Dorfit Properties Ltd v. Fujita Corporation
Read the full judgment text of HCCT127/1999 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 26 July 2002 before Hon Burrell J.
Construction and Arbitration Proceedings — Joint venture guarantee — Liability of joint venturer for contractor’s defaults — Strict construction of guarantees in favour of surety — No novation or assignment of building contract obligations to joint venture — Guarantee liability limited to Joint Venture’s own obligations — Fujita not liable for liquidated damages arising from B+B’s defective work. Estoppel — Representation that liquidated damages would cease if Fujita completed works — Fujita relied upon assurance — Commercial context supportive — Estoppel found in alternate scenario. Plaintiff’s claim under guarantee dismissed; costs follow event. Appeal dismissed by Court of Appeal (CACV000346/2002).
Legal issues: Construction of Joint Venture Guarantee · Promissory Estoppel Regarding Liquidated Damages
Outcome: Claim against Fujita under the Joint Venture guarantee dismissed; costs ordered to follow the event in favour of the defendant.
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HCCT000127/1999 HCCT127/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS ----------------------
----------------------- Coram: Hon Burrell J in Court Dates of Hearing: 26, 27, 28 June and 2, 3, 5 July 2002 Date of Judgment: 26 July 2002 ------------------------- J U D G M E N T ------------------------- 1.The plaintiff ("Dorfit") is a Hong Kong based property developer. The defendant ("Fujita) is a Japanese based construction company. The third party, who has played no active role in these proceedings was a Hong Kong construction company. It was originally known as Franki Contractors Ltd but changed its name to B+B Construction Co. Ltd in January 1997. I shall refer to them as "B+B" throughout because nothing turns on the change of name. Background 2.I shall outline the background to these proceedings as briefly and as simply as I can. In 1995 Dorfit acquired a site in Blue Pool Road for redevelopment. They decided to build a 25-storey residential block. 3.After negotiations, on 26 November 1996, Dorfit accepted a tender from B+B and on 28 November entered into a contract with themselves as the employer and B+B as the main contractor for the construction of the foundation and basement works of the project. Clause 17 of the contract stated that "The Main Contractor shall not assign the contract". 4.Fujita's appearance on the scene was earlier, in April or May 1996. Fujita were keen to establish a presence in Hong Kong and wanted to acquire experience and get some involvement in the Hong Kong construction industry. Again, after negotiations, B+B and Fujita signed a Joint Venture agreement dated 16 December 1996. The following are extracts from the Joint Venture agreement : " BETWEEN
AND
The full document is eight pages. 5.On 20 December 1996 B+B asked for Dorfit's consent to assign the contract to the Joint Venture. Again after more negotiations (primarily concerned with the best way to proceed legally) Dorfit agreed subject to the provision of a satisfactory joint and several guarantee. By July 1997, the Joint Venture guarantee had been signed and sealed. It is the guarantee which is the centre piece of this litigation. The parties disagree fundamentally as to its construction and effect. It is sufficiently important and sufficiently short to set out in full : " JOINT-VENTURE GUARANTEE
6.The works on site were carried out by B+B. In June 1998 "short piling" was discovered. At about the end of June 1998, B+B ceased work and left the site with the contract unfinished and in need of urgent remedial work. 7.Not surprisingly, serious discussions ensued and correspondence was exchanged. On 29 September 1998 Fujita agreed to carry out the remedial works. By their letter of that date they made their position clear :
8.Fujita completed the remedial works on 22 December 1998. Later Fujita also agreed to complete the foundation and basement works. They began work on 25 January 1999 and completed those works on 29 June 1999. 9.The consequence of the short piling by B+B was that there was a delay in the completion of the contract works. Dorfit has recouped some of its loss by calling on a bond of $3.1 million in respect of B+B's performance. In this claim Dorfit is suing Fujita for liquidated damages and brings its claim under the Joint Venture guarantee. Fujita contends they are not liable to Dorfit for such losses under the guarantee. Dorfit contends that they are. The construction of the guarantee 10.When reading the documents before trial, when hearing evidence and legal argument during the trial and when considering the competing submissions since the trial, I have found this a very difficult issue to resolve. The two opposing constructions are :
11.Having wrestled with the problem, I return to the fundamental principle that the terms of a guarantee should be construed strictly in favour of the surety. A construction which imposes a liability on a surety which is not clearly and distinctly covered by the guarantee is likely to be wrong. I think the correct approach is if, having considered the surrounding circumstances to try and establish what was the scope and object of the contract, there remains some uncertainty then the court should construe it strictly. The court in such a situation is not permitted to dig deep into extrinsic evidence in an effort to discern the subjective intentions of one or both of the parties to the guarantee. Rather, the court should act as the reasonable man and read and interpret the actual words of the guarantee whilst possessed of the background information which led to its signing. 12.In my judgment such an approach must result in a construction contended for by Fujita. Once broken down to its bare essentials the defence submission is straightforward. There is no need to go beyond it. The court's finding is that this guarantee does not make Fujita liable for liquidated damages which were the result of delay caused by B+B's defect. 