SECRETARY FOR JUSTICE v. THE HONG KONG & YAUMATI FERRY CO LTD AND ANOTHER

HCA 15329/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15329 OF 1999

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J U D G M E N T

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I.       INTRODUCTION

1.  The Government claims an indemnity against Hong Kong and Yaumati Ferry (HYF) and Hong Kong Ferry (Holdings) (HKF) under a written agreement dated 28 September 1993.  The scope of the Indemnity Agreement was extended by amendments dated 26 November 1993 and 20 June 1994 (respectively, Amendment Nos.1 and 2).

2.  The Indemnity Agreement provides that HYF would indemnify the Government against additional costs incurred in re-providing certain ferry piers on reclaimed land in Victoria Harbour.  By the same agreement HKF (as HYF’s parent company) guaranteed the performance by HYF of its obligations.

3.  Government entrusted the reclamation of the relevant land to the Mass Transit Railway Corporation (MTRC).  MTRC in turn awarded the Reclamation Contract (UA 11/91) to a Contractor in August 1993.  The contract included the re-providing of ferry piers in the reclamation area according to a specific piling design (the original design).

4.  At around the same time, HYF approached Government with a proposal for developing 4 of the re-provided ferry piers and their forecourt.

5.  It was apparent that the original design would not support HYF’s proposed development.  An alternative piling design was accordingly put forward by HYF.

6.  But there was no time for Government to decide whether to accept HYF’s proposal, before piling pursuant to the original design commenced.  Further, if the original design was changed to the alternative one after reclamation work had started, significantly greater cost and time would be incurred under the Reclamation Contract than if the Contractor proceeded with the alternative design from the outset.

7.  To give Government time to consider HYF’s proposal, Government and HYF agreed that the reclamation should proceed from the start according to the alternative design.  But HYF would reimburse the Government against all additional costs incurred, either directly or indirectly, as a consequence of ordering implementation of that alternative design.  Government made clear at the time (and the Indemnity Agreement recites) that reimbursement was to be made “whether or not the Government approves the HYF proposal”.

8.  Ultimately, despite 5 years of negotiation over the proposed pier re-development, the parties could not conclude a deal.  Although HYF has paid some $175 million of additional costs incurred by the Government, a balance remains unpaid.  It is that balance which Government claims here.

9.  The Defendants deny liability.  On the contrary, they counterclaim for some of the profit which they say that HYF would have earned had an agreement on pier development been reached.

10.  The Defendants contend that the Indemnity Agreement (including its amendments) was subject to an implied term that Government would negotiate fairly, reasonably and in good faith in respect of the proposed pier development.  They allege that Government did not so negotiate.

11.  In particular, the Defendants claim that the sticking point in the parties’ negotiations was the question of the premium to be paid by HYF for a private treaty grant of the land for pier development.  Government (the Defendants say) breached the implied term to which the Indemnity Agreement was subject by demanding too high a premium.  Had Government assessed a reasonable premium, the Defendants would (it is claimed) have agreed such amount and a deal would readily have been reached.

12.  In February 2004 Sakhrani J (then in charge of this case) ordered a split trial of liability and quantum.  I have been hearing the trial of liability.  What I have just summarised constitutes the principal issue on liability.

13.  There are other issues and sub-issues on liability, some major, others less so.  During the trial, the parties worked out a list of liability issues (including the principal issue just identified).  Those specific issues are set out in the sub-headings to Part III of this Judgment.  They provide the framework for the discussion of liability in Part III.

II.      BACKGROUND

A.      HYF’s ferry service franchise in the early 1990s

14.  HYF held a franchise from the Government to operate ferry services (including cross-harbour, new town and outlying island routes) for 15 years from 1 April 1984 to 31 March 1999.

15.  Usage of HYF’s ferries declined significantly between the 1980s and 1990s as a result of increased competition from land-based cross-harbour transport networks (including MTR and bus services).  In the 1990s, the decline was expected to continue such that HYF forecast substantial losses from any continued operation of its ferry business.

16.  Government, on the other hand, was keen in the 1990s to maintain and improve ferry services, especially to the outlying islands.  It believed that such services were essential in the public interest.  It was concerned that HYF might become insolvent or walk away from its franchise obligations.  It accordingly wished to explore ways by which HYF could viably continue to provide ferry services even after expiry of its franchise.

17.  In the early 1990s, it was envisaged that, as part of the development of the new airport at Chek Lap Kok, reclamation works would take place along the waterfront in Central.  Those works would include the relocation and re-provisioning of HYF’s ferry piers from their existing site in Central to the northern edge of the relevant reclaimed land.  More specifically, HYF’s piers would be replaced by 4 new piers, to be known as Nos. 4, 5, 6 and 7 (the New Piers).

B.      The HYF proposal of August 1993

18.  From 1992 onwards the Defendants made several proposals for the commercial development of the New Piers in order to supplement HYF’s declining earnings.

19.  In June 1992, for example, the Defendants suggested that a substantial portion of the profit from the residential part of a proposed development could be devoted to ferry services improvement.  Revised proposals for that scheme were submitted in October 1992.  But, for various reasons, Government did not find those proposals acceptable.

20.  In August 1993 the Defendants submitted another development proposal (the HYF proposal).  This involved building yacht-shaped towers above each of the New Piers.  The HYF proposal comprised a gross floor area (GFA) of 55,740 sq m and included 18,1000 sq m of service apartments; 19,110 sq m of retail shops; and 18,530 s m of offices.  As already mentioned, this HYF proposal was not compatible with the original design.

21.  Under the Entrustment Agreement dated 26 August 1993 between Government and MTRC, Government bound itself to pay such sums as may from time to time be certified by the engineer as due to the Contractor.  Government would also pay a sum of 11.6% “on costs”.

22.  It was within the context of this entrustment arrangement that, upon signing the Indemnity Agreement, Government instructed MTRC to cause the Contractor to undertake the reclamation works in accordance with HYF’s alternative design.  To comply with the Government’s instruction, MTRC entered into a Supplemental Agreement No.1 dated 29 October 1993 with the Contractor. 

23.  When the Indemnity Agreement was executed on 28 September 1993, Government also issued a Side Letter to HYF.

24.  By the Side Letter the Government agreed to direct MTRC to provide HYF with “copies of all claims for payment submitted by the Contractor for the [reclamation contract], which arise directly or indirectly out of the implementation of the Alternative Design and Supplemental Agreement No.1”. 

25.  The Side Letter recorded the parties’ agreement that HYF was “entitled to make representations to MTRC and Government about any such claims [for payment submitted by the Contractor], including those for extra payment or extensions of time”. 

26.  The Side Letter further stated in a clause 3 that the “Government shall ensure it will closely monitor all such claims by the Contractor in order to ensure that any payment by MTRC is justified and is strictly in accordance with the terms of the Reclamation Contract and Supplemental Agreement No.1.”

27.  Shortly after signing the Indemnity Agreement, HYF proposed the construction of a basement in the forecourt of New Piers 5 and 6 as part of its envisaged development.  HYF therefore asked that the rockfill for the sea wall foundation between New Piers 5 and 6 specified in the reclamation contract be changed from Type B to Type A.  Government accepted this suggestion.

