Nan Fung Development Ltd v. New Kwong on Ltd

HCA007865/1982

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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BETWEEN

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Coram: The Hon. Mr. Justice Hunter.

Dates of hearing: 20th to 24th June, 7th to 11th, 14th & 15th November 1983.

Delivery

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JUDGMENT

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1. This case concerns the air-conditioning system at Flat 8A Fortuna Court, 25 Repulse Bay Road. The block was built by the plaintiffs. By a sale and purchase agreement dated 26th June 1981 the plaintiff agreed to sell and the defendant to buy this flat, which was then in the course of construction, together with two parking spaces, for the sum of $7.970m. The net floor area of the flat was 2,592 sq. ft. so that this price works out at over $3,000 a sq. ft.

2. For present purposes the relevant terms of this agreement were:-

3. The building was not in fact completed on or before 30th November 1981 and the occupation permit was not issued until 19th April 1982. This gave rise to what is now an undisputed obligation on the part of the plaintiff to pay or allow interest to the defendants in the sum of $79,700. Disputes between the parties which are no longer the subject matter of claims either way delayed completion until 20th July. On that day, when the defendant was first able to inspect the flat, it objected to the sufficiency and quality of the air-conditioning system and refused to proceed. Happily a very sensible solution was reached between the solicitors to the parties in what became known as the stakeholders agreement. This is alleged in paragraph 7A of the amended statement of Claim (and admitted in terms in the amended defence) as follows:-

4. Immediately after the making of this agreement, the defendant sought the advice of Mr. Duff Hsu, the Managing Director of Thomas Anderson and Partners Limited and a very experienced engineer in this field. His initial informal report on the air-conditioning system, c88 (the "c" reference is to documents in the agreed bundle) was very critical of the size, efficiency and method of installation of the units fitted and of the level of noise which they created. On 6th August, c87, a copy of this report was sent to the plaintiff along with a request for the details of the repairs which the plaintiff proposed. On 10th August, c90, the plaintiffs solicitors replied that alterations had been carried out. Mr. Hsu thought that this made matters, and especially the noise, worse. His second informal report to this effect, c92, was sent to the plaintiff's solicitors on 11th August, c91, with the warning that the defendant intended to effect its own repairs.. This was followed up on 19th August, c94, with a letter enclosing the modification plans prepared by Mr. Hsu, the estimated cost of which was then about $160,000, and a statement to the effect that the defendant was proposing to put these works in hand forthwith.

5. The response of the plaintiff's solicitors to this threat was immediate and to the point. On 20th August, c95, they denied the allegations in a letter of 11th August, and enclosed a report from the plaintiffs then consultants, c93, which concluded that the "system is therefore considered suitable for domestic use". This was followed on 23rd August, c96, by an emphatic disclaimer of liability for any of the works referred to in Mr. Hsu's plan, coupled with a demand for the 5% retention fund. On 2nd September this action was started by a specially endorsed writ. The claim was for the full 5% balance i.e. $318,800 together with damages measured by interest from 24th April. The document ignored the stakeholders agreement.

6. By this time the defendant had received from Mr. Hsu his first formal signed report, c194, which although dated 4th August was completed some time later. This report condemned the existing system and advised its removal and replacement by a different system known as a "chilled water" system. His estimate was that the work would take four to five months to complete at a total cost of works of about $280,000.

7. In the light of Mr. Hsu's comments on noise, the defendant took advice from two experienced members of the Department of Engineering at Hong Kong University namely Dr. Chan and Dr. Yuen. Their findings, c199, in effect were that the system was about twice as noisy as it ought to have been. The guidelines most relied upon by acoustic engineers in this field are those of the American Society of Heating, Refrigerating and Air-conditioning Engineers (ASHRAE). For apartment houses their suggested ranges are 35 - 45 on the dBA scale and 30 - 40 on the Noise Criteria (NC) scale. In the residential parts of the flat the findings ranged from 54 - 61 on the dBA scale and from 55 - 70 on the NC scale. When one remembers that noise doubles with each increase of 10 points on the dBA scale, the results revealed by these readings can be seen to be far from satisfactory.

