Weltime Hong Kong Ltd v. Cosmic Insurance Corporation Ltd

HCCT000072A/2002

HCCT72/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.72 OF 2002

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Coram: Deputy High Court Judge Poon in Chambers

Date of Hearing: 22 July 2003

Date of Decision: 29 September 2003

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D E C I S I O N

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Applications

1.There are two applications before me. By a summons dated 4 September 2002, the plaintiff applied against the defendant for (a) summary judgment under Order 14 for HK$17,102,218.97 or alternatively, (b) if leave to defend is to be granted, an interim payment into court by the defendant under Order 29, rule 11(1)(c) of HK$17,102,218.97 or HK$29 million. By another summons dated 9 December 2002, the defendant applied for determination various points of law pursuant to Order 14A and an order dismissing the action in the event that those points are decided in its favour. (The points will be set out in greater detail when I come to deal with them.) I first summarise the background facts leading to the present proceedings below.

Background facts

2.The plaintiff was at all material times a property developer engaged in a residential development at Lot No.1861, DD 100, Sheung Shui, New Territories ("the Project"). It engaged Ken Forward Engineering Limited ("Ken Forward") as its main contractor, the latter's tender having been accepted by a letter dated 25 October 1997 ("the First Letter of Acceptance") from the plaintiff's architect for the Project. According to the First Letter of Acceptance, the contract sum was HK$298,628,007.00 and the contract was to be completed within 306 days from 29 October 1997. A performance bond was required.

3.The defendant is and was at all material times an insurance company incorporated in Singapore and registered in Hong Kong as an overseas company. In November 1997, Ken Forward's parent company forwarded the First Letter of Acceptance to the defendant's insurance broker who in turn sent it to the defendant for consideration. On 13 December 1997, the defendant executed a Performance Bond No.BDH97A002969 dated 13 December 1997 under seal ("the Bond") as surety in favour of the plaintiff to guarantee Ken Forward's performance in connection with the Project. The material parts of the Bond are set out in the Annex to this judgment. I will recite some of the more pertinent terms of the Bond when necessary. At this stage, it is sufficient to note that the Bond referred to an agreement dated 13 December 1997 between Ken Forward and the plaintiff regarding the Project. No such agreement, however, existed at the time. The plaintiff's case, which is not challenged, is that it did not know why the date of 13 December 1997 was so stated because it was not involved in the negotiations regarding the Bond. Although it was the defendant who issued the Bond, it has not offered any explanation in this respect.

4.The First Letter of Acceptance was later superseded by another acceptance letter dated 17 December 1997 ("the Second Letter of Acceptance"). Under the Second Letter of Acceptance, the contract sum was raised to HK$308,817,500.00 and the completion date was changed to 306 calendar days from 13 December 1997. It also contained new terms which did not appear in the First Letter of Acceptance, including :

(a)	the design of the pile caps by the previous site formation contractor should be deemed to be the design by Ken Forward;
(b)	the Schedule of Rates should reflect the quality and quantity of the works to be carried out according to the Specifications and Drawings;
(c)	the Schedule of Rates shall be regarded as firm and will not be subject to re-measurement or adjustment whatsoever;
(d)	no adjustment will be made for the attendance on the final nominated sub-contract/supplier sums and/or specified contract sums; and
(e)	the plaintiff should in its discretion determine the contract at any time and Ken Forward should not be entitled to any claim for loss and/or expense whatsoever incurred.

A performance bond in the sum of HK$30,380,000.00 as per specimen attached to Second Letter of Acceptance was required. But none had in fact been issued. On the evidence before me, the reason for not issuing the new performance bond as specified is not apparent. (It is the plaintiff's pleaded case that the Second Letter of Acceptance is part of the evidence of the main contract between the plaintiff and Ken Forward.)

5.Disputes between the plaintiff and Ken Forward subsequently arose. The plaintiff complained that Ken Forward had been guilty of serious defaults in its performance as the main contractor for the Project. It alleged to have suffered loss and damage in the region of HK$29.9 million. Pursuant to contract, the disputes were subsequently resolved by arbitration.