28.  Since the change of rockfill was not consequential upon a change from the original to the alternative design for piling, the parties entered into Amendment No.1.  This extended the definition of “Additional Costs” in the Indemnity Agreement to include the costs incurred from the change of rock-fill.

29.  Throughout this time, negotiations between the Government and HYF in relation to the HYF proposal were proceeding.

C.      The course of negotiations over the HYF proposal

30.  On 10 January 1994 the Government’s Administration prepared an ExCo memo.  The memo recommended that HYF be permitted to develop the New Piers.

31.  On 18 January 1994 ExCo decided that the Administration should further consider other ways in which the ferry services currently provided by HYF could be made viable in the longer term.  ExCo asked that another submission be made in due course.

32.  After more discussions with HYF, the Administration prepared another ExCo memo.  This memo of 27 June 1994 summarised the parties’ then bargaining positions.  It recommended that development rights over the New Piers be granted to HYF by private treaty grant.

33.  On 5 July 1994 ExCo accepted the recommendation, but subject to conditions. 

34.  Those conditions included:-

(1)     the finalisation of a pier development package with HYF and HKF on broad terms set out in the ExCo memo of 27 June 1994;

(2)     a stipulation that disposal of commercial space retained for rental purposes should only take place with Government permission;

(3)     a requirement that the Defendants state their intention of providing ferry services after 1999;

(4)     (in the event of HYF’s franchise being terminated) a stipulation that any successor to HYF should continue to receive 50% of the rental income from the commercial space; and,

(5)     the conclusion of a Tripartite Agreement among Government, HYF and HKF whereby HKF agreed to inject funds into HYF and guarantee that HYF would use those funds for ferry service improvement.

35.  Among the broad terms set out in the ExCo memo of 27 June 1994 were:-

(1)     the payment by HKF of a full market premium (then estimated by the Administration at $2.7 billion);

(2)     the injection into HYF by HKF within the next 5 years of $640 million or 60% of development profits, whichever was greater;

(3)     the payment to HYF by HKF of 50% of future rental income; and,

(4)     a commitment by HKF to grant loans to HYF at concessionary interest rates if the injection of $640 million or more proved insufficient for HYF’s needs.

36.  On 18 March 1995 HKF applied to the Town Planning Board for permission to develop the relevant land in accordance with the HYF proposal.  The application (which at the time included the creation of 33,050 sq m of public open space) was approved by the Town Planning Board on 5 May 1995.

37.  On 29 June 1995 the Administration prepared a further ExCo memo, summarising negotiations with the Defendants.  Paragraph 5 of the memo listed the points on which a general understanding had been reached with the Defendants.  It read:-

“(a)      HKF agrees to pay for the benefit of HYF, which ever is more:-

(i)   $640 million; or

(ii)   60% of the sales profit from the disposal of the entire development and 50% of the rental income to be derived during the franchise period from not less than 20% of the commercial gross floor area of the entire development (hereinafter known as ‘the development profits’);

(b)   HYF agrees to use the payment in (a) above to finance service improvements in accordance with an agreed improvement programme (Annex B), to keep future fare increases in line with inflation and to cover the losses that HYF would incur in operating ferry services;

(c)   HKF agrees to make an interest-free cash advance, as an interim measure, pending the payment under (a), to HYF, not exceeding the guaranteed cash injection of $640 million, before the pier development is completed and the development profits and rental income are realized, to enable HYF to fulfil the terms in (b) above in advance of the completion of the pier development;

(d)   in case the interest-free cash advance in (c) above is insufficient to meet HYF’s cash requirements for fulfilling the terms in (b) above, HKF agrees to grant loans to HYF for the whole of the shortfall at an interest rate not higher than the prime rate, to be repayable by HYF as and when the development profits are realized;

(e)   HYF agrees to pay a full market premium for the site;

(f)  HYF agrees to apply for an extension of its franchise from 1999 to 2010; and

(g)   HYF agrees to withdraw its claim for compensation under the Foreshore and Seabed (Reclamation) Ordinance arising from the Central and Wanchai Reclamation (Stage 1).”

38.  The claim mentioned in paragraph 5(g) of the ExCo memo was HYF’s application for compensation for not being able to run services from the ferry piers franchised in 1984, due to the reclamation works in Victoria Harbour.

39.  The ExCo memo noted that the precise terms of the proposed private treaty grant, Tripartite Agreement and new franchise still had to be worked out.  The memo proposed that the basic terms of a private treaty grant should be along lines summarised in an annex to the memo.

40.  On 5 July 1995 ExCo decided that:-

“(a)    subject to contract, the general terms of the pier development package set out in paragraph 5 of the memorandum should be approved, but, in addition,

(b)  &nbspthe Administration should seek to obtain from HYF, either the company’s agreement that the rental properties should be the subject of a fixed charge after the repayment of the development loan (or a floating charge if a fixed charge cannot be obtained) or, in the event that this is not acceptable to HYF, a pledge that the company will not re-mortgage its rental properties at that time; and

(c)   the implementation of the pier development package at (a) above should now proceed and should not be conditional upon the outcome of (b) above.”

41.  By letter dated 19 July 1995 Mr. Haider Barma (then Secretary for Transport) informed the Defendants of ExCo’s decision.

42.  Mr. Colin Lam (HKF’s Director and Chairman) replied by letter dated 25 July 1995 that the Defendants were looking forward “to discussing with the Administration the detailed terms of the pier development, the premium payable for the site and the renewal of pier franchise”.  The letter also doubted that any charge could be arranged over the rental properties.

43.  On 4 December 1995 a Lands Valuation Conference determined that the land premium for the envisaged private treaty grant should be $2.6463 billion.

44.  By letter dated 12 January 1996 the Lands Department forwarded draft special conditions for the anticipated private treaty grant to the Defendants.  Among the Special Conditions proposed were:-

(1)     a provision that HYF would undertake the construction, management and maintenance of not less than 33,050 sq m of public open space; and,

(2)     a stipulation that the service apartments to be developed should not be assignable except as a whole, although individual units could be sub-let for up to 2 years at a time.

45.  On 13 March 1996 the Defendants replied that the premium was unrealistic.

46.  Protracted discussions over premium in connection with the HYF proposal ensued.

47.  At a meeting between Government and the Defendants on 13 February 1998 the possibility of a scaled-down HYF proposal was discussed.  It was thought that such a revised proposal could lead to lower construction costs and to a reduced premium.

48.  Four days later, on 17 February 1998, the Defendants submitted a revised proposal to the Town Planning Board.  In fact, unknown to the Government at the time, the Defendants had already been working on such a proposal several months before. 

D.  The alternative HYF proposal of February 1998

49.  Under the alternative HYF proposal 2 Chinese junk shaped towers would be built over a retail and concourse podium on the land immediately south of the New Piers.  Towers would no longer be built over the New Piers as had been envisaged in the HYF proposal.  GFA remained the same as under the HYF proposal, and so did the mix of retail, office and service apartments.

50.  In a letter to the Town Planning Board dated 3 March 1998 HKF confirmed that, as part of the alternative HYF proposal, it would design and construct 34,350 sq m of public open space at its own expense.

