UNISTRESS BUILDING CONSTRUCTION LTD v. TOP DOLLARS DEVELOPMENT LTD

HCCT 29/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 29 OF 2017

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(Transferred from HCA912/2017

pursuant to Order of Hon M Chan J on 4 July 2017)

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D E C I S I O N

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INTRODUCTION

1.  This is my decision on the plaintiff (“Unistress”)’s application for continuation of an injunction originally granted by Madam Justice B Chu on an ex parte basis on 25 April 2017 and continued by Madam Justice Au-Yeung by consent of the parties on 27 April 2017 restraining the defendant (“Top Dollars”) from continuing or pursuing its demand on HSBC for payment of HK$14,185,000 under a surety bond dated 5 July 2013 (“the Bond”), or receiving any payment made by the bank under that bond, until trial or further order of the court.

2.  The following issues arise for determination in this decision:-

(1) whether the Bond is a (i) “single” (or “on demand”) bond, or (ii) a “double” (or “conditional” or “default”) bond;

(2) whether Unistress has any locus standi to apply to restrain Top Dollars from seeking, or receiving, payment under the Bond;

(3) whether Unistress has shown a serious issue to be tried; and

(4) where does the balance of convenience lie?

BACKGROUND FACTS

3.  The following brief summary of the background facts should suffice for the purpose of deciding whether there should be a continuation of the injunction against Top Dollars pending trial or further order of the court.

The Contract

4.  Unistress is a construction contractor, and Top Dollars is a property developer and the registered owner of the land known as NKIL 6419, Tai Po Road, Kowloon (“the Land”).

5.  By a Contract dated 10 June 2013, Top Dollars (as Employer) engaged Unistress as the Main Contractor for a residential development (“the Development”) to be constructed on the Land for the contract sum of HK$283,707,750.

6.  Clause 33.1 of the General Conditions of the Contract states as follows:-

“Contractor to obtain guarantee from insurance company or bank

(1) The Contractor shall obtain the guarantee of an insurance company or bank, approved by the Architect to be jointly and severally bound with the Contractor to the Employer in the sum stated in the Appendix for the due performance of the Contract under the terms of a surety bond.

(3) The surety bond shall be in the form set out in the Specification or, if not set out in the Specification, in the form set out in Schedule 1 of the Conditions, and the costs of obtaining the bond shall be borne by the Contractor.”

7.  Although the sum stated in the Appendix for the bond was in the amount of HK$28,371,000, it is not in dispute that the parties agreed to reduce the amount to HK$14,185,000.

8.  Pursuant to Clause 33.1, Unistress procured HSBC to issue the Bond in favour of Top Dollars.  It is not in dispute that the Bond is in the form set out in Schedule 1 to the General Conditions, and complies with the requirements of Clause 33.1.  I shall come back to the terms of the Bond later in this decision.

9.  The contract works under the Contract comprised two phases, which the Architect certified were substantially completed on 1 December 2014 and 13 May 2016 respectively.

10.  Clause 17 of the General Conditions provides for the usual 12-month Defects Liability Period.  Unistress is required to rectify all defects, shrinkages or other faults identified during that period caused by (inter alia) materials, goods, or workmanship which are not in accordance with the Contract.

The Stone Panel Incident

11.  On 25 October 2016, during the Defects Liability Period, an external stone panel on the third floor level of the façade of Block 1, measuring some 38cm x 10 cm, fell off and damaged the timber deck on Floor B3 of Block 2 (ie 7 floors below) of the Development (“the Incident”).

12.  According to Top Dollars, Unistress was immediately informed of the Incident during a site meeting, and was instructed to (1) fence off the concerned area, and (2) submit an incident report, remedial proposal and rectification schedule no later than 28 October 2018.  Top Dollars says that Unistress should not proceed to rectify the defect before its incident report, remedial proposal and rectification schedule had been approved by the Architect (see email dated 2 November 2016 from the Architect to Unistress).

13.  On the other hand, Unistress says that it was instructed by the Clerk of Works (“COW”) on 28 October 2016 to replace the panel and repair the deck within a week.  In the COW’s site memo, the following was stated:-

“You are instructed to survey all stones on the said area [and] submit the survey report to us before 31 October 2016 and replace the stone and broken wooden deck within a week. If you fail to do so, the employer will engage other persons to survey and rectify the stone and wooden deck, all cost/[expense] will be deducted from you.”

