Pamax Ltd v. Cross Max Interiors Ltd

HCA 2181/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2181 OF 2002

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Before: Deputy High Court Judge Gill in Court

Dates of Hearing:    14-18, 21-25, 28-31 January, 1, 4-6, 11-15, 18, 20, 25-27 February 2008

Date of Judgment: 31 March 2008

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J U D G M E N T

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1.This action is a dispute between the parties to a design and build contract made between a house owner, the plaintiff, Pamax Limited, and the defendant designer and contractor, Cross Max Interiors Limited. 

2.Pamax is in fact the alter ego of Mr Larry Kwok and his wife Ms Vivienne Tsao, who occupy the house as their family home.  It is in the upmarket development on Redhill Peninsula, Tai Tam.  The work undertaken under contract was a major redecoration of nearly all the interior as well as some of the exterior, to the extent that for the duration of the contract of four months the Kwoks vacated the premises.

3.After extensive meetings to establish what had to be done, the contract emerged on August 24, 2001.  It was in the form of a quotation, stretching to several pages in which every individual item of work to be undertaken was recorded and costed.  Where there were fittings or furnishings to be supplied the cost was recorded as being “allowed for” to provide for adjustment if the Kwoks in the event chose a cheaper or more expensive alternative.

4.The agreed price (allowing for this flexibility) and with a built in “special discount” of 10%, came to $3,998,631.  The terms of payment provided for a deposit of 30% upon signing (to be used for the purchase of materials), 30% when the work was halfway through, 30% upon practical completion, and 10% one month after the date of practical completion.  Pamax paid the first instalment of $1,199,589.30 upon signing.  The Kwoks moved out and the work began in earnest on 18 September 2001.  It proceeded to the date of practical completion being 14 January 2002.

5.I mention at this point that although Mr Kwok shared with his wife much of the decision making, and on behalf of Pamax signed acceptance of the quotation, Ms Tsao was the key player in Pamax.  It was she who had attended all the meetings before the signing of the contract and those conducted during the four months when the work was undertaken.  When, as I shall come to, the dispute erupted, it was she who tabled what was wrong and why, she who made witness statements and she alone who was to become the witness of fact for Pamax at the trial.

6.On the defence side, the primary participant for Cross Max was a man called Sandi Lee.  He was and remains a director of Cross Max with qualifications and experience in interior design.  He undertook the design of all intended alterations, attended all but the first of the meetings held with Ms Tsao and, when he came, Mr Kwok, was responsible for the layout plans and drawings, the preparation of various preliminary quotations as well as the one which became the contract, and supervised the work undertaken through to practical completion.

7.That work proceeded uneventfully.  The key players met frequently during the course of it either on site or elsewhere.  About all that was untoward was that the Kwoks having received an invoice for the second instalment in November did not pay it.  Their reason given for not doing so is not accepted by Cross Max; however that is not material.  More importantly, it was not because of any problem in the work performed thus far, and there was no disruption to the schedule because of that.

8.As it turned out there were adjustments to the price for additional works and add-ons to the allowed for prices.  Cross Max in due course was to invoice for these in the sum of $256,629.  Further, on its account, it was commissioned by Pamax to supply further goods and services from third parties.  It did so, charging 5% for its role, and invoiced this total at $340,409.79.

9.Shortly after the date of practical completion the Kwoks returned to their home they had vacated four months earlier.  Upon Mr Lee’s account Ms Tsao telephoned him and thanked him for a job well done, expressing their appreciation for that.

10.But this appreciation turned out to be short-lived.  During the few days following their return and the immediate upheaval of unpacking and settling in, on Ms Tsao’s account she became aware of a number of things which in fact were wrong.  These I shall come to in some detail in due course.  Suffice in the meantime to record that she noted and complained of numerous examples of shoddy workmanship, departures from an agreed particular design or format and, what was particularly distressing for her, occasions where work had been carried out without prior consultation and approval from the Kwoks.

11.Contractors of Cross Max returned to undertake remedial work and some of this was carried out.  But the Kwoks remained dissatisfied as, in their view or at least that of Ms Tsao, the most serious of the problems she had uncovered went to design, requiring a major rebuild.  On her account she became disillusioned with Cross Max’s ability to make good these deficiencies, and its contractors were ordered off site, with much of the intended remedial work left undone.

12.Thereafter there were attempts to resolve what had blown up to be a dispute containing numerous aspects of faulty design or workmanship or other non-performance by Cross Max.  Whilst conceding there were some examples where rectification of a minor nature was required, Cross Max hotly disputed the allegations of the Kwoks. 

13.What then came out and became a persistent feature in the evidence at trial was a divergence of views as to the extent to which the parties discussed, considered and achieved agreement on the design and construction of various rooms or features in the course of the project.

14.In due course Ms Tsao was to list a total of 132 examples when there was no consultation and agreement; thus a material breach of a fundamental duty owed by Cross Max as designer to its client.

15.Mr Lee for his part was to deny vehemently any shortcoming in this regard.  The extent of the meetings between the parties held in the months leading up to the signing of the contract and thereafter until the date of practical completion is an indication of the amount of time taken to pursue this very course.  And he was to present sketches, drawings, notes and other data prepared contemporaneously to back this up.

16.With such disparity emerging at this early stage it is hardly surprising that the attempts to settle were not successful.  In June 2002 Pamax filed its writ.

17.The statement of claim recorded a breach of contract.  The claim was for damages for the cost to rectify the defects (including accommodation of the family during the course of that) yet to be determined, deductions in renovation costs including purchased items, and denial of liability in respect of the invoices for $256,629 at $340,409.79. 

18.In the event some months later the Kwoks did embark on a re-renovation.  On Ms Tsao’s account that lasted for six months from December 2002 and cost about $3.87 million.  During that time the Kwoks incurred accommodation and storage costs of $776,364.10 and $136,283 respectively.

19.But no further details of the work undertaken were forthcoming in the evidence.  Thus I have not been told of what that re-renovation amounted to; whether it was limited to rectifying perceived design flaws, shoddy workmanship or other defects in the work undertaken by Cross Max, or whether it was additional work or variations based on new ideas.  Nor have I been told what of that which had been built or supplied by Cross Max was preserved in the re-renovation or discarded.

