West Kowloon Cultural District Authority v. Aig Insurance Hong Kong Ltd

HCA 2039/2018

[2020] HKCFI 569

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2039 OF 2018

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Before: Hon Ng J in Chambers

Date of Hearing: 10 April 2019

Date of Judgment: 2 April 2020

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J U D G M E N T

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Introduction

1.There are 2 summonses before this court.

2.First, the Defendant’s application by summons dated 11 September 2018 for the Writ and Statement of Claim herein to be struck out and the Action to be dismissed on the grounds that none of the 3 demand letters relied upon by the Plaintiff constitute valid demands upon the Bond No H.7478 (“Bond”) issued by the Defendant since

(1)  none of the said demands identify the amount of damages, losses, charges, costs or expenses sustained by the Plaintiff by reason of the Contractor’s alleged default; and

(2)  the said demands purport to demand payment of the full Bond sum in respect of an unidentified amount of future or prospective damages etc, which are not within the terms of the Bond.

3.At paragraph 2 of the Defendant’s summons, it seeks in the alternative that this Court determines as a preliminary matter the following questions of law and/or construction of the following documents –

(1)  Whether the aforesaid demands constitute a valid demand on the Bond when:

(a)  the demands do not identify any amount of damages etc sustained by the Plaintiff by reason of the Contractor’s default;

(b)  the demands claim for future or prospective losses which are not covered by the terms of the Bond.

(2)  The said demands were made fraudulently, in that the Plaintiff could have formed no bona fide opinion that the Contractor was in default of its obligations under the Contract between the two, nor that by reason of such alleged default the Plaintiff had sustained damages etc of or exceeding the Bond sum of $297,198,000.

4.Second, the Plaintiff’s application by summons dated 14 September 2018 for summary judgment against the Defendant on the basis that it had made a valid demand on the Bond.  In the prayer of the Statement of Claim, the Plaintiff’s claim is for the sum of HK$297,198,000 together with interest.

5.By a consent order of Master Ho dated 14 September 2018, and for reasons unknown to this court, the Plaintiff’s application for summary judgment and the Defendant’s application to strike out the Writ and Statement of Claim only were ordered to be heard together.  This is meant to be the hearing of the said 2 applications.  However, since the issues raised by the Defendant in resisting summary judgment are the same as the basis for the striking out application as well as the preliminary issues raised in the Defendant’s summons, it is inevitable that this court’s decision on the said 2 applications will also effectively determine the preliminary issues one way or another.

Material Facts

6.The basic material facts are uncontroversial and can be briefly summarized as follows.

7.The Plaintiff is the body corporate established under the West Kowloon Cultural District Authority Ordinance, Cap 601, engaging in the development of the West Kowloon Cultural District.

8.By General Conditions of Contract for Building and Civil Engineering Works dated 26 September 2015 (“Contract”), the Plaintiff engaged Hsin Chong Construction Company Limited (“Hsin Chong” or “Contractor”) as contractor for the construction of a project known as “M+” project.

9.By Clause 14(1) of the Contract, Hsin Chong was obliged to obtain and provide to the Plaintiff a bond in its favour from a bank or other financial institution, valid until completion of the works.  Pursuant to the clause, Hsin Chong procured the Defendant to issue to the Plaintiff a Form of Contractor’s Bond No H.7478 and dated 8 October 2015 ie the Bond in the sum of HK$297,198,000 (“Bonded Sum”).

10.The Bond expressly provided that the Defendant is irrevocably and unconditionally bound to the Plaintiff in the sum of HK$297,198,000 for payment of which sum the Defendant binds itself in accordance with the provisions of the Bond.

11.The clause of the Bond which is of special relevance to the present case is Clause 2:

“If, in the [Plaintiff’s] opinion, the Contractor is or has been in default in respect of any if its obligations under the Contact, the [Defendant] shall upon demand made by the [Plaintiff] in writing and without conditions or proof of the said default or amount demanded, pay the amount identified in the demand in respect of the damages, losses, charges, costs or expenses sustained by the [Plaintiff] by reason of the default, up to the amount of the Bonded Sum.” (emphasis added)

12.Further, Clause 3(b) of the Bond expressly provides that the liability of the Defendant under the Bond shall remain in full force and effect and shall not be affected or discharged in any way by, and the Defendant hereby waives notice of inter alia the termination of the Contract or the employment of the Contractor under the Contract.