8. In these circumstances the defendant took a decision the reasonableness of which has given rise to considerable debate. This was not then to proceed with the works recommended by Mr. Hsu or to occupy the flat. Instead the defendant decided to contest the plaintiffs claim; to counterclaim for the cost of the works recommended by Mr. Hsu and for loss of user; to press on with the action and await the result in whole or in part. The action proceeded with reasonable expedition. The defendant set it down for trial for a fixed date, 20th June 1983.

9. When the case first came on before me on this date I was invited to rule upon the right to begin. I concluded that this, and the onus on the then pleadings, remained with the plaintiff. It then emerged that the plaintiff no longer wished to maintain the view advanced the preceeding August and theretofore maintained on the pleadings that the air-conditioning system was satisfactory. On the contrary it had already agreed a rectification specification with their contractor. This work was intended to be carried out in the whole block, and had in fact been executed in flat 5B. The plaintiff wished to contend that the execution of this work at a modest cost of some $40,000 was all that was necessary.

10. I was accordingly invited to utilise the time fixed for the hearing by doing three things. First both parties were emphatic that I should view both flats 8A and 5B and experience and hear their systems for myself. This I did. In fact I paid two visits to the block because on the first occasion the electrical system at 8A had been rendered inoperative.

11. Secondly I granted the plaintiff leave to amend the Statement of Claim. The new pleading pleaded the stakeholders agreement and claimed the balance of the 5% retention fund after allowing, in paragraph 7(G) three deductions namely:-

12. Thirdly I started to hear evidence from Mr. Felix Tsang, another experienced electrical engineer whose services had been retained by the plaintiff very shortly before the hearing. In the course of this evidence it emerged that insufficient attention had been paid to differences in the main aspects of the two flats which was, westerly in the case of 8A and easterly in the case of 5B. This affected the required loading of the air-conditioning system; the capacity, the number of British Thermal Units per hour (BTUs/hr) the system had to generate to reduce temperatures to appropriate levels. Mr. Tsang then reconsidered his calculation, and in the event he and Mr. Hsu were able to reach a very substantial measure of agreement upon the loadings necessary in the two flats. At this juncture on 24th June the hearing had to be adjourned.

13. It was resumed on 7th November. Two things then emerged. First the works recommended by Mr. Hsu had been put in hand immediately after 24th June. They had been completed, and the new system commissioned, very shortly before the resumed hearing. Secondly the plaintiff had decided that by reason of its easterly aspect the 5B scheme was not suitable for the A flats. The 5B scheme had been further amended, and the new version installed in flat 4A. This work, the plaintiff now contended constituted "all necessary works" at flat These works were said to cost about $80,000 and so put this limit on the plaintiff's claim.

14. In these circumstances two main issues arose for determination namely:-

Cost of Works

Further, despite the lack of express definition in the contract there was no serious dispute as to the applicable standard. It was common ground that the air-conditioning system had to be reasonably suitable for and commensurate with the class of flat. The advertising made reference, to "luxurious, development" and "top quality fittings". The location, the price, and the contents of the second schedule supported this. Both Mr. Hsu and Mr. Tsang were agreed that a rpoper airconditioning system in such, a flat should be able to maintain temperatures in the range of 23.3℃ to 24.4 ℃in outside temperatures of up to at least 33℃. The only difference between the acoustic engineers was an insignificant one as to whether the ASHRAE guidelines should be adopted as a whole, or whether a noise level in living rooms rising to 47 not 45 dBA was acceptable. The real dispute arose as to the means necessary to achieve temperatures within this range in the A flats. There was also a minor issue as to the need to provide air-conditioning in the kitchen.

15. The air-conditioning system originally installed was a packaged unit system. A packaged unit in the words of the relevant British Standard (B. S. 1608: 1966 para. 2) consists of "one or more motor-driven compressors, condensers ... and ancillary equipment all assembled on a common base". The units in question consisted of a single condenser and compressor. Such a unit is designed to cool some defined area and you have to fit as many units as there are areas. Flat 8A was divided into three areas so three units were fitted as follows: A/C 1 for the dining-room: A/C 2 for the living room and study and A/C 3 for the bedroom. The units are themselves air cooled. They need to draw in air from the atmosphere and expel hot air. They, therefore, have to be installed externally or in an internal position with ample access to external air. Further each unit must be fitted in such a way that it does not draw in its own or another unit's exhaust gases. Such short circuiting of air, as it is called, materially impairs the efficiency of the unit as well as increasing the running costs.

