A. Introduction
This is the third article in the series on the differences between Hong Kong and English construction laws. In the second article, the authors explored the differences between the two regimes on two substantive issues relating to the breakdown of contractual machinery and the impact of failure to issue certificates under a contract.
In this third article, the authors will continue to examine the differences between the two laws in the following areas:
- The consequence of denying a defendant an opportunity to rectify its defects; and
- The applicability of liquidated damages post-termination.
B. Consequence of denying a defendant the opportunity to rectify
The principle on measure of damages for breach of contract is well established. It was held by Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co. Ltd v Underground Electric Railways Co. of London Ltd [1912] AC 673 at 689 that:
“… 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, and debars him from claiming any part of the damage which is due to his neglect to take such steps.” (emphasis added)
However, the consequences of failure to mitigate by denying a defendant’s opportunity to rectify the defects in its works appear to be different under Hong Kong and English laws.
In the Hong Kong case of Pamax Limited v Cross Max Interiors Limited HCA2181/2002, 31 March 2008, the plaintiff entered into a design and build contract with the defendant, whereby the defendant agreed to undertake major redecoration for the plaintiff’s house. After practical completion, the plaintiff noted and complained of numerous examples of shoddy workmanship, departures from an agreed particular design or form and occasions where work had been carried out without prior consultation and approval of the plaintiff. The plaintiff subsequently engaged a third-party contractor to embark on a re-renovation, which lasted for six months and cost over $3 million.
At the end of the trial, the court found that while the defendant did not undertake any work without the plaintiff’s prior approval, the defendant was in breach of the contract in that (1) there were several items built where express instructions by the plaintiff were not heeded, (2) there were design flaws and (3) some of the works were substandard. [1]
Notwithstanding the above findings, the court held that the plaintiff’s denial of the defendant’s opportunity to make good any perceived defects was fatal to its claim for costs of rectification. In particular, DHCJ Gill held at [129]-[133] that:
“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…
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 [i.e. the defendant] 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.
…
132. The Kwoks [i.e. those in control of the plaintiff] 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 recovery anything from Cross Max.
133. And that is the end of it.” (emphases added)
It is convenient to note at this juncture that the “issue 1” referred to at [131] in the extract above refers to issue 1 of the list of issues set out at [92] of the judgment, namely “Was Cross Max [i.e. the defendant] in breach of its contract of design and build by virtue of faulty workmanship, failure to comply with specific instructions in the carrying out of the work and failure to consult and obtain approval for carrying out the work?”.
At first sight, the court’s answer to the issue at [131] may appear to suggest that the court made a finding that the defendant was not in breach of the contract by reason of the plaintiff’s failure to mitigate. However, to properly understand the court’s decision, [131] has to be read in the context of the rest of the judgment.
As highlighted above, it is clear from [122]-[124] of the judgment that the court did find the defendant to be in breach by reason of design flaws, substandard works and “failure to comply with specific instructions in the carrying out of the work”. Importantly, the finding at [131] was made in the context of the court’s discussion of the fundamental obligation of a plaintiff to mitigate its loss after having found the abovementioned breach of contract.
In the circumstances, properly understood, what was held in Pamax was that where a plaintiff had failed to mitigate its loss by denying a defendant the opportunity to rectify its defects, the plaintiff’s claim for costs of rectification would be rejected in its entirety (as opposed to being subject to a reduction). It is, however, not an authority for the proposition that there can be no breach of contract by the defendant where the plaintiff has failed to mitigate.
The authors observe that the court in Shun Fai Decoration Handicraft Co Ltd v F&F Investment Ltd HCA 1588/2006, 9 April 2009, referred to Pamax at [34] for the proposition that “the contractor could not be held to be in breach for defective workmanship in circumstances where he had been denied the opportunity to put right items which required further work.”
In our respectful submission, for the reasons given above, such proposition is not supported by the decision in Pamax. As a matter of principle, the issue of mitigation only arises where a breach is found, and not the other way around. In other words, the question of whether the “opportunity to put right items which required further work” had been given to the defendant does not come into being without a prior finding that the defendant was “in breach for defective workmanship”.
The English court arguably takes a different approach towards failure to mitigate.
Generally, in the absence of the clearest wording, even where the contracts contain defects liability obligations, such obligations will not normally be interpreted as creating an exclusive remedy which displaces the employer’s common law right to damages for defective works.
