The Hong Kong Institute of Surveyors Construction Law Update

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The Hong Kong Institute of SurveyorsConstruction
Law Update

• Damon So and Timothy Hill
• Projects (Engineering and Construction) Group
• 28 August 2007

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Breach without loss?Closing the legal black
hole

• Damon So, Senior Associate
• Projects (Engineering and Construction) Group

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The Legal Black Hole
property
Employer
Subsequent Owner
privity of contract
Loss suffered as a result of breaches by
consultants
Consultants/ Contractors
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The Tortious Claim
Employer
Subsequent Owner
tort
Consultants/ Contractors
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The Tortious Claim (Contd)

• Problems
• Pure economic loss
• - recoverable if personal injury or other
  property damage involved
• loss incurred to prevent personal injury or
  property damage
• cost of repair and damage to property concerned
• special relationship/assumption of duty

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The Contractual Claim
assignment of cause of action
Subsequent Owner
Employer
incurred loss
contractual cause of action
Consultants/ Contractors
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The Contractual Claim (Contd)

• Problems
• Assignment of cause of action
• assignee cannot recover more than assignor
• Employer only suffered nominal damages
• no cause of action for substantial loss
• assign no more than it is entitled to
• assignee only entitled to recover nominal
  damages

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The Legal Black Hole
Linden Gardens Trust v Lenesta Sludge Disposal HL
1993 3 All ER 417
If this is right, in the words of Lord Keith of
Kinkel in GUS Property Management Ltd v
Littlewoods Mail Order Stores Ltd 1982 SC (HL)
157 at 177, the claim to damages would disappear
into some legal black hole, so that the
wrongdoer escaped scot-free.
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The Courts intervention

• In the Linden Gardens case

Assignment invalid
Subsequent Owner
Original Owner
Substantial damages for subsequent owner
Contractors

• General rule
• a plaintiff can only recover substantial damages
  for its own loss
• a plaintiff who had parted with ownership of
  property at the date of the breach was not
  entitled to damages or was entitled to nominal
  damages at most.

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The Courts intervention (Contd)
Exception to the general rule Original owner can
recover substantial damages for the subsequent
owner if

• contract entered into on the footing that the
  original owner would be entitled to enforce
  contractual rights for the benefit of those who
  suffered from defective performance, but
• the third party could not acquire any right to
  hold the defendant liable for breach

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Legislative intervention in the UK

• Contract (Rights of Third Parties) Act 1999
• reforms privity of contract rule
• third party may in his own right enforce a term
  of the contract if
• (i) the contract expressly provides that he
  may or
• (ii) the term purports to confer a benefit on
  him.
• third party must be expressly identified in the
  contract
• subject to the terms of the contract

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Rights of assignee

• What if the Act does not apply, as in HK?
• What if there is a valid assignment?
• unnecessary for HL to consider the assignees
  remedies in the Linden Gardens case
• CA considered the question which HL did not apply
• Technotrade v Larkstore, CA 2006 BLR at 345

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The Facts

• November 1998 - Starglade retained Technotrade to
  prepare a site investigation report in relation
  to a sloping site (the Site)
• December 1998 - Technotrade produced their Site
  Investigation Report (the Report)
• June 1999 - Starglade sold the Site to Larkstore
• March 2001 - Larkstore had used the Report for
  design and construction and for obtaining
  planning permission

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The Facts (Contd)

• October 2001 - landslip occurred causing damage
  to properties uphill from the Site and
  necessitating stabilisation works to the Site
• February 2004 - Starglade assigned rights under
  the Report to Larkstore
• October 2004 - Larkstore commenced proceedings
  against Technotrade based upon the assignment

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Three relevant points of time

• Time of breach
• - Site Investigation Report
• - Starglade was owner
• - only nominal damages
• Time of the landslip
• - Larkstore was owner
• - substantial damage suffered
• - no contractual right

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Three relevant points of time (Contd)

• - Starglade had chose in action, but not entitled
  to substantial damages not being the owner
• 3. Time of the assignment
• - Starglade could not assign more than it had
• - no claim for substantial damages could be
  assigned

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Timing of relevant events
(ii) sold property
Starglade
Larkstore

• assignment of rights after landslip

• Site
• Investigation
• Report

• Loss suffered due to landslip stabilisation work
  required

Technotrade
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What was assigned?

