Tozaka v Hata Enterprises Ltd [1999] SBHC 123; HC-CC 198 of 1996 (26 April 1999)

HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 198 of 1996

JANE TOZAKA
V
HATA ENTERPRISES LIMITED

High Court of Solomon Islands
Before: Muria, CJ.
Civil Case No. 198 of 1996

Hearing: 5 February 1999
Judgment: 26 April 1999

A. Radclyffe for Plaintiff
A. Nori for Defendant

MURIA CJ: This is a claim by the plaintiff upon alleged breaches of contract. She claims firstly the sum of $26,154,12 spent on materials and secondly damages by way of penalty, at the rate of $25.00 per day pursuant to clause 21 of the contract (Exhibit 1). In its defence the defendant denies these claims.

Facts not disputed.

The following facts are undisputed between the parties in this case.

1. The plaintiff and the defendant entered into a written building contract on 23rd May 1995 under which the defendant was required to build the plaintiff's residential house at Mbua Valley at the cost of $78,000.00.

2. Under the contract the defendant was responsible for ordering and delivery of building materials to the site.

3. The completion date was 29 September 1995.

4. The plan for the building was approved by the Honiara Town and Country Planning Board and it was for a residential high frame three bedroom house.

5. By the completion date the house was not yet completed.

6. Despite the non-completion within the prescribed time, the plaintiff did not enforce the termination clause of the contract.

7. In or about August 1995, the plaintiff informed the defendant that she required additional work to be done on the bottom floor of the house. This was a separate verbal contract for the prize of over and above the $78,000 original contract prize. The defendant started work on the bottom floor in or about October 1995.

8. By February 1996 the work still had not been finished and as a result of the plaintiffs complaint, there were meetings with the National Provident Fund and the defendant. It was agreed that the AF Construction would be sub-contracted to complete the work. It was a condition under this subcontract that the defendant supply the building materials.

9. The defendant failed to supply materials and as a result the plaintiff had to buy materials costing $26,154.12. This was an additional cost to the plaintiff as the defendant had already completed and been paid up to stage six by 29 September 1995 by NPF.

10. The defendant's contract was terminated on the 25^th March 1996.

Thus the background to this case can be sufficiently made out from those undisputed facts. This is one of the usual types of dispute that normally arises in building construction cases.

The issues

From the facts as revealed in this case, it would appear that the issues arising for the court's determination are as follows,

1. Whether a breach of contract occurred in this case by the defendant, and if there was then whether the plaintiff is entitled to claim for damages for such a breach.

2. Whether the plaintiff is entitled to claim, $26,154.12 in respect of materials said to be purchased in order to have the house completed.

There can be no doubt in this case that the work on the house by the defendant was not completed by the 29th September 1995 which pursuant to the contract is the date for practical completion of the work. That was a breach of the contract says the plaintiff and that she was entitled to claim damages against the defendant pursuant to clause 21 of the contract which provides as follows;

"21. LIQUIDATED DAMAGES FOR DELAYED COMPLETION.

(1) If the contractor fails to complete the works by the date for practical completion or within any period of time extended under clause 23, and the employer's architect or other person qualified to do so certifies in writing that in his opinion the works ought reasonably so to have been completed, the Contractor shall pay to the Employer a sum calculated at the rate of $25.00 per day for every day that the works remain after the date for practical completion or after the period of time 23, as the case may be.

(2) Any sum payable as liquidated damages under subclause (1) may be by or on of the Employer from monies due or to the under this Contract.

By virtue of that clause the plaintiff is entitled to claim damages at a sum calculated at a rate of $25.00 per day for everyday that the work remains Incomplete after the date for practical completion or after the period of time extended, if the contractor fails to complete the works by the date for practical completion or within that period extended. This is what is normally called a claim in liquidated damages particularly where provisions for it is made in the contract.

Against this claim the defendant says that the work on the main contract could not be performed to completion because of the added work given to it on the bottom floor of the house. In particular the defendant says that plumbing could not have been completed on the top house unless the bottom floor was completed. Apart from this, the defendant said that all other work required at the top floor were completed except for the staircase and power and plumbing connections.

