Greatworth Industrial Ltd v Chevalier (Construction) Co Ltd

HCA41/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.41 OF 2002

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J U D G M E N T

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1. The defendant, Chevalier, was the main contractor for the construction of housing blocks at Tin Shui Wai, Area 110 Phase 2, for the Housing Authority. Chevalier had to build two housing blocks called Concord blocks, each containing 320 domestic flats. Originally the Housing Authority wanted stainless steel gates fitted at the entrances of the flats. Chevalier entered into a sub-contract with the plaintiff, Greatworth, for the supply and installation of 640 such gates. However, before the gates could be supplied and fitted, the Housing Authority decided not to have gates fitted, and so instructed Chevalier. Chevalier cancelled the sub-contract with Greatworth, which now sues primarily for the loss of its profits, and also for abortive costs in maintaining staff in expectation of doing the work, and for the cost of five sample gates which it delivered.

The case on the pleadings

2. It is not in dispute that by contract no.1042-123/98 in writing, made between Chevalier as main contractor and Greatworth as sub-contractor, Greatworth agreed to supply and install 640 stainless steel gates at unit price of $6,100 per gate. The works were scheduled to commence in about June 2000 and the commencement date was subject to three days’ prior notice from Chevalier.

3. Greatworth says that it was an implied term of the sub-contract that Chevalier would not hinder or prevent Greatworth from carrying out the works. This Chevalier denies.

4. Greatworth says that in pursuance of the sub-contract, it ordered materials on 10 August 1999 from one Tien Shan Engineering Ltd for the 640 gates. Chevalier denies this, and disputes the authenticity of the contract document. It also says that pursuant to the sub-contract, Greatworth had to obtain approval before starting manufacture; and that Chevalier warned Greatworth not to buy materials unless expressly instructed, or on the contract manager’s approval. No approval was ever given. Therefore, if Greatworth ordered materials, it did so at its own risk.

5. Greatworth claims for five sample gates delivered; Chevalier admits receipt of them but says that under the sub-contract these were to be free of charge. Alternatively, they were delivered for the approval of the contract manager of the main contract, which approval was never given. Chevalier denies liability for the cost of these gates.

6. Greatworth pleads that Chevalier unilaterally cancelled the sub-contract, as confirmed by a letter dated 29 May 2000. In doing so, Chevalier was in repudiatory breach of the sub-contract, which repudiation Chevalier accepted by ceasing to proceed with further work, and/or by not making delivery, and/or by its solicitor’s letter of 25 April 2001.

Chevalier denies repudiatory breach or acceptance thereof. It says that the cancellation was made pursuant to the contract manager’s instruction of deletion on 10 December 1999, and that pursuant to Clause 4 of the conditions of the sub-contract, Chevalier was entitled to pass the same to Greatworth and adjust the contract sum to that effect.

7. As to quantum, Greatworth claims abortive costs in maintaining staff for the fabrication of the gates from 21 July 1999 to 20 February 2000. It claims loss of profits on 635 gates, at $3,611 per gate; and it claims $30,500 for the five gates delivered. Chevalier denies liability for any of these claims but says that if it is found liable for loss of profits, the reasonable figure therefore is no more than $212,988.05.

Background

8. I set out the background, mainly taken from the correspondence in the document bundle before me. As indicated, Chevalier was the main contractor to the Housing Authority. The contract manager for the main contract was an architect firm named Design 2 Consultant Architects. On 1 March 1999 Chevalier put out to tender the job of supplying and installing the domestic gates. Greatworth had expended considerable time and money in obtaining approval as a domestic supplier of gates and this approval was granted in early March 1999. Greatworth put in its tender, which was later amended, and ultimately the tender was accepted. This led to the execution of the sub-contract between Chevalier and Greatworth for the supply and installation of the gates, on 26 July 1999.