20.Mr Chan, representing Pamax at trial, told me at the outset that Pamax’s case was that the breaches by Cross Max were so extensive and pervasive that it should no longer be liable to make any further payments.  Thus its primary claim was that it be released from liability for payment of the balance due of the contract price and the cost of additional work and further fittings, fixtures and services provided and invoiced for, together with the costs of accommodation and storage during the course of the re-renovation.

21.In its statement of defence Cross Max denied breach and counterclaimed for the balance of the contract price due and owing; a total of $3,396,080.40, plus interest.

22.Before dealing with the disputes in detail as came forth in the evidence, I believe it useful to backtrack to events leading to the emergence of the contract.

Background

23.The house in question is typical of those making up the Redhill Peninsula development, which came into being in the early 1990’s.  It is multi-storied, spacious, with a small courtyard garden and balconies off the upper floors and on the roof.  There is a carport for two cars at the front entrance.  It is attached by a party wall to its neighbour.  It has commanding seaviews.  I believe given its location, its size and set-up, one would be entitled to expect the standard of internal fixture and fittings to be superior, commensurate with the quality of the house and generally of the neighbourhood.

24.Mr Kwok bought the house in 1993 in anticipation of his marriage with Miss Tsao the following year.  When they moved in its layout and construction was as originally built a few years earlier.

25.In or about 1997 the Kwoks undertook a first redecoration.  Those areas primarily involved were the kitchen, and the construction of a mezzanine floor between the ground and 1^st floors; this area near the entrance was to provide accommodation for their driver.

26.The kitchen in its original form was compact.  It is on the 1^st floor at the rear of the house overlooking the garden.  Its wall on the left side looking out was and remains the wall shared with the neighbouring house.  The Kwoks decided to extend the kitchen outwards, about doubling its size to incorporate what became known as the breakfast area.  This was achieved by building a foundation up from the garden, making use of the common wall on the left and an existing wall of the house on the right.  The extension had for its roof clear glass or other transparent material, supported internally by exposed wooden beams running both lengthways and laterally, giving the effect of a conservatory.  Built into the roof’s design was a fall of about 1 to 1½ feet to provide for run-off.  The breakfast area led by glass doors to a new balcony with stairs down to the garden.

27.By early 2001 the Kwoks decided to embark on further redecoration, which became the subject of this action.  Their reasons for doing so included the need to provide more space for their growing family (they now have two daughters) and this included accommodating Ms Tsao’s mother as well as two maids and providing a rest area for their driver.  They also wanted to increase storage space, upgrade the plumbing, improve the layout and modernize the décor.

28.It was Ms Tsao who made contact, on recommendation, with Cross Max, and that was with a director called Wong Koc Kei.  He in turn introduced her to his partner Sandi Lee.

29.There then followed the series of meetings to which I have earlier referred spanning the period between February and August 2001.  Mr Lee was able to retrieve from his diary the dates of these meetings, how long they lasted, who was present and broadly what was discussed.  There were eight in all, more or less at monthly intervals.  They lasted from 3 to 6 hours; overall a total of 31 hours.  Ms Tsao and Mr Lee attended all of them.  Mr Kwok was at one and for part of another.

30.Mr Lee’s summary reveals a progression from preliminary plans and drawings, revisions, layouts, design plans, cost estimates and types and styles of furnishings and fittings proposed.

The Contract

31.This emerged as a quotation dated 18 July though it was not accepted by signing until late in the following month.  It had been preceded by earlier quotations from 15 June, which in turn came to be replaced, giving an indication the parties were in a process that had advanced to considering and fine-tuning various aspects of what was to become a commitment to the final design and build.

32.I mention here that the detail of work to be undertaken and pricing of it in these quotations are indicative of the detail in the discussions leading up to their preparation and finally to the terms which formed the contract.  This is a feature which will bear to the outcome of the dispute as to the extent (or lack) of discussion and approval in respect of Mr Lee’s designs.

33.The final quotation was for 245 individual items of work to be done, grouped under twelve sub-headings.

34.Although the external structure remained undisturbed, hardly any of the house otherwise escaped attention.  Included in the project was a remodelling of all the rooms, in some cases changing the character of the room in question.  For instance, the room formerly occupied as a maid’s room was to become a study, whilst the two maids were to be relocated in the mezzanine floor with access by spiral staircase to a new laundry and driver’s rest area, to be built at the rear of the carport on the ground floor.

35.The kitchen incorporating the breakfast area was to be the subject of a significant makeover.  The glass roof was to be replaced by a solid roof with metal ceiling beneath and there was to be a refit throughout.  The existing deck outside with staircase to the garden was also to be changed.

36.The flooring in the living and dining areas was to be replaced by exposed natural timber.  The Kwoks had spotted and approved of such flooring in a showhome they had inspected in Peel Rise on the Peak, and Mr Lee was asked to have a look at that and match it.

37.In all, two en suite and four further bathrooms were to be refurbished or built from scratch.

38.There was to be a new cabinet enclosing a plasma TV and other audio/video equipment in the living room and four bedrooms were to be similarly equipped.

39.A metal fence was to be built around the garden.

40.I do not pretend this to be a comprehensive account of the work agreed to be carried out.  But it does give a flavour of the extent of the project.

The Work Underway

41.I have already stated that a further feature is that during the four months of activity there were a number of ongoing meetings between the parties.  Mr Lee’s record prepared from his diary reveal these lasted from 1½ to 3 hours; in total 30 hours more of meetings.  The meetings were variously held at the offices of Mr Kwok and of Mr Lee, at the Kwok’s temporary address and on site.  Again Mr Lee has contemporaneous documents to show the extent to which they dealt with discussions of design options, supporting his case that these discussions and approvals were a standard feature of the project before work proceeded on any given item. 

42.Ms Tsao was in evidence to dispute this claim in dramatic fashion, giving rise to her list of 132 items where there had been no discussion and no approval.  The cost of these exceeded $1.67 million; a significant percentage of the contract price.