51.  The Town Planning Board approved the alternative HYF proposal on 3 April 1998.

52.  At a lunch meeting with Ms. Fanny Law (then Commissioner for Transport) on 8 June 1998, Mr. Colin Lam informally suggested extending HYF’s franchise in order to give more time for negotiations.  He repeated the proposal in a telephone conversation with Ms. Eliza Lee of Transport Bureau on 27 June 1998.

53.  On 19 June 1998 a Lands Valuation Conference assessed the premium for a private treaty grant in relation to the alternative HYF proposal at $1.771 billion.  Government made an offer in those terms to HYF on 26 June 1998.  That offer required HYF to provide 34,350 sq m of public open space at its own expense.  The offer also repeated the restriction against alienation of individual service apartments.

54.  By letter dated 2 July 1998 HKF told the District Lands Office that the premium of $1.771 billion was unrealistic.  HKF said in the letter that its agent Larry Tam & Associates (LTA) would be submitting an appeal against the assessment.

E.   The 2^nd alternative HYF proposal of July 1998

55.  By a letter dated 13 July 1998 the Defendants put forward another revised proposal.  This 2^nd alternative HYF proposal was substantially different from those that had preceded it.

56.  In the 2^nd alternative HYF proposal, development was reduced from 55,740 to 37,161 sq m.  Service apartments and retail areas were omitted, leaving only offices (35,303 sq m) and a small food and beverage area (1,858 sq m).  It was proposed that the entire office building would be sold in order to repay loans and generate cash flow.  Only the food and beverage space would be retained for rental income, half of which would go towards subsidising ferry services.

57.  Under the 2^nd alternative HYF proposal, HKF would only inject the greater of either $320 million or 60% of the sale profit from the disposal of the entire development and 50% of net rental income over the franchise period.

F.   The collapse of negotiations

58.  By a letter dated 15 July 1998 LTA on behalf of the Defendants appealed against the premium assessment of $1.771 billion for the alternative HYF proposal.  The letter suggested that a premium of $191 million was appropriate.  The latter did not take account of the cost of public items which the Defendants would carry out (about $742.4 million).  But LTA stated that they “reserve their position to request the relevant governmental departments to create the public works programme items for reimbursement of the costs to our client”.

59.  The Administration prepared a memo to update ExCo on the progress of the slow (and yet to be concluded) negotiations.  The memo dated 18 July 1998 referred to the appeal against the premium assessment of $1.771 million.  The memo also mentioned the 2^nd alternative HYF proposal, noting that it represented a significant departure from the pier development package which ExCo had previously endorsed in July 1995.

60.  The memo observed:-

“Our assessment is that HYF is walking away from the commitment it made in 1995.  If we were to accept HYF’s second proposed revised design the planning approval and premium assessment procedures would take about 6 months ie to early 1999 (assuming HYF would not continue challenging the basis on which the premium is assessed) and this will leave us with no time to consider other alternatives, given HYF’s franchise will expire in March 1999.  We will then be held to ransom by HYF and will be forced to accept its proposals in order to ensure continued ferry service post 31 March 1999.  Our concern is that the longer the exercise drags on, the greater the bargaining edge HYF would have over Government in negotiating for a package favourable to the ferry company.”

61.  The memo suggested continuing negotiations with HYF on the basis of a land premium of $1.771 billion “or such other figure as the Administration may accept as being the full market value premium,” maintaining the restriction against alienation of individual service apartments, and rejecting the 2^nd alternative HYF proposal.  But the memo also recommended that HYF be given until mid-August 1998 to accept those terms, pointing out that there was a need to prepare for a possible breakdown in negotiations.

62.  On 21 July 1998 ExCo accepted the memo’s recommendations.  It instructed the Administration to “start trawling for prospective operations interested in providing a ferry service in Hong Kong”.

63.  Accordingly, on the same day as ExCo’s decision, Government wrote to the Defendants requiring them to accept the general terms then being proposed by the Government by 15 August 1998.

64.  By letter dated 4 August 1998 the Lands Department asked LTA to make “a realistic counter offer” in relation to premium.  LTA replied on 7 August 1998 that the submitted figure of $191 million was “fair and reasonable”.

65.  On 10 August 1998 another Lands Valuation Conference took place.  This was because it thought that a premium review for the alternative HYF proposal was justified, given the recent downward market trend and the latest costs advice from the Architectural Services Department (ASD).  By its advice, ASD had indicated that the costs estimated by the Defendants for the development envisaged by the alternative HYF proposal were reasonable.

66.  The Valuation Conference concluded that a revised premium of $1.059 billion was appropriate.  It rejected the Defendants’ figure of $191 million as too low.

67.  On 11 August 1998, Mr. Nigel Burley (acting as Director of Lands) telephoned Mr. Larry Tam of LTA to sound out whether the Defendants might be prepared to pay a premium of about $1 billion.  According to Mr. Burley, Mr. Tam replied in the negative.  Even if it came down to $1 billion, Government (Mr. Burley alleges that Mr. Tam said) would be “wasting its time”.

68.  I note that Mr. Tam cannot now recall Mr. Burley having made such a telephone call.  He can find no internal note of it.  He therefore believes that it did not take place.  He says that it is unlikely that a call of such nature took place because, in any event, he would not have rejected an approach of $1 billion out of hand.  Mr. Tam says he would first have had to obtain the Defendants’ instructions before saying anything.

69.  But Mr. Burley, who was a close friend of Mr. Tam and who regards Mr. Tam as a mentor, is adamant that the telephone call took place.  Mr. Burley further observes that in March 2001 he rang Mr. Tam to ask whether he recalled the conversation and Mr. Tam had said “yes”.

70.  Mr. Tam does not deny the March 2001 telephone call.  But he suggests (in my view, unconvincingly) that by “yes” he simply meant something like “Oh, yes?  Tell me more...”

71.  Between the 2 conflicting accounts, I prefer that of Mr. Burley.

72.  Mr. Tam’s position seems more a deduction that the conversation could not have taken place because of the absence of any internal record.  But there is no evidence as to whether Mr. Tam was in the habit of regularly taking notes of telephone conversations, especially informal ones such as that claimed by Mr. Burley. 

73.  Further, given the informal nature of the approach, it would be unsurprising if Mr. Tam rejected the possibility of a $1 billion premium straightaway, in order (as far as Mr. Tam was concerned) to signal that the Defendants were not budging from $191 million as the appropriate premium. 

74.  Indeed, Mr. Colin Lam’s cross-examination suggests that the Defendants were not prepared to go significantly above a premium of $191 million.  I consider this evidence in greater detail below.

75.  The Defendants having insisted on a $191 million premium by LTA’s 7 August 1998 letter and Mr. Tam’s response to Mr. Burley’s informal approach, Government believed that there was no point in formally informing the Defendants of the $1.059 billion premium assessment.  There was (as far as Government was concerned) no realistic possibility of bridging the gap between $191 million and $1.059 billion.

76.  Lands Department wrote to LTA on 11 August 1998 to ask whether a premium of $191 million was the Defendants’ final position.  The reply of 12 August 1998 was that the figure of $191 million was “fair and reasonable”. 

77.  On 14 August 1998 Government wrote to LTA recording that the parties had failed to reach agreement on premium.  This effectively ended negotiations on pier development between Government and the Defendants.

