A Study on First Hand Residential Quality In Hong Kong

Li, R.Y.M. Department of Real Estate and Construction, The University of Hong Kong

(email: ritarec@hotmail.com) Chau, K.W.

Department of Real Estate and Construction, The University of Hong Kong (email: hrrbckw@hku.hk)

Abstract

Hong Kong has long been famous for her skyrocketing dwelling price. The high cost of mortgage has clipped the wings of many high-educated working class and raise their expectation on quality of residential units. This paper study first instance court cases with regard to the quality problem in first hand residential units over the past 9 years. Results have shown that most of the developers in Hong Kong seldom overstated the quality of residential units and the majority of the cases which end up in court are caused by subcontractors’ failure in providing merchantable quality products.

Keywords: first hand, residential, quality, court cases, Hong Kong

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1. Introduction

In Hong Kong thousands of dwelling units are built every year to satisfy the needs of dwellers (figure 1), however, price of newly built residential housing units remain high over the years. Most of the families spend more than half of their salary on monthly bank payments for their residential units. It is therefore natural that residents have high expectations on quality of private dwellings -- no wonder builders in Hong Kong invest a huge sum of money on modern kitchenware and bathroom utilities, well design cabinet (So and Leung, 2004) as well as smart technology which integrates a variety of home systems such as lighting, security climate control to enhance the quality of these residential units (Petersen et al., 2001). Nevertheless, developers often conduct forward sales before building completion, vendors may worry that housing units sold in this way turn out to be substandard -- a typical moral hazard problem. Nonetheless, such payment method has become very popular in Hong Kong. One plausible explanation is that the market has already efficiently adjusted the forward price for this potential quality problem according to developers’ reputations (Chau et al., 2007, Chau et al., 2001) as they are not fly-by-night developers which can be found in China (Li, 2009). Alternatively, quality of the first hand residential units is high on average, home purchasers have confident on developers’ fittings. This paper aims to reveal the quality of first hand residential units by studying the relevant court cases in 2000-2008. Under the common law jurisdiction, the research results are likely to be used in other common law cities, such as Bangladesh and United Kingdom.

Figure 1: Housing units completed from 2004 to 2009 (Rating and Valuations Department, 2009)

*2009 is an estimated figure #forecast by Rating and Valuations Department

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2. Legislation govern the quality of fittings

Quality fittings and furnishings is important to all the residents of the housing estates. They reduce maintenance and renovation costs, improve sustainability (Li and Chau, 2010) and enhance success rate of resale. The outbreak of severe acute respiratory syndrome in 2003 in Hong Kong Amoy Garden reminds us the importance of fittings’ quality on people’s health. In view of these, acceptable quality of fittings provides benefits to both investors and home purchasers (Stoker, 2002). To ensure the quality of fittings, Property Law Group of the Australian Law Council had issued a sample standard form of residential property contracts in various states of Australia. Some of the Hong Kong people were impressed with this approach and recommended this standard form to give considerable protection to residential purchaser (Stoker, 2002).

There are some laws and regulations which govern the goods sold in the market, e.g. residential units sale. Cap 26 Sale of Goods Ordinance Section 2(5) has stated clearly that goods of any kind should be of merchantable quality if they are 1) fit for the purpose(s) for which goods of that kind are commonly bought; 2) of such standard of appearance and finish; 3) free from defects (including minor defects); 4) as safe; and 5) durable.

To prevent sellers overstate quality of goods and services, Misrepresentation Ordinance has been drafted specifically for this. Under Misrepresentation Ordinance section 3, a person who has entered into a contract after a misrepresentation which lead to other party’s loss, the one who makes misrepresentation would be liable even if such misrepresentation was not made dishonestly, unless there is sufficient ground to prove that he had and did believe the statement he made up to the time the contract was made.

To ensure the quality of dwellings, legislators have also drafted and implemented pieces of legislation specially for residential units, e.g. Cap 123F Building (Planning) Regulations has stated explicitly that all the dwelling units have to be provided with kitchen unless exempted by the Building Authority. The internal surface of every kitchen shall be either rendered in cement mortar or covered with tiles. Every kitchen shall be provided with a sink and fittings for water supply and properly constructed cooking slab or fireplace. There is also specific requirement for bathrooms that room-sealed gas water heater has to be provided in every bathroom in a building. Where the room-sealed gas water heater installed in any place other than bathroom, appropriate provision has to be made for the installation of such room-sealed gas water heater. In Cap 123 F, Regulation 15 has also specified the requirement of door and window that no gate, window, door or shutter opening shall be placed at a height of less than 2.5 m above the ground level.