6.In the arbitration proceedings, Ken Forward raised a number of points. For present purposes, I will only mention two of them. First, it alleged that prior to the entering of the main contract with the plaintiff, given the unfavourable circumstances on the site and the fact the plaintiff wanted Ken Forward to initiate a swift start-up of site works, Ken Forward required the plaintiff to pay HK$20 million by way of deposit. The plaintiff agreed to such payment in consideration of the inclusion in the main contract of a provision entitling the plaintiff to terminate the contract without liability to Ken Forward for loss of profit and expenses resulting from such termination. This is referred to in the course of submissions before me as "the Collateral Agreement". The plaintiff denied the existence of the Collateral Agreement. The arbitrator found against Ken Forward on this issue. The defendant's case is that there was evidence to suggest the existence of the Collateral Agreement and that the arbitrator was wrong in coming to her finding. It further alleged that it was not aware of the Collateral Agreement when issuing the Bond.

7.Ken Forward further alleged in the arbitration proceedings that the parties agreed to terminate the main contract according to the terms set out in a letter dated 13 November 1998. According to this letter, the plaintiff shall (1) pay Ken Forward the sum of HK$5 million on or before 17 November 1998, (2) engage another quantity surveyor to agree with Ken Forward's on a fair assessment or its works done as soon as possible, and (3) waive all its claims against Ken Forward whatsoever howsoever and fully discharge it from its obligations under the contract. Ken Forward agreed to vacate the site on 18 November 1998, which it did. This is referred to as the "Termination Agreement" in the course of submissions. The plaintiff similarly denied the existence of the Termination Agreement. Again, the arbitrator rejected Ken Forward's assertion. The defendant sought to challenge the finding by the arbitrator in the present proceedings. It asserted that the Termination Agreement did exist and had terminated all Ken Forward's obligations.

8.On 1 March 2002, the arbitrator issued the second interim award ("the Award"). Pursuant to the Award, Ken Forward was adjudicated to pay damages to the plaintiff in the net sum of HK$17,102,218.97. Ken Forward's application to appeal out of time the Award was refused by Burrell J. Its appeal against Burrell J's order was dismissed by the Court of Appeal. On 22 May 2003, the Court of Appeal refused its application to leave to appeal to the Court of Final Appeal. By a notice of motion dated 19 June 2003, Ken Forward sought to appeal to the Court of Final Appeal. By a summons dated 20 June 2003, the Acting Registrar of the Court of Final Appeal informed Ken Forward that she was of the opinion that its application disclosed no reasonable grounds of appeal. Ken Forward was called upon to show cause by written submissions on or before 18 July 2003 why its application should not be dismissed by the Appeal Committee. Apparently, no further step has since been taken. Forward has not paid the awarded sum to the plaintiff to date.

9.It is the defendant's case that it was not aware of the arbitration proceedings or the Award until it received a demand issued by the plaintiff's solicitors pursuant to the Bond dated 4 June 2002. The present proceedings were commenced on 22 July 2002.

10.On 25 September 2002, the plaintiff commenced another action, namely, HCCT84/2002 against its architect for the Project alleging, inter alia, negligent certification of interim payment; failure to exercise due care in the supervision of the works, and failure to warn Ken Forward against proceedings with the works without obtaining consent from the Building Authority.

11.With these background facts, I now turn to the plaintiff's application for summary judgment.

Summary judgment application

12.In the Amended Statement of Claim, the Award is pleaded as the conclusive evidence of Ken Forward's defaults and of the consequential loss and damage suffered by the plaintiff : see paragraphs 10 and 12 respectively. The intended effect of the plea is that the Award is the conclusive evidence against the defendant of Ken Forward's defaults and the plaintiff's consequential loss and damage. This is the very basis upon which the plaintiff launched the application for summary judgment : see paragraph 24 of the written opening submissions of Ms Cheng, SC, appearing for the plaintiff. In paragraph 1 of her reply submissions, while conceding that the Award did not create any issue estoppel against the defendant, Ms Cheng nevertheless contended that it offered very strong evidence in support of the plaintiff's claim against the defendant. That being the case, she argued, it is up to the defendant to raise an arguable defence or triable issues. This brings me to examine the evidential value of the Award.