III.  DISCUSSION

A.      Issue I: The implied terms of the Indemnity Agreement

I.1     Did the Indemnity Agreement contain the implied terms, or any of the implied terms alleged in Re-Re-Amended Defence and Counterclaim (RRADC) paragraphs 64(a) to (f) and 65, whether by operation of law, in order to give business efficacy to the Indemnity Agreement or by reason of the matters set out in RRADC paragraphs 5 to 53?

78.  To be implied into a contract, a term must meet the following conditions:-

(1)     It must be reasonable and equitable.

(2)     It must be necessary to give business efficacy to the         contract which would otherwise be ineffective without it.

(3)     It must be so obvious that “it goes without saying”.

(4)     It must be capable of clear expression.

(5)     It must not contradict an express term of the contract.

See BP Refinery (Western-Port) Pty Ltd. v. Shire of Hastings (1977) 180 CLR 266 (at 283) (Privy Council).

79.  The Defendants plead various formulations of terms to be implied into the Indemnity Agreement. 

80.  But, in substance the implied term which the Defendants contend should be read into the Indemnity Agreement is to the effect that the parties should deal openly and fairly (in good faith) with one another in considering and negotiating over the implementation of HYF’s pier development proposals.  At a minimum, such implied term (the Defendants say) includes the parties acting reasonably (as opposed to arbitrarily or capriciously) in arriving at an appropriate premium or in terminating negotiations.

81.  Mr. Bathurst QC (appearing with Ms. Teresa Cheng SC and Mr. Johnny Ma for the Defendants) argues that it is reasonable to imply the term just mentioned.

82.  By signing the Indemnity Agreement, the Defendants (Mr. Bathurst submits) were committing themselves to spending in excess of $100 million as a result of the change from original to alternative piling design.  Directors of a company acting reasonably (Mr. Bathurst suggests) would not have entered into an arrangement such as the Indemnity Agreement “unless they were entitled to expect that the Government would give serious and reasonable consideration to the HYF proposal and ... act reasonably and in good faith in negotiations for its terms”.

83.  Moreover, in discussing the implementation of the various HYF proposals, the parties (Mr. Bathurst says) would not simply be negotiating over a conventional commercial arrangement.  When entering into the Indemnity Agreement, the parties were hoping to enable a mutually beneficial proposal to proceed.  The Defendants needed the HYF proposal or a variant thereof to succeed, if HYF was to stem its financial losses and continue in business.  The Government, on the other hand, wished to maintain ferry services (especially those to the outlying islands) which it considered vital in the public interest.

84.  As far as premium is concerned, Mr. Bathurst accepts that usually the Government as landowner is free to charge such premium as it sees fit.  But in the special situation here, for the reasons just identified, the Defendants (Mr. Bathurst says) were entitled to expect that the Lands Department would act reasonably in accordance with its normal practice when assessing premium.

85.  In summary, given the particular circumstances leading to the Indemnity Agreement, it would be ludicrous to suggest (Mr. Bathurst argues) that Government or the Defendants could simply act in any way that they wished during ensuing negotiations over the HYF proposal.

86.  I am not persuaded by the Defendants’ submission.

87.  It is not necessary to imply the term for which the Defendants contend.  One does not have to imply the term to give business efficacy to the Indemnity Agreement.  Nor do I do believe that the term “goes without saying”.

88.  As Mr. Mark Strachan QC (appearing with Mr. Anderson Chow SC and Mr. James Campbell for the Government) submits, the Indemnity Agreement is (as its name suggests) a simple agreement for indemnity.  By such contract (as amended), the Government agreed to carry out additional works with a view to keeping alive the possibility of the HYF proposal being accepted later and the Defendant agreed to reimburse the Government for the additional costs of so doing.  There was no guarantee that Government would accept the HYF proposal.

89.  There is little more to the Indemnity Agreement (as amended) than that.  There is nothing unworkable about it that requires, in order to be effective, the implication of a term that ensuing negotiations over the HYF proposal are to be conducted reasonably, in good faith, or using best endeavours.

90.  If anything, the express terms of the Indemnity Agreement militate against the Defendants’ reading. 

91.  Thus, for instance, recital H and clause 7 of the Indemnity Agreement categorically state that the Defendants remain under an obligation to indemnify whether or not the Government accepts their proposal. 

92.  Amendment No.1 states in clause 3 that the revision therein “shall carry no implication in respect of the Government’s consideration of the proposal and in particular nothing ... shall affect ... clause 7 [of the Indemnity Agreement]”.

93.  Amendment No.2 states in recital D that “the parties have entered into this Agreement further amending the Indemnity Agreement.  The Government however has not approved the HYF Proposal and its entering into this Agreement does not imply that it will do so.”

94.  The Indemnity Agreement (as amended) consistently re-affirmed that Government was free to accept or reject the HYF proposal.  The provisions identified above suggest that, in coming to its decision whether to accept or reject, Government was unconstrained.

95.  Parties conventionally enter into contracts with one another in order to achieve some mutually beneficial objective. 

96.  I do not think that the mere fact that (for different motives) Government and the Defendants both entered into the Indemnity Agreement to explore the possibility of maintaining ferry services, logically leads to an inference that the parties implicitly agreed to negotiate in good faith. 

97.  If Mr. Bathurst is right that mutually coinciding objectives can give rise to the relevant implied term, that would mean that in almost every commercial contract there would automatically be implied a term of the sort alleged here.

98.  Nor does the fact that by executing the Indemnity Agreement the Defendants undertook a potential liability in excess of $100 million, point to any necessary implication. 

99.  The evidence is that, at the time of signing the Indemnity Agreement, HYF was in a difficult financial position.  It had little room to manoeuvre.  Its future rested with the New Pier development proposal.  Unless the alternative design was incorporated into the reclamation contract at an early stage, Government would likely not have considered the HYF proposal, but would simply have rejected it out of hand.

100.  The reality is that HYF had little option. 

101.  In entering into the Indemnity Agreement, it took the risk (“punt” as Mr. K. Y. Yeung (former Secretary for Transport) colourfully described it in a contemporaneous memo) that the HYF proposal might be rejected.  If so, HYF would not just lose $100 odd million, it would probably have to cease business altogether.  If, on the other hand, the HYF proposal (or some variant) were accepted, then although HYF would be down $100 million, its future would be secure.  It would benefit from an injection of funds from the proposed pier development and continue in business for the foreseeable future.

102.  It was a gamble.  But, with survival at stake, it is entirely plausible (contrary to Mr. Bathurst’s submission) that a board of directors would enter into a contract like the Indemnity Agreement, even without any assurance from Government as to good faith negotiations.

103.  The minutes of the HKF board meeting on 24 September 1993 which authorised the signing of the Indemnity Agreement show that the Defendants (especially Mr. Colin Lam) were fully cognisant of the risk involved.  Nonetheless, the board entered into the indemnity because there was “not much choice other than to take the risk”.  There were no other viable alternatives for HYF’s survival.

104.  In the course of the trial, the Defendants alleged that, in the negotiations over the Indemnity Agreement, Government had said that Government would “give full support to the HYF proposal” and the Defendants should “trust the Government”.

105.  But the evidence does not make out the Defendants’ case that words of the nature quoted were in fact ever said by the Government.