16. Mr. Hsu's fundamental criticism of the original system was that insufficient space was provided in the flats' design for the installation of a packaged unit system. The intended location for these units was a canopy outside the servant's bedroom. This was simply not large enough for its purpose. Packaged units of sufficient size and power to maintain proper temperatures in the three areas could not be accommodated either at all or without producing serious short circuiting of air between the units. Further, he said, the units were themselves too small. The catalogue ratings of the units fitted were A/C 1 29,000 BTU/hr A/C 2 and 3 both 42,000 BTU/hr. On the occasion above referred to he calculated the design requirements of the dining-room A/C 1 as 32,180 BTU/hr: the living room and study A/C 2 56,300 BTU/hr and the bed-rooms A/C 3 43,349 BTU/hr. These factors together accounted for the manifest inability of the system to produce the required temperatures. He was also critical both of the noise and the size of the outlet grilles in the bed-rooms.

17. As it was not permissible to hang packaged units on the outside of the building, in Mr. Hsu's view the solution was to find more space, and adopt a system which could be fitted into such space. More space could be found in a store-room at the back of the kitchen, and in the ceiling space over the servant's bedroom. He recommended the installation of a chilled water system, the components of which could properly be split between these areas; putting air cooled condensers in the ceiling space, and the compressor, chiller and water pump in the store room. He accepted that a chilled water system was more expensive, more flexible and more easily controlled than a packaged unit system. But he said it was the " feasible solution".

18. I found Mr. Hsu a most impressive witness, and events seem to me to have proved him right. I think that the plaintiff's various solutions have been shown to be unsatisfactory and unacceptable make shift attempts to surmount the basic design problem. The main feature common to both the 5B and 4A modifications was to create more space by utilising the servant's room ceiling area and by splitting units A/C 2 and 3. The original compressors from each were installed in the ceiling, and new locally fabricated condensers were installed one on top of the other in the canopy. The main new feature in the 4A modification was to replace the old A/C 1 rated at 29,000 BTU/hr with a new unit rated at 46,800 BTU/hr. It was recognised that the unit which was particularly under powered was A/C 2 serving the living room. But there was not enough space to enlarge this. Excess capacity was introduced to the dining room unit in the hope that this would carry over into the living room which was physically situated in part "down wind" from the dining room.

19. In my judgment the flat 4A modification does not provide a reasonably suitable air-conditioning system within the meaning of the contract. My principal reasons for saying this are:-

In summary I accept Mr. Hsu's views on all except one small point, where they conflict with Mr. Tsang and I accept the correctness of his rejection of both the original system and the 4A modification.

20. Acoustically the 4A modification is a very great improvement on the original. The noise level in the study bath room and on occasions in the study remain on the high side, but this is insignificant by comparison with the basic air conditioning deficiencies of the system.

21. It follows in my judgment that the proper cost of all necessary works has to be based upon the actual cost of installing the new system in flat 8A. These actual costs were:-

I therefore turn to consider whether any and if so what deductions have to be made from this total:

These deductions total $14,500. I therefore assess the cost of necessary works at $301,000.

Loss of Use

22. There was some common ground here. First the issue was not whether but how long: whether the claim which in the amended Statement" of Claim admittedly started to run on 29th July ceased on 9th September 1982 or at some very much later date. It followed that no question of remoteness was raised. Secondly the rate of $38,000 a month pleaded in the amended Statement of Claim was an agreed figure representing the monthly-value of this flat at the. material time. Thirdly it was not suggested that the defendant ought to have occupied the flat before the air-conditioning system was rectified. It was sensibly recognised that uncomfortable occupation plus departure when the modification works were carried out would have produced a different but not necessarily a lower claim. Fourthly it was conceded by the plaintiff that if I accepted the need for Mr. Hsu's rectification works which I have, then the loss of use period applicable to the execution of such works was the period claimed of 4 months. The total elapsed period was 41/2 months, but to avoid argument on the fringes Mr. Swain limited his claim to 4 months. This part of the claim is therefore made out in the sum of $152,000.