13.On 17 August 2018, the Plaintiff issued a formal notice to Hsin Chong under Clause 74.1 of the Contract advising that the Plaintiff was terminating Hsin Chong’s employment under the Contract on the basis that a default had occurred under Clause 73.1(a) viz “You have become insolvent.” (“Termination Letter”). The Plaintiff also required Hsin Chong to leave “the Site and the Project Site forthwith”.  In the same notice, the Plaintiff announced its intention to employ others to execute the remaining works.

14.The relevant parts of Clauses 73.1(a) and 74.1 of the Contract provided:

“73.1 If the Contractor (which, without prejudice to Clause 1.2.3, means for the purposes of this Clause 73.1, any of the entities comprising the Contractor) shall be in default in that the Contractor:

(a) becomes insolvent …

then the Authority may give notice to the Contractor pursuant to Clause 74.1.

74.1 If the circumstances of default referred to in Clause 73 occur …

then the Authority may:

(g) in the circumstance of default referred to in Clause 73, forthwith by the service of a notice to the Contractor; or

…

terminate the Contractor’s employment under the Contract and, if the Contractor is on the Site, enter upon the Site and expel the Contractor from the Project Site and the Site …”

15.Also on 17 August 2018, the Plaintiff delivered to the Defendant a letter demanding payment of the Bonded Sum (“1^st Demand”).  

16.The relevant parts of the 1^st Demand stated that:

“ Form of Contractor’s Bond, Bond No. H.7478

We refer to the above bond issued by you in our favour, under which you are the Bondsman.

We hereby demand that you pay to us the full bonded sum of HK$297,198,000.

We are of the opinion that the Contractor is and has been in default in respect of various of its obligations under the Contract between the Contractor and us, and by reason of such defaults we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses.” (emphasis added)

17.On 21 and 24 August 2018, the Plaintiff delivered to the Defendant 2 letters again demanding payment of the Bonded Sum (“2^nd Demand” and “Final Demand” respectively).  These 2 demands are effectively chasers and add little, if at all, to the 1^st Demand.

18.The Defendant failed to comply with the Demands and on 29 August 2018, the Plaintiff commenced the present Action.

Deliberation

19.The legal principles in relation to applications for summary judgment and striking out are trite and no doubt familiar to experienced senior counsel on both sides.  They will not be rehearsed here.

20.In Kono Insurance Ltd v Tins’ Industrial Co Ltd [1987] 3 HKC 71, Hunter JA stated that the first issue in a case of this kind is the true construction of the bond in question and his Lordship identified 2 different types of bonds ie a single or on demand bond and a double conditional bond.  At 74E and 75B of the report, the learned Judge observed:

“The first issue here is the nature of this bond, and it is common ground between counsel that the outcome turns upon the true construction of the bond. Bonds are conveniently categorised in 12 Halsbury’s Laws of England (4th Ed) paras 1386 and 1387 into two different species. The first is what the editors call a single bond, and they go on to say that those ‘had become rare’. A single bond is a simple demand bond, which is payable on demand, or on production of whatever additional evidence the bond itself may specify…

…

The second type of bond is dealt with in para 1387 of Halsbury’s and is called a ‘double or conditional bond’:

‘This form of bond is called a double or conditional bond and consists of two parts: first, the obligation, and secondly, the condition. The condition ... specifies the real agreement between the parties.’” (emphasis added)

21.In Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd [1995] 3 All ER 737 at 742j–743a, Lord Jauncey observed:

“In recent years there has come into existence a creature described as an ‘on demand bond’ in terms of which the creditor is entitled to be paid merely on making a demand for the amount of the bond. … All that was required to activate it was a demand by the creditor stated to be on the basis of the event specified in the bond.” (emphasis added)

22.In his skeleton submissions, Mr Westbrook SC correctly and very properly accepted that the wording of the Bond points to it being an on demand bond.

