Lee Fung Realty Ltd v. James Woo Construction Co Ltd

HCA001048/1975

Coram: Zimmern, J.

Date of Judgment: 25th May, 1978.

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JUDGMENT

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1. The plaintiff Lee Fung Realty Ltd. was incorporated by a Mr. Alex Yau as his corporate vehicle for the re-development of No. 6 Shan Kwong Road purchased in the name of "the Company" (which I shall call the plaintiff) in 1971. Mr. Yau was a novice in this sort of venture. He had arranged finance and for expertise he relied on a friend, Ha Wai an interior decoration contractor albeit registered with the Public Works Department as a contractor. Mr. Ha had a good friend Mr. Sun Ko Chua, a civil engineer and authorised architect then in partnership with a Mr. Taylor and a Mr. Hui under the firm name of Consolidated Associates. Through the introduction of Mr. Sun to Mr. Yau by Mr. Ha, Consolidated was appointed Architects for the project. Piling and general plans were drawn up and approved by the Building Authority for the construction of a 12 storey building. The then existing building was demolished in 1972. A piling contractor was appointed and piling work commenced in December 1972. In the same month the Architects issued invitations to certain contractors to tender for the construction of the intended building. On the 12th January 1973 the defendant submitted its tender and it was the lowest. The Architects by a letter dated 17th January 1973 wrote to the defendant accepting the tender for the construction work in the lump sum of $1,528,746.87. Coincidentally Mr. James Woo managing director of the defendant contractor company bearing his name and of 30 years standing in contracting work in Hong Kong was a good friend of Mr. Sun so here there was the making of a happy family.

2. The formal agreement in the then Society of Architects' Standard Form was signed on 20th February 1973 and for the time being I shall refer to only one of its terms set out in the appendix namely "Date of Possession: To be notified by Architect".

3. It was common ground that possession of the site could not be given to the defendant till after completion of the piling work and it was further common ground that the piling contract was not completed till end October 1973. The question arises whether there was a breach of contract by the Company. There was some conflict of evidence as to the estimated time for the piling work at the outset ranging from 2 to 4 months but in view of my finding in this matter I am prepared to take the longest estimate namely 4 months. The question then arises 4 months from when and again I am prepared to take the latest date i.e. 20th February 1973 the date of the formal contract.

4. The consent date for the commencement of piling work was 7th December 1972 and trouble in the work reared its ugly head towards the end of December 1972 when 2 of the piles then driven failed to pass the Building Authority test and cracks were discovered in an adjoining building. The work was stopped pending approval of revised piling plans and shoring of the adjoining building. The revised piling plans were submitted on 25th January 1973 and on 19th April 1973 the defendant made a bid for the shoring work which was not accepted. Mr. Sun told the court that a few days before the execution of the formal contract he told Mr. James Woo that the piling work would take about 4 months. I accept this evidence. Mr. Mills-Owens argued that by the very term of the contract in respect of possession of site no time limit was imposed and that the Architects on behalf of the employer could notify the defendant to take possession of the site and commence work within a reasonable time after completion of the piling work. In support of this he said that at the time both of tender and signing of the formal contract James Woo knew the piling contractor had encountered trouble and he entered into the lump sum contract with his eyes wide open to the risk of delay. I do not accept this argument, Mr. Sun had told James Woo that the work would take about 4 months a few days before 20th February 1973 which was at that time the Architects' genuine forecast. Where a party to a contract undertakes to do an act, the performance of which depends entirely on himself and the contract is silent as to the time of performance the law implies an obligation to perform the act within a reasonable time having regard to the circumstances of the case (Chitty on Contracts para. 1274). The completion of the piling work was a sine qua non of delivery of possession. In the circumstances of this case the Company was bound to complete the piling work within a reasonable time. What is that time is a matter of fact. On the evidence I hold the time to be within 4 months from 20th February 1973. Giving a few days allowance for the notification I further hold that the Company was in fundamental breach of the Contract when it was unable to deliver possession of the site by 30th June 1973.

5. Having dealt with this issue I now come to the matters which led to the Company's claims in this case for damages for breach of contract, detinue and for conversion. I shall deal with the defendant's counterclaim later.

6. 1973 was the year of the bubble boom in Hong Kong. Prices of shares in the Stock Market rocketed upwards month by month alarmingly. Property prices rose and materials for building works followed suit in particular steel bars both high tensile and mild. Soon after the Company accepted the defendant's tender the latter covered its position in steel and certain other materials required for the contract. Confining myself to steel for the time being first on 19th January 1973 it entered into an agreement with Cheong Wah Company for the purchase and sale of 1000 piculs of mild steel bars at $56 per picul for a total consideration of $56,000. Second on 26th January 1973 it entered in a purchase and sale contract for 2900 piculs of high tensile steel bars for a total consideration of $167,778.17. The quantities were sufficient for the intended construction work. Let me say here now that the Company was not privy to these two contracts and had no interest in law or equity in the steel purchased by the Company.