23. The sole but real issue in dispute was the date on which these works ought to have been put in hand the date from which these 4 months start to run. For the plaintiff it was contended that the works ought to have been put in hand immediately after 14th August when it was apparent that satisfactory repair work had not been carried out. The defendant, it was said, ought to have done precisely what the solicitor's letters of 11th and 19th August said it was going to do. The loss of use claim should accordingly be limited to a total of 41/2 months or $171,000. For the defendant on the other hand it was contended that this four months should run from the true date namely the termination of the last hearing. The relevant period for loss of use was then 29th July 1982 to about 25th June 1983, which was rounded down to 10½ months. This gives a figure of $399,000. But this is of course additional to the actual working period claimed so that the whole claim is $399,000 plus $152,000 or $551,000. It is nearly double the cost of works claimed.

24. The relevant principles of law applicable to a situation such as this have I think been much illuminated by three recent decisions of the Courts in England. Not so very long ago, many practitioners would I think have said that the rule that damages for breach of contract fall to be assessed as at the date of breach applied to damages measured by costs of works notwithstanding a substantial increase in the cost of such works between the date of breach and the date of trial. Phillips v. Ward (1956) 1 All E. A. 874 might well have been cited in support. This was an action against a surveyor for negligence. The Court of Appeal held that the damages had to be . measured not directly by any estimated cost of repairs but by a diminution in value of calculation as at the date of purchase, which was itself affected by the cost of repairs at such date. The Court held that the relevant repair costs for this purpose were those ruling at the date of breach not at the date of hearing. Morris L. J. in addition rejected the contention that this assessment date could be postponed by any need to preserve the property for inspection by the Court, although the trial judge had availed himself of this opportunity.

25. In Radford v. De Froberville (1978) 1 All E. R. 33, Oliver J. was concerned with the measure of damage for non performance of a covenant to build a brick wall. His answer was cost of construction not diminution in value of the land. But in the course of a most helpful judgment the learned judge:-

These observations were all made in a case where having regard to inflationary effects the date taken could materially alter the assessed cost of works, but where there was no continuing loss of use claim. Lord Wilberforce, when delivering the opinion of the House of Lords in Johnson v. Agnew (1979) 1 All E. R. 883 referred to Oliver J.'s decision with apparent approval at p. 896 in support of his proposition that the basic common law rule was not absolute.

26. In Dodd Properties v. Canterbury City Council (1980) 1 All E. R. 829. The Court was concerned with the proper date for the assessment of damage occasioned by acts of nuisance to the first plaintiff as owner, i.e. the cost of repairs and to the second plaintiff as occupier i.e. disruption occasioned by such repairs. The damage was caused in 1968. The trial judge assessed damages as at 1970 in a total sum of $15,483. 1970 was the earliest date on which, allowing for practicalities in setting the work up, the repairs could have been undertaken. The Court of Appeal held that the proper date to be the hearing date i.e. 1978 which produced a total award of £42,278. In reaching this decision the Court emphasised the need to balance the interests of both parties in determining what was reasonable, repeating what was said for example in Darbishire v. Warran (1963) 1 W. L. R. 1067; echoed Oliver J. in emphasising the importance of a denial of liability in this context; and specifically approved Oliver J. 's observations on measure and mitigation. In the Court's view the postponement of the second plaintiff's disruption claim "necessarily followed", p. 638e, from the postponement of the date for the assessment of the cost to repairs. But again there was there no claim for continuing loss.

27. Perry v. Sidney Phillips (1982) 3 All E. R. 705 was again a case of negligence by a surveyor. The Court of Appeal reaffirmed the principle of Phillips v. Ward that such damages fall to be measured by a diminution in value calculation not by the cost of works. But in relation to the latter type of case Lord Denning M .R. said at p. 708b: "where there is a contract to build .... a house ...., then if the contractor .... does it badly, the employer is entitled, by way of damages, to recover the reasonable cost of doing such work as is reasonable to make good the breach. The cost is to be assessed at the time when it would be reasonable for the employer to do it, having regard to all the circumstances of the case including therein any delay due to a denial of liability by the contractor or the financial situation of the employer".

