Hay Nien Co Ltd v. The Prosperity Insurance Co Ltd

HCA002925/1980

BETWEEN

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Coram: Hon. LIU, J. in Chambers

Date: 27 March 1982

On appeal from Master's decision on 2nd March, 1982.

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JUDGMENT

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1. This is an appeal from the decision of Master McClelland given on the 2nd March, 1982 dismissing the defendant's application for striking out the Statement of Claim on inter alia the ground that it discloses no reasonable cause of action. It is the Court's discretionary jurisdiction under Order 18 rule 19 which was sought to be invoked, and such jurisdiction should be exercised sparingly and only when the claim is, on the face of it, "obviously unsustainable" or "almost incontestably bad". The plaintiff's claim was also challenged as being frivolous and/or vexatious, and affidavit evidence was exhaustively resorted to before the learned Master.

2. The plaintiff's claim against the defendant arose from a Performance Bond. In 1978, the plaintiff engaged a contractor for erecting an industrial building in Kwun Tong. It was provided by Clause 25(1) of the Building Contract that upon failure of the contractor to proceed regularly and diligently with the works, the plaintiff's architect was entitled to serve notice requiring the contractor to remedy the default within fourteen days and that should the contractor fail to comply with such notice of the architect, the plaintiff was thereafter entitled to terminate the contract and claim damages. Clause 25(2) of the said Building Contract empowered the plaintiff to terminate the employment of the contractor and claim damages on the making of a winding-up order under the Companies Ordinance against the contractor. The defendant's Performance Bond was executed together with the contractor for his due performance of the said Building Contract.

3. After the commencement of work under the said Building Contract, the conractor caused delay. By a letter dated the 19th March, 1980, the plaintiff notified the defendant that the contractor was not expected to complete the construction within time or the agreed cost. It was intimated that the defendant would be duly held responsible for payment up to $550,000 under the Performance Bond. Pursuant to Clause 25(1) of the said Building Contract, by a letter dated the 25th March, 1980 the plaintiff through its architect called upon the contractor to "remedy its default in not proceeding regularly and diligently with the works "within fourteen days subject to the penalty of termination and dismissal. The contractor having made no attempt "to rectify its default", the plaintiff accordingly discharged the contractor on the 10th April, 1980. I have had no sight of any of these letters dated the 25th March and 10th April.

4. The plaintiff's claim is two-pronged : a claim arising from the termination of the said Building Contract on the 10th April under Clause 25(1) and a further or alternative claim in consequence of an automatic termination as a result of the making of a winding-up order against the contractor on the 25th April under Clause 25(2). The special damages claimed under each head are identical, but with damages for delay claimed in one case down to the 10th April and in the other down to the 25th April. Both these alternative claims for damages for delay are calculated from the alleged scheduled completion date on the 7th December, 1979. Under the said Building Contract, date for completion was to be 380 days from possession of the site, inclusive of rainy days, Sundays and Public Holidays. For the purposes of these proceedings, suffice it to refer to Clause 23 of the said Building Contract whereby extension of time may be granted by the plaintiff's architect for inclement weather and extras necessitated by any discrepancy in or divergence between the contract drawings or quantities. The rest of the relevant parts of Clause 23 speak for itself:

"Upon it becoming reasonably apparent that the progress of the Works is delayed, the Main Contractor shall forthwith give written notice of the cause of delay to the Architect, and if in the opinion of the Architect the completion of the Works is likely to be or has been delayed beyond the Date for Completion ... or beyond any extended time previously fixed ... then the Architect shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair and reasonable extension of time for completion of the Works ..."

5. For extra works, 21 days extension was allegedly granted by the architect and another 6 days for typhoon signals, making a total extension of 27 days, thus bringing the date of completion up to the 27th December, 1979 which is later in time than the scheduled completion date pleaded in the Statement of Claim.

6. The first attack mounted on behalf of the appellant/defendant was that the plaintiff's action was commenced beyond the six months' limit laid down in the Performance Bond. Both the alleged scheduled completion date, the 7th December, 1979, and the completion date as verified by the plaintiff's architect, the 27th December, 1979, would bring the institution of this action on the 6th June, 1980 within such six months' limit. But it was argued by Mr. Lee on behalf of the appellant company that none of the alleged extensions was shown to have been applied for in writing or thereafter granted in writing. Grent emphasis was placed on the word "shall" in that portion of Clause 23 of the said Building Contract set out above, which governed the giving of written notice of the cause of delay to the architect and the obligation of the architect to assess and grant a reasonable extension in writing thereafter. In my view, much violence would be done to the language of Clause 23 if it were to be construed as having the effect of depriving the contractor's right to claim for delay unless a written notice shall have been duly given. The absurdity may best be illustrated by the suggestion that the contractor's right to claim delay would be defeated by the architect's failure to assess and grant a reasonable extension in writing thereafter, a default of the other contracting party. I am not entirely convinced that any non-compliance with such prescribed manner for claiming delay would put an end to the contractor's right under Clause 23. Furthermore, there are provisions in the Performance Bond for extension of time or grant of other indulgences in any form or shape. It will be convenient here to set out the Performance Bond in extenso:

"THIS BOND is executed by the Surety upon the following express conditions which shall be condition precedent to the right of the Employer to recover hereunder:-

The Surety shall be notified in writing of any non-performance or non-observance of the part of the Contractor of any of the stipulations or provisions contained in the said Contract and on their part to be performed and observed which may involve a loss for which the Surety is responsible hereunder within Fourteen (14) days after such non-performance or non-observance shall have come to the knowledge of the Employer or his representative or representatives having supervision of the said Contract and a registered letter posted to THE PROSPERITY INSURANCE COMPANY LIMITED at Solar House, 4th Floor, No.28 Des Voeux Road Central, Hong Kong shall be the notice required within the meaning of this Bond and the Employer shall in so far as it may be lawful permit the Surety to perform the stipulations or provisions of the said Contract which the Contractor shall have failed to perform or observe.