According to the defendant he says that the work on the bottom floor was nearly completed by the time the subcontract was entered into with A F Construction. On this, the defendant says that the plaintiff's witness confirmed that. In any case, says the defendant, the plaintiff knowing of the breach by the defendant allowed the contract performance to continue despite the lapsed of time. By not enforcing her right to give notice under clause 24(b) of the contract the defendant said that she waived her rights. Again it is part of the defendant's case that by entering into the two subcontracts dated 7 February 1996 and 7^th March 1996 respectively, the plaintiff was varying the periods in which the contract or the work on the house was to be concluded and therefore she was uncertain as to the actual date of completion under the new arrangement. This, says the defendant, was an act of novation which basically amounted to a rescission of the original contract and therefore the plaintiff cannot claim damages or breach of the original contract as that had now been substituted for a new contract to be performed by A.F. Construction.

The general law of contract treat certain kinds of breach as giving rise to a right in the innocent party to treat the breach as a repudiation of the contract and relieve itself of further obligation and sue for damages: Tramsway Advertising Pty Ltd -v- Luna Park (NSW) Ltd (1936) 38 S.R.(NSW) 632. This is of practical usefulness in many contracts although in building contracts this position may not be necessarily so, although commercially It may be desirable. It is therefore necessary to find out whether the delay in the completion of the construction constitutes a basis for determining the contractual obligation of the parties because of a fundamental breach.

Is time of the essence in this case?

Now whether an obligation as to time for completion is fundamental will, of course, depend on the provisions of the contract and the nature of the obligation. At the common law, time is essential unless otherwise stated and performance must be done at the date or time specified in the contract. Failure to do so entitles an action for breach of contract: Canning -v- Temby [1905] HCA 45; (1905) 3 CLR 419. But in building contracts the general principle is that unless it is specifically provided for as such, time is not of the essence. In the absence of an expressed term there is an implied obligation to complete the works within a reasonable time. However if time is specifically to be of the essence of the contract then this particular obligation will be fundamental to the contract obligations and a breach of it will give rise to a right in the innocent party to rescind. The bottom line, however in all these, is the apparent intention of the parties as disclosed in the contract. Reuter -v- Sala [1879] UKLawRpCP 23; 4 CPD 239, also Mitsui Construction Co. Ltd -v- Attorney General of Hong Kong [1986] LRC (Coram.) 245.

In the present case the date for practical completion is 29 September 1995 and if the contractor fails to complete the works by that date or within any period of time extended, then the plaintiff is entitled to a sum calculated at $25.00 per day as damages for everyday that the works remain incomplete. In my judgement in the light of the provisions of the contract and the nature of the obligations to be undertaken by the defendant in this case, time is not of the essence, although the obligation to complete the work within time specified is important since the plaintiff is entitled, as a result of such a breach of obligation, to sue for damages for the delay. It does not, ipso facto, entitle the plaintiff to terminate the contract. The mere fact that a date for completion is stated in the contract does not make time of the essence. This was pointed out in the American case of De Sombre -v- Bickel, 118 Wis. 2d 390, 118 NW 2d 868 where the contract provided that the construction work should be substantially completed by October 1 and "the first floor to be finished first and must be fully ready for occupancy by October 1, 1959." The court field that this provision did not make time of the essence of the contract. Thus time in the present case is not of the essence, in the sense that failure to complete within the time fixed does not terminate the contract.

Waiver

The defendant in this case strongly urges that the plaintiff, knowing that the time obligation is fundamental in this contract, elected to waive her right by entering into new contracts with the defendant and thereafter with the subcontractor and thus, not entitling her to claim under the breach now complained of. In support of this contention, Counsel for the defendant referred to a statement from Chitty on Contracts, 23^rd Ed. para. 11241, page 581 where it is stated:

"When one party voluntarily accedes a request by the other that he should not insist on the precise mode of performance fixed by the contract, the court will hold that he has waived his right to insist that the contract be performed in this respect according to its original tenor"

There was, however, no such request made in this case. In any case the plaintiff was clearly in no mood to relax her insistence that her house must be completed within the time agreed to in the contract.