• Cause of action
• complete at time of breach
• nominal damages?
• Staughton LJ in Linden Gardens
• the assignee can recover no more damages than
  the assignor could have recovered if there had
  been no assignment, and if the building had not
  been transferred to the assignee.

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What was assigned? (Contd)

• - remedy in damages not limited to the loss that
  could have been proved at the time of breach
• includes loss which occurs after the cause of
  action has accrued
• - assignment of cause of action remedies, not
  a loss

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The Principle

• the assignee cannot recover more than the
  assignor
• at the date of assignment, assignor only entitled
  to claim nominal damages
• purpose of the principle protect
  contract-breaker from paying more damages to
  assignee than to assignor had the assignment
  never taken place
• not intended to enable contract-breaker to escape
  all legal liability creating the legal black
  hole

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No legal black hole

• parties did not contemplate anyone other than
  Starglade would suffer loss
• Technotrades retainer based on Starglade
  carrying out the development
• Larkstore did not seek any warranty from
  Technotrade
• Larkstore did not engage its own geotechnical
  advisers and relied on Technotrades report
  without consent for a purpose not intended

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The Court

• an ingenious attempt to deny what has been
  correctly conceded
• the Report and causes of action were assignable
• no prohibition against assignment
• arguments rejected

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Position in Hong Kong

• Linfield v Taoho and Ors, 3 September 2004
• - arrived at the same results through different
  routes

property
Sing Kee
Linfield
assignment
GWA
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The Tort route

• Linfield is a wholly owned subsidiary of Sing Kee
• GWA treated them interchangeably, e.g. payments,
  correspondence
• assumption of special relationship
• Hedley Byrne principles apply
• pure economic loss recoverable

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The Contract route

• Panatown v Alfred McAlpine Construction 2000 4
  All ER 97
• right to performance interest, being the cost
  to Sing Kee of providing the agreed services to
  Linfield, the broader ground
• could have applied the exception in the Linden
  Gardens case, the narrower ground
• this right could be assigned

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Expert Determination

• Timothy Hill, Managing Partner
• Projects (Engineering and Construction) Group

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Specimen Clause General

• Expert shall act as experts and not as
  arbitrators and their or his determination shall
  be conclusive and final and binding for all
  purposes.

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Specimen Clause Share Valuation

• The expression Fair Price means the price
  which the auditors of the Company state in
  writing to be in their opinion the fair value of
  the shares on a sale between a willing seller and
  a willing purchaser and, if the Company is then
  carrying on business as a going concern, on the
  assumption that it will continue to do so. The
  Fair Price shall be assessed at the date of
  service of the Transfer Notice and by reference
  to the information available to the company at
  that date.
• In stating the Fair Price the auditors shall be
  considered to be acting as experts and not as
  arbitrators and their decision shall be final and
  binding on the parties.

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Expert or Arbitrator?
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The Process

• Agreement
• Submissions
• Reference to others
• Investigation
• Co-operation
• Third Parties

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The Decision

• We determine the sales amount to 2,527,135
• Jones v Sherwood Computer Services plc

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Halifax Life Ltd v Equitable Life
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Challenge to Decision

• No right to challenge
• Exceptions
• Does not comply with mandatory requirement
• Answers wrong question
• Fraud or collusion

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Enforcement

• No streamline procedure
• - New York Convention
• Enforce as a breach of the underlying contract
• - Nature of decision
• - Strict compliance required
• - Limitation period

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Court Proceedings

• Stay of proceedings
• Contracts void ab initio
• Where mechanism breaks down

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Position of Experts

• No immunity from suit
• Contractual agreement to appoint
• Liability for negligence

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Advantages of Expert Determination

• Quick
• Informal procedure
• Absence of formal presentations
• Cheap
• Knowledge base
• Private

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Disadvantages of Expert Determination

• No right to interest
• No right to costs
• No provision to compel
• - Disclosure of documents/information
• - Co-operation of witnesses
• No right of appeal
• Enforcement

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Questions?
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Expert Determination

• Timothy Hill, Managing Partner
• Projects (Engineering and Construction) Group

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The Hong Kong Institute of SurveyorsConstruction
Law Update

• Damon So and Timothy Hill
• Projects (Engineering and Construction) Group
• 28 August 2007