14.  On 1 November 2016, Unistress replaced the fallen-off panel and repair the damaged deck, without having first submitted the incident report, remedial proposal and rectification schedule to the Architect, or obtained the Architect’s approval of the same.

15.  At a joint inspection held on 3 November 2016, it was discovered that the bracket for the replaced stone panel had been installed incorrectly (in that it had been turned upside down).  In an email dated 3 November 2016 sent by the Architect to Unistress, the following was stated:

“We are astonished that you have already re-installed the stone panel without approved remedial proposal. This work is totally unacceptable; you are required to remove the stone panel immediately without delay. Please notify the project team once the non-approved stone panel was removed as joint inspection should be carried out amongst [the Architect, the Structural Engineer and Unistress] as soon as possible.”

16.  The following day, on 4 November 2016, Unistress rectified the incorrect installation of the bracket and re-installed the stone panel, again without the prior consent or approval of the Architect.

17.  It is Top Dollars’ case that Unistress should not have carried out the rectification works on 1 November 2016 and 4 November 2016 without having first submitted the incident report, remedial proposal and rectification schedule to the Architect and obtained the Architect’s approval of the same.

18.  On 8 November 2016, the Architect instructed Unistress to carry out a site survey of 100% of the stone panels with the same fixing details as the dislodged panel and 5% of all other stone panels under the witness of the COW, and submit the survey report within 14 days (ie by 22 November 2016).  Unistress was also required to first submit a method statement and time schedule for the site survey works by 9 November 2016.

19.  On 10 November 2016, the Architect informed Unistress that its site staff and workers would be temporarily prohibited from entering the site while the project team was conducting investigation into the stone panel incident.  This prohibition of Unistress’ access to the site was lifted on 11 November 2016.

20.  According to Top Dollars, inspections at different locations of Block 1 carried out on 11 and 16 November 2016 revealed serious and extensive non-compliance with the approved drawings and problems of workmanship.

21.  On 18 November 2016, the Architect issued an instruction prohibiting Unistress from entering into the site unless with its prior approval, purportedly on the ground of the “continuous unsatisfactory performance on the defect rectification works and the mal-practice of [Unistress]” (see the Architect’s email dated 18 November 2016 to various parties including Unistress), the latter allegation being a reference to Unistress’ disregard of the Architect’s instructions, apparent attempts to cover up mistakes in construction and its re-installation of the bracket without authorization (see paragraph 29 of Mr Houghton SC’s skeleton arguments on behalf of Top Dollars dated 16 November 2017).

22.  On the other hand, Unistress says that the prohibition of access to the site, initially imposed on 10 November 2016 (which was lifted on 11 November 2016 as aforesaid) and again on 18 November 2016, prevented Unistress from carrying out the site survey which it was instructed, on 8 November 2016, by the Architect to carry out.

23.  On 24 November 2016, the Architect wrote to Unistress stating that it had failed to submit the survey results by the deadline of 22 November 2016, and gave notice that Top Dollars would employ other persons to carry out investigation with all costs to be borne by Unistress.

24.  In response, Unistress sent a letter to the Architect dated 28 November 2016, stating the following:-

“Firstly, [Unistress] are not unwilling to carry out the survey (100% for stone cladding with same fixing detail of the fallen cladding and 5% for all other stone cladding with different fixing details) as stated in your letter … of 8 Nov 2016. In order to carry out the survey as instructed, scaffolding in four elevations of the property have to be erected first, it will take one week to set up the scaffolding. To open the cladding concerned for investigation will take another two weeks. Therefore, at least three weeks are required for the preparation of the survey report. But the time allowed by you is only two weeks which is inadequate. Moreover, [Unistress] are forbidden to enter the site on 11 Nov 2016 and continuously starting from 18 Nov 2016. It is the constraints imposed by you leading to impossible completion of survey on time.