While time obligation is provided for here and the right to rescind for non performance is also stipulated under the contract in this case, the plaintiff had decided that she could only rescind after she had given notice requiring performance within a further specified reasonable time and after non compliance with that further time. 1 do not see the course of action taken by the plaintiff in giving the defendant extension of time to complete the work as being inconsistent with her right to terminate the contract for non-compliance. The plaintiff's right to terminate the contract had not necessarily been lost just because she allowed the defendant further time to complete the work. In fact the plaintiff's action was consistent with her reserving her right to terminate the defendant's contract at the end of the extension of time. That was what she did. Thus I do not think that the plaintiff can be said to have waived her rights to rescind the contract simply because the contract performance was allowed to continue despite the lapse of time. See (No. 45) Pty Ltd -v- The Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1992-1993) 182 CLR 26, Carr -v- JA Berriman Pty Limited [1953] HCA 31; (1953) 89 CLR 327. See also Tropical Traders Ltd -v- Goonan [1964] HCA 20; (1964) 111 CLR 41.

Variation

Next, the argument by the defendant is that there was a variation in the terms of the original contract by including the work at the bottom floor of the house together with the entering into two new contracts with AF Construction. By doing so, says the defendant, the plaintiff was actually interfering with the original contract thereby resulting in the delays of the work to be done by the defendant. Such interference, says the defendant, by the plaintiff in the performance of the original contract, amounts to interference of the original contract. Thus, it is argued by the defendant, the Plaintiff cannot insist on strict performance by the defendant of the contract within the time agreed.

It must be noted that it is a basic principle of contract law that one party cannot insist on timely performance by the other if he wholly or partly prevents or interfere with the other party's performance. This is particularly so in the area of building construction where a party to a contract delays in the performance of the contract but such a delay is attributable to the act of the principal or his agents. See Perini Pacific -v- Greater Vancouver Sewerage and Drainage District (1966) 57 D.L.R. 2d 307.

Against the defendant's contention that the parties had agreed to vary the original contract, there is the clear evidence in this case that the original contract was for the main house only, funded by the NPF and that work on that house had to be completed by 29 September 1995. In August 1995, that is a month or two prior to the date fixed for completion of the work on the main house and at the end of Stage 5 of that work, the plaintiff requested and the defendant agreed ("the August Agreement") to take on the extra work on the bottom floor of the house and which was to be funded by the ANZ Bank. It was acknowledged by both the plaintiff and defendant that the August Agreement was separate from that which they- entered into on 23 May 1995. What is the effect of the August Agreement? As clearly acknowledged by both parties, that Agreement was separate from the one they entered into on 23 May, 1995 which must be regarded as standing on its own and could not be varied by the subsequent August Agreement. It could only do so if it expressed to be an extension of or subsidiary to the main purpose of the original contract of 23 May, 1995. That is not the case here. See Tallerman and Co. Pty Ltd -v- Nathan's Merchandise (Victoria) Pty. Ltd. [1957] HCA 10; (1957) 98 CLR 93. British and Beningtons Ltd -v- North Western Cachar Tea Co. Ltd [1923] KC 48, Royal Exchange Assurance -v- Hope [1928] 1 Ch. 179, Fenner v. Blake [1900] UKLawRpKQB 9; [1900] 1 Q.B. 426.

As to the suggestion that the delay was contributed to by the plaintiff's interference with the original contract, there is clear evidence in this case, as had already been found, that the defendant had entered into two separate contracts. In the main contract, he agreed to complete the work by 29 September, 1995 and in the August Agreement to take on the extra work on the downstair unit agreeing to complete that within two months. This in effect meant that he agreed to complete the downstairs unit at the same time as that of the main house. He failed to complete the main house by 29 September. As agreed, he was given further 4 weeks to complete the work on the downstair unit. This is confirmed by Exhibit 2 which was a letter in support for a requested for additional fund from the ANZ Bank which funded the August Agreement. That work had not been completed within the time agreed and consequently a further agreement was entered Into (Exhibit 8) whereby the defendant subcontracted the work on the bottom floor to A F Construction. Under that subcontract the defendant was to supply all materials on site. The defendant failed to supply the materials. Not only that the defendant had to sub-construct the work on the bottom floor of the house, but the work on the main house (top floor) had also to be subcontracted as it had not been able to complete the work within the time allowed. The defendant agreed that it was well behind by six months in completing the work and that it had no choice but to subcontract the work. (see Exhibit 9). It had been paid up to Stage 6 of the construction work on the main house. The defendant subcontracted the work to A F Construction and that the defendant would supply materials on site. See Exhibits 7 and 11. The defendant failed to do so. Both jobs had not been done within the agreed time. Subcontracts had been entered into with a view to completing the works within the extended times. The defendant failed to comply with the terms of those subcontracts also.