7. I have held that the Company was in fundamental breach of the contract when it failed to deliver possession of the site on 30th June 1973. On the 23rd July 1973 the defendant wrote to the Architects a letter complaining of the non-delivery of the site and setting out increases in the prices of labour and materials and the financial burden of the interest rates and storage charges for the steel.

8. The 3rd and last paragraphs of the letter are worth citing and they read:-

9. It does not fall upon me to determine whether if the Contract had been performed the Company would have succeeded in any intended claim under clause 24. What is important is that the defendant by 23rd July 1973 had not accepted the Company's repudiation and had elected to treat the Contract as subsisting.

10. On the 25th July 1973 the defendant sent to the Architects a Bill of Quantities said to be Application for Payment No. 1 setting out the 2 steel items at cost totalling $223,778.17, delivery, and storage charges and bank interests, certain claims for overheads and other materials.

11. On the 28th July 1973, the Architects issued a certificate of payment in terms:-

"We hereby certify that the Contractor is entitled to a payment of $201,400.35 in accordance with the terms of the above mentioned Contract."

12. There was no mention of the word steel in the certificate but the sum of $201,400.35 was derived from the cost of the steel to the defendant i.e. $223,778.17 less 10% retention money. The defendant received this sum of $201,400.35. On the 4th September 1973 the defendant sent to the Architects another Bill of Quantities said to be Application for Payment No. 2 containing all the items set out in No. 1 plus certain new items such as steel windows. The Architects ticked certain items in their copy and issued another certificate for payment in the same terms this time in the sum of $68,106.85. 10% retention money having been deducted. I do not have to go into the details of these items, they are fully set out in the schedule appended to the Statement of Claim. The defendant received this sum of money.

13. On the 27th October 1973 when the piling was nearing completion the defendant wrote to the Architects expressed to be further to its letter of 23rd July 1973 and subsequent to discussions with Messrs. Hui and Sun of the Architects. With the letter the defendant sent its revised estimate for the construction work in the sum of $2,019,479.86 an increase of $490,732.99 plus another sum of $123,383.42 being storage and delivery charges and bank interests. The defendant made clear that the new rates on the revised estimate marked with an asterisk were those materials already ordered and delivered with no increment of cost taken into account. The estimate was subject to the date of commencement of work not later than mid-November 1973.

14. By a letter dated 23rd November 1973 the Company wrote to its Architects referring to the defendant's letter and the unfortunate delay in the piling work went on to say:

"in view of the financial losses incurred by the above construction company, we hereby agree to pay extra 10% of the original construction fee of $1,528,746.87 with the lump sum now amounting to $1,681,621.55. Please negotiate with James Woo Construction Ltd. so that construction will be started immediately after this settlement."

15. I set out below in full two letters written and delivered by the defendant to the Architects dated 14th December 1973 and 24th December 1973 respectively. The Bill of Quantities referred to did not mention the steel save as to charges and interests.

Construction of Apartment Building on I.L. 2343 Sect. A S.S.1 S.A. & B.6 Shan Kwong Rd.

Dear Sirs,

Construction of Apartment Building on I.L. 2343 Sect. A S.S.1 S.A. & B.6 Shan Kwong Rd.

16. In October, 1974, Deacons, Solicitors for the Company instructed the defendant to commence work which instructions through its Solicitors the defendant refused to accept.

17. I have dealt with the documentary evidence and turn now to the viva voce. Alex Yau, Ha Wai and James Woo all gave evidence. Of the Architects Mr. Taylor was called by the Company and Mr. Sun by the defendant. The former could not help the Court to any great extent. He was not involved in the negotiations between Client, Architects and Contractor. He probably had his say in the Architects' partners' meeting and was the partner dealing directly with the Building Authority vis-a-vis the development. Mr. Sun was the partner concerned directly with the negotiations between the Company and Contractor and having heard him I have no doubt of his professional impartiality and understanding of his duty as Architect to both Employer and Contractor. It is from his evidence which I accept that I try to fill in the gaps of the documentary evidence.

