XCHRX UDL KENWORTH ENGINEERING LTD. v. AIRPORT AUTHORITY HONG KONG AND ANOTHER

HCA 8431/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8431 of 1998

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REASONS FOR JUDGMENT

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1. The Plaintiff obtained an ex-parte order on 23rd May 1998 from Mr. Justice Pang ordering injunctions restraining firstly, the 2nd Defendant from making any payment to the 1st Defendant under a Performance Bond issued by the 2nd Defendant to the 1st Defendant on the 19th day of April 1996, and secondly, the 1st Defendant from dealing with any money which may have been received by the 1st Defendant from the 2nd Defendant under the said Performance Bond until the hearing of an Inter Partes Summons returnable on 29th May 1998 before Mr. Justice Sakhrani.

2. On the return date the 1st Defendant appeared before Sakhrani J. by counsel, the 2nd Defendant being absent. Sakhrani J. Gave directions for the filing of affidavit evidence, adjourned the hearing of the Inter Partes Summons and further ordered that the Order of Pang J. of 23rd May to continue until the hearing of the Inter Partes Summons.

3. At the hearing of the Inter Partes Summons which came before me whereat the Plaintiff was represented by Miss Cheng and the 1st Defendant by Mr. Westbrook (the 2nd Defendant having sent along a representative from the company but again taking no part in the proceedings) I ordered the injunctions granted ex-parte by Pang J on 23rd May against both the 1st and 2nd Defendant be discharged. I now give my reasons.

4. The Plaintiff is a sub-contractor of Nishsimatsu Construction Company Limited ("Nishimatsu"), the Main Contractor engaged by the 1st Defendant to carry out the construction works in respect of the Ground Transportation Centre for the new airport at Chek Lap Kok. Nishimatsu sub-contracted to the Plaintiff the building services works, namely the installation of the mechanical and electrical services, the hydraulics and the fire services for the Ground Transportation Centre, at a fixed lump sum price of HK$192,270,158.00. Pursuant to the terms of the sub-contract, the Plaintiff procured the issue by the 2nd Defendant of a Performance Bond ("the Bond") dated 19th April 1996 in favour of the 1st Defendant to the extent of 10% of the lump sum price of the sub-contract. The Bond is expressly stated to be irrevocable and unconditional.

5. Clause 2 of the Bond expressly provides:

"If the Sub-Contractor shall be in default in respect of any of his obligations under the Sub-Contract the Bondsman shall upon demand made by the Employer 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 Employer by reason of the default up to the amount of the Bonded Sum."

6. The sub-contract works which the Plaintiff undertook were further sub-contracted by the Plaintiffs to others. In February 1998, Nishimatsu was notified by two of the Plaintiff's sub-contractors of alleged non-payment by the Plaintiff to them and giving notification to terminate their sub-sub contracts. As a result Nishimatsu agreed with the Plaintiff for Nishimatsu to make direct payments to the sub-sub contractors.

7. Moreover, between 19th January 1998 and 30th March 1998, Nishimatsu had written to the Plaintiff no less than 12 times complaining of the Plaintiff's performance. These complaints include slow progress of works, refusal to pay its sub-sub-contractors, insufficient management and inadequate attendance at meetings and at site, failure to maintain sufficient workers. A written warning was given by Nishimatsu to the Plaintiff by letter of 25th March 1998 under the terms of the Sub-Contract.

8. By a letter of 2nd April 1998, the 1st Defendant wrote to Nishimatsu setting out in the letter the terms of an agreement reached between the Plaintiff, Nishimatsu and the 1st Defendant in March 1998 that substantial completion of the sub-contract works undertaken by the Plaintiff are to be achieved by 31st May 1998. The agreed "Special Measures" that will have to be taken by the Plaintiff are also stated to be attached to this letter and that the 1st Defendant will pay out the additional sum of $49 million being the valuation of such variation in respect of the Special Measure to be undertaken by the Plaintiff. The last paragraph of this letter request confirmation of the acknowledgement and acceptance of the terms of the letter by both Nishimatsu and also by the Plaintiff. This letter was acknowledged and agreed to by the Plaintiff having been signed by one K. K. Cheung on its behalf, the date of the signing being 7th April 1998.

9. By letter of 3rd April, Nishimatsu wrote to the Plaintiff to confirm their understanding of the proposed agreement as to the special measures. The letter further stated that the amount in respect of the special measures from 23rd March to 31st May will be $40,460,000.00; those for the special measures before 23rd March will be $10,000,000.00; the prolongation costs will be $16,800,000.00 and the disruption costs (or handling fee) will be $3,500,000.00. The total amount therefore payable to the Plaintiff for these items comes to $70,760,000.00.

