Caution when suspending contract works and seeking to reduce the scope and price of works

In Ipson Revovation Ltd v The Incorporated Owners of Connie Towers [2016] HKEC 2719, a decision of the Hon. Mimmie Chan J on 16th December 2016, the High Court considered a claim for repudiatory breach arising out of an instruction to suspend works and an employers efforts to reduce the scope of the works and the contract sum.

Background

By a contract dated 26 April 2013 the Incorporated Owners engaged the Contractor to carry out repair and maintenance works at Connie Towers for a contract price of HK$37,074,090.  The scope of works was set out in a “List of Works”, payment was on a lump sum basis, and the works were to be completed within 150 days from the date of commencement.

Pursuant to the Contract, the Contractor commenced the works on 22 May 2013.  However, between 23 May 2013 and 30 May 2013, the Contractor was prevented from accessing the building by some dissident owners, who were dissatisfied with the Contract and with the management of the Incorporated Owners.  Various attempts were made by the Contractor to deliver materials and tools to the building for the commencement of the scaffolding work, but to no avail.

On 24 May 2013, the property manager of the building instructed the Contractor to suspend work at the Towers until 9 June 2013, and informed the Contractor that it would be notified when future arrangements were made for the works to be carried out.  On 16 June 2013, at a general meeting of the owners, a new chairman and new members were elected to the Committee, and it was further resolved that 6 categories of works were to be deleted under the Contract.  On 28 June 2013, a formal written notice of suspension was issued, instructing the Contractor to suspend all works under the Project without further notice for an indefinite period without mention as to cost implication of the suspension.

Negotiations took place between the Contractor and the management committee but no agreement could be reached on the items of works to be deleted.  On 19 July 2013, the Contractor issued a letter to the Incorporated Owners accepting the Incorporated Owners’ repudiation of the Contract, demanding damages in the sum of HK$16,147,122.87.

Further negotiations took place between July 2013 and September 2013.  While the Contractors initially agreed to delete certain items from the scope of works with a reduction to the Contract sum of HK$3,693,000, no final agreement was reached as the Incorporated Owners wished to retain the entire scope of works and to reduce the Contract sum to $32 million.

The Contractor issued a notice of arbitration, which was served on the Incorporated Owners. An arbitrator was appointed but the arbitration did not proceed.  Subsequently, in January 2014, a new consultant appointed by the Incorporated Owners issued instructions to the Contractor to commence works within 7 days on the basis of a reduced list of works and contract sum.  The Contractor did not reply.

The Claim

The Contractor claimed that the Incorporated Owners were in repudiatory breach of the Contract by preventing the Contractor from entering the site to commence the Works on 23 May 2013, by instructing the Contractor to suspend the works, and by seeking to reduce the scope of the Works and the Contract Sum.

Denial of Access

The Contractor alleged that the Incorporated Owners were in breach of Contract by preventing the Contractor and/ or its workers from entering the buildings to commence the scaffolding works.  The claim was rejected by the Court because there was no evidence that the Incorporated Owners had authorised the disgruntled owners from preventing the Contractor from entering the building work and, further, by reason that the Incorporated Owners were not liable for the individual acts of the owners in the building.

Suspension of the Works

The issue here was whether the Incorporated Owners were empowered under the Contract to suspend the commencement of Works.  The Incorporated Owners relied on a clause which provided for the authority of the Consultant to issue instructions, and the corresponding duty of the Contractor to abide by and carry out such instructions.  As a matter of construction, the Court held that the duty of the Contractor to follow the Consultant’s instructions to suspend works was dependent on the Consultant actually having power under the Contract to issue instructions to suspend works.

The Incorporated Owners replied that, first, time is generally not of the essence in a construction/ building contract, and second, as stated in the relevant specification, if exceptional circumstances arise, the approved work progress could be revised.

The Court accepted the general non-essentiality of time in a construction/ building contract. Nonetheless, as a matter of construction, the specification only provided for the revision of the progress plan where there was a variation in the scope of works.  As such, the specification did not apply in circumstances where it was accepted in evidence that the suspension notice was issued not only for the purposes of facilitating negotiations with the Contractor for the reduction of the scope of works, but also for a reduction in the Contract price.