9. Under the sub-contract, Greatworth had to supply one sample gate set for the contract manager’s approval, and that was done at this stage. Shop drawings were submitted and at first disapproved but finally the contract manager approved them on 15 September 1999. On 24 September, Chevalier passed on the approval to Greatworth, and asked for information about performance tests, installation method statements and a finishes sample. In this letter Chevalier requested Greatworth not to secure raw material for bulk quantity before Chevalier gave its approval.

10. Meanwhile, in early September 1999, the Housing Authority in a draft Development and Construction Management Board Instruction proposed amendments to the standard of fittings in the blocks which Chevalier was building. The draft Instruction was to be put to the Building Committee for approval. The amendments included the deletion of the gates in the Concord blocks. Design 2 communicated the draft to Chevalier on 8 September 1999. Chevalier replied on 29 September, notifying Design 2 that sub-contracts, including that for the gates had already been awarded, confirming discussions to the effect that the extent of the implementation of the draft instruction would be advised later, and reminding Design 2 that Chevalier would be entitled to claim loss of profits and/or damage for substantial omissions to contract works.

11. It is not clear from the documents that Chevalier gave Greatworth any instruction about the cancellation of the gates at this time, but Greatworth got wind of what was going on in early October, and on 8 October it wrote to Chevalier to the effect that it had already placed an order for the bulk purchase of stainless steel materials, because cost of stainless steel in the market was rising. Greatworth said that it would lose profits on the cancellation of the order but was prepared to cancel on Chevalier’s confirmation. Chevalier wrote to Greatworth on 12 October in these terms :

“We refer to your letter … as would like to remind you that you can only secure material and commence your manufacturing after Architect’s approval to your material samples, shopdrawings and HKHA’s approval to your works at the sample wings and sample flats. This is already stipulated in the Main Contract and your Subcontract document. Should you insist to secure materials before the approval, you may run your own risk. However, you must be aware of the possibility that HKHA may delete the stainless steel gates after their inspection to the sample wings and sample flats.”

12. On 1 November 1999, Chevalier instructed Greatworth to supply four gates for the sample flats. Greatworth delivered these on 23 November 1999.

13. Then on 10 December 1999, Design 2 issued an architect’s instruction with drawing amendments, which included the deletion of the gates, by which Chevalier was instructed to delete the gates. It passed on the instruction to Greatworth, which wrote to Chevalier, referring to their meeting on the same day, and advising that it had spent a lot of money on obtain approval as a supplier, had entered into a binding contract for the supply of material and saying, in effect, that if the sub-contract was cancelled it would have heavy losses which it could only recover from Chevalier. The latter replied on 14 December, in effect saying that Greatworth’s claims were unfounded, but asking for evidence of loss of profit on a without prejudice basis. Greatworth on 22 December submitted a copy of its contract with Tien Shan, along with a breakdown of its costs, to a total of $3,904,000 which included “operation setting-up and standby costs”. It put the loss of profit as a result of termination of the gate supply sub-contract at $2,624,000.

14. In January 2000, Greatworth contracted to supply 1280 gates to another contractor, named Main Kind Industrial Ltd which was building Concord blocks at Tung Chung for the Housing Authority. The price was $5,500 per gate including installation. Production commenced on 21 February 2000; hence the cessation of Greatworth’s claim for abortive costs at 20 February.

15. As between Greatworth and Chevalier, however, there was no more correspondence until 12 May 2000 when Greatworth told Chevalier it was prepared to go ahead with production of the gates under the sub-contract, and asked Chevalier to issue its notice under the sub-contract. It also applied for payment for the five gates delivered. On 29 May 2000 Chevalier replied to the effect that the deletion of the gates had been confirmed by the architect, and this had been passed on to Greatworth at the meeting on 10 December 1999.

Issues

16. There is little dispute on the facts, save for whether or not Greatworth actually ordered the materials for making the gates from Tien Shan.

17. The primary issue on liability is whether Chevalier was in breach of the sub-contract or whether Clause 4 of the sub-contract, which is essentially a variation clause, permitted Chevalier...