3. Objectives of the paper

As Hong Kong people become wealthier, their demand on quality of fittings also increases. Provisions of fittings are no longer restricted on basic wall and floor tiles, kitchen and bathroom TV has become

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more and more popular. It is worthwhile to study the claims which concern quality of materials provided by contractors and developers. The objectives of this paper are to:

1. Identify the court cases related to quality of residential developments

2. Nature of disputes

3. Amount of compensation and the corresponding heads of claims

4. Research method

Relevant court cases over the past 9 years in 2000-2008 concerning first hand housing were obtained from Hong Kong Law Report by using the keyword search “residential”, “housing”, “flat” and “dwelling”. To achieve the aforementioned objectives, First Instance cases include poor quality of fittings and furnishings provided by 1) subcontractors to their corresponding contractors, 2) main contractors to developers, 3) developers to dwelling purchasers. There are 6 first hand dwelling cases only within the study period. Although they are relatively small in number, careful consideration can provide us insight on how the judges made decisions.

1) Ng Chi Keung v Jade Art Design & Contracting Ltd [2008], District Court

2) Maze Aluminium Engineering Co. Ltd. v Go-tech Fire Protection Co. Ltd. [2006], Court of First Instance

3) United Building Material (Hong Kong) Ltd. v E Man Construction Ltd. [2006], Court of First Instance

4) Prudential Project Ltd. v Lau Hon Kwong Henry Trading Co. Ltd. [2004], High Court

5) Luk Kwan Hung Nelson v Victory Mark Investment Ltd. [2003], High Court

6) Bordon Construction Co. Ltd. v Chi Lik Window Works Co. Ltd. [2002], Court of First Instance

The above cases can be categorized into 3 categories 1) Products not of merchantable quality, 2) no problems with the products themselves but they fail to adhere to the contract requirements, 3) contravene legal legislation requirement.

4.1 Products are not of merchantable quality

Among the seven cases concern quality of fittings, 4 cases fall under this category:

1. Maze Aluminium Engineering Co. Ltd. v Go-tech Fire Protection Co. Ltd. [2006],

2. United Building Material (Hong Kong) Ltd. v E Man Construction Ltd. [2006],

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3. Court of First Instance Prudential Project Ltd. v Lau Hon Kwong Henry Trading Co. Ltd. [2004],

4. Ng Chi Keung v Jade Art Design & Contracting Ltd [2008]

All plaintiffs except the last one win the case and receive compensation.

Maze Aluminium Engineering Co. Ltd. v Go-tech Fire Protection Co. Ltd. [2006]

Maze, was an aluminium contractor which provided service to a domestic development in Tuen Mun. Maze contracted with the defendant (Go-Tech) for the supply of FRP glass. The supply began in November 2001 and Maze completed the installation in August 2002. By September in the same year, Go-Tech had fully received the contracted price for the glass. The principal contractor, Hip Hing Construction Co. Limited complained Maze of defects in FRP glass in August 2003. Maze informed Go-Tech about this. Nevertheless, no remedial work had been undertaken until February 2004. To replace the defective panes, the developer had made another contract with Winner Max to supply and install new FRP glass from June 2004 to September 2004. The cost of that came to $1,500,202. Hip Hing paid that and reimbursed by Maze. Maze sought recovery from Go-Tech. Go-Tech claimed that they would not be liable for any claim which Maze not made within a week’s time according to terms stated in contract. The defendant further argued that the defects were far from being minor imperfections. However, the judge held that the defendants were liable because there were significant material defects in large number of FRP glass panes and there was no express or implied contract terms which concluded that any claim had to be made in 7 days. Consequently, Go-Tech was in breach of its contract in the sense that it fails to provide good merchantable quality panes and Go-Tech had to recover the cost in damages at the costs of 1,500,202.

United Building Material (Hong Kong) Ltd. v E Man Construction Ltd. [2006]

E Man, a subsidiary of Henderson Land Development Company Limited, entered into contract with United on 1st December 1997. United supplied E Man 500,000 sq. m. mosaic tiles at $31 per square metre. Tiles delivered by United were not of merchantable quality on several days between December 1997 and August 1999. Some of the tiles’ color faded after they were washed with a cleaning agent KF-28. E Man therefore alleged United for breach of the Contract, United. E Man also argued that the tiles delivered on site had been failed to comply with the Japanese Industrial Standard which was specified in the Contract. United denied its obligation under Japanese Industrial Standard and claimed that the tiles delivered which would not be discoloured when they are washed with KF-28.