Secondly, [Unistress] are willing to cooperate with the architect and engineer to detailed check the extent of the defective stone cladding work and to rectify the defects afterwards. [Unistress] disagree the investigation to be done by others employed by the employer.  [Unistress] will not agree the extent of defects discovered by third parties without the presence of [Unistress] as witness.”

25.  On 9 December 2016, Top Dollars invited tenders for the rectification works.  On 17 March 2017, Top Dollars awarded the tender to Liddell Construction Company Limited (“Liddell”) in the total contract sum of HK$22,938,772.  The scope of works included (but was not limited to) the supply and re‑installation of “all limestone/crystalline stone panels (545 m² at the rate of HK$5,580/m²)” as well as the provision of spare stone panels and spare aluminum panels.  The rectification works commenced on 24 March 2017.

26.  According to Mr Patrick Ma (Top Dollars’ General Manager), the Architect and various consultants advised Top Dollars that “no scientific survey or infra-red technology was available to determine whether similar defects existed on the external walls of the Development which had not yet been opened-up”, and that “in order to ensure that the stone cladding panels had been installed correctly and in accordance with the approved drawings, all the stone cladding panels would need to be taken down and examined.  This is indeed the most economical and straightforward method available to check that all the stone cladding has been properly installed” (see paragraph 52 of Mr Ma’s affirmation dated 28 June 2017).

27.  On 30 March 2017, the Architect issued a letter (“the Architect’s Certificate”) stating or certifying, inter alia, the following:-

(1) the Incident was due to Unistress’s poor workmanship, which constituted as a breach under various clauses of the Contract;

(2) as a result, Top Dollars had to engage other contractors to carry out rectification of the defects and to complete the outstanding works;

(3) on 17 March 2017, a “Contract for Rectification Works for Defective Stone/Aluminum Wall Cladding and Water Leakage” was awarded by Top Dollars to a specialist contractor, which amounted to HK$22,938,772 in total; and

(4) the award of the “Rectification Works Contract”, which directly arose from Unistress’ breach of contract, constituted as a loss suffered by Top Dollars, for which it was entitled to recover damages from Unistress.

The call on the Bond

28.  On 6 April 2017, Top Dollars made a call on the Bond.  In its letter to HSBC demanding for payment of HK$14,185,000, being the maximum amount under the Bond, Top Dollars stated as follows:-

“We now give you notice to call for the full guaranteed amount of HK$14,185,000 under the Bond as a result of [Unistress’] failures and/or breaches of its relevant obligations under the Contract … Particulars of [Unistress’] failures and/or breaches and the loss and damage suffered by us as a result are set out in [the Architect’s Certificate].”

29.  HSBC was prepared to accede to Top Dollars’ call on the Bond.  In an email dated 10 April 2017 from HSBC, it was stated that “[t]he Bank shall pay the beneficiary the requested amount within 5 working days (i.e. latest on 12 April 2017) with conditions written on the said bond [having been] met”.

THE INJUNCTION

30.  On 13 April 2017, Unistress wrote to Top Dollars objecting to its call on the Bond.  For the present purpose, it is not necessary to set out the contents of that letter, save to point out that Unistress contended that Top Dollars’ allegations were grossly exaggerated and made on bad faith for the sole purpose of plotting to evict it and engage others to carry out unnecessary and wholesale rectification works at grossly high prices.

31.  The disputes between the parties were not resolved.  On 25 April 2017, Unistress applied for, and obtained, an ex parte injunction from Madam Justice B Chu restraining Top Dollars from continuing or pursuing its demand on HSBC for payment of HK$14,185,000 under the Bond, or receiving any payment made by the bank under that bond.  Madam Justice Au-Yeung continued the injunction by consent of the parties on 27 April 2017 pending the determination of Unistress’ inter partes summons dated 26 April 2017 for continuation of the injunction until trial or further order of the court.

32.  Unistress’ inter partes summons came before this court for substantive argument on 21 November 2017.  Shortly before the hearing, Top Dollars issued a summons on 13 November 2017 seeking (i) for the first time, a discharge of the ex parte injunction granted by Madam Justice B Chu on the ground of material non-disclosure, and (ii) leave to adduce a further affirmation of Mr Thomas Kam, a director of CYS Associates (Hong Kong) Limited (the Architect).  Unistress opposed Top Dollars’ applications under the summons of 13 November 2018.  In the event, Top Dollars did not pursue the application for leave to adduce the further affirmation.  In so far as the discharge application was concerned, the court, having heard the parties, decided to adjourn it sine die with liberty to restore, on the basis that most of the matters raised by Top Dollars in support of the discharge application could effectively also be argued and dealt with in relation to Unistress’ application to continue the injunction.