18. He told the Court that when he received the defendant's letter of the 23rd July 1973 he appreciated the difficult position of the defendant. He passed the letter to Alex Yau and told him to make some payment. Yau agreed and he told Woo of this. The defendant then made its first application for payment after which the Architects issued its certificate and the defendant was paid followed up a couple of months later by another payment upon application and certificate. I have dealt with these figures. Unfortunately nobody gave a thought to the niceties of the law or what in fact the payments were for. The Architects had certified on two occasions that the contractor was entitled to payment in accordance with the terms of the Contract, yet as matters stood in July and September 1973 the Architects had no power to issue the certificates under terms and the conditions of the Contract. Clauses 14 and 24(2) of the Contract, read as follows:

19. In respect of unfixed materials the Architects had the power to issue interim certificates only after delivery of the materials to the site or adjacent thereto. Mr. Sun told the Court that Mr. James Woo had satisfied him by means of documents of the existence of the materials in storage in Kowloon. These materials were never delivered to the site or any adjacent site. I hold that the certificates were not issued under the terms of the Contract but on the express authority or consent of the Company as means of payment to the defendant. The important question is by these two payments did the plaintiff acquire any interest or property in the actual materials.

20. The Company framed its claim which I summarise as follows:

21. Para. 6. The said 2 interim certificates and the payments made by the plaintiff to the defendant thereon were in respect of materials intended for the said building.

22. Para. 7(ii). By a letter 28th October 1974 the plaintiff's Solicitors on behalf of the then Architect (not the architects referred to herein) served notice on the defendant to commence work.

23. Para. 10. Wrongfully and in breach of agreement the defendant failed to commence work.

By its amended Reply the Company further pleaded

24. Para. 1A. The defendant was under a duty

25. It is clear to me that the foundation of the plaintiff's claim was the allegation of the defendant's breach of contract by its refusal to commence work when properly notified on 28th October 1974. As I am going to find for reasons given later that it was in fact the Company which was in fundamental breach accepted by the defendant's letter of 14th December 1974 terminating the Contract on that date, what then is the position?

26. The Company claims:-

To sustain its claim in detinue or damages for conversion the Company must prove that at the time of the detention or conversion it was either in actual possession or it had the immediate right to possession of the materials. It was not suggested by the Company's Statement of Claim that by the 2 payments it had actually purchased the materials from the defendant nor indeed could it have been suggested. The payment in respect of the steel was made in July 1973. No one in his right mind would sell say mild steel bar purchased in January at $56 per picul for the same price in July when the market price was far higher. In Bennet & White (Calgary) Ltd. v. Municipal District of Sugar City No. 5⁽¹⁾ concerning what I might call a clause 14 case where materials had been delivered to the site Lord Reid in delivering the judgment of the Privy Council said:

"It is true that apart from the case of bargain and sale of goods (and sale of goods is not here in question) either a deed or a delivery (actual or constructive) is necessary to transfer the title to chattels inter vivos. But in the present case there was delivery on a site owned and occupied by the building owner."

In our present case there was no delivery actual or constructive or indeed notional of the materials. I therefore hold that by the two payments the Company did not acquire any title, property, or interest in the materials. Nor did the Company acquire any right to possession of the materials. In July 1973 when the Architects issued the 1st certificate prices had surged upwards and the defendant had already complained of late delivery of the site and its intention to claim compensation for many items. In my view and I so hold the two payments were made for the purpose of pinning down the defendant to charge the prices shown in the Estimate appended to the Tender for these items and to be taken into account when the defendant presented its application for payment after the work in respect of these materials had been done. Let it be noted that in the Estimate the price for high tensile steel was $243,540.66 and mild steel $77,034.46 totalling $320,575.12 as against $299,451.89 less 10% retention money i.e. $269,506.70 received by the defendant. I now turn to the allegation of admission by the defendant about 10 days before the commencement of hearing of this action that is on the 20th March 1978 when the Solicitors for the defendant wrote to the Company's Solicitors advising of an application for leave to amend the counterclaim. The contents include this sentence:

"We are therefore prepared to accept that the steel became the property of your clients by virtue of clause 14 of the agreement."

This was certainly ill-advised but it was an admission or representation of law and not of fact and did not bind the defendant or estop the defendant from asserting otherwise.

27. For the foregoing reasons I hold that the Company had no title in the materials to maintain an action in detinue or damages for conversion and all the plaintiff's claims which I have set out above fail. There was no alternative claim for restitution of the sum of $269,506.70 received by the defendant but I shall deal with this sum later.