43.But in the meantime, during the course of this work, there was no apparent disagreement or difficulty.  In evidence Ms Tsao stated:

“Throughout the course of the works I had attended the Property about 6 times from mid to late October 2001 onwards to check in on progress from time to time as the first month or so was spent for demolition and Mr Lee advised us against going in during that period as there was nothing to see plus it was dangerous during demolition.”

So, she was clearly “hands on” during the period of reconstruction.  Yet, pertinently, she made no complaint that work was being carried out without discussion and approval.  She expressed no dissatisfaction and did not at any time call for any of the work to be temporarily halted because it was not what was wanted.

Post Practical Completion

44.Of course a few days after the family’s return all this had changed.

45.Having ordered Cross Max off site in early February, Ms Tsao wrote to Cross Max by letter of 7 February to which she attached a memorandum setting out in detail those defects which she had become aware of.  It is a comprehensive document of ten pages, concluding with the caveat that it was not necessarily exhaustive.

46.Following the unsuccessful attempts to resolve the dispute and the issue of the writ, Cross Max engaged the services of one John Bowden.  He runs a design consultancy in Hong Kong and was commissioned as an expert in his field to inspect the Kwok’s home and to report on the workmanship and other features of the project.  His expertise was not challenged.  The inspection was carried out in early August 2002 and the report emerged in June 2003.

47.Mr Bowden was to produce and expand upon his report in evidence.

48.Likewise Pamax engaged the services of a professional to give his expert view; that was Kenneth Chan, a surveyor of DTZ Debenham.  He was to report and give evidence as well.

49.In addition, Cross Max employed one Dr Kin Tak Lau, a registered professional engineer with qualifications and expertise in the field of heat transfer, to deal with criticisms of Ms Tsao in the layout of the kitchen.  He undertook a forensic test as I shall come to; in the event the report he prepared was not challenged, and he was not called.

50.Finally in this phase Ms Tsao employed the services of a freelance cameraman who followed her through and around her home, filming those parts of it which in her view illustrated her claim of substandard workmanship and/or design.  That video was produced in evidence and she commented from the witness box on what was shown.

Evidence

51.First, that adduced by Ms Tsao.  She made a number of witness statements which became her evidence in chief. 

52.The first, of March 2004, variously spelt out in detail her complaints.  Most were transcribed from her memorandum of 7 February 2002 but she had discovered more defects and these were listed as well.  She grouped the problem areas into three, namely:

53.In respect of work not undertaken to expressly given specifications or without consultation and approval, these included the following:

54.Under the head of work which revealed a poor standard of workmanship and finishing there were included the following:

55.Ms Tsao then went on to record that there had been no discussion or approval of the 5% “handling charge” imposed by Cross Max in respect of the furnishings and other items purchased by it on request.

56.There was a problem also about the size of the new bed designated for the master bedroom.  Ms Tsao’s complaint was that she had wanted to go from queen size to king size, an increase in width of 6 inches.  But Mr Lee told her that this would not fit, so she settled for another queen size.  Yet when the work was completed and the new bed installed, it turned out that there would have been sufficient room for the larger size.

57.Ms Tsao went on to describe how it was that soon after the family had moved back in following the date of practical completion, the enormity of the defects in design and build became more and more apparent, and more and more fundamental.  She and her husband formed the view that making good would have been quite beyond the capacity of Cross Max.  In the event, the family found itself no longer able to live with what Cross Max had delivered up.  They moved out again on 18 February 2002, and were not to return until after completion of the re-renovation, which began that December and was concluded in July of the following year.  The re-renovation, she deposed, was made necessary as a result of the unacceptable works of Cross Max.

58.Ms Tsao’s fourth and final witness statement was, with leave, made as recently as several days into the trial (though before the adducing of any live evidence) whose primary purpose was to list those 132 items originally contracted for in respect of which no approval had been given before the work was carried out. I was then informed that 20 of the items were no longer at issue leaving the remaining 112 that were.

59.It would not be productive to list out those that remain.  It would be simply to reproduce that part of Ms Tsao’s statement.  Suffice to remark that they are far-reaching; I suppose a somewhat obvious comment given their number.  Every room or area was affected; for instance there were 6 items in the girls’ bedroom, 13 in the master bedroom and 10 more in the kitchen.  The cost of these items ranged from $350 (for a built in litter bin under the sink in the kitchen) to $211,824 (for the wooden flooring in the lounge and dining room).  The total came to $1,673,633, more than 36% of the total charge.

60.I come now to the evidence of Mr Lee. He gave his first account in a witness statement also dated March 2004.  In it he included at paragraph 11 an outline of how matters developed from thoughts and spoken ideas and intentions.  It is I think useful to repeat this paragraph verbatim:

And paragraph 18 also:

18.   Prior to commencing and during the course of the renovation work, the Defendant produced for the approval of Mr. Kwok and/or Ms. Tsao samples of materials and colour and the same were approved by them.  I now produce a schedule of 25 samples of materials and colour approved by the Plaintiff together with a set of photographs of the same marked ‘SL-13’.”

Pausing here, it is at once apparent from these excerpts how divergent are the parties on the level of information sharing and communication generally between the parties.  Ms Tsao was quick to go into print in a supplemental witness statement to put her slant on the points raised in Mr Lee’s paragraph 11:

“4.    In respect of what Mr Lee says in paragraph 11 of his earlier witness statement, I had ideas and certain preferences which I told Mr Lee about and discussed with him.  However, as a layperson not having expertise in design or the arts, I relied on his advice and experience on feasibility and practicality of my ideas that accorded with my needs and requirements.  It was reasonable for me as would any other client in such a project, to expect that he would give appropriate guidance and advice so as to ensure that the work done would be suitable and appropriate to my needs and requirements.  The fact that Mr Lee lists this task (of working on my ideas and coming up with necessary sketch plans) and others in paragraph 11 as ‘special features’ in carrying out his role in this project is astounding – one would have thought this was a basic requirement that was necessary for the project.”