THE NATURE OF THE BOND

33.  The Bond is in a form which is well known to the construction industry in Hong Kong.  It was executed by both Unistress (as the Contractor) and HSBC (as the Surety).  After reciting the parties to the Contract and the background leading to the issuance of the Bond, the substantive part of the Bond states as follows:

“NOW THE CONDITIONS of the above-written Bond are:-

2 The Contractor shall duly perform and observe all the terms, provisions, conditions, obligations, stipulations and specification of the Contract according to the true purport intent and meaning thereof and to the reasonable satisfaction of the Architect appointed by the Employer in respect of the Works or if on default by the Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby as certified by the said Architect, up to the amount of the above written Bond then his obligation shall be null and void but otherwise his obligation shall be and remain in full force and effect.

4 This Bond shall be binding upon the Contractor and the Surety and their respective successors and assigns jointly and severally … and shall inure to the benefits of the Employer and its successors and assign.” [emphasis added]

34.  The true nature and effect of this form of bond has been well settled since the decision of the Court of Appeal in Kono Insurance Ltd v Tins’ Industrial Co Ltd [1988] 2 HKLR 36.  In that case, the Court of Appeal had to consider the nature and effect of a bond in materially the same terms as the one before me (save the omission of the underlined words “as certified by the said Architect”).  After reviewing a line of authorities, Hunter JA, giving the judgment on behalf of the Court of Appeal, first identified two different types of bonds:-

“12 The first issue here is the nature of this bond, and it is common ground between counsel that the outcome turns upon the true construction of the bond. Bonds are conveniently categorised in volume 12 Halsbury’s Laws (4th edition) paragraphs 1386 and 1387 into two different species. The first is what the editors call a single bond, and they go on to say that those ‘had become rare’. A single bond is a simple demand bond, which is payable on demand, or on production of whatever additional evidence the bond itself may specify. This may be no more than the mere ‘say‑so’ or ipse dixit of the beneficiary under the bond. They can be oppressive documents…

14 The effect of those decisions is that the court allied these performance bonds payable on demand with confirmed letters of credit. They said that you have to look to the terms of the separate contract between the bankers, in the same way as you do in looking at confirmed letters of credit, and that for those reasons you were not concerned with the underlying contract…

15 The second type of bond is dealt with in paragraph 1387 of Halsbury’s Laws, and is called a ‘double or conditional bond’:

‘This form of bond is called a double or conditional bond and consists of two parts: first, the obligation, and secondly, the condition. The condition .... specifies the real agreement between the parties.’

One of the best known bonds of this nature was that given by the Trade Indemnity Co. Ltd. to the Workington Harbour and Dock Board, which came before the House of Lords on two separate occasions. The terms of that bond we can see from the report of that case Workington Harbour and Dock Board v. Trade Indemnity Co. Ltd. (No. 2). At p 144 in the judgment of Slesser L.J., he sets out the terms of that bond in full. I am not going to read it all. It is sufficient to say that the bond in its effect is indistinguishable from the first part of the bond here, namely the contractor’s part of our bond. In the course of his judgment in that case Greer L.J., on the preceding page 143, says this in relation to this bond:

‘The plaintiff bringing an action has not merely to prove a breach of contract: he has to prove the damages which he suffered by reason of that breach of contract.’”

35.  The learned judge then reviewed a number of authorities, and eventually came to the following conclusion at paragraph 18 of his judgment:-

“This in form is clearly a claim against a surety, and it is elementary that a surety’s liability involves proof first of breach or default by the principal debtor, and secondly of damage, before it arises.”

