Wo Hing Engineering Ltd. v. Tyco Engineering & Construction (Hong Kong) Ltd.
Read the full judgment text of CACV 1120/2000 on BabelCite. This 高等法院上訴法庭 judgment was delivered on 17 April 2002 before Hon Rogers VP, Le Pichon JA and Ma J.
Civil law – Contract – Breach of subcontract – Methodology for damages assessment – Whether damages should be based on actual additional costs plus 3% contractual fee or an enhanced profit margin – Evidence on projected external costs – Whether speculative or ascertainable – Loss of business opportunity claim – Insufficient evidence – Appeal allowed on damages quantum – Remission ordered for fresh assessment – Cross-appeal on loss of business dismissed – Costs ordered in favour of plaintiff. Defendant Tyco repudiated subcontract by failing to finance works, plaintiff Wo Hing completed the works itself. Trial judge awarded damages based on 10% profit approach not in line with compensatory principle which requires plaintiff be placed as if contract performed with recovery limited to actual losses net of contract fee. Projection of external costs to completion based on purchase orders found speculative and unreliable for present determination; final costs ascertainable only upon final accounts. Loss of business opportunity claim dismissed for lack of evidence. Appeal court set aside damages quantum, dismissed cross-appeal, and remitted matters to trial court for reassessment based on actual costs and receipts applying formula of 3% fee plus shortfall between costs and 97% of contract price. Order nisi for costs made in favour of plaintiff save as increased by cross-appeal.
Legal issues: Appropriate assessment of damages for breach of contract · Assessment of projected external costs to completion · Loss of business opportunity claim
Outcome: Set aside the amended judgment on quantum; dismissed cross-appeal on loss of business claim; remit to trial judge for fresh determination of actual costs and receipts and consequent damages calculation
Cites 1 case
|
CACV001120/2000 CACV 1120/2000 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 1120 OF 2000 (ON APPEAL FROM HCCT NO. 40 OF 1999) ____________________
____________________ Coram: Hon Rogers VP, Le Pichon JA and Ma J in Court Date of Hearing: 12-13 March 2002 Date of Handing Down of Judgment: 17 April 2002 ____________________ J U D G M E N T ____________________ Hon Le Pichon JA: 1.This is an appeal by the defendant Tyco Engineering & Construction (Hong Kong) Limited from the judgment of Burrell J awarding the plaintiff Wo Hing Engineering Limited ("Wo Hing") damages in the sum of $4,783,102 for loss sustained as a result of the defendant's breach of contract. Background 2.Wo Hing was the nominated subcontractor for electrical installation works in Phases 2A and 2B of the Olympic Station Development Site C in Kowloon. The main contractor was Kumagai Gumi Hong Kong Limited (now Hong Kong Construction (Holdings) Limited) ("the main contractor"). The subcontract awarded to Wo Hing was for a lump sum of $80 million. The defendant Tyco Engineering & Construction (Hong Kong) Limited ("Tyco") became the sub-sub-contractor. Under its contract with Wo Hing, Tyco stepped into the shoes of Wo Hing and effectively took over the subcontract works, while for its part Wo Hing was entitled to receive from Tyco 3% of the said contract price of $80 million subject to later adjustments. Thus, Wo Hing would receive as its profit from this sub-sub-contract $2.4 million and leave the responsibility for the day-to-day funding and performance of the subcontract works wholly to Tyco. 3.The judge found that Tyco was in repudiatory breach by failing to finance the project on a day-to-day basis. Having dealt with the issue of liability, the judge went on to assess damages. In this connection, it is relevant to note that at the pre-trial review on 11 April 2000, the judge had ordered that there be separate trials of liability and quantum, that the issue of liability be tried on 8 May 2000 and the issue of quantum be adjourned sine die with liberty to restore. Nine days later, 20 April 2000, the defendant took out a summons to adjourn the trial fixed to commence on 8 May and for the hearing date to be vacated. On 26 April 2000, only two weeks after the pre-trial review, the judge ordered, inter alia, that the trial be adjourned to commence on 11 September 2000 and that the issues of both liability and quantum be determined at the same hearing. The judgment below on quantum 4.On the assessment of damages, the judge did not accept the methodology advocated by either of the parties. He made a number of findings which, broadly speaking, related to two matters. The first related to the correct methodology to be adopted in compensating Wo Hing. He found that Tyco's breach took place approximately a third of the way through the projected length of the contract, that Wo Hing was faced with a choice: it could have engaged another sub-contractor and continued to receive the 3% fee or it could have carried out the remainder of the project itself. By opting for the latter, Wo Hing accepted the financial burden which previously had been Tyco's and from then on worked towards the completion of the works intending to make a commercial profit. He further found that a reasonable profit for it to have expected would be 10%. The judge explained his approach in these terms (at page 22K-R of his judgment):
5.The other aspect of his findings related to the actual quantification of the loss of profits. He accepted Tyco's submission that the court had sufficient evidence to make a final determination as to quantum there and then although variations and/or additional works were still being carried out. He did not accept Wo Hing's submission that the court would have to make numerous guesses as to future costs. 6.There were four main heads of costs as set out below. The parties were able to agree certain items. It is to be noted that internal costs are those costs incurred or expended within Wo Hing as opposed to external costs which are the payments that Wo Hing has had to make to outsiders. The judge made findings relating to internal costs about which there is no appeal.