10. On 13th May 1998, Nishimatsu wrote to the Plaintiff referring to a meeting on 9th May where the Plaintiff confirmed their inability to pay their fire services sub-contractors without an assurance from the Airport Authority (i.e. the 1st Defendant). Nishsimatsu stated their decision to pay the fire services sub-contractor direct indicating at the same time that they will seek to recover from the Plaintiff the same as well as other direct payments made by them to other sub-contractors of the Plaintiff due to the Plaintiff's inability to pay.

11. The Plaintiff replied by letter of 15th May stating that they were not unable to pay their sub-contractor but that they were not prepared to make further payments to their sub-contractor for acceleration and/or special measures to meet the time frame of the 1st Defendant or of Nishimatsu unless they were reimbursed in full.

12. On the same day, i.e. 15th May, Nishimatsu wrote to the 1st Defendant in a 3-page letter detailing the failings and the poor or non-performance of the Plaintiff and seeking the consent of the 1st Defendant to terminating the sub-contract of the Plaintiff in accordance with the terms of clause 64.1 of the Contract General Conditions and also seeking the approval of the 1st Defendant to calling in the bond given with respect to the Plaintiff. To this request the 1st Defendant replied to Nishimatsu by letter of 19th May giving its consent to Nishimatsu to terminate the Plaintiff's sub-contract on the grounds identified by Nishimatsu.

13. Matters thus came to a head and on the same day i.e. 19th May Nishimatsu wrote to the Plaintiff to the effect that the Plaintiff's persistent failure to proceed with diligence and their inability to complete the works by the completion date showed that the Plaintiff did not intend to be bound by the terms of the Sub-Contract which comprised a repudiation on the part of the Plaintiff. By the same letter Nishimatsu gave notice of their acceptance of the Plaintiff's repudiation, that they will be claiming damages in respect of those breaches and requested the Plaintiff to leave the site forthwith.

14. The Plaintiff replied by letter the following day denying any repudiation on their part but instead accepting and treating the request of Nishimatsu for the Plaintiff to vacate the site as a wrongful repudiation by Nishimatsu of the sub-contract between them.

15. On 21st May 1998, the 1st Defendant wrote to the 2nd Defendant demanding the immediate payment of HK$19,227,015.80 under the performance bond given by them in respect of the Plaintiff on the grounds that the Plaintiff is in default of its obligations under the sub-contract.

16. It is against this background and on these facts that the Plaintiff now seeks the continuation of the injunction granted ex-parte by Pang J. restraining the 1st Defendant from calling in the amount of the Bond as well as restraining the 2nd Defendant from paying over such sum to the 1st Defendant. The locus upon which the Plaintiff makes this application is that there is an indemnity given by the Plaintiff to the 2nd Defendant under which the Plaintiff will have to make payment of a similar amount to the 2nd Defendant once the amount of the Bond is called in by the 1st Defendant and paid over to them by the 2nd Defendant.

17. It is common grounds between the parties that there is here a serious question to be tried as a result of the dispute between basically Nishimatsu (and to a lesser extent the 1st Defendant) on the one hand, and the Plaintiff on the other, as to who is in wrongful repudiation of the sub-contract, each alleging the other to be the defaulting party.

18. The first point taken by the Plaintiff is that the Bond is not simply what is commonly called a 'demand bond' but that the wording of it is such that it guarantees the proper performance of the sub-contract by the Plaintiff. Accordingly, the Plaintiff submits that the Bond can only be called if it can be shown that the Plaintiff was in default and that default has resulted in loss expense or damage being sustained by the 1st Defendant. This the Plaintiff says has not been shown by the evidence before the Court. The Plaintiff further submits that if the wrongful repudiation was that of Nishimatsu, that would in itself discharge the guarantor, i.e. the 2nd Defendant from all its obligations under the Bond.

19. Secondly, it is submitted by the Plaintiff that the demand was not made bona fide or with an honest belief by the 1st Defendant and in that sense it was made fraudulently in that in the Affidavit of Douglas Edwin Oakervee, the Project Director of the 1st Defendant, Mr. Oakervee is unable to point out any or any quantifiable damages sustained by the 1st Defendant as a result of the alleged default of the Plaintiff.

20. The express wording of the Bond states that firstly, the Bondsman is "irrevocably and unconditionally" bound to the Airport Authority (i.e. the 1st Defendant); secondly, the Bondsman shall "upon demand made by the Employer 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 Employer by reason of the default up to the amount of the Bonded sum."

21. From this wording it seems clear enough that the 1st Defendant, if he is to make a demand on the Bond has to do the following:

(a) make a demand in writing;

(b) state in the demand that the Plaintiff is in default of his obligations under the sub-contract but without the need to prove such default or indeed any other conditions;

(c) identify in the demand the amount not exceeding the bonded sum as being the losses or damages sustained by the 1st Defendant.