61.Mr Lee went on to state that the “Additional Work” in respect of which Cross Max invoiced for $256,629 was as per the terms of the contract whereby changes agreed during the project would be accounted for in this way.  He also deposed that it was agreed that when Cross Max purchased various items of furnishings, appliances and other services at the request of Pamax, it would be reimbursed together with 5% as a handling charge.  Thus emerged the invoice for $340,409.79 (Liability in respect of both these amounts is denied in full in the pleadings).

62.Following the date of practical completion, Mr Lee noted that the Kwoks gave him a list of what he described as “minor remedial and/or touch up work” with which he took no issue or complaint.  In fact he said some of the remedial work was initiated by Cross Max.  Much of this had been carried out or was under way when his firm’s contractors were ordered off site.

63.Mr Lee made a supplemental witness statement of some 36 pages in which he dealt with Ms Tsao’s specific complaints of work having been undertaken without heed to specifications agreed to, and without consultation and approval, and where the workmanship was shoddy.

64.I shall not spell out in detail his response.  Generally, he denied the allegations in respect of the individual matters complained of.  Those that stand out include the following:

65.Finally I come to Mr Lee’s response by witness statement to Ms Tsao’s list of 132 items of work undertaken without consultation or approval.  Of course it, too, emerged at the late stage of several days into the trial.  Again this resulted in a lengthy document (some 42 pages) with every complaint dealt with in turn.  Again I do not intend to replicate his replies.  Suffice to say that he refuted a lack of discussion and prior approval in respect of each item.  He produced original plans and drawings with sketches, notes, jottings and so on which he said were made by him during the course of these discussions.

66.Both witnesses of fact were in the witness box for a number of days during which they were cross-examined extensively.  Both held firm to their divergent versions.

The Experts’ Reports

67.Mr Kenneth Chan identified a number of items which to the eye were substandard as to quality or were of what he described an unsuitable or improper design.  Of course the later so-called deficiency begs the question — unsuitable to whom? — and thus relevant only if found not to have been approved as such.

68.Of those items that he said were substandard many could be categorized as trivial, albeit raised by Ms Tsao in her list.  These include examples of sloppy paint work, the failure to clean off stains, oil, dirt or other superficial markings, loose hinges which required adjusting and electrical sockets not properly aligned.  Some design features, assuming that there were mistakes in the execution, could also be similarly categorized, easily and inexpensively changed.  These included provision of a slot in a computer table for various cables and wires, inappropriate positioning of light switches, and the shelves in the toy area said to be a safety risk.

69.Others of the defects as to quality or design were more serious, involving necessarily full or substantial replacement or reconstruction.

70.These included the following:

71.He reported on other discrepancies which of necessity I discount because the reporting thereof was faulty, or because the conclusion reached was not backed up by forensic examination.  Into these categories are included the following:

72.Mr Chan concluded his report with this paragraph:

“The consequence to the Client is that the remedial works to address all the matters complained of including defective works, unapproved works and deficient design may foreseeably require such an extensive overhaul of the Fitting Out Works as to result in substantial proportion of the premises being affected.”

73.But he did not condescend to detail as to what it was that would have to be done to make good, or the cost of that.

74.I come next to Mr Bowden’s report.

75.Giving first an overview of his impressions following a walk around he was generally complimentary.  He said:

“I felt that the general standard of workmanship was within the high range for Hong Kong with attention to detail, evidence of good preparation, installation and finishing and in design and placement of construction elements, fixtures and fittings.  Materials installed were of a mid to high standard, in keeping with expectations from the budget documents presented by the Designer.  The design elements reflected a generally competent and high level of expertise and experience and — in the absence of loose furnishings — appear to be quite fit for a residence of this type.  The overall effect of the premises is of clean lines, cool modernity with a touch of richness, practical planning and use of space that conforms exactly with the plans and detail drawings, perspectives and other documentation that were included in the package of drawings presented to me.”

76.He did note the presence of minor defects; these by and large went to the stains and markings not properly cleaned, location of light switches, adjustment of hinges, cleaning out the routing in doorframes, and other matters able quickly and simply to be rectified.  In this category he included carpet cleaning.  He may not have been aware that this was attempted in the post-practical completion period without success.

77.One item he conceded would need more significant activity; that was the inadequate drainage in the master bedroom’s en suite shower, requiring lifting of the tiles and the repair and making good of the plumbing beneath.

78.Including this item his estimate to make good all the defects he had uncovered was $35,000; that would have taken about three weeks in all to complete.

79.Mr Bowden used as his primary point of reference Ms Tsao’s memorandum of 7 February 2002 which included most but not all of those items with which she and thus Pamax had taken issue.  I shall now summarize his comments on these complaints:

80.In a subsequent supplemental report Mr Bowden addressed further matters which included the following:

81.Mr Bowden having been called to produce and be cross-examined on his report dealt with further matters that had come to light following his inspection.  These included the following:

82.In cross-examination he was asked about the shape of the kitchen which he had reported was not rectangular.  He confirmed that to be so, probably because the pair of houses of which the Kwoks’ is one were built around a bend in the road with a consequential flare.  He did not regard the tiling misalignment to be a flaw.  The variation from a rectangle was a matter of 3 to 4 centimetres only. 

83.He was also asked about the slant of the ceiling.  He accepted that just because the roof had a fall did not necessarily mean that the ceiling had to follow suit; it could have been installed horizontally.  But with a fall of some 1.5 feet there would have to have been a step down which would not have been visually attractive.  The alternative would have been to drop the entire ceiling, resulting in a significant reduction in space, from a practical and visual point of view.

84.Taken to the video and the shots of the guest bathroom, he conceded that the grouting complained of was “not perfect” and that it could have gone on the list of defects.

85.He also accepted that in the girls’ en suite bathroom there was insufficient room in the space housing the lavatory, as a result of the dimensions of the vanity next to it.

86.Further, Mr Bowden was questioned as to the role of a designer, and his duties, in a design and build redecoration project such as this one.  In particular, he was asked to comment on the extent to which a designer should consult with a client as to the design and function of a particular item and get his express approval to that before, as contractor, proceeding to construct or install. 

