Court considers measure of damages for breach of contract for services

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Authored by: Joseph Chung

In the recent case of Jekco Elevators Ltd v Million Hotel Management Ltd, CAMP 101/2022, the District Court awarded the Plaintiff damages of HK$135,300 for the Defendant’s wrongful termination of a lift maintenance service agreement and dismissed the Defendant’s counterclaim for damages occasioned by the engagement of another service provider to carry out remedial works. The Court of Appeal dismissed the Defendant’s renewed application for leave to appeal.

Background

The Plaintiff agreed with the Defendant to provide service and maintenance to two elevators at a hotel, for two years from 1 June 2015, at a monthly service fee of HK$6,000 (1^st Agreement) and for two years from 1 June 2017, at a monthly fee of HK$6,600 (2^nd Agreement).

The Defendant gave notice to terminate the 2^nd Agreement on the ground that the Plaintiff’s service was unsatisfactory and that the Plaintiff had persistently breached the express terms of the 2^nd Agreement in: (i) failing to provide competent technicians to carry out maintenance and repair service of the lifts; (ii) failing to inform and/or explain to the Defendant’s employees the repair works required and progress of such; (iii) failing to ensure that the two lifts and their associated equipment and machinery were kept in a proper state of repair and safe working order; and (iv) failing to provide technicians to the Defendant’s premises as soon as possible in cases of emergency. It was also the Defendant’s pleaded case that, by reason of the above “Four Failures”, the Plaintiff was in breach of the implied terms of both Agreements in failing to carry out the lift maintenance service with reasonable care and skill and within a reasonable time, pursuant to sections 5 and 6 of the Supply of Services (Implied Terms) Ordinance, Cap.457.

The Plaintiff commenced proceedings against the Defendant for HK$135,300 damages for repudiatory breach, being the monthly fee for the rest of the contractual term of the 2^nd Agreement. The Defendant counterclaimed for HK$213,300 damages for breach of the 2^nd Agreement, that being the costs of engaging another service provider (Sigma) to carry out inspection and repair works to remedy the defects in the lifts.

District Court Judgment  

Liability

The District Court judge (Judge) held that breaches committed during the contractual period of the 1^st Agreement could not be taken into account in deciding whether termination of the 2^nd Agreement was justified.

After assessing the four failures referred to above, the Judge found that the Defendant had no valid ground for terminating the 2^nd Agreement prematurely. Accordingly, the Defendant’s early termination of the 2^nd Agreement amounted to a repudiatory breach, which was accepted by the Plaintiff.

Quantum

The Judge rejected the Defendant’s argument that the Plaintiff could only claim damages but not the balance of the contract sum (i.e. monthly fees for the remainder of the contractual term) because:

• While the Plaintiff was indeed suing for $135,300, which was equivalent to the contractual sum for the remaining period of the 2^nd Agreement, it was clear from the Statement of Claim that the Plaintiff was suing for this sum as damages rather than as a debt.

• The term of the 2^nd Agreement was undisputed. On the evidence, the Defendant had stopped paying the monthly service fee after it terminated the 2^nd Agreement on 15 September 2017.  

• The Defendant had not pleaded any positive case in its Defence and Counterclaim for challenging the amount of damages claimed by the Plaintiff and the particulars of facts relied upon.

The Judge expressed agreement with the proposition in Ryoden Lift Services Limited v The Incorporated Owners of Rialto Mansion (unreported) DCCJ 36/2005 that “the prima facie measure of damages for wrongful termination of a contract for professional service is the contract price.”

The counterclaim

The Judge dismissed the Defendant’s counterclaim, which was premised on the quotation given by Sigma (Quotation) setting out the repair works proposed to be done to remedy the defects.

The Judge said that if the undisputed fact was that the lifts operated without any problem even without any replacement of the alleged defective parts, the Defendant had failed to prove that the Plaintiff had breached the Agreements in failing to replace those parts for the Defendant. This objective fact coincided with the Plaintiff’s expert opinion, which the Judge preferred over the Defendant’s expert opinion.

Defendant’s application to Court of Appeal for leave to appeal

The Defendant’s intended grounds of appeal were:

The Judge erred in:

• not making a determination on whether the Plaintiff was in repudiatory breach of the 2^nd Agreement by reason of the incident when lift no. 1 uncontrollably descended from 27/F to G/F, that being a serious incident based upon which the Judge ought to have concluded that the Plaintiff was in repudiatory breach. Further or alternatively, the Judge should have taken into account nine incidents of uncontrolled ascending and descending during the 1^st Agreement, and held that this together with the other uncontrolled descending incident were sufficiently serious to warrant the termination of the 2^nd Agreement (Ground 1).

• not making a determination on whether the Plaintiff was in breach of the 1^st Agreement, when the determination was relevant to (i) whether the Defendant was entitled to damages on its counterclaim, and (ii) whether the Plaintiff’s breach of the 2^nd Agreement was sufficiently serious to justify the termination of the 2^nd Agreement (Ground 2).

• relying on the proposition that the prima facie measure of damages for wrongful termination of a contract for professional service is the contract sum: Royden Lift Services Limited, supra, which is incorrect as a matter of law; and awarding the balance of the contract sum of the 2^nd Agreement as damages when the Plaintiff had failed to plead and prove any loss of net profits as a result of the Defendant’s termination of the 2^nd Agreement (Ground 3).