Evidential value of the Award

13.The law relating to the evidential value of an arbitral award in cases like the present one is well settled. In the absence of special agreement, general words in a guarantee guaranteeing the due performance of all the obligations of the principal debtor did not of themselves have the effect that the surety was bound by an arbitration award between the principal debtor and creditor, even where the arbitration award arises out of an arbitration clause in the contract containing the obligations of the principal debtor guaranteed by the surety. (This has been figuratively referred to as "the arbitration trap".) In Re Kitchen (1881) 17 Ch D 668, James LJ explained at p.671 thus :

"... It is contended that [the surety] is liable to pay any sum which an arbitrator shall say is the amount of the damages. The guarantee must be expressed in very clear words indeed before I could assent to a construction which might lead to the grossest injustice. It is perfectly clear that in an action against a surety the amount of the damage cannot be proved by any admissions of the principal. No act of the principal can enlarge the guarantee, and no admission or acknowledgment by him can fix the surety with an amount other than that which was really due and which alone the surety was liable to pay. If a surety chooses to make himself liable to pay what any person may say is the loss which the creditor has sustained, of course he can do so, and if he has entered into such a contract he must abide by it. But it would be a strong thing to say that he has done so, unless you find that he has said so in so many words. The arbitration is a proceeding to which he is no party; it is a proceeding between the creditor and the person who is alleged to have broken his contract, and if the surety is bound by it, any letter which the principal debtor had written, any expression he had used, or any step he had taken in the arbitration would be binding upon the surety. The principal debtor might entirely neglect to defend the surety properly in the arbitration; he might make admissions of various things which would be binding as against him, but which would not, in the absence of agreement, be binding as against the surety. It would be monstrous that a man who is not bound by any admission of the principal debtor, should be bound by an agreement between the creditor and the principal debtor as to the mode in which the liability should be ascertained. That is enough to dispose of the case. ..."

These principles have been faithfully followed and applied up to now : see for example, Burns & Others v. Colocotronis (Vasso) [1979] 2 Lloyds Rep 412; Hayter v. Nelson [1990] 2 Lloyds Rep 265; Stargas Spa v. Petredec Ltd (the Sargasso) [1994] 1 Lloyds Rep 412 and Hicks v. Humbercycle Finance Group [2001] All ER (D) 202.

14.Ms Cheng did not seek to dispute these principles but tried to overcome them by taking essentially two points. First, she submitted that there was a special agreement whereby the defendant agreed to honour the Award. Clause 35 of the articles of agreement, which formed part of the underlying contract between the plaintiff and Ken Forward provided that dispute between the parties were to be referred to arbitration which shall be final and binding on them. When the defendant provided the Bond, it knew that the parties would, if dispute arose, resolve such dispute by way of arbitration and that any loss and damage would be conclusively determined by such arbitration. It was on this basis that the Bond was issued and the defendant should therefore be estopped from denying the Award as conclusive evidence of Ken Forward's default and the loss and damage suffered by the plaintiff.

15.Ms Cheng relied on two cases in support of her contention. The first case is the unreported judgment of Leonard J in Marshall-Karson Construction & Engineers Limited v. KCRC, HCCT38/1994. There, KCRC awarded a contract to the plaintiff subject to provision of a banker's performance bond. The contract contained an arbitration clause. Disputes subsequently arose and the plaintiff commenced legal proceedings. KCRC applied for a stay, which was granted. Ms Cheng relied on the following paragraph of Leonard J's judgment at pp.6 and 7 :

"The Respondent [i.e. the plaintiff] is trying in effect to obtain from this Court a declaration as to the Applicant's [i.e. KCRC'S] right to enforce the undertaking against the bank and as to the bank's right to rely upon the irrevocable instructions given to it by the Respondent. But the bank is not a party to the proceedings. The bank is seeking no declaration and, so far as I am aware, there is no dispute at present between the Applicant and the bank or between the bank and the Respondent. When I enquired why the bank was not a party to the proceedings, I was informed by counsel for the Respondent that the reason is that the bank is quite content to accept whatever decision the Court may make. That is not surprising, for it has security in the form of a deposit pledged by the directors of the bank as well as a guarantee. The proceedings are misconceived."

