Nishimatsu Construction Co. Ltd. v. American Home Assurance Co.

HCA010416/1999

HCA10416/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10416 OF 1999

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Coram : Mr Recorder Kotewall S.C. in Chambers

Date of Hearing : 20 September1999

Date of Judgment : 20 September 1999

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J U D G M E N T

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1. The Plaintiff seeks summary judgment under O.14 of the Rules of the High Court against the Defendant in the sum of $7,291,773 being the amount of a bond entered into by the Defendant and under which the Plaintiff has called but the Defendant has refused to pay.

2. The Plaintiff was the main contractor for the Airport Authority for Contract 420. This was for the construction of the Ground Transportation Centre at the airport at Chek Lap Kok. The Plaintiff employed UDL Argos Engineering and Heavy Industries (hereinafter referred to as "UDL Argos") as a subcontractor for the fabrication and erection of low level roofs and pedestrian canopies in the Ground Transportation Centre. It was a requirement of the subcontract that UDL Argos provided the Plaintiff with a bond in a prescribed form. This was obtain by UDL Argos from the Defendant in favour of the Plaintiff and was executed as a Deed on 27th May 1997.

3. The Plaintiff's case is that UDL Argos defaulted in its obligations under the subcontract. Accordingly, on 2nd June 1999, it demanded payment from the Defendant in the full amount of the bond.

4. On 14th June 1999, the Defendant wrote asking the Plaintiff to specify the default relied upon and to provide evidence of the damage it suffered as a result. The Plaintiff took the view that, under the terms of the bond, it had no obligation to provide this information or evidence and declined to do so. Further correspondence between the parties failed to resolve the difference between them. The Plaintiff issued a writ endorsed with the Statement of Claim on 26th June 1999.

5. The Defendant filed a defence. This was on 23rd July. In essence, it raises one issue and that is that the letter of 2nd June 1999 did not constitute a valid demand under the bond in that the Plaintiff failed to identify, in the written demand, the matters which the Defendant said are necessary. The breakdown of what the Defendant said the Plaintiff had to supply, I can summarise from the skeleton argument of Mr Westbrook :

(1) the default by UDL Argos relied upon by the Plaintiff;

(2) the quantification or substantiation of the damages and losses allegedly sustained by the Plaintiff; and

(3) the identification or proof of the causal link between the alleged default and the alleged damage.

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 2nd 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. Mr Westbrook for the Plaintiff had suggested that I should first determine whether this is a demand bond or a performance bond. He said that the former is payable upon a simple demand conforming with the words of the bond, whereas the latter is payable only on proof of default. My view of the matter - and I don't think either Counsel quarrel with this - is that whatever label one puts on the bond, my ultimate task is to determine the exact effect of this clause in this bond. If the bond in question is a demand bond, says Mr Westbrook, the Court treats it as equivalent to irrevocable letters of credit which the bank or the party issuing the bond is obliged to pay upon demand, absent only a clear case of fraud. That may be so, but the legal effect is still determined by the terms of the bond. Fraud is not alleged in this case.

8. However, the degree of specificity in the demand or call to trigger liability remains to be considered. Mr Sussex for the Defendant did not dispute that this is a demand bond. The principles established by the cases I can take by and large, subject to refinements, from Mr Westbrook's skeleton argument. These principles Mr Sussex did not, in general, dispute. I will refer to Mr Sussex's detailed submissions later on. The principles are as follows :-

(1) As I have said, the task is to construe the wording of the bond in question.

(2) It is only in exceptional cases that the Courts will interfere with irrevocable obligations assumed by banks or others in a similar position, for instance, in clear cases of fraud of which the bank has notice. I will for convenience refer to the institution issuing the bond or the letter of credit as 'the bank'.

(3) A bank is not concerned with the relations between the contracting parties, nor with whether one party has performed its contractual obligations or whether it is in default. The bank must pay on demand if so stipulated without proof or conditions.

(4) A bank is unfitted to and should not be called upon to decide the merits of a construction dispute, and the parties would not be treated as having intended such a result without clear words to that effect.

(5) An identical form of bond between similar parties came before the Hong Kong Court last year in UDL Kenworth v Airport Authority Hong Kong and American Home Assurance Company, HCA8431/98 (judgment delivered on 19th June 1998). There Suffiad J. held that that bond was a demand bond payable without proof of default or damage. I note that Mr Sussex pointed out that the argument raised in that case was a more extreme one which he said he does not espouse. His case is that some information had to be provided, not actual proof of default.

(6) The Court should be very slow to impute to the parties an intention to require a degree of particularity similar to a request for further and better particulars in litigation, and the authority for that proposition is Odebrecht Oil and Gas Services Ltd v North Sea Production Co. Ltd., (the English Technology and Construction Court dated 10th May 1999) (Unreported), per Dyson J. at p.12. The bond in that case was a rather complicated one and the wording is significantly different from the bond which I have to consider.

(7) It is in the nature of a performance bond that there will at some stage after the call be an accounting between the contracting parties. Thus, the Plaintiff can claim later for any damages over and above the bonded amount. The Defendant can also recover any over-payment. This is a matter for subsequent argument between the contracting parties and is not a reason to delay payment of the bond. Mr Westbrook referred to this as the 'pay now argue later' principle. This principle is fully supported by the observations of Potter LJ and, in particular, Staughton LJ in Cargill International SA and another v Bangladesh Sugar and Food Industries Corp [1998] 2 All ER 406 at 416.

