A reminder that quantification of loss must be supported by detailed expert evidence

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Authored by: Stanley Lo

In the recent case of Hip Hing Construction Company Ltd v Hong Kong Airlines Ltd, HCCT 72/2021, the Court granted the Plaintiff summary judgment for over HK$200 million, being the sum outstanding under a construction contract. The Defendant did not dispute that the sum was owing, but sought to set off over HK$200million, for the Plaintiff’s alleged defective works. Although the existence of defects was not in dispute, save for the sum of HK$21 million, the Court granted summary judgment to the Plaintiff, as the Court found that the Defendant had not properly particularised some items of loss or provided support for them and it found the costs of some of the proposed remedial works manifestly excessive and only supported by an oral estimate.

Background

The Plaintiff was the main contractor engaged by the Defendant for the construction of the Hong Kong Airlines Aviation Training Centre (Training Centre) at Chek Lap Kok. The Plaintiff claimed against the Defendant for the outstanding contract sum of HK$215,980,000 plus interest. There was no dispute that the sum was due and owing to the Plaintiff, but the Defendant counterclaimed and sought to set off losses that it said it had incurred as a result of the Plaintiff’s defective work. The Defendant claimed that there were various defects in the building works, the most serious of which concerned water leakage at the basement, which comprised (i) basement screen walls constructed by the Plaintiff and (ii) footings and raft slabs constructed by Kim Hung, the specialist contractor for foundation works. 

According to the Defendant, the Plaintiff had agreed to “take over” the work done by Kim Hung under a “Takeover Agreement”, by virtue of which, the Plaintiff was to be held responsible, not only for its own works, but also the works of Kim Hung.

The Defendant’s set off and counterclaim

The Defendant instructed two external consultants to propose remedial solutions for the water leakage problem and based on an “oral costs estimate” provided by a Mr Ching, the Defendant claimed that the remedial costs totalled approximately HK$212 million. Mr Ching had not provided a written estimate with a costs breakdown. 

The Defendant claimed that during the remedial works, it would not be able to use the Training Centre to train its pilots and staff, and would have to send its pilots and flight crew overseas to undergo regular training, at a total estimated cost of HK$76.43 million. There was no evidence that such training costs had been incurred.

Apart from the water leakage problem at the basement, there were (and remained) various other defects in the Plaintiff’s building works at the Training Centre. According to a preliminary report prepared by the Defendant’s in-house engineer (Mr Tsoi), the costs of those proposed remedial works were estimated at HK$30.07 million. All but one of the items, were lump-sum estimates without adequate particulars or breakdowns.

Could the Defendant substantiate the defects?

The Court said that for present purposes, it would concentrate on the water leakage in the basement, as the Defendant’s evidence concerning other defects was quite unsatisfactory and for some of those other defects some rectification works had already been carried out. The Court noted that the burden was on the Defendant to identify what defects attributable to the Plaintiff remained outstanding and the costs (with sufficient particularities) of the rectification works. The Court was not satisfied that the burden had been discharged in respect of those other defects, apart from two of them (2 Defects). It was for the Defendant, the Court said, to point out specifically what the outstanding defects and relevant costs of rectification were and it was not for the court to look high and low to see which of the many items of alleged defects had or had not been dealt with over the years.

The Court was satisfied that the Defendant had made out an arguable set-off or counterclaim in respect of the loss that arose from the leakage. That set-off or counterclaim arose out of the same project as the Plaintiff’s claim and it would therefore be manifestly unjust to allow one to be enforced without regard to the other.

The Court did not find any merit in the Defendant’s contention on the Takeover Agreement, as it was not supported by any contemporaneous document. The Court said that is was self-evident that is was a highly onerous and risky obligation for the Plaintiff to take on and the Defendant’s suggestion that in return the Plaintiff was able to gain control of the site and start its work earlier was quite unconvincing. 

Quantum of the Defendant’s Losses

The Defendant claimed three items of loss:

• Item 1: Costs of proposed remedial works for the leakage: HK$212 million;
• Item 2: Training costs for sending the Defendant’s pilots and staff overseas to undertake training: HK$40 million per year
• Item 3: Costs of proposed remedial works for the 2 Defects.

In respect of each item of loss the Court held:

Item 1 -The Defendant had failed to condescend to details as to how the figure of HK$212 million was calculated. It was derived from an oral preliminary estimate provided by Mr Ching. The Plaintiff had obtained a costs estimate report from an experienced quantity surveyor who assessed, with a breakdown, that the proposed remedial works would cost only HK$21 million. In light of such evidence, Mr Ching’s estimate appeared manifestly excessive.

Item 2 – The Defendant claimed that the mechanical and electrical plant supporting the flight simulator equipment in the Training Centre would have to be shut down when remedial works were being carried out to address the leakage and the Defendant would therefore have to incur over HK$40 million per year to send its pilots and staff for training overseas. The Defendant’s proposed remedial works were limited to the ground floor and basement of the building. The mechanical and electrical plants were controlled floor by floor and there was no satisfactory evidence to explain why the Defendant would not be able to use the other floors of the Training Centre for training. The Defendant’s case that the whole Training Centre would be rendered unusable was little more than a bare assertion. It must be borne in mind that the Defendant was under a duty to mitigate its loss. Assuming that the mechanical and electrical plant had to be shut down, common sense dictated that mitigating measures could be put in place to, e.g. minimise the down time and/or re-arrange the training hours. Further, why would the training of other staff be affected assuming that the flight simulator could be used? In any case, the breakdown for this claim of HK$40 million of training costs was not explained. There was no information on where the staff would be sent, the number of staff currently retained by the Defendant and how many of them would have to be sent for training at any given time. This very substantial loss had not been made out on the evidence. This was not a bona fide or believable claim. 

Item 3 – There was no proper evidence for the requisite rectification works for the 2 Defects and the costs of them. The Defendant’s remedial costs estimates were all lump-sum items with no particulars or breakdowns. It was not a matter of guesswork for the court based on such unparticularised estimates. In the absence of the requisite evidence, the Defendant should resort to its right under the Plaintiff’s guarantee.

Court’s Decision

Accordingly, the Court granted the Plaintiff summary judgment for the amount claimed, save for HK$21 million for those defective works of the Plaintiff that the Defendant had been able to substantiate.

Comments

In order for a defendant to succeed in defending a summary judgment application, they have to show an arguable defence to the plaintiff’s claim. It is not a high burden for the defendant to discharge, especially in construction projects, where the usual defence is set-off for delay and defective work of the contractor. In many cases, the court may not have the opportunity to go through all the details to determine the merits of the defence. However, in this case, the defendant succeeded in raising the defence of set-off but the evidence on quantum of loss and damage was so unsatisfactory that the Court saw fit to dismiss it, even in a summary judgment application. The lesson to be learnt by employers is that the quantification of loss must be supported by detailed expert evidence.

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