23.In relation to the nature of on demand bond, Deputy Judge Lok (as he then was) set out his understanding in Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd [2012] 5 HKLRD 620 at 624-5, which this court gratefully adopts:

“(i) The legal principles

15. Both parties agree with the following legal principles which are applicable in the context of the plaintiff’s claim under the APG [ie advance payment bank guarantee]:

(i) the APG is, in substance, an unconditional performance bond;

(ii) the essential character of a performance bond is akin to cash, letter of credit or promissory note payable on demand (see: O’Donovan & Philips, The Modern Contract of Guarantee, 2^nd ed., 2010 at para 13-12);

(iii) it is an irrevocable undertaking to pay a specified sum to the beneficiary in the event of a breach of contract, rather than a promise to it that the contract will be performed (see: Andrews & Millet, The Law of Guarantees, 6th ed., 2011 at para16-001);

(iv) the nature of the bond is strictly autonomous from the underlying contract, and so evidence or proof of an underlying breach is not necessary for a valid demand to be made, and there will be no term implied into such bond to the effect that a breach of the underlying contract is required before the bond can be called in (see: State Trading Corporation of India Ltd v E D & F Man (Sugar) Ltd [1981] Com LR 235; Esal (Commodities) Ltd v Oriental Credit Ltd and Wells Fargo Bank NA [1985] 2 Lloyd’s Rep 546 and IE Contractors v Lloyds Bank Plc [1990] 2 Lloyd’s Rep 496 …; and

(v) such essential character of a performance bond is said to be the life blood of commerce, and unless fraud is involved, the courts will treat it as being equivalent of ‘cash in hand’ (see: The Bhoja Trader [1981] 2 Lloyd’s Rep 256, 257).

16. I agree with Mr Pao, counsel for the plaintiff, that these legal principles are a reflection of the modern commercial reality in which such bonds are consistently provided for and confidently relied upon by their holders in the course of international business. The purpose of an unconditional performance bond is to give the utmost commercial certainty to its holder. … In such circumstances, the courts are always cautious in intervening in cases which involve unconditional performance bonds. To do otherwise may undermine the certainty and reliability of these bonds, which are their essential and defining characteristics.” (emphasis added)

24.In the skeleton submissions of Mr Maurellet SC and Mr Westbrook SC, the parties are ad idem that there are 2 issues which fall for determination by this court:

(1)  Whether the Demands (or more precisely the 1^st Demand) complied with the terms of the Bond when they did not identify the amount of damages sustained by reason of Hsin Chong’s default and they referred to future damages, losses etc.  The Defendant’s case is that the Demands are non-compliant and hence invalid.  (“Formality Issue”)

(2)  Whether the Demands were made fraudulently in that the Plaintiff could not have formed a bona fide opinion that Hsin Chong was in default, or that by reason of such default the Plaintiff had sustained damages, losses etc of or exceeding HK$297,198,000.  The Defendant submits that the Demands were fraudulent and should not be enforced on this ground; at least this point raises a triable issue.  (“Fraud Issue”)

Formality Issue

25.On this issue, both parties accept that it is a question of construction of the terms of the Bond and whether the Demands (or more precisely the 1^st Demand) complied with Clause 2 of the Bond.

26.In Nishimatsu Construction Co Ltd v AHA Co unrep, HCA 10416 of 1999, 20 September 1999, the plaintiff applied for summary judgment on a bond entered into by the defendant the terms of which were substantially identical to the present one.  The most relevant parts of the Judgment are:

“6. The bond in question is a standard Airport Authority bond and is stated to be irrevocable and unconditional. The relevant part is Clause 2 which reads:

‘If the sub-contractor shall be in default in respect of any of its obligations under the subcontract, the bondsman shall, upon demand made by the contractor in writing and without proof of the said default or conditions, satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the contractor by reason of the default, up to the amount of the bonded sum.’

The demand letter of 2^nd June 1999 reads in part:

‘Argos is in default of its obligation under the subcontract. By reason of such default, we have sustained damages, losses, charges, costs or expenses in the sum of $16,320,821.68. This sum exceeds the amount of the bonded sum. However, by the terms of the bond, we can only require you to pay the whole of the bonded sum. We hereby demand payment of that sum of $7,291,773.’

7. My task, as I see it, is to construe this bond …

…

17. Here, in my judgment, the wording of Clause 2 of the bond is clear. No requirement of proof of default is necessary. Such proof is in fact negative. As Ackner LJ (as he then was) observed in Esal (Commodities) Ltd v. Oriental Credit Ltd [1985] 2 LLR 546 at 549, the object of such a bond is to enable the beneficiary to obtain prompt and certain payment without the bank getting involved in, or concerned about, the merits of the dispute. So long as the demand is correct in form, the bank is obliged to make immediate payment.