With respect, I fail to see how Marshall-Karson Construction & Engineers Limited is relevant. The facts are clearly distinguishable : the surety bank did not take part in the proceedings because it was content to accept and presumably be bound by the court's decision. Here, the defendant denied that it was bound by the Award and challenged vigorously the findings made by the arbitrator. What a surety chose to do in a particular set of circumstances in Marshall-Karson Construction & Engineers Limited could not possibly be relevant to the present case. In my view, Leonard J's judgment does not lend any support to Ms Cheng's submissions at all.

16.Ms Cheng next relied on Sabah Shipyard (Pakistan) Ltd v. The Islamic Republic of Pakistan & another [2002] EWCA Civ 1643 (14 November 2002). There, the English Court of Appeal dealt with an appeal against the judgment of Steel J granting an injunction against the appellant from continuing with an action commenced against the respondent. The facts are completely different. In brief, the parties and others were involved in a construction project of a barged-mounted electric generation facility at Karachi. The appellant entered into a guarantee in favour of the respondent guaranteeing the performance of the obligations of other parties to the underlying contracts. Steel J made a ruling that the appellant's assertion that the claimants could not rely on an arbitration award but would need to establish the case in the arbitration was misconceived. He distinguished Re Kitchen on the basis that there was a special agreement in the case before him. There is, however, nothing in the judgment of the English Court of Appeal to show how Steel J arrived at his ruling. There is certainly nothing in the judgment to suggest, as Ms Cheng sought to do, that Steel J arrived at his ruling purely on the terms of the guarantee in question. In my view, Ms Cheng cannot possibly derive any support from that case.

17.I reject Ms Cheng's submission that there is a special agreement that the defendant accepted the Award as conclusive evidence of its liability under the Bond. Such a contention is neither supported by the terms of the Bond nor any other extrinsic evidence before me. Even assuming that the defendant knew that any disputes between the plaintiff and Ken Forward would be conclusively resolved by arbitration, that alone did not amount to an acknowledgement or agreement, express or implied, on the part of the defendant that it accepted the arbitral award as conclusive evidence binding on it when the plaintiff sought to enforce the Bond in some other proceedings.

18.The second point taken by Ms Cheng is this. She argued that Ken Forward's failure to honour the Award triggered the defendant's obligations under the Bond. This submission is contrary to authority. In The Vasso, Goff J (as he then was) had this to say at pp.418-9 :

"I come now to the issues in the case. The plaintiffs advance their claim in two separate ways. First of all, they seek to recover a sum equal to the amount awarded by Mr. Staughton [the Arbitrator], $1,069,917.66, plus the costs of his award, ￡1,000. The basis of this claim is that it was an implied term of the contract contained in the addendum that each party to it would pay any sum awarded by an arbitration tribunal established pursuant to the arbitration clause in the addendum, and that since, under his guarantee, the defendant undertook and guaranteed the due performance and payment by Astrofeliz of all liabilities and obligations of Astrofeliz arising out of the addendum, he guaranteed that Astrofeliz would honour Mr. Staughton's award.

Now, the first part of that proposition, the implied term of the addendum, is supported by authority (see Bremar v. Drewry, [1933] 1 K.B. 753) and is not disputed. But the second part is, in my judgment contrary to authority and cannot be supported. It is well established that general words in a guarantee guaranteeing the due performance of all the obligations of the principal debtor do not of themselves have the effect that the surety is bound by an arbitration award in an arbitration between the principal debtor and the creditor, even where the arbitration award arises out of an arbitration clause in the contract containing the obligations of the principal debtor guaranteed by the surety. That is established by the case of Re Kitchin, (1881) 17 Ch.D. 668, a decision of the Court of Appeal which has stood unchallenged for nearly 100 years and is still cited in the leading text books as good authority today. As was pointed out in that case, if the law was otherwise, serious injustice might occur. For example, an arbitration award might result from an admission made by the principal debtor in the course of the arbitration without the authority of the surety."

This point must also fail.