The one item about which the parties were poles apart concerned projected external costs between 31 August 2000 and completion. Wo Hing's expert, Mr Pritchard, calculated them to be $10,579,918 based on purchase orders issued and Tyco's expert, Mr Tennant, considered zero to be the proper amount. As to that disputed item, the judge found the figure to be $1.5 million. 7.On that basis, he found that the total costs amounted to $76,569,354. As at the date of trial, the value of work done as certified was $83,100,000 although Wo Hing had only been paid $78,729,000 by the main contractor who, currently, is believed to be in financial difficulties. The shortfall of $1,799,354 arising between 10% of the certified value of work done and the profit based on the costs of $76 million odd found by the judge was the amount which the judge ruled Wo Hing was entitled to as profit for taking on the project as a result of Tyco's repudiation. 8.The judge went on to consider Wo Hing's claim for loss of business. Wo Hing had claimed $12 million under this head on the basis that it could have been engaged in another $80 million contract and would have made a 15% profit. Since the judge had already awarded Wo Hing a 'profit' on the project of 10% by reason of Tyco's repudiation, he found that what Wo Hing had lost was the opportunity of receiving its risk free 3% from Tyco had Tyco not repudiated the contract. The judge therefore ruled that in addition to the loss of profit of $1.79 million, Wo Hing was entitled to the $2.4 million but had to give credit for the sum of $113,940 that it had already received by way of deduction prior to Tyco's breach. The damages finally awarded to Wo Hing came to $4,783,102 made up as follows:
The appeal and cross-appeal 9.Neither party was content with the award of damages. Tyco's appeal raised two issues: first, whether it was appropriate for damages to have been assessed on the basis of a 10% profit; and second, whether the sum of $2,286,060 should have been awarded for loss of business opportunity. Wo Hing filed a respondent's notice challenging the finding of $1.5 million as the projected external costs from 31 August 2000 to completion and the rejection of its loss of business claim of $12 million. Damages 10.The judge found that Tyco was in breach of its contract with Wo Hing. There is no appeal from this finding. So far as damages for breach of contract are concerned,
See per Lord Wilberforce in Johnson v Agnew [1980] AC 367 at 400H. Applying that principle to the facts of this case, had Tyco not been in breach, at a minimum, Wo Hing would have received 3% of the contract sum i.e. $2.4 million. If extra costs have had to be incurred in order to complete the contract, whether the cost of engaging a subcontractor to carry out the work or doing the work itself, as a matter of principle, Wo Hing is entitled to recover such additional costs. Expressed as a formula, Wo Hing is entitled to 3% of the contract price plus any shortfall arising between actual costs incurred and 97% of the contract price. 11.The judge's approach to assessing damages was quite different. He summed it up at page 26 of his judgment:
The reasoning was that because Wo Hing had elected to take over and complete the contract itself rather than to employ a third party to complete the work, it should be entitled to a profit of 10% on the project. Had it employed a third party, true enough by undertaking the work, the third party would have worked towards a commercial profit. But the fact that Wo Hing elected to perform the work itself did not, ipso facto, entitle it to earn a profit. In my judgment, what it is entitled to recover (apart from the 3%) would include any additional costs incurred: for, to that extent, it would have been out of pocket and should be reimbursed in order to be made whole. The judge's approach was not based on any decided case law and, in my view, was not consonant with the general approach for assessing damages for breach of contract, that it should be compensatory in nature. 12.As is almost invariably the case with building contracts, variations do occur which result in additional sums being payable. If, therefore, as a result the total amount payable under the contract were to exceed the original lump sum amount, any shortfall (if any) between the actual cost of the project including any costs involved in variations and 97% of the overall contract price for the project (including any additional amounts payable for variations) would constitute an item of expenditure which Wo Hing would not have had to incur had Tyco not been in breach. The difference is thus recoverable under the general principle stated above. Variations and/or additional work do not affect the essence of the formula: the contract price embraces all additional sums payable under the contract. 13.The next question is whether Wo Hing has had to incur additional expense in order to complete the job. The answer turns on the two components to the equation: actual costs and actual receipts to which I now turn.