Accordingly, the Incorporated Owners were in breach by instructing the Consultant to suspend all of the works for an indefinite period without any indication to the Contractor that it was entitled to an extension of time or to claim for direct costs or loss as a result of such suspension.

Variation to the scope of works

The Incorporated Owners claimed that they were entitled to exclude items of the works from the scope of the contract and to reduce the Contract sum.  In support of its argument the Incorporated Owners relied on a clause providing the Consultant with a power to issue an instruction for the variation of the project according to the actual project implementation, and that “variation” for the purposes of the relevant clause was expressly stated as including the “addition, omission or alteration of work items required to complete the Project”.

The Court rejected this argument for a number of reasons:

• Reading the Contract as a whole, the Contract was one for the execution and completion of work in return for the Contract sum. The Contract was a lump sum contract, the Contract price was expressed as being inclusive of the costs of the completion of the works and all works incidentally necessary, and that the quantities specified were only for reference.
• A contract for the execution of work confers on the Contractor not only the duty but also the corresponding right to complete the work contracted to be done. To take away or to vary the work is an intrusion into and an infringement of that right and is a breach of contract.
• Accordingly, provisions purporting to allow the Incorporated Owners to vary the scope of the works have to be strictly and carefully construed, having regard to the purpose of the contract as well as the intention of the parties as to the scope and meaning of the relevant clauses, at the time when the contract was made (citing’s Abbey Developments Ltd v PP Brickwork Ltd [2003] EWHC 1987 (Technology) [45]-[54] (Humphrey Lloyd QC) and Hudson on Building and Engineering Contracts (13th ed), [3.151]).
• Variations sought by the Incorporated Owners in the course of the negotiations and during the suspension of works were not in order to complete the project, but to deviate from the needs and stated aims of the project, and from the purpose of the Contract.
• Even if there was any power under the Contract to omit the scope of the works as claimed by the Incorporated Owners, it could not have been within the reasonable contemplation of the parties, at the time when the Contract was made, that the Incorporated Owners (or the Contractor) would have been able to alter the Contract sum under any of the provisions relied upon by the Incorporated Owners, simply because the Incorporated Owners thought that the Contract sum under the concluded Contract was too high, or that it was a bad commercial bargain.

For the reasons above, the Court held that the Incorporated Owners were in breach of Contract by demanding material items of the works and the Contract sum to be omitted.

Acceptance of repudiation

The Court considered that the actions of the Incorporated Owners evinced a clear refusal to perform the Contract in essential respects.  The fact that the parties had been in continued negotiations, or that a new committee had been elected, was irrelevant to the finding that the Incorporated Owners had repudiated the Contract since the Incorporated Owners had consistently made clear in the negotiations that they refused to pay compensation to the Contractor in respect of the reduction of the scope of work.

More importantly, the unambiguous wording used in the Contractor’s letter demanding damages was sufficient acceptance of the Incorporated Owners repudiation such that it was unreasonable and highly improbable for the Incorporated Owners to have believed that the letter did not serve any real purpose or was not intended by the Contractor to have any effect.

Furthermore, as the Court found, the Contractor was only willing to participate in the negotiations because it had been held to ransom by the Incorporated Owners indefinite suspension of the Project before the works could even commence.  As the Court noted, “whatever may have been the subjective intentions of the members of the Committee in continuing negotiations with the Contractor, the Contractor reasonably understood from the conduct demonstrated by the Committee and the Consultant that the Incorporated Owners did not intend to and would not abide by the terms of the Contract, or would only abide by the terms of the Contract subject to the condition that the Contractor would accept a reduced Contract Sum”.

In any event, the issue of the Notice of Arbitration identifying the nature of the claim and referring to the “termination” of the Contract would have dispelled any reasonable doubt in the mind of any of the owners that the Contractor was relying upon its termination of the Contract.

Accordingly, the Incorporated Owners had repudiated the contract and the Contractor had accepted that repudiation.