19.Mr Scott, SC, for the defendant, submitted and I agree that the Award is not conclusive evidence against the defendant. The plaintiff needs to establish against the defendant afresh at the trial of this action the defaults on the part of Ken Forward and the loss and damage that it had suffered as a result. Relying on the Award is not enough for present purposes or indeed for the trial. As pointed out by Goff J in The Vasso, one of the reasons for the rule in Re Kitchen is that, were the surety to be bound by the conclusive award of an arbitration to which it was not a party, serious injustice could occur where the contractor fails to argue or plead relevant points which would disentitled the employer to some or all of the amounts awarded, or where the contractor makes admissions in the course of the arbitration without the surety's approval. Mr Scott complained that Ken Forward had made significant errors of approach in conducting the arbitration, including its failure to plead highly relevant materials upon which omissions the arbitrator relied in arriving at the Award. He also complained that the arbitrator had made errors of law and facts which need to be properly investigated at trial. I do not propose to set out in detail the complaints counsel has raised. They can be found at paragraph 15 of Mr Scott's revised skeleton and the Schedule attached thereto. Suffice it to say that having considered the complaints carefully, I come to the conclusion that they are matters for trial. Accordingly, I do not consider it desirable to express my views on them at this stage.

20.For these reasons, the plaintiff's application for summary judgment must fail. In the affidavit filed by So Yui Chit, solicitor acting for the defendant, on 8 October 2002 in support of its application for specific discovery of documents, the defendant had already stated its case that it was not bound by the Award. The plaintiff had since been made aware of this line of defence, which is clearly arguable in the circumstances. In my view, the plaintiff should not have proceeded with the summary judgment application. The application is thus dismissed : see Hong Kong Civil Procedure 2002, Vol.1, para.14/7/3. The application for interim payment must also fail because the plaintiff has failed to demonstrate that it has met the requisite threshold laid down in Order 29, rule 11(1)(c) : see Hong Kong Civil Procedure 2002, Vol.1, para.29/11/1 at pp.507-8.

21.On costs, I will make an order nisi that the defendant shall have the costs of the plaintiff's summons from 8 October 2002 up to and including the hearing before me and the costs incurred before 8 October 2002 be in the cause.

Application under Order 14A

22.I now turn to the defendant's Order 14A application. The points raised for my determination are :

(1)	Whether as a matter of law and/or on the true construction of the Bond the defendant could have any liability under the same in the absence of any agreement dated 13 December 1997 between the plaintiff and Ken Forward ("the First Point")?
(2)	If the answer to the First Point is in the affirmative, whether the defendant's liabilities under the Bond were in any event released by the Second Letter of Acceptance which superseded the First Letter of Acceptance ("the Second Point")?
(3)	Whether as a matter of law and/or on the Bond's true construction a written demand under the Bond must be made prior to the termination of the main contract between the plaintiff and Ken Forward ("the Third Point")?
(4)	Whether as a matter of law and/or on the Bond's true construction, the termination of the main contract between the plaintiff and Ken Forward on or about 18 November 1998 deprived the defendant of the opportunity to satisfy or discharge its liability (if any) under the Bond other than by a payment of a sum of money ("the Fourth Point")?
(5)	If the answer to the Fourth Point is in the affirmative, is the defendant released from its obligations under the Bond by reason of a breach thereof by or other acts of the plaintiff ("the Fifth Point")?

Before addressing with these points in turn, I would like to preface my discussions with two general observations.

23.First, as can be readily seen, the Points relate mostly to a proper construction of the Bond. As a general rule, when construing a contract, the court is entitled to enquire beyond the language of the documents and see what the factual matrix or the circumstances were with reference to which words were used, and the object appearing from those circumstances which the person using them had in view. Thus, in Reasdon Smith Line Ltd v. Yngvar Hansen-Tangen [1976] 1 WLR 989, Lord Wilberforce said at pp.995-996 :

"No contracts are made in a vacuum; there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

24.The second observation, which is related to the first is this. If the point of law or construction sought to be determined is sensitive to the facts, as in the case where facts are in dispute and can only be determined after trial or where fuller facts are required, it is not a suitable case for Order 14A. Likewise, where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to spilt the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do : see Hong Kong Civil Procedure 2002, Vol.1, para.14A/2/4 at pp.178-179. In cases where a proper construction of a document is "facts-sensitive", it is not suitable to bring an application under Order 14A.

