum

135.This component was considered by Mr Cheung in section 3 of his Final Report on Issue 1 (valuation of the notional final sub-contract sum), and had been summarized to be within a range from HK$167,001,754.92 to HK$175,207,080.13.  The reason for the range was that the assessments for the variations were made in a range from HK$42,492,594.92 to HK$50,697,920.53.

136.The Plaintiff contended that the total value of Variations should be in the sum of HK$44,073,881.72.  By adopting that sum for “Sub-Total (3)” of the table in §56 of the Final Report[47], the notional final sub-contract sum should be HK$168,583,041.32.

137.The justifications for the valuation of Variations at HK$44,073,881.72 had been set out in a 11-page Attachment 1 to the Plaintiff’s Opening Submissions, plus enclosed supporting documents. However, I agree with Mr Khaw that the detailed analysis set out in Attachment 1 had not been adequately covered by the factual evidence.  It would not be appropriate for this court to, in effect, carry out a paper assessment of the value of the Variations.

138.On the other hand, I see no sufficient reason to adopt the higher end of the range as suggested by Mr Khaw because it was premised on the assumption that all the factual and liability issues in relation to the assessment for the notional value were found in favour of the 1^st Defendant.  Doing the best I can and adopting a broad brush approach, I adopt the median of the range as the notional final sub-contract sum: HK$171,104,417.53.

Conclusion on Additional Costs

139.The Plaintiff’s claim for additional costs incurred to complete the Sub-Contract Works becomes :

		HK$
A	Total Payments to 1st Defendant	99,886,000.00
B	Costs to complete the outstanding works and rectify the defective works	77,051,466.59
	Total costs incurred by Plaintiff	176,937,466.59
C	Less Notional Final Sub-Contract Sum	-171,104,417.53
	Additional costs incurred by the Plaintiff	HK$5,833,049.06

PY’s prolongation claim

140.The Plaintiff relied upon its Voluntary Particulars, §§1 to 3, which set out the basis and quantum of this claim :

“1. As a result of the 1^st Defendant’s breaches which led to the Main Contractor’s termination of the Nominated Sub-Contract on 11 December 2019, the Plaintiff was obliged to nominate replacement sub-contractor(s) who was willing to complete the 1^st Defendant’s defective and/or outstanding works without causing any delay to the time for completion of the Main Contract Works (which was then extended to 30 April 2019). By the time, Occupation Permit had already been issued on 29 November 2019, and the only substantial works outstanding under the Main Contract were fitting out works. However, the Plaintiff was able to appoint replacement sub-contractors who were only willing to complete the 1^st Defendant’s defective and/or outstanding works by 31 March 2020. The Main Contractor was therefore entitled to claim under GCC 23 (as modified by SCC-19) and GCC 24 (as modified by SCC-20) of the Main Contract for extension of time and for related loss and expenses from 11 December 2019 to 31 March 2020 (i.e. 111 days) – for critical delay due to act of breach or prevention on the part of the Plaintiff in failing to appoint replacement sub-contractor who was willing to complete without causing any delay to completion of the Main Contract Works. But for the 1^st Defendant’s breaches which led to the Main Contractor’s termination of its Nominated Sub-Contract, the Main Contractor would have been responsible for all delays caused by the 1^st Defendant and would not be entitled to claim against the Plaintiff.

2. The Main Contractor has raised a prolongation claim of HK$19,795,107.15 for a period from 1 October 2019 to 31 May 2020, which was subsequently revised to HK$21,960,000.00 for a period from 1 October 2019 to 31 August 2020 (i.e. 335 days). … Eventually, the Plaintiff has settled the Main Contractor’s revised prolongation claim at a lump sum of HK$10M.

3. The Plaintiff is entitled to claim for the said prolongation claim or for the sum assessed by the Joint Quantum Expert on quantum.”

141.The evidence suggested strongly that the NSCtt of the 1^st Defendant would not have been terminated if not for the delay and defects of its fitting out work.  There was no sensible reason for PY to choose to termination the NSCtt if the situation was tolerable.  The Plaintiff’s evidence was that there was a pressing need to have the Clubhouse ready to be used as the sales office for the Development.  Clearly, the delay had got to a point where PY had little choice but to look for replacement contractor(s) to complete the fitting out work. 

142.Further, there is no reason to believe that the Plaintiff had not acted reasonably in nominating replacement fitting out contractors given the prevailing delay and its need to have the work completed as soon as possible.  If there was available a reasonable replacement contractor who could have completed the work before 31 March 2020, it was unlikely for the Plaintiff not to have chosen it.   

143.Based on the authorities cited by Mr Clayton, I am satisfied that PY’s prolongation claim was attributable to the breaches by the 1^st Defendant of its NSCtt, and the Plaintiff is entitled to be compensated by the 1^st Defendant under the Warranty for what it had paid in respect of such claim: see Keating on Construction Contracts, 11^th edn, [13-076] to [13-078]; Bickerton v NW Metropolitan Regional Hospital Board [1970] 1 WLR 607, at 613A-E; Fairclough Building Ltd v Rhuddlan Borough Council 30 BLR 26, at pp 41-42; and Percy Bilton Ltd v GLC [1982] 1 WLR 794, 802C-D.

144.As for the quantum of this claim, PY’s prolongation claim was settled by the Plaintiff in the sum of HK$10 million. The Plaintiff accepted that the settlement with PY embraced more than the delay occasioned by the need to nominate replacement contractor for the fitting out. The Plaintiff relied on Mr Cheung’s assessment of PY’s prolongation costs from 11 December 2019 to 31 March 2020 at HK$7,540,186.53[48].

145.Mr Khaw took issue with 2 elements of the assessment, namely, the expenses under “Other expense” and the statutory levy percentage.  There is some force in the submissions.  However, given that the sum of HK$10 million was arrived at as a commercial settlement, it is pointless to try to make a precise adjustment based on the Defendants’ objections. 

146.Doing the best I can and adopting a broad brush approach whilst using Mr Cheung’s assessment as a guide, I award the sum of HK$5,000,000 under this head of claim.  The discount is justified given the lack of clarity on how much of the settlement sum was attributable to the prolongation resulted from the Termination.

Disposition

147.I give judgment in favour of the Plaintiff against the 1^st Defendant in the sum of HK$10,833,049.06 with interest at prime rate(s) plus 1% from 13 June 2020 (date of the Plaintiff’s demand made to the 1^st Defendant[49]) to date of judgment and thereafter at judgment rate(s) until payment. 

148.The Plaintiff’s claim against the 2^nd Defendant is dismissed, and so is the 1^st Defendant’s Counterclaim against the Plaintiff.

149.As between the Plaintiff and the 1^st Defendant, the costs of this action and the Counterclaim, with a certificate for 2 counsel, be paid by the 1^st Defendant to be taxed if not agreed.  I make no costs order in respect of the action against the 2^nd Defendant.  All costs orders are made on nisi basis.

150.Last but not least, I am grateful for the assistance of counsel.

Mr Peter Clayton SC and Mr David Tsang, instructed by Fung, Wong, Ng & Lam LLP Solicitors, for the Plaintiff

Mr Richard Khaw SC and Mr Anthony HK Chan, instructed by SK Wong & Co, for the 1^st and 2^nd Defendants