It is evident from the contract that colour was an important consideration for the parties. Hence, the learned judge held that United had not fulfilled its obligation under the contract. Tiles with colours which easily discolored by applying common cleaning agent would negate the importance of the contract attached to colour. United's catalogue stated that "Atlantic" glazed ceramic tiles can be cleaned with 3-5% HCl, it would be reasonable for E Man to assume that tiles would not be

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discoloured upon being washed with a 3-5% HCl solution. Thus, the defendant had to pay 301,415.70 to the plaintiff as compensation.

Prudential Project Ltd. v Lau Hon Kwong Henry Trading Co. Ltd. [2004]

The Plaintiff was the main contractor of a residential development project. The Defendant was interior decoration sub-contractor. The defendant failed to supply doors of merchantable quality. 1) The main door surfaces were ridged and patterned with four and half pieces or six pieces of veneer instead of four pieces; 2) the vertical and horizontal members of the door frames were not properly jointed with 45 degree joint; 3) colour of the doors and frames did not match; 4) the locks were not properly installed; 5) marble works were damaged by the installation.

The judge assessed the Plaintiff's damages to be $1,991,687.45 under the following headings:

Costs of completing outstanding works and rectifying defective works

$1,486,946.16

Administrative and supervision charges $60,000.00

Deductions by main contractor $8,850.00

Costs of preservative treatment test $4,500.00

Labour Tribunal pay-outs $278,497.59

Over-payment $152,893.70

Total : $1,991,687.45

Ng Chi Keung v Jade Art Design & Contracting Ltd [2008]

Mr. NG and Mr. Kwong (director of Jade Art) worked together between October/November 2004 and October 2005 for decoration and fitting out works at 17 residential premises. Mr. Ng mainly carried out woodwork at the premises and arranged for wooden furniture to be made. Mr. Kwong’s company provided interior design and decoration works for clients. Mr. Kwong liaised between the clients and other contractors which included Mr. Ng to provide different aspects of decoration and fitting out works at the premises. fees agreed in respect of the works covered by these 17 projects was $1,219,777, and that Mr. Kwong paid to him a sum of $971,300 between November 2004 and May 2006. Mr. Ng claimed that a balance of $231,375 remains owing and unpaid. Defects were found in the woodwork of Mr Ng. The claims were dismissed because of four reasons:

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1. Allegations of errors made in the work carried out on projects are unsupported by any of his original designs, drawings or photographs.

2. The plaintiff had continued to make payments to Mr. NG until May 2006 without any evidence of complaint, does not in line with his claim of the defects detected in the projects.

3. Mr. Kwong was happy to give Mr. NG new projects between commencement of work at the Hang Fa Chuen project in mid-November 2004 and the last project in July 2005. This contradicts his claim that Mr. NG had made errors and produced defective work.

4. When cross examined on this, Mr. Kwong accepted that defects in the work on the projects had all been remedied to his satisfaction.

4.2 Breach of contract

Second type of claims arises because the contractor has provided products which have no problems or defects themselves but there was deviation in the requirements as specified in the contract. There was, however, only one case within the past 9 years.

Bordon Construction Co. Ltd. v Chi Lik Window Works Co. Ltd. [2002]

The plaintiff was the main contractor for a residential development on the Peak. The defendant was the sub-contractor for doors, louvers, sky light, windows installation and canopy works. The sub-contract was dated 23 September 2000 but terminated on 21 December 2000 by the plaintiff. The defendant was accused of breach of contract because it had used 1) sliding doors instead of folding/sliding doors as specified in contract; 2) mullions/transoms comprising of small components instead of one single piece as specified in contract.

In determining the head of quantum, the judge considered the issue under 4 heading:

Cost of completing the works $500,000

Wasted expenditure (for preparing a new tender)

$47,708.48

Indemnity against further liquidated damages claim

employer will make a claim against the plaintiff for the liquidated damages

Interest nisi order (infra)

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4.3 Contravene current legislation

Luk Kwan Hung Nelson v Victory Mark Investment Ltd. [2003]

On 25 September 1996 the plaintiff bought a flat as his future matrimonial home. The property sales manager mentioned that Flat 25 A was one of the best dwellings among entire building units and would also be opened and spacious with have a ceiling of more than 8-feet high.

Nevertheless, the plaintiff's case sued the developers because the unit had suffered from the following defects: 1) the height measured from the floor to the underside of the beams in rooms was not less than 2.3 m which contravened the provisions of the Building (Planning) Regulation section 24(1); 2) the height of the security bar along the bay window openings was less than the 1,100 mm requirement in height, contravened the provisions in 3A of the Regulations; 3) the height of the bay window base was less than 500 mm from floor level which had failed to meet the requirement stated in the Practice Note for Authorized Persons and Registered Structural Engineers PNAP No.68.