No alteration in the terms of the Contract made by agreement between the Employer and Main Contractor or in the extent or nature of the Contract works and no allowance of time by the Employer under the Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the contract on the part of the Employer shall in any way release the Surety from any liability herein.

IF any suits at law or proceedings in equity are to be brought against the Surety to recover any claim hereunder the same must be instituted within Six Months after the Contract Completion Date."

7. Thus it would appear that the extension of time sought and granted, even not in writing, must ultimately be salvaged, if need be, by the pen-ultimate clause in the Performance Bond. In conclusion, it is not beyond argument that the extension applied for and granted purportedly under Clause 23 of the said Building Contract was not rendered invalid by any departure from the stipulated procedural formality. I need not stress that once an extension was granted, the delay would not "involve a loss for which the (defendant as) Surety (was) responsible" under the Performance Bond. The argument that the plaintiff's action was clearly commenced after the six months' time limit as laid down by the Performance Bond cannot be said to be incontestably sound.

8. I turn next to the second limb of Mr. Lee's submissions. My attention was drawn to the provisions of the Performance Bond that any non-performance or non-observance by the contractor of any terms in the said Building Contract should be notified in writing to the defendant as surety within 14 days after the same had come to the knowledge of the plaintiff as employer and that such written notification was clearly stipulated to be a "condition precedent to the right of the (plaintiff) to recover".

9. There were matters which, I felt, were not fully canvassed before me in this appeal. At one stage, I felt anxious enough to express my hope to receive further documents in the possession of the parties. Neither party appeared to be willing. Unless the arguments of the appellant are completely flawless without much profound examination, I would be reluctant on a Performance Bond claim in a building contract case involving not inconsiderable documentation to exercise my discretionary jurisdiction to shut a plaintiff from his judgment seat. I also know not the circumstances in which a winding-up order was made against the contractor company. I certainly cannot say at this stage if the making of the winding-up order was clearly the result of any fault on the part of the contractor; less would I be entitled to assume that the liquidation of the contractor company was brought about by any non-performance or non-observance on its part under the said Building Contract. Mr. Lee categorically stated that he was not at all concerned with quantum but with merits. It may very well be that the claim for damages for delay cannot be substantiated on merits to the full quantum claimed, but the plaintiff's further or alternative claim on account of the making of the winding-up order against the contractor does not appear to be incontestably bad.

10. The first claim of the plaintiff is, as I see it, based not so much on delay caused by the contractor as on a dismissal and termination by reason of the contractor's failure to remedy its default upon the service of a notice pursuant to Clause 25(1). It was argued by Mr. Lee that a claim for damages for delay once defeated by reason of an omission to notify in writing the defendant as surety of a non-performance or non-observance on the part of the contractor cannot be revived by the service of a notice under Clause 25(1) calling upon the contractor to remedy its default on pain of dismissal from and termination of the said Building Contract. There may be some substance in such argument, but I need express no or no concluded view thereon as it would seem that a claim for damages for delay per se AND a claim for damages for delay and non-completion arising from termination of the said Building Contract after service of a notice under Clause 25(1) are separate causes of action.

11. Mr. Lee conceded that his appeal would stand or fall on the question of merits or the lack of it in the plaintiff's Statement of Claim. There was no disclosure of the precise contents of the letter dated the 25th March, 1980 and the letter of termination dated the 10th April, 1980, but after the letter of the 19th March to the defendant as surety, by the 25th of March, 1980 the defendant must have been aware of the lack of diligence on the part of the contractor. There was also nothing before me to indicate that the letter of the 25th March and the letter of termination on the 10th of April were both copied to the defendant. Mr. Allman-Brown intimated that he did not appreciate that such point was to be or had been taken by the defendant. He stated that in fact both letters were copied to the defendant. To such statement, the only response from Mr. Lee was that he had no clear instructions and that it would in any case be incumbent upon the plaintiff to plead a condition precedent said to have been laid down by the Performance Bond requiring notification in writing of any non-performance or non-observance on the part of the contractor. If in fact these letters had both been copied to the defendant, it would have been difficult to maintain that the defendant was not given any written notification of matters under Clause 25(1) even though no written notification had been served on the defendant for breaches prior to the service of the notice by way of the letter dated the 25th March, 1980 pursuant to Clause 25(1). I can appreciate the contended possibility of part of the damages for delay claimed by the plaintiff being unsustainable, but again the real question to be decided is whether this head of the plaintiff's claims is clearly not maintainable. I cannot accept that as the position with as well the plaintiff's first claim as with the plaintiff's further or alternative claim.

12. Obviously the Statement of Claim will have to be amended on at least the alleged scheduled date of completion, quantum of damages and the alleged notification pursuant to the Performance Bond. Mr. Allman-Brown drew my attention to the fact that had it been a mere challenge to some deficiency in pleading, the plaintiff would have had no objection to apply for and effect the necessary amendments and it would have not been necessary to incur such heavy litigation costs. Mr. Lee had time and again assured the Court that the application before the learned Master and this appeal were wholly based on "merits". In the circumstances, it remains for me to order that the appeal of the defendant be dismissed with costs to the plaintiff.

13. I would now entertain the plaintiff's application to amend its Statement of Claim, and obviously the costs of such application and all consequential amendments will have to be borne by the plaintiff.

Representation:

Mr. Allman-Brown instructed by Wilkinson & Grist for Plaintiff.

Mr. Philip Lee instructed by Johnson, Stokes & Master for Defendant/Appellant.