28. I have already held that the Company was in fundamental breach of contract when it failed to deliver possession of the site latest 30th June 1973. Mr. Sun told the Court that when in October 1973 the piling work was about to be completed he told James Woo to send in a new estimate as prices had increased sharply since January hence the defendant's letter of the 27th October 1973 with the estimate to which I have referred. Mr. Sun discussed the letter with Mr. Alex Yau who instructed him to bargain. In November Yau offered an increase of 10% to the defendant through the Architects which the defendant deemed too low. Yau then took a very strong attitude and called for an estimate from his friend Ha who quoted $1.95 million. According to Mr. Sun, Yau was prepared to pay $1.95 million for the work to Ha but not any sum higher than 10% over the contract price to the defendant. Accordingly the defendant wrote the letter of the 14th December 1973 to the Architects which I have set out in full. The terms of the letter were quite unequivocal and the defendant clearly made known to the Company of its election on that date to treat the Contract as discharged by reason of the Company's breach and I hold that the Contract terminated on that date. The letter of the 24th December 1973 was a follow up on the advice of Mr. Sun.

29. The defendant counterclaimed in damages for breach of contract. As to the measure of damages the 13th Edition of McGregor on Damages at para. 823 starts off thus:-

"On the measure of damages where the owner acts so as to bar completion there are again surprisingly no English cases. General principles would put the normal measure at the contract price less the cost to the builder of executing or completing the work."

The learned author then goes on to suggest certain alternatives one of which finds favour with me for the purpose of this case namely "the net profit which the builder could have made on the whole contract plus his expenditure in part performance."

30. As to the net profit the defendant claimed a sum of $152,874.69 being 10% of the lump sum contract price. The evidence was clear that contractors normally estimated for a net profit of 10 to 15%, but in this case these percentages would be based on estimates made in January 1973. The Contract was not terminated till December 1973 and the defendant would be entitled to damages other than nominal if only it could prove a net profit on the work commencing at the date of termination at the contract price and a reasonable time thereafter, Mr. James Woo said he still could make 10%. I do not believe him. His estimate in October 1973 was slightly over $2 million. This was submitted for the purpose of bargaining and no doubt inflated. Ha was said to have submitted an estimate of $1.95 million. His estimate would have been based on prices then prevailing on materials if not higher. Price for steel was still rising. Mild steel was $56/picul in January by December it was $100. That sum would also have included his profit. The defendant had covered his position early in steel and certain other materials. James Woo was and is an experienced contractor of 30 years standing. He would not have persevered with this matter so long unless there was something in it for his company. Take Ha's figure of $1.95M. According to Sun he was not an experienced building contractor. Deducting 10% profit would leave his costs at $1.755M. His costs for steel must have been higher than the defendants by at least $200,000. On Ha's estimates the defendant's costs would have come to $1.555M less savings in other materials it had purchased and its long experience and expertise. It is impossible to break down the figures in any detail but all in all I think the figure of $50,000 for loss of net profit would be about right and so I award.

31. Turning now to the expenditure in part performance. First the costs of materials purchased other than steel, comprising of items such as steel windows, tiles, kitchen and sanitary fittings come to $94,231. Apparently the defendant still has them in stock but that is not the concern of the plaintiff. The defendant is only entitled to the loss suffered up to 14th December 1973 and a reasonable time thereafter which would include the depreciation of the materials after nearly a year's storage, delivery charges to the warehouse and storage charges up to that date and to take into account possible loss on non standard items. This will have to be assessed by the Registrar. Second the defendant claimed over $116,421 under preliminary and miscellaneous expenses. The defendant is entitled to direct as well as indirect costs but I do not accept its claim under this head for reimbursement paid to sub-contractors. The claim of $44,000 for office expenses and $12,000 for site foreman standing 8 months are grossly inflated. Under this second head I award $15,000. Third I disallow the claim for $5,964.20 in respect of reconditioning mosaic tiles. As for the steel I have already said that the plaintiff was not privy to the contracts entered into by the defendant for them. I accept that when James Woo told Mr. Sun he had the supply of steel in stock the defendant did but it was certainly not the steel ordered in January. That would have been used up long ago. James Woo in answer to the Court agreed that all contractors with severable works in hand would cover their position in steel upon each contract but when it came to using the steel they would first take delivery from the suppliers the steel contracted for at the lowest prices. There will be no order in respect of the steel.

32. There will be judgment for the defendant with costs on the claim. As to the counterclaim the defendant having admitted by its pleading that it will give credit to the Company in the sum of $269,506.70, I direct that the first matter be referred to the Registrar for assessment of damages in the manner set out by me. He will then take into account the specific awards made above and the sum admitted by the defendant and after taking such account there will be an order for payment to the party in the sum in credit.

33. There will be no order as to costs on the counterclaim up to to-day but on the application to the Registrar there will be costs to the party in credit after the taking of the account.

Representation:

Mills-Owens (Deacons) for the Plaintiff.

Bokhary (Johnson, Stokes & Master) for the Defendant.

(1) [1951] A.C. at 814