It is not uncommon that renovation contractors abandon the works contracted for, despite having received partial payments and the employer needs to engage a replacement contractor to finish the outstanding works. The usual question is not whether the original contractor is liable, but how the quantum of damages ought to be assessed.
In New Era Group (China) Limited v Studio M Interiors HK Limited [2021] HKCFI 3711, the Court of First Instance considered how damages should be assessed when a fitting out contractor abandoned the works and the owner engaged a new contractor to complete only some of the outstanding works and to carry out some additional works originally not required. Whilst the Court was of the view that the normal measure of damages for breach of contract is the cost to the owner of completing the original contract in a reasonable manner less the original contract sum, the Court found it inappropriate to assess damages based on the cost of completing the works under the original contract because completion of the works under the original contract was no longer meant to be achieved due to the owner’s substantial change in the scope of works. Eventually, the Court assessed damages based on expert evidence produced by the owner on (i) the difference between the partial payments made to the original contractor and the value of the works carried out by the original contractor and (ii) the market rent of the property for a reasonable period of the owner’s loss of use and enjoyment of the property.
In rejecting the period claimed by the owner and assessing the “reasonable period”, the Court held that the owner failed to provide a reasonable explanation as to why it took the owner over 3 months to engage the new contractor after accepting the original contractor’s repudiation and that a reasonable time for the owner to engage a new contractor was 1 month and, having taken into account the proportion of additional works to the new contract, made an assessment of the time reasonably required for the new contractor to complete the outstanding works under the original contract (i.e. exclusive of the time impact of the additional works, which was not caused by the original contractor).
Takeaway
If the scope of works under the new contract only covers the outstanding works under the original contract, the Court can put the innocent party back into the position it would have been in by comparing (a) the value of the outstanding works that should have been done under the original contract and (b) the costs incurred under the new contract to complete such outstanding works, and taking into account loss and damage that arose from the delay in completing the works.
However, when the scope of works under the new contract has substantially changed and the impact of the changes on time and costs are not readily distinguishable, this approach may no longer be appropriate. In this situation, the Court can only do its best on the available evidence to assess the loss and damage arising from the breach and isolate the impact on time and costs not arising from the breach.
For further information, please contact:
Joseph Chung, Partner, Deacons
joseph.chung@deacons.com.hk