The First Point

25.I now examine the First Point. It arose out of the date of 13 December 1997 stated in the Bond. The relevant parts of the Bond are set out below :

"WHEREAS by an agreement made the 13th day of December 1997 between Ken Forward Engineering Limited (hereinafter called 'the Main Contractor') of the one part and the Employer of the other part (hereinafter called 'the Main Contract') the Main Contractor has agreed to undertake the execution, completion and maintenance of The Proposed Residential Development at Lot No.1861 in D.D. 100, Sheung Shui, New Territories ('the Works') as therein defined in conformity with the provisions of the Main Contract.

...

For the avoidance of doubt, the Main Contract, as defined herein, shall include, where applicable any formal contract which is entered into following acceptance of the Main Contractor's tender and/or the signing of any letter of award. PROVIDED THAT the aggregate liability of the Surety hereunder for all claims shall not exceed the amount state above AND PROVIDED THAT this Bond shall remain in full force and effect with respect to all written demands made hereunder until the Architect shall have issued the Certificate of Making Good Defects under the Main Contract or if more than one the last of such certificates.

..."

Mr Scott submitted that no such agreement of 13 December 1997 was ever made on that date and no reference to any agreement bearing that date was ever made in the arbitration proceedings. Since no right or obligation arose out of the agreement referred to in the Bond there could be no sum for which the defendant's surety stood liable under such a mis-identified document. He went on to submit that no reliance could be placed on the penultimate paragraph of the Bond (the second paragraph quoted above). He submitted that the use of the word "following" was intended to refer to any documents which came into existence after the agreement referred to in the 3rd paragraph of the Bond (the first paragraph quoted above). As at 13 December 1997, the only agreement between the plaintiff and Ken Forward in relation to the works was the First Letter of Acceptance.

26.Ms Cheng submitted that the defendant was well aware that the Bond related to the contract between the plaintiff and Ken Forward which was dealt with by the arbitrator : see the demand letters by the defendant's solicitors to Ken Forward and its parent company both dated 4 December 2002 respectively exhibited as "SYC-2" to the 2nd affirmation of So Yui Chit filed on 5 November 2002 on behalf of the defendant and "SWMV-9" to the 3rd affirmation of Vivien Sum filed on behalf of the plaintiff on 25 November 2002. In the two counter indemnities referred to in these letters, the Bond was referred to. Ms Cheng submitted that from the factual matrix giving rise to the issuance of the Bond and as confirmed by the subsequent conduct of the defendant, there can be no doubt that the date of 13 December 1997 was typed in by a mistake of fact. That being the case, the court will rectify the contract so as to carry out the intentions of the parties. In support, she referred to Chitty on Contracts, (28th Edn), Vol.1, para.5-065 which deals with rectification in cases of common mistake. Ms Cheng also submitted that at word "following" in the penultimate paragraph of the Bond referred to "following acceptance of the tender".

27.As I have noted in paragraph 4 above, on the undisputed evidence before me, the plaintiff was not aware of the reason why the date of 13 December 1997 was stated in the Bond and the defendant who issued the Bond has not offered any explanation. The reason why the date of 13 December 1997 was stated in the Bond is, I believe, part of the factual matrix that the court will have regard to when construing the Bond. Whether it was a mistake remains to be seen when all the evidence pertinent to this issue is placed before the court at trial. There is, however, considerable force in Ms Cheng's submissions. In my view, it is arguable for present purposes that it is a mistake to state the date of 13 December 1998 in the Bond. It is also arguable that on a proper construction, the "Main Contract" as defined in the Bond included any formal contract entered into following acceptance of Ken Forward's tender by the plaintiff by virtue of the First Letter of Acceptance. I do not consider it appropriate to come to a definite view on these matters, which are dependent on the evidence relating to and findings to be made on the relevant facts. They are best answered at trial. The First Point is not suitable for determination under Order 14A.

The Second Point

28.The Second Point is premised upon the proposition that if the obligations assumed by the defendant under the Bond were subsequently varied in a material way without the defendant's knowledge and consent, the Bond will be discharged : Holme v. Burnskill (1878) 3 QBD 495. This rule is however subject to express agreement to the contrary. The 4th paragraph of the Bond contained this proviso :

"... no alteration in the terms of the Main Contract made by agreement between the Employer and/or the Main Contractor or in the extent or nature of the works to be constructed, completed and maintained thereunder and no allowance of time under the Main Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Main Contract on the part of the Employer shall in any way release the Surety from any liability herein."