Refusal of leave to appeal

The Court of Appealheld that the intended grounds of appeal were not reasonably arguable and the intended appeal had no reasonable prospect of success. Nor was there any matter which, in the interests of justice, required the appeal to be heard. It held as follows:

Ground 1

The Judge had not erred in his dealing with the uncontrolled descending incident and this ground was not reasonably arguable.  

Ground 2   

The Defendant bore the burden of proving that the parts mentioned in the Quotation were defective and that the Plaintiff had failed to replace them pursuant to the Agreements, as a result of which costs were incurred to engage Sigma to carry out remedial works. Given that the Judge had, after considering the Defendant’s complaints and relevant provisions in the Agreements, concluded that the Defendant failed to prove that the Plaintiff was in breach of both Agreements by failing to replace the parts mentioned in the Quotation, this would be the end of the counterclaim. 

The Defendant’s argument in this application that the Judge made the finding without first making a finding on whether the Plaintiff was in breach of the 1^st Agreement was both circular and untenable. In relation to loss other than the Quotation, there was no room for arguing it on appeal, since there was no plea of general damages or other special damages in the Defence and Counterclaim, and the claim of “Further and/or other relief” in the Prayer could not change the position.

Ground 3                           

The Defendant’s primary contention was that the damages should be based on loss of net profits and not loss of gross revenue, and the Judge erred in awarding damages based on the monthly service fee for the remainder of the term of the 2^nd Agreement. It was also argued that the proposition in Ryoden Lift Services that “the prima facie measure of damages for wrongful termination of a contract for professional service is the contract price” was incorrect as a matter of law, and the Judge erred in accepting and relying on it.

As regards the issue of the measure of damages, the Judge had correctly, held that:

• the Plaintiff had pleaded that the unpaid balance of the contract sum was its loss and damage occasioned by the Defendant’s repudiation of the 2^nd Agreement;
• on the undisputed evidence, the Defendant had not paid any monthly service fee to the Plaintiff after the termination of the 2^nd Agreement; and
• the Plaintiff was accordingly deprived of the monthly service fee as a result of the termination of the 2^nd Agreement, which was the loss and damage it has suffered.  

If the Defendant wished to challenge the measure of damages that the Plaintiff could claim or argue that the Plaintiff was only entitled to loss of net profits and the balance of the contract sum was not its loss of net profits, it was obliged to properly raise it in the pleading. Fairness required that the Plaintiff be given due notice of what case it was called upon to meet so that it could prepare its case accordingly. It was thus incumbent upon the Defendant to state the grounds on which it sought to contest the amount of damages claimed by the Plaintiff and to give particulars of all the facts relied upon to support any positive case it sought to advance on the amount of the damages claimed. The Defendant, not having properly pleaded its case on the measure of damages that the Plaintiff was entitled to, could not now seek to raise this ground as a ground of appeal. 

As to the proposition in the Ryoden Lift Services Limited case, both in Ryoden Lift Services Limited and the present case, the contract involved was not an employment contract, but a contract for service. The following passage on the measure of damages for breach of contracts for professional and other services by the party engaging the services  (in McGregor on Damages (21^st edition) at §34-002)  represents the law to be applied in a case like the present, namely where a contract for service is repudiated by the party engaging the service:

 “A person whose services have been improperly dispensed with has a number of alternative remedies open to them, similar to those whose available to the employee and also to the agent acting on behalf of a principal. They may sue on the contract for such remuneration of fees as have been agreed and, if suit on the contract is not available, they may sue on a quantum meruit for the value of the services already rendered. With these actions at their command, an action for damages may not prove necessary. When it is brought into play, the measure of damages is likely to be the amount that they would have earned from the services had they not been prevented from continuing to act; consequential losses are somewhat difficult to envisage. As with the employee, they will be required to mitigate their damage by seeking alternative remunerative occupation. However, since they have a freer hand in performing the services and may not have to devote their time exclusively to the contract, other services upon which they embark will not be truly alternative if they could have performed both concurrently, and will therefore not go in mitigation of damage.”

In the present case, the monthly service fees for the remaining contractual period of the 2^nd Agreement were what the Plaintiff would have earned had it not been prevented from continuing with the 2^nd Agreement by the Defendant’s wrongful termination. The Defendant had not raised the issue of mitigation of loss in its pleading. Nor was it shown at trial that the Plaintiff could have mitigated its loss through alternative engagement. In the circumstances, the award of the service fees for the remainder of the term of the 2^nd Agreement as the measure of damages for the Defendant’s wrongful repudiation could not be faulted. 

Accordingly, while the reference to the proposition in Ryoden Lift Services Limited was not entirely apposite, the Judge had not erred in his award of damages on the Plaintiff’s claim. 

Comments

Ground 3 of the appeal might seem to be attractive at first glance. The measure of Damages for wrongful repudiation of a contract for building works is usually loss of net profit since the cost of earning the profit is saved after the repudiation of contract. The Court of Appeal in this case makes it clear that the approach in employment contracts and contracts solely for services is different. Proof of loss of net profit may not be necessary, as explained in McGregor on Damages (21^st edition) at §34-002.

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Joseph Chung

Partner | Litigation and Dispute Resolution

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