18. In my judgment, in this case the demand conformed with the wording of the bond and the Defendant has to pay. The demand stated that there had been a default and identified the amount of damages, losses, charges, costs or expenses sustained by the Plaintiff by reason of the default … I am happy to follow the decision of Suffiad J. in the UDL Kenworth case. The learned Judge decided that on the bond he had to consider, and which was in the terms of the clause I have to consider, a demand made on the bond had to comply with the following:-

(1) the demand had to be made in writing;

(2) the party making the demand had to state in the demand that the Plaintiff in that case, or UDL Argos in this, is in default of its obligations under the subcontract, but without the need to prove any such default or indeed any other conditions; and

(3) it had to identify in the demand the amount not exceeding the bonded sum, as being the losses or damages sustained by, in this case, the Plaintiff.” (emphasis added)

27.On the basis that the demand in that case was a conforming one, Recorder Kotewall SC granted summary judgment in favour of the plaintiff.

28.Similarly, in Esal (Commodities) v OCL [1985] 2 Lloyd’s LR 546 at 550, Ackner LJ (as he then was) set out the twin requirements of a valid demand on the bond in that case:

“ … I accept Mr. Tugendhat’s alternative submission that in addition to the beneficiary making the demand, he must also inform the bank that he does so on the basis provided for in the performance bond itself. This interpretation not only gives meaning and effect to the words ‘in the event that the supplier fails …’ which otherwise would be mere surplusage, but it in no way imposes an extravagant demand upon the bank. A beneficiary may seek, honestly or dishonestly, to apply a performance bond to the wrong contract, and the need to inform the bank of the true basis upon which he is making his demand may be very salutary.” (emphasis added)

29.The question is therefore: did the 1^st Demand comply with the requirements of Clause 2 of the Bond?

30.One thing is very clear: proof of the Contractor’s default or the amount demanded is not necessary.  Paraphrasing Recorder Kotewall SC in Nishimatsu Construction Co Ltd v AHA Co, and as a matter of construction, all that is required under Clause 2 are:

(1)  A demand made by the Plaintiff in writing.

(2)  In the Plaintiff’s opinion, the Contractor is or has been in default in respect of any if its obligations under the Contact.

(3)  The amount stated in the demand is in respect of the damages, losses, charges, costs or expenses sustained by the Plaintiff by reason of the Contractor’s default.

31.In this court’s view, 1^st Demand satisfied all 3 requirements and is therefore a valid demand on the Bond.

32.First, the 1^st Demand was in writing.

33.Second, the Plaintiff did say in the 1^st Demand that it was of the opinion that the Contractor was or had been in default in respect of various of its obligations under the Contract.

34.Third, the Plaintiff has set out the sum demanded ie HK$297,198,000 and that the sum was in respect of damages, losses etc sustained by reason of the Contractor’s default.

35.In his skeleton submissions, Mr Westbrook SC submits that the 1^st Demand was defective in that it did not identify the amount of damages, losses etc sustained by the Plaintiff by reason of Hsin Chong’s unspecified default.  Specifically, Mr Westbrook SC submits that in the 2^nd paragraph, the Plaintiff merely demanded payment of the full Bonded Sum without stating the basis for the demand while in the next paragraph, it alleged defaults and consequential damages, losses etc but failed to identify the amount of any such damages, losses etc.

36.With respect, this court does not agree.

37.First, specifying a particular breach/ default by the Contractor or particularizing the amount of damages, losses etc sustained is not a requirement under Clause 2:  see, for instance, the 3^rd requirement laid down by Recorder Kotewall SC in Nishimatsu Construction Co Ltd v AHA Co at [18].

38.Second, and importantly, the 1^st Demand must be read as a whole and not in a truncated manner.  If one reads the 2^nd and 3^rd paragraphs of the 1^st Demand as a whole, and putting two and two together, it is reasonably clear that the Plaintiff was saying expressly, or at least in substance, the basis for the demand for the full Bonded Sum was that the Contractor’s default had caused the Plaintiff to suffer and sustain damages and losses etc to the tune of HK$297,198,000, the only figure which appeared in the1^st Demand.