The defendant defended that even if a breach of the Regulations and a contravention of the building plans really existed, flat 25A was still a legal and authorized structure. The judge accepted it as a valid point, but such contravention meant that the defendant had to pay the plaintiffs as follows:

House value reduction due to the low beams $1,102,967

Replacement costs of hardwood board on window $6,000

Additional lighting system installation costs $45,000

Additional security bars along bay windows installation costs $5,000

-------------

Total $1,158,967

The aforementioned six court cases can be summarized as follows:

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Table 1 Summary of the six court cases

Plaintiff and defendant

Plaintiff's background Defendant

Date of Judgment

Date of dispute Background Total

Ng Chi Keung v Jade Art Design & Contracting Ltd

Designing and decorating company

Woodwork contractor

2008/03/14 2004/10-

2005/10

Defects or errors in the works carried out under the Contracts

0

Maze Aluminium Engineering Co. Ltd. V Go-tech Fire Protection Co. Ltd.

Aluminium windows fitting specialist

Glass supplier

2006/04/21 2004/02/01 Panes of the FRP glass suffered from readily observable air bubbles

1,500,202

United Building Material (Hong Kong) Ltd. V E Man Construction Ltd.

Developer Tile contractor

2006/01/24 1998/12/01

Color of mosaic tiles faded after they were washed with a commonly used cleaning agent known as KF-28.

3,301,416

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Prudential Project Ltd. V Lau Hon Kwong Henry Trading Co. Ltd.

main contractor

sub-contractor of interior decoration and fitting

2004/07/26 2002/10/21

1) The main door surfaces were ridged and patterned with four and half pieces or six pieces of veneer instead of four pieces; 2) the vertical and horizontal members of the door frames were not properly jointed with 45 degree joint; 3) colour of the doors and frames did not match; 4) the locks were not properly installed; 5) marble works were damaged by the installation.

1,991,687

Plaintiff and defendant

Plaintiff's background Defendant

Date of Judgment

Date of dispute Background Total

Luk Kwan Hung Nelson v Victory Mark Investment Ltd.

Vendor of residential unit

Developer 2003/09/19 1997/10/8

1) The height measured from the floor to the underside of the beams in the bedroom was not less than 2.3 m; 2) the height of the security bar along the middle of the bay window openings was less than 1,100 mm height ; (3) the height of the bay window base was less than 500 mm from the floor level.

1,158,967

Bordon Construction Co. Ltd. V Chi Lik Window Works Co. Ltd.

main contractor

sub-contractor

2002/07/09 2000/12/21

1) Used sliding doors instead of the folding/sliding doors as specified in contract; 2) used of mullions/transoms comprising of small components instead of one single piece as specified in contract.

547,708

5. Discussions

Disputes over quality issues which ended up in court can only be found occasionally in Hong Kong. While there were more than 10,000 units produced each year, there were only 6 court cases in

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2000-2008. Despite its small number, the above cases have illustrated several important information: 1) most of the cases concerned the quality of dwellings arose when subcontractors failed to provide merchantable quality products; 2) there was once in a blue moon case that the contractors contravened the requirement stated in the contract, e.g. the provision of sliding door instead of sliding and folding doors in the case aforementioned; 3) efficiency of court was quite low, it took a long time for parties to receive settlement from judges. Some of the cases, e.g. United Building Material (Hong Kong) Ltd. v E Man Construction Ltd. [2006] took the parties more than 2600 days. Even simple case as Bordon Construction Co. Ltd. V Chi Lik Window Works Co. Ltd took more than 580 days to receive the decision from the judge 4) In considering the decisions on heads of compensation, the judge mainly considered a) costs of completing the task by other contractors e.g. Prudential Project Ltd. v Lau Hon Kwong Henry Trading Co. Ltd. [2004], Bordon Construction Co. Ltd. v Chi Lik Window Works Co. Ltd. [2002], Luk Kwan Hung Nelson v Victory Mark Investment Ltd. [2003] and b) administrative costs for new contract arrangement, e.g. Bordon Construction Co. Ltd. v Chi Lik Window Works Co. Ltd. [2002], Luk Kwan Hung Nelson v Victory Mark Investment Ltd. [2003].

6. Areas for further research

There are a number of other areas which are worth studying so as to further develop the research. Firstly, this research only reveals cases happen in the latest 9 years, longer time span might yield a better view on the developers and contractors’ fittings issues. Second, this study only focuses on quality issues in Hong Kong; it will be valuable to expand the study to other cities, such as London, Singapore and Bangladesh.

References

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