87.He responded that in general terms it was necessary for the client to be kept informed, but that it all depended on the level of involvement by him.  On the one hand the client may leave everything to the designer contractor, trusting in his skill and experience to provide a pleasing and functional redecoration within an agreed budget.  At the other extreme might be the client who wants to have a say in every last detail.

88.More often than not would be the client who has clear ideas on what he wants incorporated, is shown and approves layout plans and drawings, but then leaves it to the designer to complete, in exercise of his expertise and flair. 

89.Finally I come to the report of Dr Kin-Tak Lau, the expert on heat transference engaged by Cross Max to answer the complaint that the freezer and oven were located too close together, thus to cause the freezer to get hot and malfunction.  By the time of his appointment, the re-renovation had deprived him of the opportunity to test on site, so he was obliged to use an oven of similar type with matching surfaces of Corian and plywood in a laboratory setting. 

90.His conclusion, which was unchallenged, was that even when the oven was switched to and left at the maximum temperature of 280^oC, there was no untoward transfer of heat from the oven to the bottom of the surface which had originally separated the oven on site from the freezer.

91.On this analysis, the proximity of the two electrical items would have had no adverse effect.  Thus there was no design flaw.

The Issues

The Measure of Damages

93.Given the way Pamax has pursued its claim for consequential loss I propose to deal with the second issue first, taking it as read for the purpose of the exercise that Pamax has proved that Cross Max had not only been in breach of the contract but that there were breaches as extensive and pervasive as Ms Tsao was at pains to allege.

94.The general, well-settled rule applicable to the measure of damages for breach of contract is that the successful claimant is entitled, so far as money can do it, to be put in the same or as good a situation as if the contract had been performed, provided he has first taken all reasonable steps to mitigate that loss; see British Westinghouse Electric and Manufacturing Co. Ltd v Underground Electric Railways Co. of London Ltd [1912] AC 673; in particular, the dicta of Viscount Haldane LC at p.688:

“The quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in dealing with particular cases … Subject to these observations I think that there are certain broad principles which are quite well settled.  The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.  The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach …”

95.This is no less apposite when the measure of damages has to be determined for defective building work.  Dealing with such a case, Lord Cohen, in East Ham Corporation v Bernard Sunley & Sons Ltd [1966] AC 406, said at p.434:

“the learned editors of Hudson’s Building and Engineering Contracts, 8^th ed. (1959) say at p.319 that there are in fact three possible bases of assessing damages, namely, (a) the cost of reinstatement; (b) the difference in cost to the builder of the actual work done and work specified; or (c) the diminution in value of the work due to the breach of contract.  They go on: ‘There is no doubt that wherever it is reasonable for the employer to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage.’  In the present case it could not be disputed that it was reasonable for the appellants to insist upon reinstatement and in these circumstances it necessarily follows that on the question of damage the trial judge arrived at the right conclusion.”

96.In Bellgrove v Eldridge (1954) 90 CLR 613, the High Court of Australia after referring to the same point in an earlier edition of Hudson, said at p.617:

“The measure of the damages recoverable by the building owner for the breach of a building contract is … the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract …”

The court then referred to a number of cases supporting the proposition and continued, at p.618:

“In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner’s loss.  The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.”

97.The matter of reasonableness on the issue of reinstatement was the focus of attention of the House of Lords in the case of Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, which involved a claim in damages for breach of a contract to build a swimming pool.  The pool in question, intended to be used for diving, was built to a depth of 6 feet, not to 7 feet 6 inches which was specified in the contract.  6 feet was deep enough for safe diving however, and there was no difference in the anticipated and actual enhanced value of the property.  The householder sued for the cost of reinstatement which would have required a complete rebuild at £21,560.  The judge awarded him but £2,500 for loss of amenity.  The Court of Appeal (by a majority) allowed his appeal, holding that the loss he was entitled to recover was the cost of putting him in the same position as if the contract had been performed, that being the cost of rebuilding.  The builder appealed.  The House of Lords unanimously allowed the appeal, restoring the trial judge’s award for loss of amenity.  Lord Jauncey raised the issue of reasonableness at p.355:

“Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained.  If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate.  A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure.  This was recognised by the High Court of Australia in the above cited passage in Bellgrove v. Eldridge, 90 C.L.R. 613, 617-618, where it was stated that the cost of reinstatement work subject to the qualification of reasonableness was the extent of the loss, thereby treating reasonableness as a factor to be considered in determining what was that loss rather than, as the respondents argued, merely a factor in determining which of two alternative remedies were appropriate for a loss once established.  Further support for this view is to be found in the following passage in the judgment of Sir Robert Megarry V.-C. in Tito v. Waddell (No. 2) [1977] Ch.106, 332:

‘Per contra, if the plaintiff has suffered little or no monetary loss in the reduction of value of his land, and he has no intention of applying any damages towards carrying out the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done.  It would be a mere pretence to say that this cost was a loss and so should be recoverable as damages.’

The Vice-Chancellor was as I understand it there saying that it would be unreasonable to treat as a loss the cost of carrying out work which would never in fact be done.

I take the example suggested during argument by my noble and learned friend, Lord Bridge of Harwich.  A man contracts for the building of a house and specifies that one of the lower courses of brick should be blue.  The builder uses yellow brick instead.  In all other respects the house conforms to the contractual specification.  To replace the yellow bricks with blue would involve extensive demolition and reconstruction at a very large cost.  It would clearly be unreasonable to award to the owner the cost of reconstructing because his loss was not the necessary cost of reconstruction of his house, which was entirely adequate for its design purpose, but merely the lack of aesthetic pleasure which he might have derived from the sight of blue bricks.  Thus in the present appeal the respondent has acquired a perfectly serviceable swimming pool, albeit one lacking the specified depth.  His loss is thus not the lack of a useable pool with consequent need to construct a new one.  Indeed were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to provide.