In Hancock v Brazier (Anerley) Ltd [1966] 1 WLR 1317, the defendant entered into agreements with the plaintiffs to sell to them plots of land with a partially erected house on each. The builders agreed to erect and complete the houses in a proper and workmanlike manner in accordance with the plan and specification annexed to the agreements. The agreements contained a defects liability clause at clause 11 as follows:
“If the purchaser shall discover any structural defects in the said house and works within six months from the date of completion and shall notify the vendor thereof in writing the vendor shall forthwith make good such structural defects without expense to the purchaser.”
Within two to four years of completion, the floors and walls cracked badly. The plaintiffs commenced proceedings against the defendant for breach of contract. The defendant argued that clause 11 provided the exclusive remedy for the plaintiffs in the event of a breach and they are not entitled to claim for damages. This was rejected by the English Court of Appeal. In particular, Lord Denning MR held at 1334A-C that:
“And I must say I think that if a builder has done his work badly, and defects afterwards appear, he is not to be excused from liability except by clear words. I am of opinion that clause 11 is no defence to the builder here. It applies only to defects which the purchaser discovers within six months, not those which he discovers afterwards. Even with regard to those discovered within six months, it only compels the vendor to make them good. It does not excuse him from liability in damages. There is nothing in clause 11 to take away the right of a man to sue in respect of structural defects which were not discoverable within six months. It does not, therefore, take away the right of the purchaser here.”
Accordingly, the failure to give notice under a defects liability clause or carrying out repairs by another contractor will not per se prevent a claim for damages under English law. However, the existence of such clause may make it reasonable for an employer to mitigate its loss by notifying the contractor of the defects so that they are repaired by the contractor. As such, where the employer does not provide the contractor with a contractual opportunity to rectify defects during the defects liability period, the employer can still recover the costs of repairing the defects, but the sum that the employer can recover may be limited to how much it would have cost the contractor to rectify the defects. [2]
Having said that, much depends on the terms of the contract and the factual circumstances of the case.
For instance, as suggested in Hudson’s Building and Engineering Contracts (14th edn, 2020) at [4-102], if a defects liability clause is accompanied by clear words of exclusion, or if completion of the duties under the defects liability clause is followed by a final certificate or final acceptance certificate under a provision which contains clear words of exclusion, it may be that the right to call on the contractor to remedy defects is the sole and exclusive remedy for defects. Such provisions are in effect exclusion or exemption clauses and require clear wordings.
On the other hand, if the employer loses confidence in the contractor and has some reasonable basis for that view, a decision to use another contractor and not use the rights under the defects liability clause may not be a breach of the duty to mitigate and the costs of an alternative contractor may be recoverable.
C. Applicability of liquidated damages post-termination
The last substantive issue this article discusses is the applicability of liquidated damages in cases where the contract is terminated prior to practical completion.
As a matter of English law, the position is now settled.
In Triple Point Technology Inc v PTT Public Co Ltd [2021] AC 1148, the claimant agreed to supply a software system to the defendant. The contract provided that if the claimant failed to deliver work within the time specified it would be liable to pay liquidated damages at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date the defendant accepted such work. When the defendant refused to pay the invoices in respect of the work that had not yet been completed, the claimant suspended work and left the site whereupon the defendant terminated the contract. The plaintiff brought proceedings against the defendant for outstanding sums shown as due on unpaid invoices and the defendant counterclaimed for, inter alia, liquidated damages.
The principal issue faced by the UK Supreme Court was whether the defendant was entitled to liquidated damages for delay where the contract was terminated before the completion of works . It was held that it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract. In particular, Lady Arden JSC held at [35]-[38] that:
“35. …Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract…After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law…
36. Of course, the parties may out of prudence provide for liquidated damages to terminate upon completion and acceptance of the works so as to remove any question of their being payable thereafter. But if they do, it is in my judgment unrealistic to interpret the clause as meaning that if that event does not occur the contractor is free from all liability for liquidated damages, and that the employer’s accrued right to liquidated damages simply disappears. It is much more probable that they will have intended the provision for liquidated damages to cease on completion and acceptance of the works to stand in addition to and not in substitution for the right to liquidated damage down to termination.
