China Complant Development (HK) Ltd v. Ng Shing Fat and Others

HCA 927/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 927 OF 2004

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BETWEEN

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Before: Deputy High Court Judge To in Court

Dates of Hearing: 16 - 18 January 2007

Date of Judgment: 26 April 2007

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J U D G M E N T

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Introduction

1.This is an action for breach of guarantee.  The Plaintiff (“China Complant”) and Fine Projects Limited were parties to a joint venture in civil engineering works.  The Plaintiff is an investing party from China providing finance for the joint venture in the amount of $7 million.  Fine Projects Limited is a civil engineering company.  It was responsible for providing technical know-how to the joint venture and to execute works on behalf of the joint venture.  The four Defendants are directors of Fine Projects Limited.  The Plaintiff and Fine Projects Limited incorporated Complant & FP Limited (the “Company”) on 4 July 2001 as the corporate vehicle for carrying out the joint venture.  The Company is held by the Plaintiff as to 51% of its issues shares and by Fine Projects Limited as to the balance of 49%.  The four Defendants from Fine Projects Limited were the executive directors of the Company vested with authority for the day to day operation of the Company.  Mr Wang Huayan and three other directors from the Plaintiff were non-executive directors.

2.The Company entered into two sub-contracts with Nishimatsu Construction Co Ltd (“Nishimatsu”); one was in respect of works to be carried out for The Hongkong Electric Co Ltd (the “HEC Contract”) and the other was in respect of works to be carried out for CLP Power Hong Kong Limited (the “CLP Contract”).  In the course of the joint venture, some discord arose between the Plaintiff and Fine Projects Limited.  Eventually, the parties agreed to alter the terms of the joint venture from one of sharing profit and loss according to their respective shareholdings into one in which the Plaintiff was guaranteed a fixed return in exchange for the Plaintiff adopting a “hands-off” attitude in the control and management of the Company.  This new arrangement was fortified by a deed signed, sealed and delivered by the four Defendants to the Plaintiff (the “Deed of Guarantee”) guaranteeing, inter alia, that each of the Defendants would within six months from the completion date of the respective contracts in their personal capacity effect payment to the Plaintiff of the shortfall where the amount paid by the Company to the Plaintiff under the respective contracts should turn out to be less than the guaranteed return. 

3.The works under the HEC Contract and the CLP Contract were completed on 30 September 2002 and 1 December 2003 respectively or at the latest on 25 April 2003 and late 2003 respectively.  Some disputes arose between Nishimatsu and Fine Projects Limited.  Nishimatsu withheld the payments under the two contracts.  As a result, the Plaintiff did not receive the full amounts of guaranteed return from the Company long after the six months period had lapsed since the works of the two contracts were completed. 

4.The Plaintiff instituted the present action against the four Defendants seeking to recover the shortfall under the Deed of Guarantee.  Judgment by consent was entered into between the Plaintiff and the Defendant on 8 January 2007; and subsequently between the Plaintiff and the 4^th Defendant on 10 January 2007.  This trial is only concerned with the liability of the 2^nd and 3^rd Defendants, both of whom are unrepresented.  Essentially, the 2^nd and 3^rd Defendants’ defence is that no payment is yet due under the Deed of Guarantee as both the HEC Contract and the CLP Contract (as distinct from works under the respective contracts) have not yet been completed, no completion certificates have ever been issued and the final accounts in respect of the two contracts have not yet been settled.  There are no substantial disputes of fact between the parties.  The issue in this case is one of construction of the Deed of Guarantee.

Background

5.Fine Projects Limited was a sub-contractor of Nishimatsu.  It had cash flow problems.  In about early 2001, the Defendants on behalf of Fine Projects Limited approached the Plaintiff proposing to set up a joint venture for the purpose of entering into what the parties thought were lucrative sub-contracts with Nishimatsu.  In essence, Fine Projects Limited would procure construction projects and be responsible for execution of works while the Plaintiff would provide the working capital.  The parties would share profit and loss according to their shareholdings in the Company.  The Defendants estimated that the contract fee under the HEC Contract would be $50 million and projected a profit of $5 million in ten months.  They estimated that a working capital of $5 million was required during the first two months of operation and thereafter the project could be self-financed by interim payments from Nishimatsu.  The Defendants proposed the Plaintiff to contribute $5 million to the joint venture for the purpose of securing the HEC Contract.  They offered to repay from the Company’s income before assessment of profit the Plaintiff’s capital contribution with interest at 2% above the prime lending rate of the Hongkong & Shanghai Banking Corporation and an overhead cost of $500,000 for supervising the accounts and the performance of works under the joint venture.  The Plaintiff agreed and a Chinese co-operation agreement incorporating the above terms was signed by the Plaintiff and Fine Projects Limited on 21 June 2001.