36.  The learned judge also rejected a submission advanced on behalf of the holder of the bond that it was a “hybrid” bond such that “to trigger the bond, all [the bond holder] had to do was to make a demand” and “if this had been a claim against the contractor, it would be for the contractor to prove that he had duly performed all his obligations under contract.  In this case, it being a claim against the surety, it is not for him to prove default and damage; it is for the surety to prove no default and no damage” (paragraph 19).  The learned judge held, instead, that “he who asserts breach has to prove breach; he who claims under the bond has to prove those breaches” (paragraph 20).  In conclusion, the learned judge held that “a claimant under the bond has to prove first breach, and secondly damages” (paragraph 23).

37.  In Dragages et Travaux Publics (HK) Ltd v Citystate Insurance Ltd [2001] 1 HKC 196, the bond under consideration was in these terms:-

“In the event of default by the Sub-contractor of any of its obligations under the Sub-Contract and upon demand in writing made by the Main Contractor upon the Surety, the Surety shall satisfy and discharge any claims, actions, damages, losses, charges, costs or expenses whether directly or indirectly sustained thereby by the Main Contractor up to an aggregate of the Bonded Sum” (emphasis added).

38.  Mayo VP (giving the judgment on behalf of the Court of Appeal) held that “[t]he correct approach to adopt in determining whether a bond is an ‘on demand’ bond is to ascertain whether the commitment engaged is conditioned upon the presentation of documents or upon the actual existence of facts which are referred to in the documents” (paragraph 7) and, following the Court of Appeal’s decision in Kono Insurance Ltd, that the bond before the court was a “conditional”, and not an “on demand”, bond, and the addition of the underlined words (“upon demand in writing”) did not take matters any further (paragraph 29).  The learned judge further said, at paragraph 31, the following: “it is imperative that there should be clear and unambiguous words to establish that a bond is an "on demand" bond. We are satisfied that the wording of the bond in this case was not such as to lead us to this conclusion.”

39.  In the present case, I consider it to be clear that the Bond is a double (or conditional or default) bond.  The fact that it requires the Surety (ie HSBC) to satisfy and discharge the damages sustained by the Employer (ie Top Dollars) “as certified by the said Architect” does not mean that all that Top Dollars needs to do is to present a certificate by the Architect to entitle it to be paid under the Bond.  What those words mean, in my view, is that Top Dollars’ claim under the Bond must be accompanied, or supported, by the Architect’s certification of the damages.  However, if the claim is disputed the certification is not sufficient by itself to entitle Top Dollars to be paid under the Bond.  In other words, the presentation of a certificate by the Architect is a necessary, but not sufficient, condition for payment under the Bond.

40.  In all, in order to justify its claim for payment of the sum of HK$14,185,000 under the Bond, Top Dollars has to “prove first breach, and secondly damages” (equal to or exceeding that amount).

UNISTRESS’ LOCUS STANDI TO INTERVENE

41.  On behalf Top Dollars, Mr Houghton SC submits that Unistress has no locus standi to intervene because:-

(1) such intervention would offend against the autonomy of the Bond; and

(2) Unistress has no cause of action against Top Dollars.

42.  I do not accept these submissions.  In so far as it is suggested that to permit Unistress to intervene would offend against the autonomy of the Bond, the underlying premise of this submission is that the Bond is in the nature of an “on demand” bond, similar to a letter of credit, in relation to which it is well established that its operation is independent of, or autonomous from, the underlying contract. However, if, as I believe it to be the case, the Bond is a double (or conditional or default) bond, its operation is not independent of the underlying contract between Top Dollars and Unistress.

43.  In so far as it is said that Unistress has no cause of action against Top Dollars, as pointed out by Mr Westbrook SC (on behalf of Unistress), the form of the Bond was stipulated by Top Dollars under Clause 33.1 of the General Conditions of the Contract, or at any rate expressly agreed by the parties.  In other words, it was the express agreement of the parties that Top Dollars would not be entitle to seek, or receive, payment under the Bond unless it can successfully establish first breach and secondly damages.  Alternatively, there is, in my view, at least a reasonable argument that a term to that effect should be implied.

44.  Further, it is, I believe, open to Unistress to argue that it is entitled to apply to restrain Top Dollars from seeking, or receiving, payment under the Bond on the basis that HSBC stands as guarantor or surety for Unistress in respect of the latter’s performance of the Contract, and Unistress would, in the ordinary course of events, come under an obligation to indemnify HSBC in respect of any payment made by it to Top Dollars under the Bond.