Mr Scott submitted that the First Letter of Acceptance constituted the only contract in existence at the time the Bond was issued. The obligations assumed under the First Letter of Acceptance was materially varied when the First Letter of Acceptance was superseded the Second Letter of Acceptance. The substitution of the Second Letter of Acceptance was not an alternation within the meaning of the proviso. Hence the need for a new bond.

29.Ms Cheng submitted that the Second Letter of Acceptance fell within the proviso. The Bond had been drafted in a way so that additional works (as contemplated by the Second Letter of Acceptance) came within the ambit of the Bond. The fact that no new bond was ever provided suggested that no substitution of the underlying contract took place and the parties treated the Bond as still valid.

30.In my view, whether the substitution of the Second Letter of Acceptance fell within the proviso is a matter for trial. The extent and nature of the additional items of the work and how they bore on the original obligations assumed by Ken Forward for the Project need to be examined. The reason why no new bond was issued under the Second Letter of Acceptance needs to be established. The Second Point is thus "facts-sensitive". It cannot be determined under Order 14A.

31.For completeness, I would mention one final point on this topic. Mr Scott submitted that the defendant was not aware of the substitution of the Second Letter of Acceptance at the time. I note however the defendant had not advanced such a positive case of absence of knowledge in its affidavit evidence. This point may well have to be explored at trial.

The Third Point

32.The Third Point concerns the demand to be made under the Bond. The second proviso in the penultimate paragraph of the Bond read :

"PROVIDED THAT this Bond shall remain in full force and effect with respect to all written demands made hereunder until the Architect shall have issued the Certificate of Making Good Defects under the Main Contract or if more than one the last of such certificates."

Mr Scott submitted that in order to trigger the obligation to pay under the Bond, two ingredients need to be present for a valid written demand : (a) a demand in writing; (b) issued prior to the issue of a certificate of making good defects. It is a necessary part of that latter obligation that the architect should still be in a position prior to such written demand for him to issue the said certificate. That is not the case here as there is no evidence of a written demand under the Bond made by the plaintiff until the solicitor's letter dated 4 June 2002. As at that date, the main contract had been terminated and therefore came to an end save for the purposes of claiming damages : Sussie Atlantique S.A. [1967] AC 361.

33.Ms Cheng submitted the second proviso is not a necessary condition precedent to bringing the action. The proviso is there to ensure that the Bond is still in force even if one demand has been made. The defendant's liability to pay arises "on default by the Main Contractor". I see considerable force in Ms Cheng's submission and take the view that it is certainly arguable that the second proviso is not a condition precedent. This point of construction should however be answered at trial. The Third Point is again not fit for determination under Order 14A.

The Fourth Point

34.The relevant part of the Bond stipulated :

"NOW THE CONDITION of the above-written Bond is such that if the Main Contractor shall duly perform and observe all the terms provisions conditions and stipulations of the Main Contract on the Main Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if one default by the Main Contractor the Surety shall satisfy and discharge any liability of the Main Contractor to the Employer and/or the loss or damage sustained by the Employer thereby then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the Main Contract made by agreement between the Employer and/or the Main Contractor or in the extent or nature of the works to be constructed, completed and maintained thereunder and no allowance of time under the Main Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Main Contract on the part of the Employer shall in any way release the Surety from any liability herein."

Mr Scott submitted that the surety could satisfy and discharge the liability of Ken Forward so as to bring the obligation under the Bond to an end. However, without notice to the defendant the plaintiff and Ken Forward agreed to terminate the main contract and Ken Forward vacated the site on about 18 November 1998 in return for the payment by plaintiff of HK$5 million. The effect of this agreement by the plaintiff was to terminate the main contract and to deprive the defendant of its right under the Bond to "satisfy and discharge" Ken Forward's obligations under the main contract other than by the payment of the sum of money. One alternative method, had this Termination Agreement not been made, would have been for the defendant to have engaged its own contractors to carry out the remaining obligations of Ken Forward under the main contract. Given the amounts involved, this would not have been a fanciful possibility. This denial of the defendant's right to "satisfy and discharge" the liabilities of Ken Forward other than by payment of a sum of money amounts to a breach by the plaintiff of a condition of the Bond, which has the effect of releasing the defendant from its obligations thereunder. This is similar to cases where a surety's right of recourse is prejudiced by the creditor's acts : Kingston Upon-Hull v. Harding [1892] 2 QB 494 and "The Law of Guarantees" by Andrews and Millett, 3rd Edn, para.9.41. If this argument is accepted (and it needs no disputed evidence of fact to resolve it), the Fourth Point (and the Fifth Point as well) should be answered in the affirmative.