6.As Fine Projects Limited was in urgent need for funds to pay deposits for purchasing or renting the tunnel boring machineries from Germany, the Plaintiff’s holding company, Complant Hong Kong Ltd paid $600,000 on 22 June 2001 on behalf of the Plaintiff to Fine Projects Limited before the Company was actually incorporated on 4 July 2001.  A further sum of $600,000 was paid by Complant Hong Kong Ltd on 13 July 2001 to the Company.

7.In about July or August 2001 while the HEC Contract was being performed, the parties agreed to include the CLP Contract in the joint venture.   The Defendants projected a profit of $5 million over a period of twenty-eight months.  A similar co-operation agreement was reached in respect of the CLP Contract save that the capital contribution required from the Plaintiff was $2 million.

8.The total funding which the Plaintiff committed was $7 million for the two contracts.  Between 22 June 2001 and 16 October 2001, the Plaintiff injected a total of $3.8 million into the Company.  As at that time, the Plaintiff’s position under the joint venture was that it was entitled to be repaid its capital investment with interest at 2% above the prime lending rate and a 51% share in the profit and loss.  The Plaintiff was financially exposed.  There was no guarantee that the joint venture would succeed.  It had the prospect of 51% of the profit and the risk of 51% of the loss.  Fine Projects Limited had no financial exposure, but had the prospect of 49% of the profit and the risk of 49% of the loss.

9.In late October 2001, the 1^st Defendant complained to Mr Wang that the Plaintiff had been too stringent in the running and management of the Company, in particular in injecting funds only in connection with the HEC Contract and the CLP Contract.  The 1^st Defendant said that Fine Projects Limited was having cash flow problems in its other projects and if it failed in those other projects, the Company would also suffer.  He even suggested that Fine Projects Limited might have to terminate the joint venture. 

10.It was under those circumstances that the 1^st Defendant proposed to alter the terms of the joint venture.  He proposed that while the Plaintiff’s capital contribution of $7 million for the two contracts, its entitlement to be repaid the capital with interest and overhead cost of $500,000 per contract remained unchanged, the Plaintiff’s return under each contract would be fixed at $2.3 million and a fixed percentage out of every payment by Nishimatsu under the HEC Contract and the CLP Contract would be paid to the Plaintiff until the above amounts have been paid in full.  The Plaintiff agreed but requested the Defendants’ fortification with their personal guarantees. 

11.Subsequently, upon the 1^st Defendant informing Mr Wang that all the Defendants had agreed to give the guarantee, Mr Wang sent the 1^st Defendant a draft deed of guarantee prepared by the Plaintiff’s solicitors for the Defendants’ consideration.  Later, the Defendants returned the draft deed of guarantee together with their proposed amendments.  The Plaintiff adopted most of the amendments.  The Deed of Guarantee was finalised and executed by the parties on 13 November 2001.  At the request of the Defendants, the Plaintiff paid $3 million into the Company on 16 November 2001 and the balance of $200,000 on 20 November 2001 making up the total capital contribution of $7 million. 

12.Thus, in releasing the full funding to the Company, the Plaintiff lost control in ensuring that its capital was applied to the purpose of the joint venture.  The Plaintiff had no management of the Company or the two contracts.  The Plaintiff’s position under the new arrangement was that it secured a guaranteed and fixed return of $2.3 million in each contract with no risk of loss, but forwent the prospect of making $2.5 million profit as projected for each contract or more.  On the other hand, the position of Fine Projects Limited was that it had complete freedom in using the Plaintiff’s capital investment on its own projects.  That was a benefit for Fine Projects Limited as the Plaintiff would then be financing Fine Projects Limited’s other projects.  Another benefit is that Fine Projects Limited would have the prospect of a return higher than the projected $2.5 million for each contract.  For those benefits, Fine Projects Limited had to pay the price of not only saving the Plaintiff from risk of loss but also to guarantee the Plaintiff a near target return of $2.3 million in each contract.

The Deed of Guarantee and some relevant contractual provisions

13.The Deed of Guarantee was entered into between the four Defendants on the first part, the Plaintiff on the second part and Fine Projects Limited on the third part.  The relevant provisions are as follow:

“NOW THIS DEED WITNESSTH that:-

1.     In consideration of the premises and of the extra incentive hereinafter provided by China Complant, the Guarantors and each of them hereby jointly and severally guarantee to and undertake with China Complant as follows:-

(I)      that the Guarantors will use their best endeavours to procure the due execution of the HEC contract and the CLP contract by the Company;

(II)    that the HEC and the CLP contracts will both be duly completed by the Company within the contract period or extended contract period as authorised by the HEC and  the CLP (or NCC as appropriate) contracts without undue delay by the Company;

(III)  that the said projects will be completed by the Company within the agreed limit of finance, i.e. HK$5 million for the HEC contract and HK$2 million for the CLP contract and that China Complant will not be called upon to inject further loan capital to the Company;

(IV)   that China Complant as an investor will receive the    following financial rewards from the Company:-

(A)      as to the HEC contract

(i)        that the net profit derived by the Company in and after the execution and completion of the HEC contract will not be less than HK$4,600,000.00;

(ii)        that all of the said net profit, being not less than HK$4,600,000, will be distributed by the Company to the shareholders by way of dividend yielding a dividend to China Complant of not less than HK$2,300,000.00;

(iii)       that China Complant will be paid a overhead cost under the HEC contract of HK$500,000.00;

(iv)       that China Complant will be paid interest by the Company on the said sum of HK$5 million or any part thereof advanced by it to the Company under the HEC contract at the rate of 2% above the Prime Lending rate of The Hongkong and Shanghai Banking Corporation Limited, such interest to be calculated on a monthly basis on the balance then unpaid of the said loan capital;

(v)        that the repayment of the said sum of HK$5 million and interests thereon will be made by the Company to China Complant before final account settlement of this contract;

(vi)      that in order to effect payment of the amounts hereinabove guaranteed, the Company shall forthwith pay to China Complant a sum which is not less than 12% of the payment made by NISHIMATSU CONSTRUCTION CO., LIMITED to the Company under the HEC contract each time such payment is received by the Company until full payment is made by the Company to China Complant of the sums hereinabove guaranteed;

(vii)     that the Guarantor and each of them will within six months from the completion date of the HEC contract in their own personal capacity effect payment to China Complant of the short fall where the amount paid by the Company to China Complant under the HEC contract should turn out to be less than the financial rewards herein guaranteed by the Guarantors and each of them.

(B)      as to the CLP contract

(Similar provisions as in Clause 1(IV)(A) above except that:

(a)     that in Clause 1(IV)(B)(iii): the overhead cost of HK$500,000.00 in Clause 1(IV)(A)(iii) is replaced by a consultation fee of HK$1,400,000.00,

(b)     that in Clause 1(IV)(B)(iv) and (v): the sum of HK$5 million in Clause 1(IV)(A)(iv) and (v) is replaced by the sum of HK$2 million; and

(c)      that in Clause 1(IV)(B)(vi): the percentage of payment in Clause 1(IV)(A)(vi) of 12% is replaced by 9%.)

14.The followings are some relevant contractual provisions of the HEC Contract entered into between Nishimatsu and the Company:

1.       Definitions

1.(1)  In this Sub-Contract (as hereinafter defined) the following expressions shall have the meanings hereby respectively assigned to them, except where the context otherwise requires:

…

(h)  “Period for Completion” shall be as defined in Schedule 3 but which shall be subject to change in accordance with these Conditions

…

(l)    “Sub-Contract” means this Agreement and the Conditions and Schedules together with such other documents as are specified in Schedule 2, …

(m) “Sub-Contract Works” means the works described in the documents specified in Schedule 2, such works to include all operations expressly or impliedly required by the Sub-Contract in relation to, and including the provision of, the plant and structures themselves and/or the Temporary Works to be provided by the Sub-Contractor.

8.      Commencement and Completion

8.(1)  … Subject to the provisions of this clause, the Sub-Contractor shall complete the Sub-Contract Works within the Period for Completion specified in Schedule 3.

Schedule 3 provides that the date of completion of this part of the HEC Contract was 30 September 2002.

15.Presumably, the Company and Nishimatsu had not executed a formal agreement in respect of the CLP Contract.  According to Nishimatsu’s post tender confirmation letter dated 15 August 2001, the commencement date of the CLP Contract was 1 August 2001 with a contract period of twenty-eight months.  The date of completion would therefore be 1 December 2003.

The legal principles applicable to construction of contract

16.The single and most important issue raised in this case is one of construction of the Deed of Guarantee, particularly what is the meaning of “completion date of the HEC Contract” in Clause 1(IV)(A)(vii), “completion date of the CLP Contract” in Clause 1(IV)(B)(vii) and associated terms in the Deed of Guarantee.  Construction of a contract is not the same as interpretation of the meaning of the words used in the contract.  It is the ascertainment of the meaning which the contract would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.  The applicable principles in construction of a document have been summarised by Lord Hoffmann in Investors Compensation Scheme Ltd and West Bromwich Building Society [1998] 1 WLR 897 at 912-913 as follows:

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated.  The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life.  Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded.  The principles may be summarised as follows.

(1)     Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)     The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)     The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception are in some respects unclear.  But this is not the occasion on which to explore them.

(4)     The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.

(5)    the ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.  Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, 201:

‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”

These principles have been affirmed by Lord Hoffmann sitting as a Non Permanent Judge of the Hong Kong Court of Final Appeal in Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 4 HKC 707.  He said at 726 to 727:

“The construction of a document is not a game with words.  It is an attempt to discover that a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.  In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant.  Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

17.These are the legal principles which I shall adopt in construing the Deed of Guarantee, particularly the meaning of “completion date” in Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) in the total context of the Deed of Guarantee. 

The meaning of “completion date”

18.Mr Chan, counsel for the Plaintiff, submits that the meaning of “completion date” in the Deed of Guarantee can be seen from the face of the HEC Contract and the CLP Contract themselves.   Clause 8(1) of the HEC Contract provides that the Company shall complete the sub-contract works within the period for completion specified in Schedule 3 and Schedule 3 provides that the date of completion of this part of the HEC Contract was 30 September 2002.  In respect of the CLP Contract, Nishimatsu’s post tender confirmation letter dated 15 August 2001 states that the commencement date of the CLP Contract was 1 August 2001 with a contract period of twenty-eight months.  Thus the date of completion for the CLP Contract was 1 December 2003.

19.The 2^nd Defendant’s argument which is adopted by the 3^rd Defendant is as follows.  Construction contracts are complex documents which cover many aspects of the construction process, such as performance, quality, maintenance of work, defect liability period, warranties and other requirements.  The Deed of Guarantee must be understood in this light.  The 2^nd Defendant argues that completion of a contract is not the same as completion of the works under the contract and that the date of settlement of final accounts of a contract is but one aspect of completion of the contract.  Accounts may take twelve to eighteen years after completion of works to settle and a contract may not be completed until expiry of warranty period, which may be as long as twenty years.  He suggests that not until the accounts have been settled, defect liability period and warranties expired would a contract be completed.  He says that there are disputes over the HEC Contract and the CLP Contract between the Company and Nishimatsu and the final accounts have not yet been finalised.  Hence, the 2^nd Defendant submits that the HEC Contract and the CLP Contract are not yet completed and the Defendants’ liability to pay under the Deed of Guarantee has not yet arisen.

20.The 2^nd Defendant has not actually defined what he understood by “completion date” of the HEC Contract and the CLP Contract.  He only described what it is not.  He says it is certainly not the same as completion of works under the contract, it is not the same as date of settlement of the final accounts under the contract but something close to and it is indeterminable as there are questions such as warranty period, defect liability period and there are disputes by the employer or principal contractor which is out of control of the sub-contractor or the Company in this case.  He cannot refer to any contractual provision under the HEC Contract and the CLP Contract or the Deed of Guarantee which supports his construction of “completion date”. 

21.While that interpretation relieves the Defendants from having to pay any shortfall before settlement of final accounts of the HEC Contract and the CLP Contract, that interpretation does not sit well with Clause 1(II) under which the Defendants and Fine Projects Limited undertook and guaranteed that the two contracts would be duly completed by the Company within the contract period.  The contract period under the HEC Contract was ten months while that under the CLP Contract was twenty-eight months.  It is common ground that the settlement of final accounts would take place some time or even years after the completion of works.  Thus, on the 2^nd Defendant’s interpretation, it is impossible for the contracts to be completed within the respective contracts periods under Clause 1.  The Defendants would as a matter of course be in breach of Clause 1(II) for failing to settle the final accounts within the respective contracts periods, to say the least.   The 2^nd Defendant was then forced to argue that for the purpose of Clause 1(II), “completion of contract” means completion of works, but for the purpose of Clause 1(IV) it means something different.  On that argument, the Deed of Guarantee could not be construed consistently.  Completion of contract would have to mean one thing in Clause 1(II) and another in Clause 1(IV).  I consider the 2^nd Defendant’s construction very strained.

22.Interpretation of contract is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.  I have set out the factual matrix in paragraphs 5 to 12 above.  At the time, there was discord about the tight financial control over the release of funds exercised by the Plaintiff.  The purpose of the financial control was to ensure that the funds of the joint venture were properly applied only to the HEC Contract and the CLP Contract and not to other projects of Fine Projects Limited.  The other purpose was to secure the Company’s profit as well as the Plaintiff’s return for its investment.  Those purposes would be defeated if the Plaintiff was to adopt a “hands-off” approach as requested by the Defendants.  Hence, in exchange for the “hands-off” approach, Fine Projects Limited offered a guaranteed and fixed return to the Plaintiff for its investment.  For that guaranteed and fixed return, the Plaintiff gave up the prospect of receiving return beyond the guaranteed return.  Under the new arrangement, the Defendants or Fine Projects Limited would be in sole control of the Company, the execution of works under the two contracts and how the resources of the Company were to be applied or even diverted to the projects of Fine Projects Limited.  The Defendants were executive directors of the Company while the four directors nominated by the Plaintiff, including Mr Wang, were non-executive directors.  With the “hands-off” approach to be adopted, the Plaintiff would have absolutely no control over the Company, the execution of the works under the two contracts and the settlement of final accounts of the two contracts.  The Plaintiff would become a passive investor.  It was under those circumstances that the Plaintiff requested the Defendants’ personal guarantee in addition to the guaranteed fixed return by Fine Projects Limited.  I shall bear in mind this factual matrix when construing the Deed of Guarantee.

23.Under Clause 1 of the Deed of Guarantee, the Defendants guaranteed to the Plaintiff:

(1)      that the Defendants will use their best endeavours to procure the due execution of the HEC Contract and the CLP Contract (Clause 1(I));

(2)      that the HEC Contract and the CLP Contract will both be duly completed by the Company within the contract period or extended contract period as authorized by The Hongkong Electric Co Ltd and CLP Power Hong Kong Limited (or Nishimatsu as appropriate) without undue delay by the Company (Clause 1(II));

(3)      that the two contracts will be completed by the Company within limit of finance, i.e. HK$5 million for the HEC Contract and HK$2 million for the CLP Contract and that the Plaintiff will not be called upon to inject further loan capital to the Company (Clause 1(III)); and

(4)      that the Plaintiff as an investor will receive the financial rewards from the Company as set out in Clause 1(IV) (Clause 1(IV)).

24.As for the financial rewards, the Defendants guaranteed four financial rewards under Clause 1(IV)(A)(ii), (iii), (iv) and (v) and Clause 1(IV)(B)(ii), (iii), (iv) and (v).  Those financial rewards are:

(1)      a guaranteed net profit of $2.3 million for each contract;

(2)      a overhead cost of HK$500,000 under the HEC Contract and a consultation fee of HK$1,400,000 under the CLP Contract;

(3)      interest on the capital under the two contracts at the rate of 2% above the prime lending rate; and

(4)      full repayment of the loan capital before the final accounts settlement of the respective contracts. 

25.The following should be noted.  Clauses 1(IV)(A)(i) and 1(IV)(B)(i) are guaranteed net profit to the Company, from which the Plaintiff’s guaranteed share of profit is derived.  It is not a financial reward as such to the Plaintiff.  Clauses 1(IV)(A)(v) and 1(IV)(B)(v) only relate to method and time of payment of some of the financial rewards and not separate financial rewards. Likewise, Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) do not provide for any separate financial reward, but are guarantees as to payment of financial rewards where the total amount paid by the Company including those paid under the mechanism of Clauses 1(IV)(A)(vi) and 1(IV)(B)(vi) falls short of the guaranteed financial rewards.

26.In ascertaining the intention of the parties as regards the financial rewards guaranteed under the Deed of Guarantee, a reader must bear in mind that the Defendants gave the Deed of Guarantee in exchange for the Plaintiff giving up control over its investment.  The Plaintiff became a passive investor with absolutely no control over the Company and its performance of the two contracts.  The Plaintiff’s concerns are how much it would receive for its investment and when it would receive payment.  The financial rewards were fixed and guaranteed, the only question is when would the Plaintiff be paid.  The Plaintiff had no control over how profits would be made and when to settle the final accounts with Nishimatsu under the two contracts.  It could play no part in the decision making as to how to obtain payments from Nishimatsu and in that connection what and when to make any concession so as to expedite payment.  The Plaintiff was aware of the other projects Fine Projects Limited had with Nishimatsu which may affect Nishimatsu’s payment to the Company under the two contracts.   It could not have left itself to the mercy of the Defendants, Fine Projects Limited or Nishimatsu as to when it would be returned its capital and return on its investment.  The only way the Deed of Guarantee could provide comfort to the Plaintiff is for the Defendants to guarantee payment at a determinable time mutually agreed by the parties and to take the uncertainty which may be created as a result of the Plaintiff’s lack of control over the Company; and disputes between Nishimatsu and the Company about settlement of final accounts or about any aspects arising out of the Company’s performance of the contracts out of the Plaintiff’s mind.  Bearing in mind the above factual matrix, I have no difficulties to find that the intention of the parties was that if there would be any shortfall by the time six months have lapsed since the completion date of the respective contracts, the Defendants would pay the shortfall regardless whether the final accounts of the contracts have been settled. 

27.The Deed of Guarantee was drafted by the Plaintiff’s solicitors and adopted by the Defendants who are men in the construction industry.  The Deed of Guarantee was to guarantee the due performance of the HEC Contract and the CLP Contract (Clauses 1(I), (II), (III) and (IV)) for which the Company would make profit to pay the financial rewards.  Hence, “completion date” as used in the Deed of Guarantee by the Plaintiff’s solicitors and as understood by the Defendants must be the respective completion date of the HEC Contract and the CLP Contract.

28.Under the article 1 of the General Conditions of the HEC Contract, “sub-contract” is defined the agreement and the conditions and schedules together with such other documents as are specified in Schedule 2 and “sub-contract works” means the works described in the documents specified in Schedule 2.  Under article 8, the Company shall enter upon the site and shall complete the sub-contract works within the period for completion specified in Schedule 3, which was 30 September 2002.  Thus completion of the contract must mean completion of the works described in the documents specified in Schedule 2 in accordance with the terms of the HEC Contract.  The HEC Contract would be completed if the works in Schedule 2 were executed.  Whether the accounts have been finalised, or warranty expired are matters beyond completion of the contract and which go to the parties’ liability under the contract.  Completion date must be construed accordingly, meaning the contractual completion date as adjusted by any extension of time approved by Nishimatsu in accordance with the terms of the contract. 

29.There was no formal written agreement for the CLP Contract.  The post tender confirmation letter from Nishimatsu provides that the commencement date of the main contract was 1 August 2001 and the contract period was twenty-eight months or such time as may be extended in accordance with the main contract.  “Completion” and “completion date” under the CLP Contract must have similar meaning as that under the HEC Contract.

30.It should be noted that under Clauses 1(IV)(A)(v) and 1(IV)(B)(v), the Plaintiff would be returned the capital of $5 million and $2 million before the final accounts settlement of the respective contracts, but no specific date was given.  Under Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii), the Defendants guaranteed that they would pay the shortfall.  It is important to note that the guaranteed time of repayment of capital by the Company under Clause 1(III) was by reference to final accounts settlement of the respective contracts, whereas the guaranteed time of payment by the Defendants of all shortfalls including repayment of capital under Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) was within six months from the completion date of the respective contracts.  If “completion of contract” means completion of works and settlement of the final accounts and performance of other obligations as submitted by the 2^nd Defendant, then the guarantees given under Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) would be illusory, as the Plaintiff would be guaranteed return of capital before final accounts settlement under Clauses 1(IV)(A)(v) and 1(IV)(B)(v) anyway.  Why should the Plaintiff wait for an indeterminable period after the settlement of the final accounts?   The only way these clauses could be read consistently is by construing completion of contract as completion of works under the contract and in accordance with the terms of the contract.  Thus, the intention of the parties as may be ascertained by reading the Deed of Guarantee as a whole is that even if the capital has not been fully repaid under the mechanism in Clauses 1(IV)(A)(vi) and 1(IV)(B)(vi) before final accounts settlement, the Defendants will pay the shortfall within six months after the completion date of the respective contracts.  This is the only construction with which the various parts of the Deed of Guarantee could be read consistently.  It makes good business sense whereas the construction suggested by the 2^nd Defendant will lead to absurdity.

31.I therefore find that on the true construction of the Deed of Guarantee, “completion date” in Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) means the contractual completion date of the respective contracts as adjusted by any extension of time approved by Nishimatsu in accordance with the terms of the contract.

Conclusion

32.The contractual completion date of the HEC Contract and the CLP Contract was 30 September 2002 and 1 December 2003 respectively.  There was no evidence of any authorised extension of time.  Hence, the Defendants’ obligation to pay the shortfall under the Deed of Guarantee arose on 1 April 2003 in respect of the HEC Contract and 1 June 2004 in respect of the CLP Contract. 

33.The 2^nd and 3^rd Defendants’ pleaded case is that there was no completion date as there were no completion certificates have ever been issued in respect of the two contracts.  That defence is doomed to fail.  The Defendants’ obligation to pay the shortfall was determined by the contractual completion date of the respective contracts and not by the actual date of completion of works.  The Defendants are liable to pay regardless whether the contracts were completed or not and whether completion took place beyond the contractual completion date in breach of the respective contracts or not.  The whole purpose of the Deed of Guarantee was that the Plaintiff would be paid the shortfall at a time certain, being within six months from the contractual completion date of the respective contracts.

34.The Defendants are also wrong on the fact.  There was a certificate of substantial completion issued by The Hongkong Electric Co Ltd dated 21 May 2003, which certified that the HEC Contract was considered as complete on 25 April 2003.  This is in line with what the Company said in its letter to Nishimatsu dated 12 March 2005.  Likewise, the Company wrote to Nishimatsu on the same date claiming that the CLP Contract was substantially completed in late 2003.  Nishimatsu replied on 23 May 2005 that the HEC Contract was completed but Nishimatsu was still negotiating with The Hongkong Electric Co Ltd on the final accounts, while the CLP Contract was completed.  Those completion dates may or may not be in breach of the respective contracts.  Even assuming they were not and therefore were the contractual completion dates under the respective contracts, they were long past.  The Defendants are liable to pay just the same.

35.If it is the Defendants’ case that the contracts were not completed, they would be liable to pay the shortfall within six months from the contractual completion date of the respective contracts just the same.  In addition, they would also be liable for breach of the undertaking in Clauses 1(I)(II) and (III) for failing to complete the HEC Contract and the CLP Contract.  That would result in damages which basically comes down to the same sum.  

36.Whatever were the contractual completion dates, they were long past.  There is no dispute that the Plaintiff has only received payments totalling $7,790,305.97 and the shortfall under the two contracts was $6,075,306.10.  I find that 2^nd and 3^rd Defendants were in breach of Clauses 1(IV)(A)(vii) and 1(IV)(B)(vii) of the Deed of Guarantee.  Accordingly, I enter judgment in favour of the Plaintiff against the 2^nd and 3^rd Defendants jointly and severally in the amount of $6,075,306.10 with interest and costs.

Mr Jeremy S K Chan, instructed by Messrs Cheung, Chan & Chung for the Plaintiff

The 2^nd and 3^rd Defendants appearing in person