39.In IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496, the bond provided that “We undertake to pay you unconditionally the said amount on demand, being your claim for damages brought about by the above named principal”.  At p 502 of the reported Judgment, Sir Denys Buckley said this:

“ … In my judgment the demand is required to state that it is a claim for damages brought about by the contractors. Thus I agree with the Judge that something more than a mere demand was needed, although not exactly with the requirement that he adopted.

…

Did the demand made comply with the requirements of the bonds as I have the construed them? It certainly asserted breaches of contract, but it did not in terms mention damages. It is here that the degree of strict compliance necessary becomes important. I resolutely decline to interpret these bonds as saying that Rafidain will pay if, but only if, the precise words in par. 3 are to be found in the demand …

…

In my judgment the demand made did say in substance, although not in express words, that what it claimed was damages for breach of contract. Accordingly I would hold that it was a sufficient demand upon the performance bonds.” (emphasis added)

40.In this court’s view, IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank stands for the proposition, which this court fully endorses, that as long as the demand states in substance what is required in the bond, and is understood by its recipient as such, the demand will be treated as a valid one.  This approach is wholly consistent with the importance of preserving the certainty and reliability of on demand bonds, which, as emphasized in the authorities, are their essential and defining characteristics.  Being hypercritical of the wording of a demand and an overzealous insistence of strict compliance would only serve to undermine the certainty and reliability of on demand bonds. This should be rigorously resisted.

41.Mr Westbrook SC then complains that the 1^st Demand purports to include a claim for future or prospective losses which are not within the terms of the Bond.

42.It is true that the 1^st Demand also referred to damages, losses etc that the Plaintiff would continue to suffer and sustain by reason of the Contractor’s default.  But the reference to future damages, losses etc does not vitiate or render nugatory that part of the 1^st Demand which did refer to damages, losses etc sustained by reason of the Contractor’s default which are admittedly within the ambit of the Bond.  Since Clause 2 does not require particularization or proof of the amount demanded as damages, losses etc sustained, the additional reference to future damages and losses is at most redundant and a surplusage and can be ignored.  It might be different if the 1^st Demand only referred to future damages and losses but omitted to mention damages, losses etc already sustained: cf AES-3C Maritza East 1 Eood v Credit Agricole [2011] EWHC 123 (TCC)[1].  If that were the case, the Defendant’s argument that the 1^st Demand is thereby rendered defective would have more force.  But that is not the case here.

43.To conclude, for the reasons stated above, this court holds that the 1^st Demand does comply with the requirements of Clause 2 of the Bond and the Formality Issue should be decided in the Plaintiff’s favour.

Fraud Issue

44.In Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd, Deputy Judge Lok (as he then was) set out his approach when fraud is relied upon to resist payment in the context of a summary judgment application based on a performance bond.

“ 20. In the context of a summary judgment application on a performance bond where the fraud exception is relied upon to resist payment, there is a dispute between the parties here as to whether a ‘heightened’ test should be applied. In this regard, Mr Pao relies on Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 and Enka Insaat Ve Sanayi AS v Banca Popolare Dell’ Alto Adige SPA [2009] EWHC 2410 (Comm) and argues that: (i) the ‘real prospect’ test simpliciter (as provided for in CPR 24 in England, as compared to the ‘arguable defence’ test in O 14 of the RHC) is a relatively low test and such a low test is not appropriate as between a bank and a beneficiary of a letter of credit or a performance bond; and (ii) in the case that the bank is going to rely on the fraud exception to resist a claim on a performance bond, particularly cogent evidence is required to establish the fraud exception. Obviously, the rationale for such ‘heightened’ test is to preserve the autonomy of the banking relationship, the integrity of the instrument issued by the bank, and the certainty and finality in the relationship between the bank and the beneficiary.