35.On the other hand, Ms Cheng submitted that the rights of the defendant were not prejudiced. It was a financial body. The Bond permitted it to satisfy and discharge the liability by paying the beneficiary. That was the whole purpose of the Bond. It was also the basis of the counter-indemnity - to provide security or fund to the defendant as indemnity. The suggestion that the defendant might have engaged a contractor is fanciful. More importantly there is no evidence of this intention or ability. The alleged prejudice is non-existent or not proven. There is no factual basis to make a decision on the question of law.

36.I agree with Ms Cheng that the defendant has not adduced any evidence to show that it might have engaged a contractor to discharge the main contract. In the absence of such evidence, I am unable to accept the submission that the defendant had been deprived of that opportunity thus discharging its obligations under the Bond. An Order 14A determination is not suitable and not established.

The Fifth Point

37.In connection with the Fifth Point, Mr Scott relied on, among other things, the Collateral Agreement and the Termination Agreement to support his contention that the Bond had been materially varied without the consent of the defendant. The disputes relating to those points are clearly "facts-sensitive". Before any ruling on the Fifth Point can be made, those factual disputes must be resolved first. That can only be done at trial.

38.For the above reasons, on the evidence before me, none of the points are capable of determination under Order 14A. The defendant's application must fail and I dismiss it accordingly. I will also make an order nisi that the plaintiff shall have the costs to be taxed if not agreed.

Representation:

Ms Teresa Cheng, SC, instructed by Messrs Jones Day, for the Plaintiff

Mr John Scott, QC, SC, instructed by Messrs Lovells, for the Defendant

Annex

The material terms of the Bond are :

"BY THIS BOND was Cosmic Insurance Corporation Limited whose registered office is situate at 3rd Floor, Kingpower Commercial Building, 409-413 Jaffe Road, Wanchai, Hong Kong (hereinafter called 'the Surety') are held and firmly bound unto Weltime Hong Kong Limited (hereinafter called 'the Employer') in the sum of Hong Kong Dollars Twenty-Nine Million Nine Hundred Thousand Only (HK$29,900,000.00) for the payment of which the Surety binds itself its successors and assigns by these presents.

SIGNED, SEALED AND DELIVERED this 13th day of December 1997

WHEREAS by an agreement made the 13th day of December 1997 between Ken Forward Engineering Limited (hereinafter called 'the Main Contractor') of the one part and the Employer of the other part (hereinafter called 'the Main Contract') the Main Contractor has agreed to undertake the execution, completion and maintenance of The Proposed Residential Development at Lot No.1861 in D.D. 100, Sheung Shui, New Territories ('the Works') as therein defined in conformity with the provisions of the Main Contract.

NOW THE CONDITION of the above-written Bond is such that if the Main Contractor shall duly perform and observe all the terms provisions conditions and stipulations of the Main Contract on the Main Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if one default by the Main Contractor the Surety shall satisfy and discharge any liability of the Main Contractor to the Employer and/or the loss or damage sustained by the Employer thereby then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the Main Contract made by agreement between the Employer and/or the Main Contractor or in the extent or nature of the works to be constructed, completed and maintained thereunder and no allowance of time under the Main Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Main Contract on the part of the Employer shall in any way release the Surety from any liability herein.

For the avoidance of doubt, the Main Contract, as defined herein, shall include, where applicable any formal contract which is entered into following acceptance of the Main Contractor's tender and/or the signing of any letter of award. PROVIDED THAT the aggregate liability of the Surety hereunder for all claims shall not exceed the amount state above AND PROVIDED THAT this Bond shall remain in full force and effect with respect to all written demands made hereunder until the Architect shall have issued the Certificate of Making Good Defects under the Main Contract or if more than one the last of such certificates.

The Bond shall be governed and construed in accordance with Hong Kong law and the Surety hereby submits to the jurisdiction of the Hong Kong courts."