#6721 - Philips Hong Kong V. Ag Of Hong Kong - Commercial Remedies BCL

Philips Hong Kong v. AG of Hong Kong

Facts

The decision was given in proceedings commenced by Philips Hong Kong Limited (“Philips”) by originating summons. The purpose was to obtain a ruling of the Hong Kong High Court upon the provisions contained in a contract which Philips had entered into with the Government of Hong Kong in connection with the construction of a highway project known as “Route 5” between Tsuen Wan and Sha Tin. The contract contained an arbitration clause and the present proceedings were initiated by Philips to obtain the ruling of the court on preliminary issues prior to arbitration.

Instead of adopting the more usual course of employing a main contractor with overall responsibility for constructing the Shing Mun Section and allowing the main contractor to sub-contract portions of the contract, the Government entered directly into a total of seven separate contracts, the designated contracts, including the Philips contract.

The flow charts identified as Key Dates interfaces with other contracts. Key Dates were dates which a contractor was under an obligation to meet so as to enable other contractors to continue with their work unimpeded. If those dates were not met by a contractor, then the contract specified a liability to pay liquidated damages to the Government at a daily rate. In addition the whole of the contract work was required to be completed within a specified time and, if this was not met, the contract provided that the contractor was required to pay additional liquidated damages also at a daily rate.

In the case of the Philips contract, the works were to commence on the date to be notified by week 36 by the engineer and had to be completed by week 195 (a period of 160 weeks). The amount of liquidated damages which was payable for not completing the whole of the works within the specified time was $74,104 per day, a figure set out in the Appendix to the Form of Tender. That Appendix also specified the amount of the liquidated damages for delay in meeting Key Dates. The amount stated varied according to the section of the works to which they related, the sum increasing according to the number of other contractors who could be affected by the delay.

Holding

Defendant’s argument

At this stage Mr. Nicholas Dennys Q.C. does not suggest on behalf of Philips that the sum claimed by the Government by way of liquidated damages is in fact exorbitant in view of the very substantial delay which in fact occurred in the execution of this contract by Philips. Instead he bases his argument on what could have happened in a number of different hypothetical situations. He suggests that if one or more of those situations had happened, the sum which would then be payable by way of liquidated damages would be wholly out of proportion to any loss which the Government was likely to suffer in that situation and that this is sufficient to establish that the provisions are penal in effect.

Hypothetical cases argument – Rejected

If Philips' approach is correct this would be unsatisfactory. It would mean that it would be extremely difficult to devise any provision for the payment of liquidated damages in the case of a contract of this sort which would not be open to attack as being penal. As is the case with most commercial contracts, there is always going to be a variety of different situations in which damage can occur and even though long and detailed provisions are contained in a contract it will often be virtually impossible to anticipate accurately and provide for all the possible scenarios. Whatever the degree of care exercised by the draftsman it will still be almost inevitable that an ingenious argument can be developed for saying that in a particular hypothetical situation a substantially higher sum will be recovered than would be recoverable if the plaintiff was required to prove his actual loss in that situation.

Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. Even in such situations so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision. The use in argument of unlikely illustrations should therefore not assist a party to defeat a provision as to liquidated damages.

A difficulty can arise where the range of possible loss is broad. Where it should be obvious that, in relation to part of the range, the liquidated damages are totally out of proportion to certain of the losses which may be incurred, the failure to make special provision for those losses may result in the “liquidated damages” not being recoverable. (See the decision of the Court of Appeal on very special facts in Ariston SRL v. Charly Records Ltd. (1990) The Independent 13th April 1990). However the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts.

To conclude otherwise involves making the error of assuming that, because in some hypothetical situation the loss suffered will be less than the sum quantified in accordance with...