21. Obviously, the test for resisting a summary judgment application in Hong Kong (ie the ‘arguable defence’ test) is different from that in England after the implementation of the CPR (ie the ‘reasonable prospect of success’ test). Nevertheless, the cases of Solo Industries UK Ltd v Canara Bank and Enka Insaat Ve Sanayi AS v Banca Popolare Dell’ Alto Adige SPA show that there are special considerations for a summary judgment application based on a performance bond, and that the court should always scrutinise the defendant’s allegation to see whether there is sufficient evidence to support the allegation of fraud. I agree with Mr Pao that such approach should be no different from cases of dishonoured cheques or promissory notes where the defendants are seeking to rely on fraud as a defence.” (emphasis added)

45.In Enka Insaat Ve Sanayi A.S v Banca Popolare Dell’Alto Adige SPA [2009] EWHC 2410 (Comm) at [24] - [25], Teare J adopted the principle that “particularly cogent evidence” is required to establish the fraud exception by banks or other financial institutions seeking to resist summary judgment based on a performance bond:

“24. In my judgment the test to be applied must be that of a ‘real prospect’ because that is the test set out in CPR Part 24. I do not consider that this court is bound to apply a ‘heightened test’ because the courts in Solo and Banque Saudi Fransi were not considering a claim against a bank under a guarantee where the defence was that the demand was said to be fraudulent. I therefore consider that the test in the present context is whether there is a real prospect that the Banks will establish at trial that the only realistic inference is that the fraud exception applies, that is, that ENKA could not honestly have believed in the validity of its demands.

25. However, there is considerable support for the view, which I accept, that in applying that test the Court must be mindful of the principle that banks, when sued on a letter of credit or performance bond or guarantee, need particularly cogent evidence to establish the fraud exception. Thus:

(a) In Turkiye Is Bankasi AS v Bank of China [1996] 2 Lloyd’s Rep.611 at p.616 Waller J. said, having referred to the United Trading case:

‘That passage identifies the difficulty that a plaintiff has in succeeding in stopping payment on a performance bond. He may show an arguable case that the demand is not honest, but that is not sufficient. He must also establish that ‘the only realistic inference is that the demands were fraudulent.’’

His approach and decision were upheld by the Court of Appeal; see [1998] 1 Lloyd’s Rep. 250.

(b) In Czarnikow-Rionda v Standard Bank [1999] 2 Lloyd’s Rep.187 at p.202 Rix J. said:

‘However, the fact that the claimant gets the benefit of a lower standard of proof for the purposes of a pre-trial hearing, places on the Court, as I believe the cases demonstrate, an additional requirement to be careful in its discretion not to upset what is in effect a strong presumption in favour of the fulfilment of the independent banking commitments.’

(c) In Solo Industries v Canara Bank [2001] 1 WLR 1800 at p.1813 Mance LJ repeated that warning:

‘…the court should be careful not to allow too extensive a dilution of the presumption in favour of the fulfilment of independent banking commitments.’

(d) In Banque Saudi Fransi [2007] 2 Lloyd’s Rep. 47 at p. 55 Pill LJ, whilst accepting that the test in CPR Part 24.2 applied said, at paragraph 34, that the task of showing a real prospect of proving that the beneficiary could not honestly have believed in the validity of its demands was ‘a high hurdle, as the authorities in my judgment recognise.’” (emphasis added)

46.This court respectfully agrees.

47.Hence, whether one applies a “low” test or a “heightened” test, there is a considerable degree of consensus in the authorities that there are special considerations for a summary judgment application based on a performance bond and that particularly cogent evidence is required to establish the fraud exception.

48.In the present case, the evidence of fraud relied upon by the Defendant is contained principally in the affidavit of Richard John Wilmot, a partner of the Defendant’s solicitors.  The evidence supporting the assertion of a fraudulent demand by the Plaintiff consists of only a few paragraphs and for ease of reference will be set out in full below:

“26 … the Defendant then asks this Court to determine the question whether the Demands were made fraudulently i.e. without any bona fide belief in the opinion allegedly formed that the Contractor was in default of its obligations under the Contract and that the Authority had already sustained loss and damage in the sum of or exceeding the full Bonded amount of $297,198,000.

27 As mentioned, the only default apparently relied up by Authority is breach of Clause 73.1(a) of the Contract i.e. that the Contractor had, by 17 August 2018, become insolvent.

28 It is difficult to understand how the Authority could have formed such an opinion, when no prior determination of insolvency had been made whether in winding up proceedings or otherwise.

29 Further, the Contractor has vigorously disputed such allegation and commenced arbitration proceedings to challenge this assertion.