When one looks at the whole of the evidence, it is plain that by the 25 March 1996, the plaintiff saw no need for any more extension of time but to exercise her right to terminate the contract and she did so. The evidence does not support the contention that the delay in the performance of either of the contracts by the defendant was attributable to the act of the plaintiff.

The evidence, in my judgement, clearly demonstrates a breach of contract in this case by the defendant for which the plaintiff is entitled to be compensated by way of damages. It is the measure of that damages that I will now turn to.

There is no dispute that the plaintiff is entitled to claim $25.00 per day for every day that the works remain incomplete after the date for practical completion or after the period of time extended. The question is whether the plaintiff should recover the $25.00 per day as liquidated damages. The answer to that question, as Lord Esher M.R. puts it in Dodd -v- Churton [1897] UKLawRpKQB 53; [1897] 1 Q.B. 562, depends on whether the building owner has or has not disentitled himself to claim the penalties mentioned in the contract by reason of his having given extra work to be undertaken by the defendant beyond the original contract work.

In Dodd -v- Churton the plaintiff was a builder who sued for the balance due to him upon a building contract. The plaintiff entered into to a contract with the defendant whereby the plaintiff was to construct the defendant's building at the cost of 664l. to be paid by the defendant to the plaintiff. The building was to be ready for the roof-timbers by May 1, 1892 and the whole of the works to be completed by June 1, 1892, under a penalty of 2l. per week for every week that any part of the works remained unfinished after that date as liquidated damages. Additional works to the amount of 22l. 8s. 8d. were ordered by the defendant to be done which necessarily involved a delay in the completion of the works until after the specified completion date. The works were not completed until December 5, 1892, a delay of 25 weeks for which the defendant claimed liquidated damages. It was held that by giving extra works which made it impossible to complete the work by the specific date he had waved his entitlement to the penalties in respect of the non compliance. That case followed Westthood -v- Secretary of State for lndia (1863) 11 W.R. 261; 7 L.T. 736 which held that although the building owner was entitled to give orders for extra work, if, by doing so, he has rendered it impossible to complete the work by the specified date, he has deprived himself of the right to claim the liquidated damages mentioned in the contract.

The present case, however, is distinguishable from the cases of Dodd -v- Churton and Westwood -v- Secretary of State for India in that in the present case, although the plaintiff can instruct the defendant to carry out extra work pursuant to Clause 10 of the original contract, the plaintiff did not order the defendant to carry out the extra work beyond that agreed to originally and that the defendant had no option but to comply with the plaintiff's instruction. Here the defendant agreed to carry out the extra work under a separate contract and that he would complete it within the same time as that specified for the main house. So it is not a case of the building owner imposing an extra burden on the contractor which necessarily increased the time required to finish the work. This is a case where the defendant, builder, agreeing to take on the extra work, undertaking to complete the extra work together with the original work within the time originally agreed to, that is, by 29 September, 1995. The authority in point is Jones -v- St. John's College (1870) LR 6 Q.B. 115 where under an agreement the builder agreed to take on extra work and that whatever that work might be, he agreed to complete both works within the time originally stated in the contract. It was held there that if the builder was it stated foolish enough to make such an agreement, he was bound by it and must take the consequences. I feel that on the true construction of the relationship between the plaintiff and the defendant in the present case, as evidenced by two contracts, the defendant had agreed to take upon himself the burden which the builder had taken upon himself in Jones v St John’s College, in which case, he must stand by it.

I find that the plaintiff is entitled to recover from the defendant the amount of $25.00 per day as liquidated damages for breach of contract pursuant to Clause 21 of the Contract.

As to the expenses of $26,154.12, claimed for materials paid, the defendant argued that the list produced, Exhibit 13, was not clear as to which expenses were for the original contract and which ones were for the work on the bottom floor. I have considered the items in Exhibit 13 and it seems clear to the Court that the expenses listed, backed up by invoices and receipts, were those incurred by the plaintiff to complete her house, both in respect of the top and bottom floors. As the plaintiff's claim is only for the work on the top floor, any expenses to be recovered (if at all) by the plaintiff under this head must be those expenses which were incurred for the purposes of completion the work on the top floor. It is for the plaintiff to show which items were purchased for the completion of the work on the top floor. But, in the first place, the question here is not how much of the $26,154.12 should be paid to the plaintiff in respect of the expenses incurred on the work on the top floor, rather the question must be, first of all, whether the plaintiff is entitled to claim at all the amount of $26,154.12 or part of it, in respect of the work on the top floor. For if the defendant is not liable to the plaintiff for that amount, then the plaintiff cannot claim that amount or any part of it from the defendant. The answer to that question depends on the construction of the contract, in particularly Clause 21 of the contract.