What constitutes the aggrieved party’s loss is in every case a question of fact and degree.  Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective.  Thus if a building is constructed so defectively that it is of no use for its designed purpose the owner may have little difficulty in establishing that his loss is the necessary cost of reconstructing. Furthermore in taking reasonableness into account in determining the extent of loss it is reasonableness in relation to the particular contract and not at large.  Accordingly if I contracted for the erection of a folly in my garden which shortly thereafter suffered a total collapse it would be irrelevant to the determination of my loss to argue that the erection of such a folly which contributed nothing to the value of my house was a crazy thing to do.  As Oliver J. said in Radford v. De Froberville [1977] 1 W.L.R. 1262, 1270:

‘If he contracts for the supply of that which he thinks serves his interests — be they commercial, aesthetic or merely eccentric — then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.

However where the contractual objective has been achieved to a substantial extent the position may be very different.

It was submitted that where the objective of a building contract involved satisfaction of a personal preference the only measure of damages available for a breach involving failure to achieve such satisfaction was the cost of reinstatement.  In my view this is not the case.  Personal preference may well be a factor in reasonableness and hence in determining what loss has been suffered but it cannot per se be determinative of what that loss is.

My Lords, the trial judge found that it would be unreasonable to incur the cost of demolishing the existing pool and building a new and deeper one.  In so doing he implicitly recognised that the respondent’s loss did not extend to the cost of reinstatement.  He was, in my view, entirely justified in reaching that conclusion.  It therefore follows that the appeal must be allowed.

It only remains to mention two further matters.  The appellant argued that the cost of reinstatement should only be allowed as damages where there was shown to be an intention on the part of the aggrieved party to carry out the work.  Having already decided that the appeal should be allowed I no longer find it necessary to reach a conclusion on this matter. However I should emphasise that in the normal case the court has no concern with the use to which a plaintiff puts an award of damages for a loss which has been established.  Thus irreparable damage to an article as a result of a breach of contract will entitle the owner to recover the value of the article irrespective of whether he intends to replace it with a similar one or to spend the money on something else.  Intention, or lack of it, to reinstate can have relevance only to reasonableness and hence to the extent of the loss which has been sustained.  Once that loss has been established intention as to the subsequent use of the damages ceases to be relevant.

The second matter relates to the award of £2,500 for loss of amenity made by the trial judge.  The respondent argued that he erred in law in making such award.  However as the appellant did not challenge it, I find it unnecessary to express any opinion on the matter.”

Lord Mustill for his part added his own observations on how a measure of damages may be assessed.  I hope I will be forgiven for recording his judgment in full, it being somewhat brief yet pertinent, for Mr Chan relies on it to support his contention that the manner of compensation sought by Pamax is a proper alternative:

“LORD MUSTILL.  My Lords, I agree that this appeal should be allowed for the reasons stated by my noble and learned friends, Lord Jauncey of Tullichettle and Lord Lloyd of Berwick.  I add some observations of my own on the award by the trial judge of damages in a sum intermediate between, on the one hand, the full cost of reinstatement, and on the other the amount by which the malperformance has diminished the market value of the property on which the work was done: in this particular case, nil.  This is a question of everyday practical importance to householders who have engaged contractors to carry out small building works, and then find (as often happens) that performance has fallen short of what was promised.  I think it proper to enter on the question here, although there is no appeal against the award, because the possibility of such a recovery in a suitable case sheds light on the employer’s claim that reinstatement is the only proper measure of damage.

The proposition that these two measures of damage represent the only permissible bases of recovery lie at the heart of the employer’s case.  From this he reasons that there is a presumption in favour of the cost of restitution, since this is the only way in which he can be given what the contractor had promised to provide.  Finally, he contends that there is nothing in the facts of the present case to rebut this presumption.

The attraction of this argument is its avoidance of the conclusion that, in a case such as the present, unless the employer can prove that the defects have depreciated the market value of the property the householder can recover nothing at all.  This conclusion would be unacceptable to the average householder, and it is unacceptable to me.  It is a common feature of small building works performed on residential property that the cost of the work is not fully reflected by an increase in the market value of the house, and that comparatively minor deviations from specification or sound workmanship may have no direct financial effect at all.  Yet the householder must surely be entitled to say that he chose to obtain from the builder a promise to produce a particular result because he wanted to make his house more comfortable, more convenient and more conformable on his own particular tastes; not because he had in mind that the work might increase the amount which he would receive if, contrary to expectation, he thought it expedient in the future to exchange his home for cash.  To say that in order to escape unscathed the builder has only to show that to the mind of the average onlooker, or the average potential buyer, the results which he has produced seem just as good as those which he had promised would make a part of the promise illusory, and unbalance the bargain.  In the valuable analysis contained in Radford v. De Froberville [1977] 1 W.L.R. 1262, Oliver J. emphasised, at p.1270, that it was for the plaintiff to judge what performance he required in exchange for the price.  The court should honour that choice.  Pacta sunt servanda.  If the appellant’s argument leads to the conclusion that in all cases like the present the employer is entitled to no more than normal damages, the average householder would say that there must be something wrong with the law.

In my opinion there would indeed be something wrong if, on the hypothesis that cost of reinstatement and the depreciation in value were the only available measures of recovery, the rejection of the former necessarily entailed the adoption of the latter; and the court might be driven to opt for the cost of reinstatement, absurd as the consequence might often be, simply to escape from the conclusion that the promisor can please himself whether or not to comply with the wishes of the promise which, as embodied in the contract, formed part of the consideration for the price.  Having taken on the job the contractor is morally as well as legally obliged to give the employer what he stipulated to obtain, and this obligation ought not to be devalued.  In my opinion however the hypothesis is not correct.  There are not two alternative measures of damage, at opposite poles, but only one; namely, the loss truly suffered by the promisee.  In some cases the loss cannot be fairly measured except by reference to the full cost of repairing the deficiency in performance.  In others, and in particular those where the contract is designed to fulfil a purely commercial purpose, the loss will very often consist only of the monetary detriment brought about by the breach of contract.  But these remedies are not exhaustive, for the law must cater for those occasions where the value of the promise to the promisee exceeds the financial enhancement of his position which full performance will secure.  This excess, often referred to in the literature as the ‘consumer surplus’ (see for example the valuable discussion by Harris, Ogus and Philips (1979) 95 L.Q.R.581) is usually incapable of precise valuation in terms of money, exactly because it represents a personal, subjective and non-monetary gain.  Nevertheless where it exists the law should recognise it and compensate the promisee if the misperformance takes it away.  The lurid bathroom tiles, or the grotesque folly instanced in argument by my noble and learned friend, Lord Keith of Kinkel, may be so discordant with general taste that in purely economic terms the builder may be said to do the employer a favour by failing to install them.  But this is too narrow and materialistic a view of the transaction.  Neither the contractor nor the court has the right to substitute for the employer’s individual expectation of performance a criterion derived from what ordinary people would regard as sensible.  As my Lords have shown, the test of reasonableness plays a central part in determining the basis of recovery, and will indeed be decisive in a case such as the present when the cost of reinstatement would be wholly disproportionate to the non-monetary loss suffered by the employer.  But it would be equally unreasonable to deny all recovery for such a loss.  The amount may be small, and since it cannot be quantified directly there may be room for difference of opinion about what it should be.  But in several fields the judges are well accustomed to putting figures to intangibles, and I see no reason why the imprecision of the exercise should be a barrier, if that is what fairness demands.