30 The Authority has declined to provide AIG with any evidence to support this assertion.

31 In addition, AIG notes that the Demand under the Bond was made on the same day that the Authority terminated the Contract on the insolvency ground (17 August 2018).

32 The Authority commenced an urgent tendering exercise for a new contractor immediately upon termination of the Contract, and has commented to the press that this process is expected to take six to eight weeks.

33 It is impossible to understand how the Authority could already have sustained loss and damage thereby on the same day in the full amount of the Bonded sum.

34 Further, the Contractor has vigorously disputed that any loss or damage has been thereby sustained by the Authority, and in particular since no previous claim had ever been made by the Authority of any loss suffered whether actual or prospective.” (emphasis added)

49.In this court’s view, such evidence is little more than a mere assertion, rather than cogent evidence, let alone particularly cogent evidence, of fraud.

50.First, regarding Hsin Chong’s breach of the Contract by virtue of its insolvency, the so-called lack of bona fide belief on the part of the Plaintiff is simply based on (i) the fact that there was no prior determination of insolvency in winding up proceedings or otherwise, and (ii) Hsin Chong’s denial of it.  In this court’s view, (i) is a complete non sequitur - a company can be insolvent, on the cash flow test or the balance sheet test, whether or not there has been prior determination of insolvency; while (ii) is simply irrelevant.

51.In the ordinary course of things, the issuer of a bond ie the Defendant, would normally not have access to the financial records of the procurer of the bond ie Hsin Chong. Nor would it normally have knowledge of the dealings and interaction between the beneficiary and procurer of the bond ie the Plaintiff and Hsin Chong respectively who had dealt with each other since the Contract dated 26 September 2015, if not earlier. There is no evidence that this case is any different. In this court’s view, unless the Defendant had access to the accounting records of Hsin Chong prior to 17 August 2018, and there is no suggestion that it did, the Defendant simply cannot make good the assertion, even in a RHC O 14 context, that the Plaintiff did not genuinely believe that Hsin Chong was insolvent.  The Defendant's assertion, in the words of Megarry V-C, is all surmise if not Micawberism.

52.In order to overcome this difficulty, the Defendant turns from defence to attacking the (in)sufficiency of the 2^nd Affidavit of Ronald Michael Randall where he referred to 4 media reports about Hsin Chong.  That seems to this court to be reversing the burden of proof by requiring the Plaintiff to present sufficient evidence to justify its belief in Hsin Chong’s insolvency.  That is also totally contrary to what Clause 2 of the Bond expressly provides ie “without conditions or proof of the said default …”. 

53.Second, concerning the loss and damage suffered and sustained by the Plaintiff as a result of Hsin Chong’s insolvency, the so-called lack of bona fide belief on the part of the Plaintiff is based on (i) the fact that the 1^st Demand was made on the same day as the Termination Letter ie 17 August 2018 and again (ii) Hsin Chong’s dispute of it.

54.In this court’s view, (i) is a complete non sequitur while (ii) is irrelevant.

55.The fact that the Termination Letter was issued on 17 August 2018 does not mean Hsin Chong only became insolvent on that very day.  Indeed, it is rare, if not utterly impossible, for a company to be solvent on 16 August and suddenly became insolvent on 17 August.  At this stage, there is no evidence as to when Hsin Chong became insolvent.  The fact that the 1^st Demand was issued on the same day as the Termination Letter equally does not mean the Plaintiff had suffered no damages, losses etc prior to the termination of Hsin Chong as contractor.  The relevant event for the present purpose is Hsin Chong’s insolvency, rather than its termination as contractor.

56.In its skeleton submissions, the Defendant assumes that the vast majority of the Plaintiff’s losses must relate to the possible future additional costs of executing the work by others after Hsin Chong’s eviction from the site.  But on a proper construction of Clause 2, as long as the Plaintiff's damages, losses etc were resulted from Hsin Chong’s default under the Contract ie its insolvency (rather than its termination and eviction from the site), they would be within the ambit of Clause 2.  Since the Defendant would have little or no knowledge of the dealings and interaction between the Plaintiff and Hsin Chong, and there is no evidence to the contrary, it cannot say what are the financial consequences to the Plaintiff as a result of and commencing from Hsin Chong’s insolvency.