14.As noted above, the parties were able to agree the amount of some of the items in the costs calculation. The judge made determinations in respect of internal costs both before and after 31 August 2000 as to which there is no appeal. But his determination of $1.5 million as the projected external costs to completion is challenged by Wo Hing. Wo Hing had claimed approximately $10.6 million. The judge thought that Tyco's response was that the amount should be zero. That was not strictly accurate. It reflected Tyco's position if the projected external costs had to be assessed at the trial date. Mr Tennant was not saying that the amount would be zero upon the taking of a final account:
He plainly thought that there would be additional costs, the exact amount of which was ascertainable once there has been a final account. It has to be said that the basis for the $1.5 million found by the judge was obscure: even counsel for Tyco did not feel able to justify that finding. 15.Despite the direction made on 26 April that there be no separate trials of liability and quantum, in the course of the evidence, the determination of projected external costs was a matter that caused the judge certain misgivings as is apparent from the following excepts from the transcript:
16.Because the judge had directed that liability and quantum be tried at the same time, Mr Graham's approach was to ask the court to grant Wo Hing an indemnity regarding future costs with a view to directions being given for assessment as and when the information became available. The judge rejected Mr Graham's request for an indemnity and, despite his misgivings, ruled that he had sufficient evidence to make a final determination as to quantum. But was that really the case? 17.The evidence revealed that Wo Hing's figure of $10,579,918.22 for projected external costs from 31 August 2000 to completion was based on the difference between the total amount of purchase orders as of 11 September 2000 aggregating $82,810,272.28 as shown in Appendix "V" to Mr Pritchard's supplementary report dated 18 September 2000 and the amount of external costs agreed between the parties of $72,230,354.06. Mr Pritchard's evidence was that the purchase orders formed a sound basis from which to estimate the balance of costs which have yet to be incurred. He believed the purchase orders to be a genuine pre-estimate of what the requirements of the job would be and he was confident that most of this cost would be realised. He regarded it as a reasonable estimate at that time with the best information available to him:
18.Tyco's expert, Mr Tennant, was of the view that the big unknown was the question of the difference between purchase orders and payments made. He did not regard purchase orders as an accurate basis for assessing projected external costs:
As to the working out of the final cost, Mr Tennant's view is evident from the following passage:
It was, in fact, no different from that of Mr Pritchard's. In the light of that evidence, it is quite clear that any attempt to assess projected external costs as at the date of the trial was nothing more than an exercise in speculation. 19.That leaves the question whether the evidence supported the reduction of the $10.6 million claim to something close to nil as appeared to be the suggestion of Mr Pennicott who appeared for Tyco below. The judge accepted Tyco's submission and discounted $4 million of the $10.6 million claim. The $4 million claim related to the costs of labour which had been provided by a sub-contractor referred to as "Professional". The total amount was in fact $3,621,916 but had been referred to during the evidence as "the $4 million claim". In order to understand the judge's approach to the $4 million claim, it is necessary to refer to two other claims by Professional, one for the sum of $600,000 and the other for $1,441,594. These related to variations and both sums had formed part of the allegedly agreed external costs of $72 million odd. Although in cross-examination it had been put to Wo Hing's witnesses that those two claims had never been paid, it was implicitly accepted in Tyco's closing submissions below and common ground during the appeal hearing, that Wo Hing's liability had been discharged by set off. The judge's rejection of the $4 million claim was premised on Tyco's submission that the $4 million claim, like the other two claims by Professional of $600,000 and $1.44 million would never be paid to Professional. That premise was demonstrably erroneous. Further, there was no other evidence pertinent to the balance of $6.6 million of the $10.6 million claim except the evidence referred to above as to the reliability or otherwise of purchase orders as the basis of projecting future external costs. Accordingly, there was no basis for the judge to have discounted either $4 million or, effectively, $9.1 million of the $10.6 million in respect of projected external costs. 