My Lords, once this is recognised the puzzling and paradoxical feature of this case, that it seems to involve a contest of absurdities, simply falls away.  There is no need to remedy the injustice of awarding too little, by unjustly awarding far too much.  The judgment of the trial judge acknowledges that the employer has suffered a true loss and expresses it in terms of money.  Since there is no longer any issue about the amount of the award, as distinct from the principle, I would simply restore his judgment by allowing the appeal.” (Emphasis added)

Finally in this case, a short extract from Lord Lloyd, at p.366:

“In building cases, the pecuniary loss is almost always measured in one of two ways; either the difference in value of the work done or the cost of reinstatement.  Where the cost of reinstatement is less than the difference in value, the measure of damages will invariably be the cost of reinstatement.  By claiming the difference in value the plaintiff would be failing to take reasonable steps to mitigate his loss.  In many ordinary cases, too, where reinstatement presents no special problem, the cost of reinstatement will be the obvious measure of damages, even where there is little or no difference in value, or where the difference in value is hard to assess.  This is why it is often said that the cost of reinstatement is the ordinary measure of damages for defective performance under a building contract.”

98.Mr Chan submitted that the correct award in damages has to be determined having regard to what the plaintiff has suffered in any given case depending upon the particular facts.

99.He paraphrased Lord Mustill when he said:

“In the context of small building works performed on residential property, the promise by the builder to produce a particular result, because the owner wants to make his house more comfortable, more convenient and more conformable to his own particular tastes, must be given sufficient weight.”

And that in the context of this case, given the enormity of the defects suffered by Pamax it should be held no longer bound to pay anything more.  The measure of damages he said was by this means calculated on what Pamax had been charged for, but had not received, namely a design prepared to the satisfaction of the Kwoks with their approval.

Discussion

100.Lord Mustill having expressly stated that remedies available are not exhaustive, did not depart from the basic principle which is that the wronged party is entitled to recover what he has lost; as he puts it the loss truly suffered by the promisee.  Neither he nor any of the other Law Lords cited an example of that loss being recompensed by a release from liability for payment of the balance of the contract sum.  Nor did Mr Chan have any authority to support his proposition that this is a rational alternative.

101.The cases state this recompense is invariably in monetary terms an amount set off against the contract price either to allow for the cost of making good or, where appropriate, the difference in value.  It is a matter of determining what is a reasonable determination of the loss.

102.I suppose that which Pamax claims as reasonable being the foregoing of moneys due could be the appropriate remedy in the following example.  Say a contractor spends the deposit he has been paid to purchase raw materials which are delivered on site.  Then he abandons his obligation to build.  The householder is able to secure the services of an alternative contractor at a comparable rate, who utilizes the material supplied and completes the job.  In such a scenario a reasonable measure of damages would be to pay the original contractor no more.

103.But in reality this amounts to a set-off of the cost of reinstatement where, coincidentally, that matches the balance contract price due. 

104.In this case the assumed situation for the purpose of this discussion is materially different.  The assumed situation is that the work was completed but with major defects in workmanship and design, with much of it undertaken without approval having first been sought and obtained.  I need only go back to the excerpt of Lord Jauncey extracted from Ruxley (my paragraph 97) where he said:

“Where the contract breaker has actually failed to achieve the contractual objective, it may not be difficult to conclude that the loss is the necessary cost of achieving that objective …”  

That is of course the cost of reinstatement, not forbearance from payment of the balance due under the contract.

105.The only proper way of calculating the measure of loss would have been to assess the cost of making good set off against the unpaid contract price.  The answer to the question posed as the second issue is ‘No’.

106.Mr Chan submitted that if I were to be against him in his primary claim then I could still assess his client’s loss based on the cost of those items whose design and/or construction were so badly at fault.

107.The first part of this exercise is to deal with the dispute of fact as to the extent if any of the defects.  I come to that next; the first of the issues. 

Disputes of Fact

108.I begin by quoting from the judgment of Judge Newey QC in Emson Eastern Ltd (in receivership) v EME Developments Ltd (1991) 55 BLR 114, in which he said at p.121:

“I think that probably the most important background fact which I should keep in mind is that building construction is not like the manufacture of goods in a factory.  The size of the project, site conditions, use of many materials and employment of various types of operatives make it virtually impossible to achieve the same degree of perfection as can a manufacturer.  It must be a rare new building in which every screw and every brush of paint is absolutely correct.”

109.And it is generally accepted that minor blemishes may not be spotted until a completed project is turned over to the occupier and it is put to use.  For this reason a common feature of a contract to build or renovate is to incorporate the term “date of practical completion”.  Over the years the courts in England and authors of texts on the topic have come to recognize this as a state of affairs in which the works have been completed free from patent defects other than ones regarded as trifling.  That is now the definitive law in Hong Kong as well; see Mariner International Hotels Ltd v Atlas Ltd [2007] 1 HKLRD 413, page 422 — per Bokhary PJ.

110.Under this contract all but 10% of the contract price fell due on this date, 14 January 2002, when the Kwok family returned to reoccupy their home.  The practical feature of this is that it would have given the parties the opportunity to find and make good those matters that needed further work, against the balance of the moneys retained.  It goes without saying that the contractor must be given every opportunity to earn that balance.

