In the recent Hong Kong Court of First Instance judgment in the high profile case, Chun Wo Building Construction Limited v Metta Resources Limited HCCT 29/2013, the Court had to decide a number of interesting issues, including the consequences of abdication of responsibility by an Employer’s Representative. The case is also notable for the Court’s comments on how changes should be made in the conduct of construction litigation. This is one of the most major construction litigation cases that has reached the Courts in recent years.
The Plaintiff, Chun Wo Building Construction Ltd, was the Main Contractor and the Defendant, Metta Resources Ltd, the Employer under a contract for the construction of Tsz Shan Monastery in Tai Po. The Main Contract was based on the previous Hong Kong private form. During the construction, disputes arose between the parties. The Plaintiff claimed that the Defendant continuously changed the designs for the project and the Defendant complained about the quality of the Plaintiff’s work and its progress.
The Plaintiff commenced proceedings, claiming (i) payment for work done (including variations) and materials; (ii) extensions of time (EOT); and (iii) loss and expense or, alternatively, damages arising from the delay and recovery of sums deducted as liquidated damages. The Defendant counterclaimed for defects, contra charges and liquidated damages.
The Court addressed a number of significant issues, including the following.
Abdication of responsibility by the Employer’s Representative, (ER) and its implications
It was the Plaintiff’s case that the ER, had abdicated their obligation to act fairly and independently between the Plaintiff and Defendant, in particular in relation to EOT assessments and valuation of the Plaintiff’s works and claims.
ERs are under an obligation to act fairly and independently between the employer and contractor. As the ER in this case had performed very few functions on their own initiative, but were largely told by the Defendant’s representatives how to carry out their functions, the Court found that they had abdicated their obligation to act fairly and independently. For example, the ER made no decision of its own motion in relation to interim payments (including deductions in respect of defects) and even, on a number of occasions, had their letters written for them. The ER’s functions were effectively carried out by the Defendant’s representatives, the Court said.
By the same token, the Court found that the Defendant was in breach of the implied terms of (i) co-operation, non-hindrance and non-prevention; and (ii) not to interfere with the ER’s exercise of the functions they had to carry out independently.
Such abdication of responsibility by the ER undermined the defence to the Plaintiff’s claim for (i) payment of work done by variation orders; and (ii) the EOT claim. The Defendant attempted to argue that the Plaintiff was not entitled to the sums claimed because it had failed to comply with formality and notice provisions under the contract in respect of its variation order (VO) claims, and the notice provisions in respect of its EOT claim i.e. that such notice provisions contained condition precedents.
The Court held that, by reason of the Defendant’s interference and the ER’s abdication of responsibilities, the contractual machinery in the case had broken down, which meant that the Defendant could not rely on its own wrong to capitalize on the absence of written instructions by the ER and failure to comply with the notice provisions to deny the Plaintiff’s entitlement i.e. to rely on condition precedents.
Omission of Work
Another notable issue was the scope of omitted work. The Plaintiff argued that all outstanding works under the Main Contract, including its obligation to make good defects, were omitted. The Defendant argued that the omission did not exclude the obligations to rectify defective works.
The ER had requested the Plaintiff to stop construction in the following terms:
“The Employer has decided and you are hereby instructed that all remaining Works under your scope are omitted with immediate effect … Due to the deletion of all remaining Works, Practical Completion is deemed to have been achieved …”
It further required the Plaintiff to leave the construction site without delay.
The parties agreed that the Court should look at the objective, not subjective, intention of the parties to find out the true meaning of the above instruction. The Court held that the omitted work included defect rectification because:
- it was within the scope of all remaining work;
- Practical Completion would entail that there was notionally no known defects within the Plaintiff’s scope other than trivial ones; and
- it was unreasonable to suggest that the Plaintiff was to leave the site without delay and return to carry out substantial rectification works.
Splitting the difference between parties’ valuations
In ruling on the VO claims (many of which were small value items of less than HK$100,000), there were many instances where the Court found merit in the quantifications of both parties.
The Court recognized that it was impossible to resolve the difference between parties’ valuations without very specific and in depth exploration of the relevant expert evidence. It held that it was therefore fair to split the difference between the two valuations.
Defects and the diminution of contract sum
In assessing the diminution of contract sum due to defects, the parties’ respective quantum experts adopted different approaches. The Plaintiff’s expert approached the question on the basis that the diminution was intended to represent the omission of work carried out by reference to the rates in the Main Contract. He assumed that if indeed there was a part of the work which was defective, even if the Plaintiff could avoid the liability for repairing those defects, they should not be paid for carrying it out in the first instance, hence the omission of the contract value (or diminution in value) of such work.
The Defendant’s expert approached the question differently. He looked at the defects rectification that was actually carried out, the cost that was actually incurred in doing the works, and then tried to calculate what the value of that same scope was in the contract. His approach involved a complicated exercise. Firstly, based on the costs incurred by the rectification contractors, he split such costs into two aspects, namely – “demolition non-contract costs” and “rectification replacement costs”– and only the second aspect was attributed to the diminution in value, subject to a premium reduction to try to reconcile it with the Schedule of Rates.
The Court preferred the Plaintiff’s expert’s approach, as being more consistent with the notion of reduction of contract sum for omitted work and there were flaws in the premium rates used by the Defendant’s expert in the premium reduction exercise. For example, the premium rates were only deducted from the costs of three out of five remedial contractors.
Calls for Changes in Construction Litigation
The Court commented on the fact that construction litigation had become unnecessarily complex and prohibitively expensive and called for changes in the way it is conducted, most notably in respect of pleadings and experts.
In respect of pleadings, the Court emphasised that they should be the simple road map of the disputes between the parties and only material facts should be pleaded. The Court warned that litigants who put forward unhelpful pleadings can expect to be asked to justify the costs incurred, even if they succeed in their action and that the court will have to consider, of its own motion, striking out pleadings which fail to comply with the rules.
In relation to experts, the court suggested that instructing a single joint expert should become the norm and that parties would have to justify why such expert should not be preferred over separately instructed experts. In this case, the Court considered that there was an unusually large number of expert witnesses (five for each party plus one jointly instructed expert) and their evidence had taken up a significant portion of the trial. The number of experts would have been halved, the Court said, if a single joint expert had been instructed on every discipline, which would have resulted in a shorter trial. Experience has shown, the Court said, that with a single joint expert, the parties are able to focus on the handful of real issues and cross-examination is conducted efficiently and expeditiously.