28. Further, notwithstanding the rejection of the cost of works as the measure of damage, the Court upheld the trial judge's award that the plaintiff was entitled to damages to be assessed for distress worry and inconvenience caused by the breach between the date of purchase and it would seem at least the date of the hearing. The Court rejected the defendant's argument that the plaintiff had brought this on himself by his failure to repair earlier. The question said Oliver L. J. was: "was it reasonable in all the circumstances for the plaintiff not to mitigate his damage by carrying out the repairs which were required?, He said that it was, one of the reasons being "because the defendants were strenuously resisting any liability at all for the repairs and denying that they were responsible" p. 711c. Kerr L. J. specifically agreed with this conclusion p. 712h. The effect was that although value was assessed as at the date of purchase; damages for discomfort distress and inconvenience fell to be assessed at the hearing and to cover the period up to the hearing.

29. In the light of these authorities the question I have to ask myself is whether or not it was reasonable for the defendant, to postpone the start of the remedial works from mid August 1982 to 25th June 1983. In answering it I have to try to balance the interests of both parties. I have to look objectively at the facts proved before me and I am not hamstrung by the absence of direct evidence from the defendant as the plaintiff suggested.

30. In my judgment the governing factor here is the plaintiff's denial of liability in August 1982, and the maintenance of the stance until June 1983 that the original system was perfectly suitable. I can see no substance in the plaintiff's submission that the defendant ought to have realised that its advisers were right and the plaintiff's advisers were wrong. First I gravely doubt whether it lies in the plaintiff's mouth to assert this at all. Secondly the boot, if anything, seems to me to be on the other foot. The plaintiff told the defendant very little, whereas the defendant passed on both Mr. Hsu's initial informal reports. Thirdly belief is one thing, proof in a court of law quite another. The defendant was being advised to put in a completely new system at considerable expense. The risk of this advice being shown to be materially wrong always existed. It was reduced but not eliminated in June 1983. The risk of this advice proving to be excessive in amount subsisted long after June 1983 and indeed until judgment. The defendant's acceptance of this risk after June 1983 is a potent factor in its favour because it has reduced the actual or potential loss of use claim by 4 months.

31. The stakeholders agreement introduces a special element. The intent of this was to put aside a fund from which the cost of necessary works would be met. But the stakeholders have been unable to release any part of this fund to either party and have had to await judgment in this action. I think there is great force in Mr. Swain's submission that this makes the position analogous to an assessment of damages in lieu of specific performance, where the Courts have said that a party cannot reasonably be required to spend money until he knows whether specific performance will be granted. The Court, said Mr. Swain, should not readily conclude that a party was unreasonable in not digging further into its pocket until the destination of the fund was decided. If right this would have justified inactivity until after judgment.

32. Thirdly there is the preservation of evidence factor rejected by Morris L. J. in Phillips v. Ward. My inspections here were useful and they enabled me more readily to follow the evidence. Having regard to the course of the case in fact took following the plaintiff's admission in June, I could not describe them as decisive. But had the plaintiffs maintained their original stance they could have been much more significant. I am therefore minder to regard the preservation of evidence in a case like this, where feel and sound are important, as a material factor on the issue of reasonableness.

33. The loss of use claim here is very substantial but its size in itself reflects the cost of the flat. I accept Mr. Swain's submissions. I think that the defendant in all the circumstances of this case acted very reasonably in postponing the execution of the necessary repairs no further than June 1983. In my judgment therefore this loss of use claim succeeds in the total sum of $551,000. It follows that the defendant is entitled to recover:-

The retention fund of $318,800 must accordingly be released to the defendant, and judgment entered in its favour for the appropriate balance. The size of this balance will be affected by interest, perhaps both ways. On this I will hear counsel.

Representation:

Mr. Robert Wei, Q.C. & Mr. Jerome Chan (Philip K. H. Wong & Co.) for Plaintiff.

Mr. John Swaine, Q.C. & Mr. Edward Chan (Iu, Lai & Li) for Defendant.