111.In fact Cross Max contractors were engaged in this activity which was interrupted when they were ordered off site in early February.

112.The fact that there were blemishes of the sort referred to by Mr Bowden is accepted by Cross Max.

113.What is in dispute are the numerous allegations of there being much more serious examples of poor workmanship and faulty design and of those instances, originally 131 but now 120 in all, where Cross Max allegedly proceeded to design and then build or install without consultation and approval.

114.I remind myself of Mr Bowden’s response to the question put to him; what is the extent to which a designer/contractor owes a duty to keep his client fully informed of details of design and construction and to require approval before going ahead? — That it all depends on the level of involvement of the client.

115.In this case I am satisfied there was a significant degree of involvement by Ms Tsao.  On a scale between a client who was prepared to leave it all up to the designer contractor with free rein within a given budget, and one who wanted to know about and approve every last screw, hinge and other detail, her position was that she was substantially involved.  This is reflected in the number and duration of the meetings conducted before the contract and then during the work, and her visits on site during the course of the project.  But I am satisfied she was not positioned alongside the extreme example of client I have referred to at the top end of the scale.  Many times during the course of her time in the witness box she used words to this effect:

“I accepted Sandi as an experienced expert in the field of design and build contracts and I trusted and relied on his advice, expertise and experience.  I left it to him to come up with the appropriate designs”.

This was in line with paragraph 4 in her supplemental witness statement I reproduced at paragraph 60 herein.

116.That said, I find Mr Lee did fulfil his duty of keeping her informed, discussing particular facets of work to be done and obtaining her approval before proceeding, except as to detail in respect of which she relied on his judgment.  This is borne out by his evidence which I accept in the light of the frequency and length of the meetings before and during the project, the extent and detail of the layout plans and drawings and the contemporaneous sketches, notes and other data Mr Lee had retained and produced.

117.Mr Chan was critical of the lateness of the disclosure of some at least of this material and invited me to query the authenticity of it; in other words, that Mr Lee might have fabricated such material to enhance the defence case.  I am satisfied that he did no such thing.

118.The availability of these documents cannot be underestimated.  I was taken to an observation made by Kaplan J in an unreported building disputes action Eu Asia Engineering Ltd v Wing Hong Contractors Ltd, HCCT 16/1990 at p.9 para.22:

“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents.  It is a particularly devious contractor, employer or sub-constructor who systematically manufactures documents to assist in a future dispute.  Fortunately, such instances are rare.  I accept that once a dispute has been identified it is necessary to pay careful attention to the documents created after that time because it is only natural that parties will reflect their grievances and justification for actions taken in those documents.  I am quite satisfied that all the contemporaneous documents until just before the crucial events can be relied upon.  I will have to look harder at the other documents prepared once the dispute existed.”

With that I respectfully agree.

119.The documents retrieved and produced do not deal with all design issues.  But they go a long way towards corroborating Mr Lee’s account that there was consultation and approval throughout.

120.I also note that during the term of the project work proceeded uneventfully.  Ms Tsao visited the site frequently, I am sure for the purpose of viewing first hand progress.  There was no issue taken by her as things moved forward, about not having been consulted about any of those 132 items which she was later to list as having been undertaken without consultation and approval.  Ms Tsao from the witness box showed herself to be no shrinking violet.  I am certain that if things seemed to be going off rail she would have been quick to spot that and voice her discontent.  That she did not right up to the date of practical completion is as I find a further compelling feature that weighs against her case.

121.Overall I find it not proved that any of the work itemised in Ms Tsao’s list was undertaken without Pamax’s approval having first been given. 

122.In respect of those items said to have been built without proper regard for the prospective function, I find that there were several items built where express instructions by Ms Tsao were not heeded, namely:

123.Other design flaws were:

124.Substandard work including that already referred to by Mr Bowden was the following:

125.All other complaints I find not proven.

126.The difficulty that Pamax has about claiming for the cost of rectification is revealed in its pleading.  Its claim under this head is for “cost of rectifying defects or substandard works quantified in a report in due course and costs associated with the report”.

127.But there was no report quantifying these costs and no evidence at all on the topic.  Mr Kenneth Chan’s report did not assist.  And there was no evidence at all on what work was undertaken in the re-renovation; particularly, none to indicate it was for rectification rather than to implement new ideas, and if it was rectification no breakdown of the cost of it.

128.There were in short no particulars and no evidence for Cross Max to face and deal with.  There is no basis upon which I am able to arrive at a reasonable figure in establishing the true measure of loss.

129.There is a further material difficulty.  Fundamental to the obligation of a claimant in such circumstances is that he must mitigate his loss.  In the context of construction contracts this invariably means giving the defaulting contractor the chance to remedy the faulty workmanship; see Chitty on Contracts, 29^th edition, 37-199, and the excerpt from Viscount Haldane’s judgment in British Westinghouse Electrical (my paragraph 94).

130.Mr Bowden reported that those matters he found wanting could be quickly dealt with at modest outlay.  My enhanced list of defects would not take up much more time, or cost.

131.Cross Max was certainly ready and willing to make good any perceived defects.  It was denied that opportunity.  The answer to the question posed in issue 1 is “No, because Cross Max was denied the opportunity to make good those matters in need of further work”.  The question in issue 3 is otiose.

The Outcome

132.The Kwoks chose to pursue a re-renovation without consideration for these factors.  I assume they were satisfied with the end result.  But by choosing that path they effectively gave up their claim to recover anything from Cross Max. 

133.And that is the end of it.

The Result

134.Pamax’s claim is dismissed.  There will be judgment in favour of Cross Max on the counterclaim, less an inadvertent overcharge on curtains of $954.  Interest thereon will run at prime as determined by HSBC from 14 February 2002 to this date, thereafter at the judgment rate. 

135.Costs, nisi, are to Cross Max. 

Mr A Chan, instructed by Messrs Mallesons Stephen Jaques, for the Plaintiff

Mr L Remedios and Mr F Chan, instructed by Messrs Bernard Wong & Co., for the Defendant