45.  Mr Houghton also takes a pleading point, namely, that Unistress has not, in its Statement of Claim, sought any injunctive relief in the prayer to restrain Top Dollars from seeking, or receiving, payment under the Bond.  That is so, but it is expressly pleaded in paragraphs 69 and 70 of the Statement of Claim that Top Dollars’ call on the Bond is not a proper or valid demand for the reasons set out in those paragraphs.  It is by no means clear to me that the court cannot grant an interlocutory injunction in aid of a causes of action pleaded in the Statement of Claim unless the plaintiff also prays for a permanent injunction in the same terms by way of final relief in the Statement of Claim.  In any event, I would, if necessary, grant Unistress leave to amend the Statement of Claim to meet this technical point raised on behalf of Top Dollars.

SERIOUS ISSUE TO BE TRIED

46.  For the purpose of the present application for interlocutory injunction, what Unistress needs to show is a “serious issue to be tried” in respect of the following matters:-

(1) whether it has any viable legal basis, or cause of action, to restrain Top Dollars from seeking, or receiving, payment under the Bond; and

(2) the issues of breach and/or damages.

47.  I have already dealt with the legal basis, or cause of action, that Unistress has or may have to restrain Top Dollars from seeking, or receiving, payment under the Bond above.

48.  In relation to the issues of breach and/or damages, it is not, I believe, seriously disputed that Unistress was in breach of contract at least in relation to the stone panel which fell off from the façade of Block 1 on 25 October 2016.  On the evidence and materials before me, there is reason to believe that Unistress’ breach was more extensive than that single stone panel.  However, the true nature, full extent, and seriousness of Unistress’ breach cannot be determined in the present interlocutory application by reference to what is necessarily limited, and incomplete, evidence.  In my view, there are plainly serious issues to be tried at least in respect of the following matters:

(1) the full extent of the breach;

(2) whether such breach as may have been committed by Unistress would justify a complete dismantling and/or replacement of all the stone panels installed by Unistress;

(3) whether the works carried out or contracted to be carried out by Lindell could all be attributed to Unistress’ breach of contract in relation to the installation of stone panels.  In this regard, I note that the works contracted to Lindell appear to also cover rectification works for alleged defective aluminum wall cladding and water leakage; and

(4) whether the contract sum of HK$22,938,772 is a proper or reasonable contract sum.

BALANCE OF CONVENIENCE

49.  Mr Sunny Yeung, a director and major shareholder of Unistress, has explained, in paragraph 22 of his first affirmation, why Top Dollars’ call on the Bond, if successful, would or may have significant adverse impacts on the business of Unistress, including impacts on its reputation and its ability to secure new works from the private and public sector markets, and that such adverse impacts cannot be readily compensated in damages.  I consider that there is force in what is said by Mr Yeung.

50.  Top Dollars argues that “if the court permits HSBC to pay [Top Dollars], [Unistress] will suffer no damage because it will always be up to [Unistress] to seek indemnity against HSBC – whose ability to pay cannot be called into question” in the event that Unistress’ case should ultimately be upheld by the court (see paragraph 69(3) of Mr Houghton’s skeleton arguments dated 16 November 2017).  However, in such a scenario, HSBC will in turn have to seek repayment from Top Dollars. This could, or would, lead to further disputes and/or litigations.

51.  On the other hand, it seems clear that if the injunction should eventually be held to have been wrongly granted, damages would be an adequate remedy for Top Dollars.  The Bond would still be available to satisfy Top Dollars’ claim.  There is also no suggestion that Unistress will not be able to honour its undertaking as to damages.

52.  Overall, I consider it to be clear that the balance of convenience lies in favour of continuing the injunction against Top Dollars.

DISPOSITION

53.  For the foregoing reasons, I order that the injunction order made by Madam Justice B Chu on 25 April 2017 and continued by Madam Justice Au-Yeung on 27 April 2017 be continued until trial or further order of the court.  I also make an order that Unistress’ costs of this application shall be in the cause of the action, with certificate for 2 counsel.

54.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.