20.Wo Hing has filed new evidence to the effect that (i) it has made payments of some $6.5 million since the day of the trial; (ii) there is still over $4 million to be paid to sub-contractors and suppliers; (iii) Wo Hing has not received any further payment from the main contractor since the date of the trial; and (iv) the Certificates for Making Good Defects have not been issued as some defects have yet to be rectified; and (v) the quantity surveyor is in the process of preparing the final accounts for the sub-contract works. Notwithstanding (v), upon instructions, Mr Graham informed the court at the appeal hearing that the final accounts may take as long as two years to complete. It is common ground that this new evidence comes within the principles laid down in the Ladd v Marshall [1954] 1 WLR 1489. 21.In my judgment, the judge's determination of $1.5 million as the projected external costs to completion cannot be sustained and must be set aside. I see no viable alternative to remitting its determination back to the Court of First Instance in order to do justice to Wo Hing who, after all, has succeeded on liability. I accept that in certain cases, as a matter of practical justice, the Court may well assess damages adopting a measure of speculation. Equally, I accept that the desirability to have finality in litigation may mean that the Court will assess damages at the same time as its determination of liability. Where, however, the assessment of damages becomes almost purely a speculative exercise and as regards future losses, the Court cannot predict the extent of such losses with reasonable confidence, this is an important factor to take into account in deciding whether to embark on an assessment there and then or to leave it to a future time: c.f. Deeny v Gooda Walker Ltd. (in Liquidation) [1995] 1 WLR 1206, at 1214H; Total Liban SA v Vitol Energy SA [2001] QB 643, at 664A-B. In the present case, as I have already said, the assessment of the projected external expenses was no more than an exercise in speculation. Given the inevitability at some stage of more concrete and reliable evidence going to this issue (and the new evidence before this court has confirmed this), I see no need to perpetuate the speculative and artificial approach that the judge adopted. The question which now arises is the scope of the remission. Remission 22.Both parties urged the court to leave 'sacrosanct' the parties' 'agreement' relating to external costs as at 31 August 2000. But what had the parties actually agreed? To what did the $72 million relate? Did it reflect actual payments made by Wo Hing as at 31 August 2000 or did it include amounts invoiced prior to 31 August but unpaid as at that date? Suffice to say that the parties cannot agree what the $72 million figure was meant to cover and the transcript throws little light on the matter. That being so and since the basis of all external costs is the total amount of purchase orders issued, the 'agreement' is meaningless. In my judgment, the whole issue regarding external costs whether pre or post 31 August 2000 must inevitably be revisited by reference to actual figures.
23.Variations were ongoing at the date of the trial. As explained in para. 8.3 of Mr Pritchard's report dated 24 August 2000, the agreed amount of $3,686,000 reflected an assessment of the amount claimed on the basis of a 55.8% success rate. That rate was itself based on variations agreed of $1.023 million odd out of a claim of $1.83 million odd. It was thus no more than an averaging exercise. Given the remission that is to take place, I see little justification for retaining in the computation of costs what is essentially guesswork. In my view, the remission should extend to variations again by reference to actual figures.