13.The defence reasoning in support of this construction has been consistent throughout. Fujita themselves were always meticulously careful to make their contractual position clear. I do not believe that they are taking an advantage of a strict interpretation to avoid a liability which might otherwise morally be theirs. Coming closer to trial, Fujita, through their solicitors on 4 June 2002, set out their position and legal submissions fully by letter. Mr Adrian Huggins, SC for Fujita, both in his opening written submission and five days later in his closing address repeated the same argument. They say : "Look at what actually happened and then look at the actual words in the guarantee", which I now do. The words of the guarantee 14.It must be remembered first of all that Dorfit can only sue Fujita on the guarantee. Fujita was never a party to the main contract. The defence makes the point, and the plaintiff agrees, that there was never any novation. Had there been a novation the original main contract between Dorfit and B+B would have been extinguished and replaced with another with the Joint Venture as a party but both sides agree that that never happened. 15.Further, it is not part of the plaintiff's pleaded case that B+B's liability under the main contract was transferred to either Fujita or to the Joint Venture. The defence's point, quite simply, is that the guarantee only makes Fujita liable if there had been, in fact, a transfer of B+B's rights and obligations under the main contract to the Joint Venture, of which Fujita was a key ingredient, but there was not. 16.The circumstances in which Fujita, as one of the guarantors, becomes liable is clearly set out in paragraphs 1 and 2 of the agreement ("the operational provisions"). Paragraph 1 states that it will guarantee the due performance by the Contractor. The contractor is specifically defined as the Joint Venture, B+B is specifically defined as the "ex-contractor". It was the ex-contractor's performance which caused the delay. Paragraph 1 continues that the guarantor will guarantee "all the obligations and duties and undertakings of the Contractor when and if such obligations, duties and undertakings shall become due and performable according to the terms of the contract". 17.By paragraph 2, the guarantor agrees to indemnify Dorfit against all losses, damages and so on "incurred by it by reason of any act default or omission on the part of the Contractor in performing and observing its obligation under and in accordance with the contract". As before, references to the "contractor" and "its obligations" are references to the Joint Venture. 18.In short, the guarantee contemplated a contract which never came into existence. That is, a contract in which the Joint Venture would perform the contract and acquire obligation etc. which would be performable by the Joint Venture. In fact, B+B performed the contract on its own until it left the site and Fujita finished the works by agreement without accepting any contractual liability to do so. Obligations etc. never became performable by the Joint Venture and B+B's obligations under the contract were never transferred effectively to the Joint Venture. The contract under which B+B carried out its defective works remained a contract between Dorfit and B+B. Fujita did not guarantee the performance of that contract. The rhetorical question is : why should Fujita guarantee the performance of a contract to which it was not a party and over which it had no control? 19.As mentioned earlier, the defendant's solicitors wrote to the plaintiff's solicitors before trial setting out their argument openly and crisply. Inter alia, the letter states :
20.Given the court's acceptance that there was neither any novation nor effective legal assignment by which obligations could have been transferred, it is unnecessary to analyse the matter any further (even though both counsel, Mr N. Cooney for the plaintiff and Mr Huggins for the defendant, helpfully did so, to cover all eventualities). The court's ruling on the construction issue is that the "operational provisions" (i.e. paragraphs 1 and 2 on page 5 supra) do not make Fujita liable. This renders an analysis of the preceding recitals unnecessary. My judgment simply is that as drafted and in the circumstances that actually prevailed, the guarantee does not bite to make Fujita liable for liquidated damages which flowed from B+B's defective work under the original contract. The estoppel issue 21.I will however briefly deal with the second major issue in the trial. As a second string to their bow the defence rely on the doctrine of promissory estoppel. In fact this issue is only relevant if I had decided the "construction issue" in the plaintiff's favour. As I have found in the defence favour they do not need to pull their second string. However, given the difficulties in the construction issue and with an eye to the future, should I be wrong, I will state in outline, what my conclusion is on the factual issues arising from the estoppel argument. 22.To a large extent the issue turns on what was said and understood at a meeting on 17 February 1999. Representatives from both sides were present. Mr Samuel Tak Lee, the principal witness for Dorfit and Mr Suganuma, a Fujita witness, were amongst those present and they both took notes. It is Fujita who have raised estoppel and so it is Fujita who must persuade the court that the answer to all of the following three question is yes :
23.Both Mr Lee's notes and Mr Suganuma's notes were the subject of careful examination and cross-examination. In Mr Lee's notes there is a single reference to liquidated damage. This note is that "liquidated damage will stop". In Mr Suganuma's notes there are three references. On the first page "L.D stop. call bond" is written. (The "bond" is a reference to Dorfit's performance bond of $3.1 million against B+B which it successfully recovered later). On the second page "Call bond. stop L.D" appears. On the third page "guarantee completion LD=0" is written. Mr Suganuma said in evidence that "LD=0" notes Mr Lee's actual words which were "L.D will be zero". 24.Mr Lee's evidence was that Mr Suganuma's notes must be referring to his (Mr Lee's) statement at the meeting that liquidated damages "will stop". As to what he meant by "liquidated damage will stop" in his witness statement he explains it by saying "Mr Okumura knew that liquidated damages would stop running once Fujita had completed the outstanding works". In evidence however he enlarged on this by saying that he was informing Fujita of the legal advice he had received. He said :
