Hong Kong’s High Court rules determination of contract for site safety irregularities lawful

In the recent case of Hong Kong (SAR) Hotel Ltd v Wing Key Construction Company Ltd, HCCT 3/2010, Hong Kong’s Court of First Instance held that the Employer’s determination of the building contract for the Main Contractor’s failure to rectify safety irregularities on the site, was lawful. The Court awarded the Employer HK$10,014,177.50, that being damages for direct loss and/or damage caused to the Employer by the determination plus monies paid to the Main Contractor before the date of determination of the Main Contractor’s employment, less the amount that would have been payable by the Employer to the Main Contractor on due completion in accordance with the contract.

Background

The Plaintiff had engaged the Defendant as main contractor to build a hotel at the Plaintiff’s site, for a contract sum of HK$48 million.

The Plaintiff, as employer, issued a notice pursuant to clause 25(1)(c) of the contract, to the Defendant, as the main contractor, thereby purportedly determining the contract. The Defendant disputed the Plaintiff’s entitlement to issue the notice.

The relevant parts of clause 25(1)(c) provided:

“25. Determination by Employer

…

(1) If the Main Contractor shall make default in any one or more of the following respects, that is to say:-

…

(c) If he refuses or persistently neglects to comply with a written notice from the Architect requiring him to remove defective work or improper materials or goods and by such refusal or neglect the Works are materially affected, or

…

then the Architect may give to him a notice…..specifying the default, and if the Main Contractor either shall continue such default for fourteen days after receipt of such notice or shall at any time thereafter repeat such default (whether previously repeated or not), then the Employer without prejudice to any other rights or remedies, may within ten days after such continuance or repetition by notice ……forthwith determine the employment of the Main Contractor under this Contract, provided that such notice shall not be given unreasonably or vexatiously.”

Employer’s Case

The Plaintiff’s case was that it was entitled to determine the contract under clause 25(1)(c) because the Defendant had failed to rectify a number of safety irregularities identified by the Buildings Department and failed to comply with the project architect’s numerous requests to rectify the same. The architect, by letter, recommended the Plaintiff to terminate the contract, pointing out two irregularities in particular that posed a serious safety risk to workers and the general public, namely discontinuous catch fans and lack of proper working platforms of bamboo scaffolding.

Defendant’s Case

Although the Defendant conceded that it had failed to rectify the safety irregularities, it disputed the lawfulness of the purported determination of the contract. It asserted that its failure to rectify the safety irregularities did not constitute a refusal or persistent neglect to remove “defective work” and/or the refusal or neglect did not materially affect the Works.

Court’s Ruling

Whether “defective work” includes temporary works like safety works

Yes. The Court held that by virtue of the express definition of “Works” in the Contract, which included both permanent and temporary works, the temporary safety constructions were very much part of the “Works”, despite the fact that temporary works would not remain after completion of the contract. The Court said that Clause 25(1)(c) caught temporary works as well as permanent works, so long as they were part of the Works that the Defendant had to execute pursuant to the contract.

Whether “remove” included “rectify” defective works or site safety work

Yes. The Court held that the argument that the notice issued could not include rectification was absurd. The Court was of the view that a notice issued under Clause 25(1) (c) should include the removal of the defective work and the making good of the defective work so that the Works would comply with the contract i.e. the notice should ask for rectification of the defective work. This was, the Court said, a matter of common sense and to add the word “rectification” to the clause was just to mention the obvious.

Whether the “Works” were “materially affected”

Yes. The Court held that the Defendant’s refusal and persistent neglect to rectify the defects had materially affected the Works and the fact that they were of a temporary nature did not make them any less important than the permanent works. They were of paramount importance to the life and property of those working at the site and both the temporary and permanent works were part of the Works in the contract.

Whether the notice of determination was unreasonable and vexatious

No. The Court said that in order to consider whether the notice of determination was issued unreasonably or vexatiously, it was necessary to consider whether the architect was justified in issuing the notice. It held that a reasonable employer in the Plaintiff’s position would have been entitled to determine the contract as the Plaintiff had done and the notice was not disproportionally disadvantageous to the Defendant. Nor was it unreasonable or vexatious.