9. Mr Sussex for the Defendant submitted that the demand which the Plaintiff served upon the Defendant and upon which it relies as having triggered the Defendant's liability to pay the full bonded sum is, in his words, cryptic in the extreme and not competent to trigger a liability. Mr Sussex pointed out that the performance bond under consideration is on a standard form used in connection with the construction works at Hong Kong's Airport at Chek Lap Kok and that it is not a form drafted by or on behalf of the Defendant. He asserted that the terms of the bond are rather curious and refers to Clause 3, which I do not think is necessary to set out, and submitted that it reads as if the performance bond were a guarantee. Mr Sussex went on to say that the draftsman of this particular bond was no doubt mindful that the parties to a contract of guarantee may, by suitable wording, exclude any of the normal incidence of suretyship. On that premise Mr Sussex further submitted that if the bond were obviously an on-demand bond, such wording would not be necessary because the bond would represent an autonomous undertaking by the bondsman to pay. It would not be a guarantee at all and it, therefore, would not be necessary to go to such lengths to exclude the incidence of suretyship.

10. Mr Sussex contrasted the wording of the bond in this case with one which is commonly employed in the building industry and points out that the usual building industry bond, if I may so refer to it, is conditional and that in arriving at the sum payable by way of damages, account must be taken of unpaid sums due and set-offs available to the allegedly defaulting party to the building contract.

11. I have no problem with this submission. At this stage, I merely point out that my tasks is to construe the terms of the bond in front of me and not any other. Mr Sussex submitted that the draftsman of this bond has borrowed wording from the widely used form of conditional bond and he points to the alleged similarities. This may or may not be so. My tasks, as I have said, is to determine, whatever it genesis, the effect of the bond and the clause before me.

12. Mr Sussex developed, with some sophistication and much ingenuity, this argument based on the precise effect of the words used. He submitted that the words of this bond were included to indicate the detail which should be included in the demand under this bond. In relation to the requisite details, Mr Sussex made three points, and I can take these from his skeleton argument :-

(1) Whilst the claimant need not or does not need to prove the default or defaults upon which he relies as entitling him to make a call under the bond, he must at least state that there has or have been defaults and to identify the default relied upon.

(2) The claimant must also give some detail of the monetary loss which, he says, flows from each default relied upon, and when claiming damages, he must indicate how he has arrived at the monetary sum.

(3) He must also indicate the causal link between the default relied upon and the monetary loss which he claims to have sustained.

13. Mr Sussex submitted that this need not place any particular burden on that claimant who must, however, submit a demand, which is at least intelligible to the bondsman. After all, said Mr Sussex, all this information must be available to him in order for him to be in a position to make a bona fide call on the bond. He further submitted that this construction of the bond takes account of the number of legal considerations which he set out in some detail in his skeleton argument. First, Mr Sussex said at the date of this bond (and he said it is to be inferred on the date on which the standard form was drafted), it was unclear as a matter of law whether a claimant who made a call upon an on-demand bond in circumstances where he had no such entitlement, could be required to account for the monies paid under the bond to the other party to the building contract who provided the bond. Mr Sussex pointed out, correctly, that until the decision of Morison J. in the Cargill case (at first instance [1996] 2 Lloyd's Rep 524, upheld in the Court of Appeal), the only traditional pronouncement upon the point was a dictum of Lord Denning MR in an unreported decision of State Trading Cooperation of India Ltd. v ED & F Sugar Ltd., a decision of the Court of Appeal in England, delivered on 17th July 1981.

14. Secondly, Mr Sussex said, however, the bondsman could recover back monies paid under the bond as money and received, or alternatively relying on the false representation contained in the demand. In order to recover monies, however, the bondsman would have to identify the representation of fact or the mistake of fact which induced him to pay. It would be all the more difficult if the demand contained no details of the breach of the building contract relied upon or the link between the breach and the monetary sum claimed.

15. Thirdly, Mr Sussex said that it is well established that a bondsman under a demand bond, like a bank under a letter of credit can refuse to pay, or be restrained from paying in the case of fraud. In the context of performance bonds, Mr Sussex said that fraud includes the beneficiary making a claim for payment to which the beneficiary knows he is not entitled, and he said a wholly unparticularized demand would give the bondsman no opportunity to evaluate whether this exception applies.

16. Both Mr Westbrook and Mr Sussex very helpfully referred to a number of the relevant authorities and pointed to similarities and differences in the wording of some of the bonds considered in the cases. Mr Westbrook placed particular reliance on I.E. Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd's Rep 496, decision of the Court of Appeal in England. I have considered these cases and have set out earlier the principles to be extracted from them. But as Staughton LJ said in theI.E. Contractors' case (at page 499) "it must never be forgotten that the task of the Court is to construe the documents which were used in this case and not any others".

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; the demand restricted the call to the amount of the bonded sum. The bond does not require more than this. The relevant provision in the bond states that the payment is to be made "without proof of the said default or conditions". Specifying a particular breach or particularising the damages sustained is not required when making a formal demand on the bond. It would be difficult and productive of argument to determine the degree of details to be supplied. And I hold that more details than were supplied are necessary. 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.

All this, in my judgment, the Plaintiff has done in its demand.

19. In my view, there is no reasonably arguable defence to this action and the Plaintiff is entitled to summary judgment under O.14 of the Rules of the High Court in terms of its Summons.

20. I must not leave this case without expressing my gratitude to Counsel who have argued and presented their respective cases clearly and concisely. Both of you have assisted me in no small measure.

[Submission on Costs]

21. The final judgment would be in the sum of $7,291,773 plus interest at the rate of 1% above prime lending rate as from 17th June 1999, and the Plaintiff is to have the costs of this application.

Representation:

Mr Simon Westbrook, inst'd by M/s Masons, for the Plaintiff

Mr Charles Sussex, inst'd by M/s Denton Hall, for the Defendant