25.On the other hand Mr Suganuma's notes record twice "L.D stop. call bond" quite separately from his note that "LD=0" which is recorded later. The first two references must be the same as Mr Lee's note that "liquidated damages will stop". The third references is in a different context namely that - if Fujita guarantees completion L.D will be zero. 26.Mr Lee was an earnest and sincere witness but on this issue I felt compelled to rely on the evidence of Mr Suganuma and Mr Okumura. I found all Fujita's witnesses to be most impressive. I found them to be very careful businessmen of integrity. Witnesses whose evidence could be relied on. 27.In coming to the conclusion that "L.D will be zero" was said in the context of Fujita agreeing to complete the contract I have considered and gleaned support from an analysis of the state of affairs which prevailed at the time of the meeting, as follows. 28.As at 17 February 1999 Fujita had successfully completed the remedial works. B+B were out of the picture for good. B+B's defects had already disrupted the programme. No other contractor had been approached as a possible replacement to finish off the foundation and basement contract. Fujita were on site and competent. It was entirely in Dorfit's interest for Fujita to step into B+B's shoes as the contracting party on site. It was likely to be the best solution for them from both a time and a money perspective. Dorfit would have been, or at least should have been keen to persuade Fujita to complete the works. Fujita also would be keen to agree to do so but not at any cost. It is unimaginable that they would have agreed to start the work with a financial deficit in the form of a liability to pay $7 million worth of liquidated damages. There is no suggestion that they accepted that they were obliged to do the work under the Joint Venture. They had made their contractual position clear in their letter of 29 September 1998 when they agreed to carry out the remedial works. It is apparent also from the notes that Dorfit did not think that B+B would only be good for the $3.1 million bond and no more. The notes refer to Dorfit suing B+B "worldwide" for the further $7 million worth of liquidated damages. 29.When this scenario was put to Mr Lee in cross-examination, his response was unimpressive. He said, in a nutshell, that he had not really thought about it. He suggested that one of his options was to sell the site in its unfinished state. However there was neither documentary evidence nor oral evidence from any of the plaintiff's witnesses that this option was ever considered. I am satisfied that the true situation was that Dorfit wanted Fujita to do the remaining works, Fujita were keen to do them provided they were not taking on the liquidated damages caused by B+B. They sought an assurance to this effect from Mr Lee, they got such an assurance, they relied on it, it formed the basis of their legal relationship thereafter and they proceeded with the works without further delay. I further reject Mr Lee's evidence that he did not appreciate that at the meeting Fujita were seeking this very assurance. 30.As well as looking at the commercial realities at the time, it is also important to consider subsequent events. In support of its contention that the assurance was not given, Dorfit points to four letters which it sent to both B+B and Fujita after the meeting which claimed liquidated damages. Fujita did not respond to these letters. The point is made that had the assurance been given they would have responded to that effect. I do not regard this as a compelling point. Dorfit merely sent the demands, out of a sense of completeness, to both of the Joint Venture partners. Fujita simply re-directed its copy to B+B who it believed, since the meeting, was the only party who would be liable for liquidated damages. Reliance 31.Finally I consider the evidence relevant to the issue of whether Fujita relied on and acted on the assurance. It is not necessary to prove that the assurance was the only thing that Fujita relied on when deciding to complete the works. It is sufficient that it was a very significant matter which weighed heavily in the balance when making the decision. The cost of completing the works was plainly going to be a costly exercise. As it turned out the eventual costs approached $18 million. Prior to the meeting it is true that Fujita had done some preparatory work on site in connection with the completion works rather than the remedial works. However the evidence as to how much work had been done in advance ranged from $150,000 to $500,000. Whatever the exact amount was it was sufficiently small to write off had Fujita not been given the assurance they were seeking, namely that their costs were not going to be $7 million higher because of liquidated damages. 32.It is true that Fujita's Board of Directors in Tokyo had given their approval for Fujita to complete the works on 3 February, two weeks before the meeting. However, I accept the submission that this would not have been a blanket approval but rather it was an approval in principle, subject to satisfactory and sensible terms being agreed. "L.D equals zero" was such a term. 33.For all the above reasons the plaintiff's case fails and I decide the issue of liability on the Joint Venture guarantee in the defendant's favour. I make the usual order nisi that costs follow the event.
Representation: Mr Nicholas Cooney, instructed by Messrs Denton Wilde Sapte, for the Plaintiff Mr Adrian Huggins, SC, instructed by Messrs Lovells, for the Defendant Remarks: |