22. The demand must of course be made bona fide, not fraudulently or dishonestly. In the present case, the fact that there is a serious dispute, and thus a serious question to be tried, between Nishimatsu and the Plaintiff does not, per se, make the demand by the 1st Defendant in calling in the Bond dishonest or fraudulent. The 1st Defendant is entitled to rely on the representation of Nishimatsu that the Plaintiff is in default of the sub-contract and provided that their belief is an honest one based on the representation by Nishimatsu, even if it turns out ultimately that it was wrong in that it was Nishimatsu and not the Plaintiff who wrongfully repudiated the sub-contract, still it cannot be said that the 1st Defendant's demand in calling in the Bond was fraudulent. The evidence that is before me shows that the 1st Defendant did act on the representation of Nishimatsu and there is nothing to show that they did so with anything other than an honest belief in what was told them by Nishimatsu.

23. As for the losses sustained, the full amount of the bonded sum was called in by the 1st Defendant. It was argued by the Plaintiff that the full amount of the bond cannot be the actual losses sustained by the 1st Defendant since in his affirmation Mr. Oakervee could only say that he believed that the 1st Defendant might already have sustained enormous losses by reason of the Plaintiff's default without being able to quantify same in terms of any fixed amount.

24. The reality of the situation must be that the 1st Defendant, having agreed to pay the sum of $49 million for the special measures to accelerate the completion date, would undoubtedly suffer loss expense or damage if the sub-contractor defaulted in completing his sub-contracted works within the scheduled time frame. It does not follow that the 1st Defendant has suffered no loss or damage simply by reason that such loss or damage has not been quantified at this point in time.

25. Moreover, in the light of the wording of the Bond that the 1st Defendant does not have to prove any default or conditions in making a demand on the Bond, it must necessarily follow from it that there is an implied term that the 1st Defendant must at some time produce an account to show the amount of the actual loss or damage it had sustained such that any sum overpaid under the bond will have to be refunded by the 1st Defendant. (see Cargill v Bangladesh Sugar [1996] 4 All E R 563 affirmed on appeal [1998] 2 All E R 406)

26. In a normal case where an interlocutory injunction is applied for it has to be shown that there is a serious question to be tried, that damages would not be an adequate remedy and that, on a balance of convenience, it would cause less harm to grant the injunction than to preserve the status quo (American Cyanimid Co v Ethicon Ltd. [1975] A.C. 396). However, these principles do not apply to on demand bonds (which the Courts have equated with letters of credit) because the obligations under such bonds must be honoured unless it can be shown that the demand was fraudulent. It would only be in exceptional cases that Courts would interfere to grant interlocutory injunctions in the case of irrevocable obligations under such on demand bonds. In this case fraud on the part of the 1st Defendant has not been made out. That would be sufficient on its own to discharge the injunction granted ex-parte.

27. It was also argued on behalf of the Plaintiff that the Nishimatsu had failed to give seven days' notice of termination as required under the terms of the sub-contract. The short answer to that, as submitted by Mr. Westbrook on behalf of the 1st Defendant, was that Nishimatsu was not giving notice of termination to the Plaintiff but by their letter of 19th May was informing the Plaintiff that it treated the Plaintiff's default as a repudiation of the sub-contract and giving notice to the Plaintiff to vacate the site at once.

28. Issue was also taken by Miss Cheng that the wording of the demand letter of 21st May from the 1st Defendant to the 2nd Defendant cannot be right when it stated:

"We confirm that the Sub-contractor is in default of his obligations under the Sub-contract."

29. The criticism of Miss Cheng, if I understand her correctly, is that there can be no "default" as there could be no breach of contract after 19th May. This argument is so technical that I can see no merit in it.

30. One further matter I have to make mention of is that in making the ex-parte application, the Plaintiff relied on the Affirmation of Lee Ka Lun Stephen, the Commercial Director of the Plaintiff. Reading that Affirmation as a whole, the Plaintiff's case was put on the basis that the "special measures" were additional works or variations proposed but had not been agreed to by the Plaintiff with the aim of accelerating the completion of the works to meet the opening date of the new airport.

31. The letter of 2nd April from the 1st Defendant referring to the agreement in March relating to such "special measures" and which was acknowledged by the Plaintiff having been signed by Mr. K.K. Cheung on behalf of the Plaintiff was neither exhibited nor referred to in the affirmation of Lee Ka Lun Stephen. This letter, which puts a very different complexion on what was stated in the affirmation of Lee Ka Lun Stephen, was only exhibited to the Affidavit of Robert James Latter, the Commercial Manager of Nishimatsu, which affidavit was filed by the 1st Defendant pursuant to the inter partes hearing.

32. In my view, the failure of the Plaintiff to disclose this letter (or make reference to it) and the fact that it had been signed by someone on behalf of the Plaintiff amounts to a material non-disclosure when making the application ex-parte. That itself would have entitled a Court to discharge the injunctions granted ex-parte without having regard to the merits of the Plaintiff's case (see R v Kensington Income Tax Commissioner [1917] 1 K.B. 486 at 504).

33. For all the above reasons I discharged the injunctions given ex-parte by Pang J on 23rd May 1998 and ordered costs of the inter-partes summons be to the Defendants.