24.The question of where the burden of the cost of rectifying defects is to fall is an issue between the parties. Tyco's position is that it should not have to pay for defects arising from work carried out after it had left the site. For Wo Hing's part, its approach is quite simply that all actual costs incurred in completing the project must be borne by Tyco who was in breach. This would therefore include normal defects correction work. No point had been taken by Tyco below that it should not be liable for the cost of remedying defects attributable to Wo Hing and, accordingly, no evidence had been adduced on this issue. 25.In making his determination, the judge had proceeded on the basis that Wo Hing had carried out the works as diligently and as expeditiously as possible. He was fully cognizant that the party in breach had no means of monitoring the diligence of the innocent party once it had left the site but the judge expressed himself satisfied that there was no danger in the present case of the innocent party not having proceeded with the works diligently. He further stated (at page 23 of his judgment) that there had been no suggestion that Wo Hing's performance had been seriously lagging and there was no evidence or allegations of delay or poor workmanship on its part from other contractors. Tyco has not sought to challenge those findings. 26.The cost of rectifying defects is part of the cost which a contractor would normally have to bear. Therefore had Tyco not been in breach, it would have had to bear the cost of remedying defects. Since Wo Hing is to be placed in the position it would have been if the contract had been carried out, the burden of these costs must, in accordance with general principle, fall upon Tyco. That apart, it is too late for fresh evidence to be adduced as to which defects are attributable to work carried out by Wo Hing since this was never an issue below. Loss of business 27.The judge's determination on this issue was part and parcel of his approach to his assessment of damages which, for reasons already stated, was incorrect and must also be set aside. Wo Hing's claim is made on the basis that because of Tyco's breach, it has had to deploy its resources to complete this project instead of being engaged in another $80 million contract from which it would have made a normal profit. It maintained that the average profit margin was 15%, calculated by dividing the amount of gross profit by the turnover of Wo Hing for the period 1 April 1998 to 31 March 1999 and rounded down. However, the only financial statements before the court are the consolidated accounts for the group and not the financial statements of Wo Hing. The figures in the consolidated accounts are very different and result in a rate of only 4.5% on the group basis. Be that as it may, and leaving aside for the moment the appropriate percentage, there was precious little evidence before the court to substantiate the claim. 28.Mr Edwin Lee, the managing director of Wo Hing, gave evidence to the effect that a contractor would have to satisfy the Government on Government projects that it had 15% of the contract price available. Tyco's evidence was substantially the same - it gave a range of 10% to 20%. That fact of itself did not take matters very far. An elaboration of the basis of the claim appears in the witness statement of Yu Fok Kwong. At para. 25, it is stated that:
Mr Yu gave particulars to the effect that for the period ending 31 March 2000, 184 invitations to tender were received of which 161 were unsuccessful and 18 of such invitations were declined. Only 5 were successful. It is unclear whether Mr Yu was cross-examined about this as the extracts from the transcript of his evidence included in the appeal bundles do not address this topic. 29.There was some cross-examination on tenders generally when Mr Lee gave evidence. He was asked about two of the tenders in the tender log which under the 'status' column bore the entry 'declined', but the reason for declining the tenders had nothing to do with the tying up of resources. As for the unsuccessful tenders, it is not enough to show that they were unsuccessful. After all, there could be many reasons why a particular tender was unsuccessful. In my view, quite apart from the fact that remoteness was never argued, the evidence adduced simply did not go far enough to show that, on a balance of probabilities, for example, Wo Hing would have been successful in tendering for another project of similar size but for its resources being tied up in completing this project. For these reasons, I would dismiss the cross-appeal in respect of the loss of business claim. Conclusion 30.I would set aside the amended judgment, dismiss the cross-appeal for loss of business and remit back to the judge below for determination afresh (1) the amounts attributable to (a) external costs, whether pre and post 31 August; (b) variations and/or additions, for the purpose of calculating the actual costs incurred by Wo Hing; and (2) the total amount received by Wo Hing in respect of the same. 31.It is a matter for the judge to decide when those matters are ready for hearing, bearing in mind that the objective is to base the assessment on actual figures. Once the actual costs and receipts have been determined, the damages to which Wo Hing is entitled can easily be quantified, applying the formula in [10] as refined in [12] above. 32.I would also make an order nisi for costs in favour of Wo Hing. Save in so far as increased by cross-appeal. Hon Ma J: 33.I agree. Hon Rogers VP: 34.I agree.
Representation: Mr Peter Graham, instructed by Messrs Deacons, for the Plaintiff/Respondent Mr Peter Clayton, instructed by Messrs Denton Wilde Sapte, for the Defendant/Appellant |
Cases cited in this judgment
Further hearings and rulings under CACV 1120/2000