57.More importantly, it is the Plaintiff’s belief of the amount of its damages, losses etc which is relevant, not what a court or tribunal subsequently determines what that amount should be. The beneficiary under an on demand bond may genuinely believe it has suffered damages, losses etc within the meaning of the bond entitling it to make a demand for a certain amount before there is precise and detailed computation of the quantum. Otherwise, the express wording of Clause 2 ie “If, in the Plaintiff’s opinion…the Defendant shall upon demand…and without conditions or proof of the…amount demanded pay the amount identified in the demand” would be rendered meaningless.

58.The significance of a claimant's belief was emphasized by Knowles J in National Infrastructure Development Company Limited v Banco Santander S.A. [2016] EWHC 2990 (Comm) at [10]-[13]:

“10 The first of the three main points taken by the defendant is the contention that the claimant has stated that sums are due and owing from OAS to the claimant when in truth no sums are due and owing.

11 The claimant accepts that it would be a defence to a claim under the standby letters of credit if the claimant had no honest belief that it was entitled to make the statement. The basis for the defendant saying no sums are due and owing is that the sums claimed are, it argues, for damages, and those damages have not been liquidated or awarded by a tribunal. Unless and until damages are awarded, argues the defendant, they are not payable.

12 Ms. Anneliese Day QC, for the claimant, argues that the construction contract contemplates entitlement to call in security now and reimburse later if it transpires that there has been overpayment. This is not, she argues, simply about damages and the time at which those damages will be liquidated. A party who believes they are entitled to damages and in a particular sum, or to call in security now, may honestly believe that that sum is due and owing, submits Ms Day QC. She noted the language used by Carr J in J. Murphy & Sons Ltd. v. Beckton Energy Ltd. [2016] EWHC 607 (TCC) at [63]:

‘The trigger for a performance bond is belief on the part of the drawing party in its entitlement, not such entitlement having been subject to a final determination giving rise to a payment obligation.’

Indeed, Ms Day QC emphasises that the claimant contends that its losses are well above the amount covered by the standing letters of credit.

13 Mr. Ayres QC, for the defendant, submits that what really matters is not the law of England but the law of Trinidad and Tobago when it comes to assessing whether an amount is due and owing. I have been shown, and have considered, a legal opinion on this question by Mr. Armour SC of the Trinidad Bar. However, in my view, what really matters is not the law of England, nor the law of Trinidad, but the belief of the claimant. It may or may not prove to be correct under English law or the law of Trinidad and Tobago that these sums claimed are due and owing. It may not ultimately be held in the arbitration or otherwise that the view that these sums are due and owing was correct, but that is not the question here.” (emphasis added)

59.On the facts of that case, Knowles J was not prepared to conclude that it was seriously arguable that the claimant did not honestly believe in the validity of the demands or that it did not believe that sums were due and owing.  The learned Judge granted summary judgment to the Claimant accordingly. 

60.To conclude, for the reasons stated above, this court is not satisfied that the Demands made by the Plaintiff were mala fide - the Fraud Issue should also be decided in the Plaintiff’s favour.

Disposition and cost order nisi

61.Given this court’s view that the 2 issues[2] raised be decided in favour of the Plaintiff, it naturally follows the Plaintiff’s application for summary judgment succeeds and the Defendant’s striking out application fails.  This court hereby grants summary judgment in favour of the Plaintiff in the sum of HK$297,198,000 together with interest at the rate of Prime plus 1% from 17 August 2018 to Judgment and thereafter at the Judgment rate until payment, and dismisses paragraphs 1, 3 and 4 of the Defendant’s summons.

62.In light of the fact that this court has entered summary judgment in favour of the Plaintiff so that the entire Action is disposed of and that the 2 preliminary issues have in substance been decided against the Defendant, this court will make an order nisi that paragraph 2 of the Defendant’s summons is also dismissed.

63.There shall be an Order nisi that costs of the Action, including costs of the Plaintiff’s summons and the Defendant’s summons, be to the Plaintiff, to be taxed if not agreed and paid forthwith, certificate for senior counsel.

64.Lastly, this court thanks counsel on both sides for their helpful assistance.

Mr Jose Antonio Maurellet, SC and Mr James Niehorster, instructed by Bryan Cave Leighton Paisner LLP, for the Plaintiff

Mr Simon Westbrook, SC, instructed by Stephenson Harwood, for the Defendant