106.  On the contrary, Government’s contemporaneous notes indicate that at all times Government stressed that the risk of the HYF proposal being rejected for whatever reason was entirely on the Defendants.

107.  Thus, at a meeting with HYF on 23 August 1993, the Secretary for Works (Mr. James Blake) made it clear that HYF should “be prepared to foot the bills required” by a change to the alternative design.  At the same meeting, the Secretary for Transport (Mr. K. Y. Yeung) said that HYF had to give a “solid guarantee to shoulder all the cost involved, regardless whether the project will come to its [fruition]”. 

108.  Later, in a telephone conversation with Mr. Colin Lam on 14 September 1993, Mr. Kevin Mak (Deputy Secretary for Transport) is recorded in a file note as having made the point that Government could give “no assurance or any word of comfort ... that the pier development project would be approved”.  While Government would consider the HYF proposal, it was “only one of the many options”.  It was up to HKF to decide whether the Reclamation Contract should adopt the alternative design.  However, if HKF decided so to proceed, “it would do so at its own risk”. 

109.  Even if words of the sort alleged by the Defendants were used, they would have been too vague to give rise to any contractual commitment.  Certainly, they could not have given rise to any sort of duty (express or implied) to negotiate in good faith.  In closing submissions, Mr. Bathurst fairly recognised this.  He did not press a case based on the alleged statements of trust and support.

110.  On the specific issue of premium, the matters set out above are equally applicable.  I do not think that the circumstances here took this case out of the ordinary situation. 

111.  Consequently, in assessing premium, the Government’s position was as stated by the Court of Final Appeal in Director of Lands v. Yin Shuen Enterprises Ltd. (2003) 6 HKCFAR 1 (Lord Millett):-

“[I]n deciding whether to grant or withhold its consent to a modification of the terms of a lease, the Government does not exercise a public law function but acts in its private capacity as a landlord: see Hang Wah Chong Investment Co. Ltd. v. AG [1981] HKLR 336 (PC).  It thus has an absolute right if it chooses to demand a premium, however large, for granting a modification of the terms of the lease, or to withhold its consent altogether, however unreasonably: see Lord Tredegar v. Harwood [1929] AC 72.”

112.  Therefore, I would answer “no” to Question I.1.  Whether the Indemnity Agreement is considered in general or in relation to premium assessment in particular, it was not subject to the implied term or terms for which the Defendants contend.  The parties were free to approach the negotiations over the HYF proposal in the manner of 2 commercial entities looking after their own respective interests.

I.2     Are such implied terms (or any of them) enforceable in law?

113.  In Hyundai Engineering & Construction Co. Ltd. v. Vigour Ltd. [2005] 3 HKLRD 723, the Court of Appeal held that agreements to negotiate in good faith are too uncertain to be enforceable.  For this reason, the Court rejected my conclusion at first instance that a contract to use best endeavours to mediate was enforceable.  In support of its conclusion, the Court relied on the famous case of Walford v. Miles [1992] 2 AC 128 (HL).

114.  It follows from Hyundai that, even if I were sympathetic to the Defendants’ arguments on implied term, I still could not find for them on that issue.  The term proposed is essentially that the parties would negotiate in good faith for the implementation of the HYF proposal.  That is precisely the term (“mediation” being akin to “negotiation”) which the Court of Appeal in Hyundai has held to be unenforceable.  That decision is binding on me.

115.  I do not think that Mr. Bathurst has been able convincingly to distinguish the term sought to be implied here from that rejected by the Court of Appeal in Hyundai.

116.  On the assumption that he can distinguish the Defendants’ term, there are still hurdles to be overcome as far as enforceability is considered.

117.  For example, the present situation is different from that in Petromec Inc. v. Petroleo Brasileiro [2006] 1 Lloyds Law Rep 121.  In the latter, the English Court of Appeal was able to distinguish Walford v. Miles. 

118.  The Court of Appeal there did so on the basis that the express obligation “to negotiate in good faith” in the relevant contract was for the limited purpose of arriving at the “reasonable costs” and “reasonable extra costs” mentioned in an earlier provision of the same contract. 

119.  Where a contract does not stipulate what a “reasonable” cost is, the Court has no difficulty in determining such cost following an objective evaluation of material facts.  Accordingly, there can be no real objection to enforcing an express obligation to negotiate in good faith to arrive at a reasonable cost as an end objective.

120.  In contrast, here the end objective is complex.  There are too many possible outcomes. 

121.  What (one asks rhetorically) would a “reasonable” agreement among Government, HYF and HKF look like in relation to (say) premium, investment in ferry service improvements, advances by HKF to HYF, securities furnished by HKF in respect of such investment and advances, “walk away” or termination provisions, alienation of service apartments and retail areas?

122.  Yet if the Court cannot say what a reasonable end agreement would look like, how can the Court gauge at any given time whether one party or another is adhering to a supposed obligation to negotiate in good faith? 

123.  In any complex negotiation, there will be many exchanges externally between parties and internally within a given party.  Absent some relatively precise idea of what the parties are supposed to end up with in their negotiations, how (as Mr. Strachan queries) can a Court judge whether any given conduct by any particular person is or is not in good faith or does or does not reasonably advance those negotiations?

124.  Consequently, in the open-ended and multifarious context of the negotiations here, as opposed to Petromec, I doubt that a Court could police an obligation to negotiate in good faith.  In purely practical terms, regardless of the legal-theoretical considerations in Walford v. Miles, such an obligation could not be enforceable in the circumstances found here.

125.  Thus, I would answer “no” to Question I.2.

B.      Issue II: The collateral agreement pleaded in RRADC paragraph 66

126.  The Defendants no longer pursue this issue.

C.      Issue III: The Side Letter as a collateral agreement

127.  From the outset, the Government has accepted that the Side Letter constituted a collateral agreement and imposed obligations on the Government in accordance with its terms.

D.      Issue IV: The implied terms of, and the Government’s obligations under, the Indemnity Agreement as amended and the Side Letter, as pleaded in RRADC paragraphs 80 and 181

IV.1   Did the Indemnity Agreement as amended and the Side Letter contain the implied term, or any of the implied terms, alleged in RRADC paragraphs 80(a) to (d)?

128.  RRADC pleads implied terms to the following effect:-

(1)     That the Government would see to it that the Additional Works (namely, those extra works necessary to put the New Piers into a state where HYF would be in a position to implement the HYF proposal) complied with the provisions of the Buildings Ordinance and its regulations.

(2)     That the Additional Works would be executed in good and workmanlike manner, would use good and proper materials, and would comply with the alternative design.

(3)     That the Government would procure the Additional Works to be carried out to the extent needed to enable HYF to implement the HYF proposal.

(4)     That the Government would exercise all reasonable care to see to it that the Additional Works were properly executed.

129.  In essence, the various formulations of implied term impose on the Government a positive duty to ensure (or at least take reasonable care to see) that the Additional Works complied with relevant statutes and the alternative design stipulated by Supplemental Agreement No.1.

130.  The Defendants’ case on these implied terms begins by noting that, as construction works, the Additional Works had to comply strictly with the Buildings Ordinance and its regulations and with the alternative design. 