Was the Defendant’s non-compliance de minimus?

No. The Court did not regard the discontinuous catch fans, irregular working platforms and the presence of lots of tools, materials and debris on the platforms and scaffoldings as de minimus. They posed grave problems of health and safety to all those working on the site, the Court said.

Was the Defendant’s neglect persistent and continuous?

Yes. The Court held that safety irregularities first mentioned in the Building Department’s complaints were found to exist again and again in site inspections. Hence it found that the Defendant had refused or persistently neglected to comply with the notices served on it requiring it to rectify the defects.

Accordingly, the Court found all four conditions in clause 25(1)(c) were satisfied and the Plaintiff’s determination of the contract pursuant to clause 25(1)(c) lawful.

Quantum

Contractual Clause governing quantum

The quantum of damages payable after a valid determination of the contract was governed by clause 25(3)(d) of the contract, the relevant parts of which provided:

“25. Determination by Employer

(3) In the event of the employment of the Main Contractor being determined… the following shall be the respective rights and duties of the Employer and Main Contractor:

(a) The Employer may employ and pay other persons to carry out and complete the Works and he or they may enter upon the Works and use all temporary buildings, plant, tools, equipment, materials and goods intended for, delivered to and placed on or adjacent to the Works, and may purchase all materials and goods necessary for the carrying out and completion of the Works.

…

(d) The Main Contractor shall allow or pay to the Employer … the amount of any direct loss and/or damage caused to the Employer by the determination. Until after completion of the Works under paragraph (a) …… the Employer shall not be bound by any provision of this Contract to make any further payment to the Main Contractor, but upon such completion and the verification within a reasonable time of the accounts therefore the Architect shall certify the amount of expenses properly incurred by the Employer and the amount of any direct loss and/or damage caused to the Employer by the determination and, if such amounts when added to the monies paid to the Main Contractor before the date of determination exceed the total amount which would have been payable on due completion in accordance with this Contract, the difference shall be a debt payable to the Employer by the Main Contractor; and if the said amounts when added to the said monies be less than the said total amount, the difference shall be a debt payable by the Employer to the Main Contractor.”

Calculation pursuant to Clause 25(3)(d)

The Court held that the amount payable under clause 25(3)(d) was to be calculated as follows:

Damages for direct loss and/or damage caused to the Plaintiff by the determination.

Add: the monies paid to the Defendant before the date of determination of the Defendant’s employment.

Less: the total amount which would have been payable by the Plaintiff to the Defendant on due completion in accordance with the Contract.

Damages for direct loss and/or damage caused to the Plaintiff by the determination

The Court held that the following were the items of damages for direct loss and/or damage caused to the Plaintiff by determination of the contract, totalling HK$30,193,387.77:

1. The Plaintiff’s management costs post-determination (HK$556,414 awarded, for extension of insurance, making good scaffolding, provision of safety matter, killing bugs, independent AP/RSE report, as-built survey work, safety management, temporary power supply and security guard).
2. The Plaintiff’s expenses to procure contractors to supply materials or carry out works included in the original scope of the contract but not awarded under the replacement contract to DKK (HK$875,190.05 awarded).
3. Costs relating to the replacement contract awarded to another contractor, DKK (HK$16,663,282.74 awarded).
4. Liquidated damages (HK$2,160,000 awarded, being HK$30,000 for each day of delay up to the date of determination).
5. Damages for loss of profit for delayed opening of the hotel (HK$9,938,500 awarded).

Monies paid to the Defendant before determination of the contract

The Court found that before determination of the contract, the Plaintiff had paid the Defendant HK$29,345,311.61, excluding HK$200,000 paid by the Plaintiff to the Defendant on account of variation of works done by the Defendant.

Amount that would have been payable by the Plaintiff to the Defendant had the Defendant completed the project according to the contract

The Court found that the amount that would have been payable to the Defendant had it completed the works was HK$49,524,521.88, being the contract price of HK$48 million plus pre-determination prolongation costs of HK$356,854.74.

Total amount awarded to Plaintiff

The total amount awarded to the Plaintiff was HK$10,014,177.50, calculated as follows: