YOUNG'S ENGINEERING CO LTD v. THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD AND ANOTHER

HCMP 2676/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2676 OF 2002

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D E C I S I O N

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1.  The Drainage Services Department of the Hong Kong Government, (DSD), entered into a contract with Mitsubishi Corporation to carry out certain works.  By a subcontract dated 17 October 2001, Young’s contracted with Mitsubishi to perform the whole of Mitsubishi’s obligations under the contract with the DSD.  Young’s in turn contracted with Wiseful, in a subcontract in which Wiseful agreed to completely perform Young’s obligations under its contract with Mitsubishi.

2.  It was a term of Wiseful’s contract with Young’s that Wiseful would provide a performance bond amounting to 10% of the price of the subcontract, (the Bond).  A draft form of bond was annexed to the subcontract.  Steps were taken to obtain an appropriate bond in the sum of $8,600,000 from Hongkong Bank.  Young’s allege that Wiseful abandoned the subcontract in October 2002.

3.  It was plain to Young’s and their advisors that there would be a substantial claim against Wiseful as a result of the abandonment of the subcontract.  However, apparently it was known to all, at the time of the abandonment, that Wiseful, being a two dollar company, was hardly worth pursuing.  Consequently, it appeared to Young’s advisors that the most sensible course for Young’s to take was simply an action on the Bond. 

4.  In late 2002, however, the amount of the claim to be made against Wiseful was not known precisely.  Those advising Young’s were mindful of the decision of the Court of Appeal in Tin’s Industrial Co Ltd v Kono Insurance Ltd (1987) 42 BLR 110, in which the court held that before recovery could be made upon a bond, the claimants had first to prove breach of the building contract and secondly damages, in order to recover from a surety.

5.  In late 2002, following Wiseful’s abandonment of the site, Young’s were not able to quantify their claim, although it was plain that they would have a claim on the Bond, and against Wiseful.  Not surprisingly, Young’s did not wish to delay upon the matter.  But in the light of Tin’s case they could not sue on the Bond to recover money until the claim could be quantified.  It is not without significance that Mr Chain does contend that there is no claim upon the Bond, in the sense that it is not asserted that there was no breach of the contract, nor that there were no damages arising from any breach.  Rather the defence to any liability under the Bond is based on technical matters surrounding the Bond, as will be seen.

6.  At the time these proceedings, (an Originating Summons for declaratory relief), were issued Young’s were aware that there was to be raised, in relation to the Bond, an issue of delivery.  Mr Scott SC accepts that the Bond, as a deed duly executed by a corporation in accordance with s 20, Conveyancing and Property Ordnance Cap 219, must be delivered to be effective.  There is a good deal of law as to what constitutes delivery.  It is contended by both Hongkong Bank and Sun Innovation that there has not been a proper delivery of the Bond, which has accordingly never taken effect.

7.  Young’s took the view that an institution with the integrity of Hongkong Bank would, if told that the Bond were valid, meet its terms.  At that stage, because Young’s were not in a position to quantify the claim against Wiseful, (that, I assume, could not be done until the work were completed by some other contractor), it was not open to Young’s to bring a money claim on the Bond in order that the issue of delivery, or indeed any other issue surrounding the Bond, might be resolved.

8.  Consequently, in order to resolve the only known issues in relation to Bond, instead of issuing a writ for the recovery of the amount due under the Bond, (which would have to meet the rule in Tin’s case), Young’s issued an Originating Summons seeking a declaration that the Bond had been delivered on 21 January 2002, and was valid and is legally binding on Hongkong Bank.  They viewed this procedure as sensible case management, seeking to resolve the issues in the speediest and less expensive manner.  Following the issue of the Originating Summons the various third and fourth parties were joined into the proceedings.

9.  On 3 June 2004, the matter came before Lam J for directions, with the primary issue before the judge being whether the matter could proceed in the usual way of an originating summons, with affidavits, or whether there ought to be formal pleadings.  In the course of the discussion Mr Scott SC was obliged to accept that there would be a “second round”, following any declaration as to the validity of the Bond, that second round being a demand on the Bond.  He then expressed the view that that second round was unlikely to require litigation unless the Bank refused to pay, a circumstance which he saw as unlikely.

10.  At the end of the argument Lam J. ordered that pleadings be exchanged, and ordered the action be set down for trial.  An appropriate Statement of Claim has been filed by Young’s.  I have not been told whether or not Hongkong Bank have filed a defence.  But it seems clear from a letter they have written that they intend to rely upon the same points as Sun Innovation.  Sun Innovation have filed a defence in which they assert that there was no delivery.  Both counsel agreed that there is a serious question to be tried on the delivery issue.

11.  Wiseful was, at all material times, a subsidiary of Sun Innovation.  Sun Innovation now makes the arguments before me.  It is now plain from Mr Chain’s argument that a second point is to be taken.  I will call this the certificate point.  There is an issue as to the period of time for which the Bond would remain valid for receipt of any claim.

12.  The point goes this way.  Clause 3 of the Bond provides that it should:

“…remain valid for receipt of claim until the date of issue of the Certificate of Practical Completion pursuant to the Conditions of the Sub-contract.”

The subcontract however does not provide for a “Certificate of Practical Completion”.  The subcontract does provide that the “general and special conditions” of the “Main Contract”, (between DSD and Mitsubishi), shall form and be construed as part of the subcontract.  But the Main Contract does not provide for a “Certificate of Practical Completion”.  Instead it has  provision for a “certificate of completion”, (General Conditions cl 53).

13.  On 5 January 2005, the Engineer under the Main Contract issued a certificate in which it is certified that “Section 4 of the Works were substantially completed on 14 December 2004”.  Mr Chain contended that it was plain and obvious that that certificate would be treated, for the purposes of the Bond, as the “Certificate of Practical Completion”.  It is, as I understand it, not argued by Mr Scott SC, that Young’s had made any formal claim on the Bond prior to 5 January 2005.  Consequently, Mr Chain argued that the Bond had expired prior to the making of any claim and no claim could now be made.  On this basis he said the statement of claim ought to be struck out.

14.  I am satisfied that it is not so plain and obvious that the certificate dated 5 January 2005, issued by the Engineer would be so treated.  Mr Scott SC has drawn my attention to a number of arguments and authorities to the contrary.  Now is not the time to resolve those arguments.  It is enough that I am satisfied that the matter is plainly arguable.  Mr Chain, while arguing to the contrary, sensibly recognised that there was some strength in the Mr Scott’s argument

15.  For those reasons I am satisfied that the Statement of Claim should not be struck out. 

16.  In the alternative, the summons before me sought to stay the proceedings.  Although in the summons this relief was expressed in the alternative, and apparently on a secondary basis, in the hearing it came to be the primary basis upon which Mr Chain put the matter.

17.  The argument goes this way.  By way of an alternative defence Sun Innovation contend as follows:

“Further, Sun Innovation avers that given the matters pleaded above, in particular paragraphs 10(x) and 13, Young’s should not be granted any declaration in these proceedings which [were] brought in a vacuo; rather any proceedings by Young’s in relation to the Performance Bond should be one to enforce it, if and when Young’s is in a position to allege and prove that it suffered loss and damage as a result of Wiseful’s breach of the Sub-Sub-Contract.”

This is a pleading which reflects the well-known proposition that declaratory relief is discretionary, and it is a trite principle that the Court will not usually answer a mere academic question. 

18.  An example of the application of that proposition may be seen in Charter View Development Ltd v Golden Rich Enterprises Ltd & Anor [2000] 2 HKC 77.  In that case the plaintiff sought declaratory relief as to its right to terminate a contract.  The court held that the relief sought was impermissible.  The plaintiff was asking the court for legal advice as to whether if, hypothetically, it should choose to assert that the first defendant had repudiated the contracts, and to accept such repudiation, its action in so accepting repudiation would be lawful.  However, the plaintiff was not obliged to accept any such repudiation, which meant that following any declaratory judgement alternative courses of action were open to it.

19.  But that is not the case here.  In the present case there is nothing hypothetical about the facts upon which the court is being asked to determine the validity of the Bond.  The acts and occurrences providing the basis for those facts have already taken place.  It is the interpretation of those facts that is important.  If Young’s succeed in obtaining a declaration that the Bond is valid they will proceed to make demand.  It would be open, in the declaratory proceedings, for both Sun Innovation and Hongkong Bank to take any points that are open to them to argue that the Bond is not valid.  Equally, upon the making of a declaration, there is nothing hypothetical about the course that will then follow.  If Young’s fail in obtaining the declaration the matter will there end, and no further expense will be incurred by any party.

20.  Mr Chain asserts that the proceedings should be stayed until such time as Young’s have established their claim against Wiseful.

21.  On 31 August 2005, Young’s formally quantified their claim against Wiseful for breach of the subcontract in a total sum of $16,004,025.  They did this by way of a letter addressed to Wiseful attached to which is a schedule setting out the formulation of the amount claimed.  The claim against Wiseful exceeds the amount of the bond by nearly 100% of the value of the bond.  It must be accepted that it may be that the claim against Wiseful will not reach $16 million.  Theoretically, the only way to determine the precise amount would be for Young’s to undertake potentially expensive proceedings against Wiseful, as is plainly contemplated by the rule in Tin’s case.

22.  But not even Mr Chain asserted that there was a possibility that the claim against Wiseful would amount to less than the amount of Bond, $8,600,000.  No suggestion at all was made that there was no breach of contract by Wiseful, nor that the damages would not exceed $8,600,000.

23.  Mr Scott SC submitted, and the submission carries pressing practical logic, that it would be a futile waste of money to demand that Young’s should undertake an arbitration or court proceedings against Wiseful to determine the precise amount of the claim, in circumstances when nobody is suggesting that there is no breach of the subcontract or that damages flowing from that breach would be less than $8,600,000.  I am completely confident that if there were an argument to be mounted on the part of Wiseful, that they were not in breach of the subcontract, or that the damages would be less than the amount of the Bond, Sun Innovation would have mounted that argument long before now.

24.  But they have not.  The arguments in opposition to the claim on the bond are confined to peripheral technical matters surrounding the bond itself.  Such arguments lend themselves ideally to declaratory proceedings.

25.  Mr Chain said that as a matter of principle a party ought to bring the whole of its claim at once, and not break it down in two stages, thereby, he says, forcing a defendant to fight the matter in a split trial.  Mr Chain did not cite any authority for the proposition, and was obliged to acknowledge during argument that it was within the discretion of the court to permit the matter to proceed as formulated, without the strict requirement that a money claim be added to the proceedings.

26.  This is the third occasion this month[1] in which I have had to write a judgement expressing the view that arguments based upon principle, where a party’s position cannot be seen to have been undermined in any way at all, ought not to be encouraged.  Arguments based upon principle which serve only to delay proper attention to the real issue between the parties, and which do not advance the position of either party, ought not to be encouraged by the courts.

27.  Mr Chain’s suggestion as to the proper course for the proceedings, apparently based upon “principle”, will achieve nothing more than delay, great expense, and in due course the arguments as to the validity of the Bond, which are the only real arguments taken in opposition to liability, must proceed.

28.  If I allow these proceedings to go on as they stand no prejudice is suffered by Sun Innovation, (none was contended for), and a great deal of expense is saved.  The issue of the validity of the Bond, the central, and indeed only, point in the dispute, will more speedily be resolved without any prejudice to any party.

29.  It will be necessary for Hongkong Bank and Sun Innovation to amend their statements of defence to reflect the arguments that are to be mounted.  As presently formulated Sun Innovation’s statement of defence does not deal with the “certificate point”.  Both defendants need to plead those matters, in order that Young’s may reply appropriately thereby narrowing the issues for resolution by the court.  If either defendant wished to take any other points of defence they must be free to do so in any amended statement of defence. 

30.  Those amended statements of defence should be filed promptly.  As Hongkong Bank, on whom a burden may fall as a result of this requirement, were not present at the hearing I (hopefully) leave it to the good sense of the parties solicitors to deal promptly, and by agreement, with the issue of the time for filing amended pleadings.  Leave is reserved to apply for directions if required.

31.  There will be an order nisi, to be made absolute in 14 days, that the costs of the summons to strike out shall be Plaintiff’s costs in the cause.