37. Reading the clause in that way meets commercial common sense and prevents the unlikely elimination of accrued rights…”
Further, Lord Leggatt JSC observed at [80]-[81] that:
“80. …there are cogent commercial reasons why parties who include a liquidated damages clause in their contract would be unlikely to intend the employer’s right to receive such damages for delay by the contractor to be conditional upon the contractor actually completing the work. In the first place, if the parties wish to obtain the benefits of a liquidated damages clause mentioned at the start of this judgment, I can see no reason why, in the event that the contract is terminated before the work is completed, they would wish to forgo those benefits of certainty, simplicity and efficiency in quantifying the damages in relation to delay which had already occurred. Indeed, making the right to liquidated damages for delay by the contractor conditional upon the contractor completing the work would itself introduce considerable uncertainty at the time of contracting about what sum would be recoverable if delay occurs and would deprive the parties of the advantage of being able to know their financial exposure from the risk in advance.
81. Secondly and still more importantly, a clause which had this effect would give a contractor who badly overruns the time specified for completion an incentive not to complete the work in order to avoid paying liquidated damage for the delay which its breach of contract has caused. It makes no sense to create such an incentive…”
The position under Hong Kong law may arguably be different.
In Crestdream Ltd v Potter Interior Design Ltd HCCT 32/2013, 24 July 2014, the plaintiff and the defendant entered into a contract whereby the defendant agreed to carry out and complete the fitting-out and building works of the plaintiff’s residential flat for a fixed contract sum. The defendant abandoned the works before completion. The plaintiff subsequently appointed a replacement contractor to complete the outstanding works left by the defendant.
Master Simon Lo in the Court of First Instance held that the plaintiff was entitled to claim for liquidated damages for the period both before and after termination from the revised contractual date of completion by the defendant until the date of completion by the replacement contractor. In doing so, the Master accepted the following submissions by the plaintiff in support of its contention that the liquidated damages continued to apply after termination (note: the Master qualified his acceptance as being without “the benefit of argument by the defendant”)[3]:
“(a) Culpability of the defendant: Project delay to the ultimate completion date was due to the culpability of the defendant who abandoned the Works and refused to return the Premises to complete the Works despite repeated demands;
(b) No Provision: There is no provision in the Contract saying that the defendant’s liability to pay liquidated damages came to an end when their engagement under the Contract was terminated; and
(c) Commonsense Interpretation: As a matter of principle, the plaintiff should not be penalised for trying to get the Works completed by the Replacement Contractor and the defendant should not be rewarded for failing to carry out the works in accordance with the Contract. Otherwise, the defendant would be better off not coming back to carry out the works, if they refused to do so, the Contract would then be terminated and their liability to pay liquidated damages would automatically come to an end. That would not be a reasonable interpretation of the Contract.”
It should be noted that the UK Supreme Court decision in Triple Point came a few years after Crestdream and the Hong Kong court has yet had the opportunity to consider its impact on the issue. It remains to be seen how the Hong Kong court might approach the issue in future cases in light of Triple Point [4].
D. Conclusion
Over the course of our second and third articles, the authors have set out the differences between English and Hong Kong construction laws on various substantive issues, namely (1) the breakdown of contractual machinery, (2) the impact of failure to issue certificates under a contract, (3) the consequence of denying a defendant an opportunity to rectify its defects and (4) the applicability of liquidated damages post-termination.
Together with the first article, this series of articles is intended to provide guidance and serve as a reminder to construction practitioners that while English and Hong Kong construction laws are broadly similar, there remain material differences between the two regimes in certain areas. Construction practitioners should stay alert and ascertain the legal position on any given issue under the applicable law.
———————————————————————————-
[1] See Pamax at [122]-[124]
[2] See William Tomkinson & Sons Ltd v Parochial Church Council of St Michael (1990) 6 Const LJ 319 at 326
[3] See Crestdream at [48]
[4] Triple Point has been cited in a recent HK case of Cunnington Guillaume Serge Charles v Qantex Capital Markets Ltd [2023] HKCFI 1374 at [46], but it was on a different issue and not on applicability of liquidated damages post-termination.
This is the third article in the series on the differences between Hong Kong and English construction laws. The first and second articles of this series can be viewed here.
- Beware of the differences between Hong Kong and English Construction Laws – Part I
- Beware of the differences between Hong Kong and English Construction Laws – Part II
This article was authored by Calvin Cheuk and Kaiser Leung.