131.  The Defendants then draw attention to clause 4 of the Indemnity Agreement and clause 3 of the Side Letter.  By the former, the Defendants undertook to pay for additional costs arising directly or indirectly out of the alternative design “strictly in accordance with the terms and conditions of the Reclamation Contract and Supplemental Agreement No.1”.  By the latter Government was to “closely monitor” all claims by the Contractor for payment “to ensure that any payment by MTRC is justified, and is strictly in accordance with ... the Reclamation Contract and Supplemental Agreement No.1”.

132.  From these premises, the Defendants conclude that Government must impliedly have undertaken an obligation “to ensure that the works were constructed in accordance with the Reclamation Contract and Supplemental Agreement No.1”.  If no such term was implied, then the Indemnity Agreement would be tantamount to a “blank cheque” with the Defendants undertaking to reimburse the Government for Additional Works, however shoddy and non-compliant.

133.  In my view, the implied term or terms alleged by the Defendants are unnecessary to give business efficacy to the Indemnity Agreement or the Side Letter.  Nor do the terms in their various formulations “go without saying”.

134.  By clause 3 of the Side Letter Government undertook to monitor (in the sense of check) the Contractor’s payment claims to ensure that such were justified in accordance with the Reclamation Contract and Supplemental Agreement No.1.  The Side Letter says nothing about monitoring (in the sense of supervising) the Contractor’s execution of the works. 

135.  Just because (say) I agree to check that X’s claims for payment were being made in accordance with the terms of a contract, does not mean that I undertake a further obligation to ensure that X has properly carried out the works for which X claims payment.  It does not follow either that, because in checking X’s claims I was acting on behalf of Y, I incurred some sort of duty to Y to ensure that X’s works complied with his contract.  This would be regardless of whether Y has an obligation to pay any claims by X verified by me.

136.  One cannot (as the Defendants attempt) infer from the bare propositions that the Additional Works should in general comply with statute and that the Defendants had to pay for claims by the Contractor made pursuant to its contract, an obligation on the part of Government to supervise the Additional Works to ensure compliance with statute.  The supposed conclusion again does not logically follow.

137.  The factual matrix against which the Indemnity Agreement and the Side Letter came into being supports the above reading of Government’s obligations.

138.  By its entrustment agreement with MTRC, Government commissioned MTRC to perform the works.  As part of its obligations, MTRC undertook that the reclamation works “with the skill and care to be expected from a compliant and workmanlike construction contractor”. 

139.  As a result, Government could not supervise the Contractor directly.  Only MTRC which (in distinction to Government) had a direct contractual relationship with the Contractor) could do so.

140.  In those circumstances, it would be odd if by the Indemnity Agreement and Side Letter, without expressly so stating, Government should be regarded as itself undertaking the onerous responsibility which Government had imposed on MTRC.

141.  I do not think that there is anything unworkable or inefficacious in the more restricted reading of the Indemnity Agreement and Side Letter for which the Government contends.  For example, as part of the implementation of the Indemnity Agreement, HYF and its consultants were allowed to visit the works site regularly to verify that requisite standards were being met.  On this basis, there would be no need to impose the onerous duties of supervising or even guaranteeing compliance of the Additional Works on Government.

142.  Accordingly, I would answer “no” to Question IV.1.

IV.2   Are the Defendants precluded from contending that the Indemnity Agreement as amended and the Side Letter contain the alleged implied terms by reason of the estoppel by convention pleaded in Re-Re-Amended Reply (RRAR) paragraph 67?

143.  Government’s Territory Development Department (TDD), MTRC and HYF adopted certain procedures for monitoring payments to the Contractor.

144.  The Contractor would submit interim payment certificates in accordance with the provisions of the Reclamation Contract.  MTRC as Engineer would assess the claims and certify the sum believed to be due.

145.  MTRC would then give a copy of its interim payment certificate to TDD.  The documents provided to TDD would include a breakdown of the value of work performed by the Contractor in order to implement the alternative design.

146.  TDD would send a demand note to HYF, identifying those additional costs which had become payable by TDD to MTRC as a result of implementing the alternative design.  TDD would itself have checked MTRC’s payment certificates before issuing a demand note.

147.  HYF was required to pay amounts so demanded within 14 days.  TDD was in turn obliged to pay MTRC within 21 days of an interim payment certificate.

148.  In addition to the foregoing, there would be regular meetings between various Government departments and MTRC to review the progress of the Reclamation Contract generally.  There would also be Cost Review Committee (CRC) meetings between Government and MTRC and regular meetings among Government, MTRC and the Defendants’ representatives.  Further, progress/cost summaries would be submitted by MTRC in monthly progress reports.

149.  The CRC consisted of representatives from Government (including the New Airport Projects Coordination Office), Maunsell Consultants Asia Ltd. and MTRC.  It met every 2 weeks or so to monitor issues of programming and cost associated with variation works.  Between August 1993 and December 1995 Maunsell acted for both Government and HYF on the CRC.

150.  Before they could be implemented, variations required issue of a duly approved CRC Change Form.  In particular, the form had to be approved by Government in relation to any design change and its cost estimate.  To make sure that HYF would bear the cost of a design change, Government would not normally approve a CRC Change Form before receiving cost estimates, comments, clarification or confirmation from HYF or its consultants in respect of a proposed change.

151.  As among the Government, MTRC and HYF, it was agreed on 9 October 1995 that MTRC would allow HYF to comment on the Contractor’s claims prior to discussion by the CRC.  The arrangement was re-considered in March 1997.  But there was no change to procedure as monitoring was thought to be satisfactory.

152.  Every month MTRC would sent a Cost Centre Value Adjustment (CCVA) to the Contractor.  This would be copied to Government.

153.  The CCVA comprised a summary table listing adjustment items (additions and omissions) associated with each reclamation works Cost Centre in the relevant month.  A back-up sheet would explain each adjustment.  The CCVA would go to the TDD which would scrutinise the form, especially checking adjustment items.

154.  A Government Engineer would verify that adjustment values in a CCVA were correctly reflected in MTRC’s interim payment certificates.  The certificates would also separately be looked at by a Senior Engineer and a Chief Engineer within Government before approval and issue of a demand note to HYF.

155.  In keeping with the system just outlined, the Defendants paid Demand Notes Nos.1 to 34.  It was not until the issue of Demand Note No.35 on 9 September 1999, after Government had decided not to proceed with the HYF proposal, that Defendants queried Government’s payment monitoring. 

156.  In consequence, the Government says that the Defendants are now estopped from alleging that Government did not comply with its monitoring obligations under the Indemnity Agreement and Side Letter.

157.  In light of my negative answer to Question IV.1, Question IV.2 does not actually arise. 

158.  However, had I answered Question IV.1 in the affirmative, I would have replied “yes” to Question IV.2.  Having dealt with Government for a protracted period on the footing that the procedures for monitoring payments to the Contractor were adequate, it would now be unconscionable for the Defendants to go back on that convention or mode of dealing.  The Defendants are thus estopped from now contending that Government’s monitoring obligations were actually more onerous than the parties had previously accepted.

IV.3   Upon a proper construction of the Indemnity Agreement as amended and the Side Letter, was the Government obliged to ensure that the MTRC would duly and properly supervise and the Contractor would duly and properly execute the works under Supplemental Agreement No.1 as alleged in RRADC paragraph 181?

