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Mitigation

It is a basic principle of contract law that a contracting party suffering from a breach of contract has a "duty" to mitigate his loss. In this context, the term "duty" does not serve to impose any restriction upon the manner in which a wronged party chooses to remedy his loss, but implies that if the wronged party incurs unreasonable cost in remedying the loss, he may not be able to recover from the wrongdoer the full amount of the cost. An important question is how far the" duty" extends. The recent case The Hong Kong Housing Authority v Hsin Yieh Architects & Associates Limited and others [2005] HKEC 1378 in the Hong Kong Court of First Instance confirms judicial guidance on the issues, in a situation in which the wronged party relies on independent advisers in choosing a course of remediation.

The case will be familiar to many of you in Hong Kong as a case concerning inadequate, short piling. The case relates to 6 blocks of flats forming part of the development known as Tin Chung Court owned by The Hong Kong Housing Authority which were intended to provide flats for the Government's Home Ownership Scheme. Amongst other matters, the Housing Authority sought the cost of stabilization and restoration works at the site. The Defendants in the case included B B Construction Company Limited, who admitted breach of their contract, but denied liability for the full amounts claimed by the Housing Authority on two broad grounds - firstly that certain heads of claim were not caused by their breach and secondly that the Authority had failed to mitigate its loss.

Piling works were substantially completed on 6 July 1997. The site was handed over to the superstructure contractor on 7 July 1997. In 1999, the Authority became concerned over the extensive differential settlement and they engaged C M Wong & Associates Ltd ("CMWAL"), a structural and geotechnical engineering consulting firm to assess the problem. CMWAL submitted an executive summary of its findings on 21 September 1999, recommending strengthening works for Blocks 1, 2 and 4. More analysis was then required for Blocks 3 and 6, and there was no apparent problem with Block 5. On 15 October 1999, CMWAL submitted to the Authority a further summary report, expanding on the findings in its previous executive summary and a more detailed investigation report came in December 1999. On 2 February 2000, CMWAL reported to the Authority that there were anomalies between the pile records and designed pile cut off levels. There was then an abortive tendering exercise for the foundation strengthening exercises, in part due to design changes by CMWAL. Ultimately a contract was executed with Gammon on 23 April 2001.

In the proceedings, B B argued that the experts appointed by the Authority, CMWAL, had taken an unreasonable amount of time in finalizing the remedial scheme and the damages that might otherwise be recoverable by the Authority should therefore be reduced. The judge disagreed. On the expert evidence presented in the hearing, His Honour Mr Justice Reyes believed that CMWAL's handling of design work was within the range of acceptable conduct by a competent engineer. However, he noted that in any event B B were not contending negligence on the part of CMWAL, and therefore he did not see how they could be said to have acted unreasonably. Relying on The Board of Governors of the Hospital for Sick Children v Mcaughlin & Harvey Plc, he suggested that it would require negligence on the part of the Authority's expert to break the chain of causation and relieve B B from liability. He approved of the judgment of Lord Loreburn in Holes Colliery Co Ltd v. Borough of Wedsnesbury, that "in judging whether la wronged party has] acted reasonably I think a Court should be very indulgent and always bear in mind who is to blame".

Mr Reyes considered that the fact that the Authority had their own in-house engineers who could assess CMWAL's proposals did not distinguish the case from the Board of Governors. The uneven settlement in this case gave rise to an unprecedented situation where the solution was far from obvious. In that circumstance, the Court had to be slow in criticising the Authority for somehow failing to override CWMAL's considered and independent advice.

B B also sought to argue that the remediation cost was disproportionate to the economic benefit obtained, relying on Ruxley Electronics & Construction Ltd v Forsyth. Ruxley was a case in which the plaintiffs built a swimming pool for the defendant which was 18 inches shallower than had been stipulated in the contract. The pool was perfectly suitable for swimming and the rebuilding cost was £21,650 whereas the loss of amenity due to a shallower pool was assessed as £2,500. In that case, the loss in value was held to be the appropriate and reasonable measure of the defendant's damage. However, Mr Justice Reyes considered that a tilting building, standing on sensitive soil and on a foundation with piles of uncertain length, was a problem of a different order of magnitude from a swimming pool built 18 inches too shallow.

In summary, the case represents a reaffirmation of principles relating to recoverability of loss caused by a breach of contract. As can be seen, in general, the Courts tend to a lenient view of the approach taken by a wronged party in circumstances where independent expert advice is obtained and acted upon.