The usual remedy in building construction contracts is liquidated damages which the contractor agrees to pay the principal in respect of delayed completion. In some building construction contracts, such liquidated damages represent a true pre-estimate of loss to the principal and not a penalty. The parties have agreed to fix an amount as an estimate of the damage for which a party is liable if he breaks the contract and in doing so, agrees to a sum payable by him if he breaks the contract. In such a case the principal may only be limited to recovering those liquidated damages principal irrespective of suffering greater actual loss than the damages specified: Widness Foundry (1925) -v- Cellulose Acetate Silk Company Limited [1931] 2 K.B. 393. In that case the plaintiffs who were the contractor, agreed to deliver and erect a recovery plant for the defendants. The plaintiffs agreed to complete the work in 18 weeks and if they failed to do so, they agreed to pay a penalty of 20l. a week and a bonus of 10l a week if the work was completed by an earlier date. The plaintiffs were in breach and they were ready to pay the sum of 20l per week as agreed but the defendants refused to accept that, saying that they had suffered more that 20l a week damage, and they claimed for the full amount of 19,750l, the damage they had sustained. The question asked in that case was: is the clause a penalty clause so that it cannot be enforced, or is it like the ordinary clause to be found in most building contracts, a clause fixing the time for completion and fixing the amount to be paid for default, varying with the duration of the delay?

I ask the same question in this case and despite the intimation by the plaintiff that she claims damages by way of penalty for the breach, the clear terms of Clause 21 of the building contract in this case does not say that the contractor would be punished for breaking the contract but rather, the contractor would have to pay $25.00 per day for breaking it. As Scrutton LJ said at page 407 in Widness Foundry:

"A contract to pay 20l. per week .... and a right to receive 10l a week bonus, is nothing like my idea of a penalty, whose object is to punish. It looks like an agreement fixing the amount of damages to be paid ... if they are in default."

Lord Dunedin also said of this in Dunlop Pneumatic Tyre Co. -v- New Garage and Motor Co. [1914] UKHL 1; [1915] A.C. 79, at 86:

"the essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage"

and on the question of whether the difficulty in precisely calculating the pre-estimate of the damage would present an obstacle, the learned Law Lord added at page 87:

"It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that that pre-estimated damage was the true bargain between the parties."

In the present case, the parties contemplating that there might a breach of the contract, and knowing that damages would be difficult to assess, agreed that for breach of Its obligation under the contract the defendant would pay the fixed sum of $25.00 per day for every day the work remained incomplete. That obligation was to complete the top house by 29 September, 1995 or within the extended time as agreed and in default of that obligation both parties agreed that the defendant would pay damages at the rate specified. Applying the principles stated in Widness Foundry case, I conclude that in the circumstances of this case, Clause 21 is not a penalty clause but is an agreement fixing the rate of damages to be paid by the defendant contractor for default in completing the work within the stipulated time.

The plaintiff is, therefore, only entitled to maintain her claim for damages for breach of contract at the rate of $25.00 per day for every day the work on the top floor remained incomplete and not for $26,154.12 for additional expenses incurred to complete the house. I do appreciate that the amount recoverable under Clause 21 as liquidated damages may be smaller than the actual damage she sustained, but as Scrutton L.J. said, "the answer to that is, they agreed to it and themselves suggested the amount."

I am satisfied that the plaintiff has established her claims under Clause 21 of the contract in this case. There will be judgment for the plaintiff for liquidated damages at the rate of $25.00 per day commencing on 10 January 1996 which was the last day of the three months extension agreed to by the defendant to complete the work, to the date the main house (top floor) was completed. The claim for $26,154.12 for additional expenses incurred by the plaintiff cannot be maintained and is refused.

Order: Judgment for the plaintiff for liquidated damages at the rate of $25.00 per day for every day the work remained incomplete, commencing on 10 January, 1996 to the date the main house (top floor) was completed.

Costs to the plaintiff.

(Sir John Muria)
CHIEF JUSTICE