MEASURE OF DAMAGES FOR BREACH OF A CONSTRUCTION CONTRACT
In Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2023] SGHC(A) 20, the key issue before the Court was the measure of damages for breach of a construction contract.
The dispute. Zhong Kai Construction Co Pte Ltd (“ZK”) engaged Diamond Glass Enterprise Pte Ltd (“DG”) as a subcontractor to supply materials, equipment and tools to carry out and complete the aluminium cladding of an external facade, blast/ballistic doors and windows, aluminium doors, and window works via a Letter of Award dated 7 November 2016 (the “Subcontract”) for a project at the Singapore Changi Airport.
In a previous suit, ZK claimed against DG for liquidated damages arising from DG’s delays. ZK also claimed the sum of $340,233.10 against DG for replacement works arising from DG’s abandonment of the worksite around 6 June 2018 and for rectification works done. ZK further sought to overturn an adjudicated amount that was awarded to DG in an Adjudication Determination.
The Trial Judge allowed ZK’s claims for liquidated damages and the costs of replacement and rectification works in part. The Judge also allowed DG’s counterclaim for payment due under one variation order in the amount of $5,070 and disallowed DG’s counterclaims for payments for three other variation orders.
On appeal, the Appellate Division of the High Court allowed DG’s appeal in part and ZK’s appeal in part, holding that, among other things:
(a) DG’s appeal against the award of $5,906.40 to ZK for ZK’s claim for replacement and rectification works was allowed; and
(b) ZK’s appeal against the dismissal of its claim for $27,735.47 for its claim for replacement and rectification works was allowed and ZK was awarded this sum.
Following the decision of the Appellate Division of the High Court, DG’s solicitors raised two further issues for clarification with the Appellate Division of the High Court.
One of these issues was that, according to DG, the Trial Judge had awarded ZK its claims for replacement works without accounting for and/or deducting the sums that ZK would have to pay DG if DG had completed the works under the Subcontract. DG argued that, while the Appeal Judgment addressed the deduction of the Retention Sum of $27,902.75, the Appellate Division of the High Court did not address the remaining sums which ZK would have had to pay DG under the Subcontract, which amounted to $62,514.30, and hence sought a clarification (the “Remaining Sums Issue”).
DG’s position on the Remaining Sums Issue. In relation to the Remaining Sums Issue, DG argued that this was an application of the general principle on the compensatory nature of damages: i.e., “to place the plaintiff in the same position they would have been in, in monetary terms, had the contract been performed” (at [24]).
DG claimed that it had quantified the remaining sums which ZK would have had to pay DG if the Subcontract was fully performed, which amounted to the sum of $90,417.05 ([10]). This sum, according to DG, accorded with claims which DG was not fully entitled to ([11]).
As summarised by Quentin Loh SJ at [28], DG’s position in short was that as the Trial Judge below erred in awarding ZK the full sums for the “replacement works”, and the court should thus take into account the value of the outstanding works under the Subcontract which ZK has not paid DG, as otherwise ZK would reap a windfall because:
“(a) ZK will not have to incur the full contract price for the works that DG was supposed to do;
(b) but [ZK would] recover from DG the full cost of completion, ie, the cost of completing the remaining works after DG had abandoned the worksite and the additional costs for engaging another subcontractor to complete the work; and
(c) [ZK] would end up with a finished subcontract product without having to pay the full price.”
ZK’s position on the Remaining Sums issue. ZK disagreed with DG’s argument, arguing that it was not part of the scope of DG’s appeal. Furthermore, DG’s own pleaded case was confined to the balance sum based on the main works and variation works carried out by DG Additionally, DG did not plead in the alternative that “should DG be found to have wrongfully terminated the subcontract and was in repudiatory breach of the subcontract, and be liable for any replacement and rectification costs, such costs awarded to ZK are to take into account the value of the remaining works under the subcontract not completed and abandoned by DG” (at [16]).
Proper measure of damages. Quentin Loh SJ, delivering the judgment of the court, first considered the general principle that in the circumstances of a breach to build at all or in part by the builder, the normal measure of damages is the cost to the owner of completing the buildings in a reasonable manner, less the contract price (at [29]).
Loh SJ held that “[w]hilst this principle is, in theory, correct, it seldom arises in practice as the facts are typically less straightforward” (at [30]).
Why? As Loh SJ stated (at [31]):
“First, incomplete works are often interwoven with works that are apparently “complete” but defective. These have to be distinguished and separately quantified. Therefore, where as is usual in such cases, there are three components to such claims: (a) completed works that are not defective and contract compliant; (b) defective or non-contract compliant “completed” works which have to be removed and replaced; and (c) work not yet completed, all of which have to be separately particularized, quantified and proved.”
Further, Loh SJ noted that (at [34]):
“… it is not often the case that there are no other damages in addition to the increased costs of completing the outstanding works. For example, a new subcontractor may refuse to warrant the work done by the earlier subcontractor in breach, in which case the court would need to quantify, in monetary terms, the loss of that warranty for works done. There may also be delays to other parts of the work, increased costs for disrupting the orderly carrying out of related work and possibly damages for delay.”
Decision. Loh SJ considered that on the facts, the Adjudicator was alive to the fact that defective works were in issue, as the Adjudicator acknowledged that he had received ZK’s “Table of Defective Works Photographs … with Reference to Items Enumerated in the Payment Claim” and had been informed by ZK that there were defective works which ZK and/or the main contractors were still rectifying (at [32]). The Adjudicator agreed with ZK that there was evidence of alignment and other defects, and ultimately determined that it would have been reasonable to award 90% of the claimed sum, amounting to $116,228.70.
Further, Loh SJ noted that the defective works were also in issue at trial, as ZK “not only claimed for incomplete work but also defective work, work that did not go through a “final handing over process”, and the failure of DG to provide warranties and indemnities” (at [33]).
Importantly, Loh SJ held at [35] – [45] that DG had not specifically pleaded this issue, which was “fatal to and undermine[d] the whole basis of [DG’s] complaint” (at [35]).
Hence, Loh SJ found that the Remaining Sums Issue was not an issue before the Trial Judge or before the Appellate Division of the High Court, and thus there was no merit in DG’s complaint and nothing that warranted the court’s clarification (at [46]).
Conclusion. When one party is in breach of a construction contract, it is rarely straightforward to calculate the damages due to the other party. As the Appellate Division of the High Court recognised in this matter, in practice, there are often multiple components to individually quantify and prove, such as incomplete works and defective works.
Further, the impact of that breach of contract must also be separately quantified and proved, as a breach of contract by one subcontractor may lead to time and cost consequences if a replacement subcontractor cannot be found quickly.
Therefore, when considering whether to bring a claim against another party for breach of contract, it is important to separately quantify each portion of such a claim to understand the extent of damages recoverable in an action for breach of contract, and to make sure that the innocent party is not under-claiming, or over-claiming, for damages.
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