159.  The suggestion is that the Indemnity Agreement and Side Letter expressly (as opposed to impliedly) imposed obligations on Government similar to the alleged implied terms discussed in relation to Question IV.1.  As stated in answer to Question IV.1, in my view Government did not come under any such express or implied obligations.

160.  I would answer “no” to Question IV.3. 

IV.4   Are the Defendants precluded from contending that the Government was obliged to ensure that the MTRC would duly and properly supervise and the Contractor would duly and properly execute the works under Supplemental Agreement No.1, by reason of the estoppel by convention pleaded in RRAR paragraph 146A?

161.  In light of the negative answer to Question IV.3, this issue does not arise.  Had I answered Question IV.3 affirmatively, I would have answered “yes” to Question IV.4.  My reasoning would have been as set out in relation to Question IV.2.

E.      Issue V: The July 1995 Agreement pleaded in RRADC paragraph 91 and its implied terms as alleged in RRADC paragraph 92

162.  The Defendants no longer pursue this issue.

F.      Issue VI: Termination of Negotiations -- Breach of the implied terms of the Indemnity Agreement (pleaded in RRADC paragraph 64) as alleged in RRADC paragraph 125, breach of the implied terms of the July 1995 Agreement (pleaded in RRADC paragraph 92) as alleged in RRADC paragraph 126, and causation of loss

VI.1   Did the Government breach:-

(i)      the implied terms of the Indemnity Agreement;

(ii)     the implied terms of the July 1995 Agreement,

in the manner as pleaded and particularised in RRADC paragraph 125?

163.  Since no term of the nature alleged by the Defendants is to be implied into the Indemnity Agreement, Question VI.1(i) does not arise.  The question is answered in the negative.

164.  Question VI.1(ii) has fallen away, as the Defendants no longer allege a July 1995 Agreement.

VI.2   In particular, was the Government in breach of one or more of such terms in:-

(i)      failing to act reasonably and/or in good faith and unilaterally and without consultation with the Defendants terminating all negotiations with HYF regarding the HYF proposal;

(ii)     alternatively, acting unreasonably to frustrate the conclusion of the negotiations of the detailed terms of the HYF proposal to implement the same, by doing any of the 3 particularised matters, namely:-

(a)     creating a time constraint, as alleged in paragraphs 125(1) and (2);

(b)     not offering the premium of $1,059.25 million to the Defendants, as alleged in paragraphs 125(3) to (11);

(c)     making misleading and/or false representations in the July and September 1998 ExCo memos, as alleged in paragraph 125(12) and as particularised under 7 heads in paragraph 122?

165.  This issue does not arise in view of the answer to Question VI.1(i).

166.  Nonetheless, since a significant part of the trial has concerned Government’s alleged unreasonable conduct, I propose briefly to consider the 3 matters particularised in sub-paragraphs (a)-(c) of Question VI.2.

(a)     Creation of a time constraint

167.  On several occasions in June 1998, Mr. Colin Lam floated the idea of extending HYF’s for a short period beyond March 1999 (possibly up to a year) to give time for further negotiation.

168.  Government never took up the extension offer. 

169.  On the contrary, the ExCo memo of 21 July 1998 stated that time for reaching a deal with the Defendants was running out.  The ExCo memo suggested that, given the expiry of HYF’s franchise on 31 March 1999, there was the possibility that Government would be “held to ransom by HYF and will be forced to accept [HYF’s] proposals in order to ensure continued ferry services post 31 March 1999”.

170.  The Defendants say that Government acted unreasonably in not taking up the offer for a short-term extension of the franchise.  Instead, the Administration (the Defendants submit) made it appear that there was a time constraint when there was none. 

171.  By the ExCo memo, the Administration misled ExCo (the Defendants say) into believing that HYF was stringing out negotiations so as to leave Government with little option but to accept HYF’s terms at the eleventh hour.  Had ExCo known of Mr. Lam’s extension offer, ExCo (the Defendants speculate) would not have imposed a mid-August 1998 deadline to agree terms.

172.  In my view, the accusation being levied against Government has no substance.  By June 1998, negotiations had been going on for nearly 5 years.  It was reasonable for Government to take the view that enough was enough and negotiations should be concluded one way or another within a short time frame.  Government was entitled to think that the matter should not be left to drag on for another year.

173.  On the ExCo memo, given that it was reasonable by then for Government to wish to conclude negotiations within a short time, I do not think that there was anything unreasonable in recommending a mid-August 1998 deadline to ExCo.

174.  Plainly, the longer negotiations dragged on, the greater would be the loss to HYF before an injection of much-needed capital could be effected.  Rather than being spent on ferry service improvements, funds raised through any pier development package would then be eaten up by financial losses occasioned by the protracted delay in reaching any conclusion.

175.  In any case, even when imposing a mid-August 1998 deadline, ExCo instructed the Administration to “be as accommodating as possible in considering [HYF’s] counter-proposals in the light of the changes in circumstances, so as to reach a deal with HYF”.

(b)     Failure to offer a premium of $1.059 billion

176.  As I have already found above, Mr. Burley floated the possibility of a premium of around $1 billion with Mr. Tam.  That informal approach was rejected by Mr. Tam as a waste of time.

177.  Given Mr. Burley’a approach, I do not see how Government acted unreasonably in terminating negotiations on premium.  The parties appeared to be too far apart, the Defendants maintaining a premium of $191 million was appropriate against Government’s figure of around $1 billion.

178.  Further, before 15 August 1998 Government twice wrote to ask LTA whether $191 million was the Defendants’ final position.  On each occasion LTA replied that the figure of $191 million was fair and reasonable.  Faced with such reply, Government was entitled to assume that the Defendants would not budge from $191 million.

179.  Mr. Bathurst argues that in fact no formal offer of $1 billion was ever made by the Government.  All Mr. Burley did at best (Mr. Bathurst says) was to approach Mr. Tam informally. 

180.  That may be true.  But I do not see how that makes a material difference.  Whether a premium of $1 billion was formally or informally broached, the message from LTA was loud and clear: even $1 billion was a waste of time.

181.  In the witness box Mr. Colin Lam was asked on 2 consecutive days to state precisely how much the Defendants would have been prepared to pay by way of premium.  His replies were contradictory and confusing. 

182.  On the first day, Mr. Lam said that he would only have been prepared to write a cheque to Government for $191 million.  But Mr. Lam suggested that he would have attempted to persuade Government that, factoring in “sunken costs,” the Defendants would effectively be paying a premium of some $830 million. 

183.  By “sunken costs” Mr. Lam was referring to some $257 million which HYF had spent on piling work and some $373 million already lost through maintaining ferry services.  Those “sunken costs” would have amounted to some $630 million.  Adding that $630 million to a premium cheque for $191 million would (Mr. Lam argued) amount to an “effective premium” of about $830 million.

184.  The thrust of Mr. Lam’s first day’s evidence was accordingly that, given “sunken costs” already incurred, the Defendants were not prepared to offer more than $191 million by way of premium.

185.  On the second day, Mr. Lam asserted that, regardless of “sunken costs,” HYF would have been ready to write a cheque for “anywhere like $830 to nearly up to a billion”.

186.  Mr. Lam could not reconcile Day 2 of his evidence with what he had adamantly maintained only the day before. 

187.  I think that Mr. Lam’s first day of evidence gave a more accurate picture of how high HYF was prepared to go on premium.  That evidence is consistent with what actually happened in August 1998.  At that time, despite repeated pressing by Government as to whether $191 million was HYF’s final position, LTA appeared to be indicating that it was.  One would have thought, especially in light of the impending mid-August 1998 deadline, that if the Defendants were prepared to offer more than $191 million, the moment to break the impasse was then.  But nothing further was forthcoming from the Defendants on premium. 

188.  Mr. Lam’s second day of evidence on premium was far too muddled to be reliable.  The evidence may have been prompted (as Mr. Strachan suggests) by overnight reflections on the previous day’s evidence.  Whether it was or not, I do not think that I can attach any weight to what Mr. Lam said on Day 2 of his testimony.

(c)     Misrepresentations in ExCo memo of 21 July 1998

189.  The Defendants say that the ExCo memo was misleading in the following respects:-

(1)     It falsely represented that there was a time constraint when there was none.

(2)     It falsely represented the 2^nd alternative HYF proposal as evidence of a “walking away” from HYF’s position in 1995.

(3)     It did not mention that the premium assessed by the Lands Department was based on an “optimal development” which did not reflect additional construction costs which the Defendants would have to incur to implement the HYF proposal.

(4)     It falsely represented that there was a policy against the alienation of individual service apartments.

(5)     It falsely represented that the 2^nd alternative HYF proposal constituted an under-utilisation of the relevant site.

(6)     It falsely represented that the terms of the Tripartite Agreement could not be agreed.

(7)     Subsequent to July 1998, ExCo was never informed that premium had been substantially revised down from $1.77 billion to $1.059 billion.

190.  I have already considered the allegation of a false time constraint.

191.  In relation to the 2^nd alternative HYF proposal, the Defendants say that was merely put forward as an option if a deal could not be reached on the alternative HYF proposal.  The Defendants deny that the 2^nd alternative HYF proposal was a “walking away” from anything.  As far as they were concerned, the alternative HYF proposal remained on the table for further discussion. 

192.  This position ought to have been clear to the Administration (the Defendants submit), because LTA had appealed against the $1.77 billion premium assessment and the Defendants were awaiting the result of the appeal.  What (the Defendants ask rhetorically) would have been the point of wasting time on an appeal, if the alternative HYF proposal had already been abandoned?

193.  However, the 2^nd alternative HYF proposal was a significantly down-sized version of the HYF and alternative HYF proposals.  Therefore, the Administration could fairly take the view that it was a “walking away”.

194.  The ExCo memo did not give a misleading picture in this respect.  It did characterise the 2^nd alternative HYF proposal as a “walking away” by the Defendants.  But it also referred to the appeal against the $1.77 billion premium assessment in respect of the alternative HYF proposal.  ExCo was thus sufficiently informed of material facts to draw its own conclusions as to whether the alternative HYF proposal remained on the table.

195.  Nor do I think that there is anything in the allegation of misrepresentation in relation to construction cost and premium.

196.  Premium is positively correlated to a site’s development potential.  In broad terms, the greater a site’s development value net of construction cost, the higher the premium payable. 

197.  The Government, acting in the public interest, seeks to maximise premium payable by a developer into general revenue.  In practice this means that the Lands Department assesses premium on the basis of a hypothetical “optimal development”.  Government accordingly posits a development which would produce the greatest profit for a developer.  That is a development which maximises the gross development value (GDV) of a site while minimising the construction costs of the project.

198.  The actual development being proposed by a developer may envisage a greater construction cost than that required by the optimal development posited by Government.  This would not be surprising. 

199.  An optimal development involves an assumption that a developer cuts costs wherever he can and so the resulting building may be a plain uninteresting structure.  A developer might wish to spend more to erect something grander and more remarkable, especially on a prominent site.

200.  But, as far as Government is concerned, such wish would be the developer’s choice.  Although Government may for some reason or another be persuaded to take the higher costs of an actual development into account, the additional costs to be incurred over and above those of an optimal development are not strictly relevant to the calculation of premium.

201.  Consequently, there was nothing unreasonable in the July 1998 ExCo memo’s failure to state that the costs of what HYF was proposing to build were higher than those assumed by the Land Department for the optimal development on which premium was based.  HYF’s actual additional costs over and above those of the optimal development posited were not truly material to the exercise of premium assessment.

202.  On service apartments, the Government sought to impose a restriction against the alienation of individual service apartments on policy grounds.  The Defendants complained that such restriction would make it difficult for them to generate revenue from the service apartments to be built as part of the alternative HYF proposal.  The Defendants allege that in fact there was no such policy.

203.  Here I accept the evidence of Mr. Robert Pope (former Director of Lands).  Where Government grants land to a developer for the specific purpose of building service apartments, the Lands Department normally imposes a restriction against the alienation of individual units.  The service apartments may be alienated but only as a whole block. 

204.  Although the policy is an unwritten one (in the sense that no formal guidelines have ever been promulgated by the Lands Department), there is no doubt that it exists. 

205.  There are in fact service apartment developments in Hong Kong where individual units may be freely bought and sold.  But, as Mr. Pope explained, these developments may be ones for which permission to build service apartments was only given after an earlier grant of land and in later granting its permission for service apartments Government may have overlooked the need to restrict the alienation of individual units.

206.  On under-utilisation of the site, the complaint is that ExCo was not told that the GFA of the 2^nd alternative HYF proposal (37,161 sq m) exceeded that originally envisaged by the Government for a development above the New Piers (31,083 sq m).

207.  This complaint was not pursued in the Defendants’ cross-examination of Government witnesses.  Here I agree with Mr. Strachan that the complaint seems to be irrelevant and immaterial.

208.  As for the Tripartite Agreement, it seems to me that in July 1998 the parties were still wide apart.  In particular, the following major issues (at the very least) still needed to be resolved:-

(1)     The amount of the bank (as opposed to corporate) guarantee to be provided by the Defendants (anywhere from $200 to about $320 million).

(2)     The imposition of a legal charge over rental properties.

(3)     The definition of “walking away” in the event that HYF decided to cease providing ferry services under a new        franchise.

209.  There was consequently nothing misleading in what was said about the differences between the parties on the Tripartite Agreement.

210.  Finally, on premium, the $1.059 billion premium was only assessed after the July 1998 ExCo memo.  The complaint is that ExCo was never told of the re-assessed figure.  ExCo would thus have been under an impression (the Defendants say) that the gap between the parties on premium was wider than it actually was.

211.  Again, as I have found, Mr. Burley tested the waters with Mr. Tam in respect of a $1 billion or so premium.  Mr. Burley having been told that even a premium of $1 billion was a waste of time, I do not see why ExCo would have to be told about the $1.059 billion assessment.  The parties were in fact far apart with no sign of the gap being bridged.

212.  I note that, in their closing submissions, the Defendants suggest that “the only reasonable conclusion to be drawn is that the Administration decided to hide the revised premium of $1,059.25 m”.  This was done (the Defendants say) consistently with the view of Mr. Bowen Leung (then Secretary of Planning, Environment and Lands) in a file note of 11 August 1998.

213.  In that file note, Mr. Leung refers to the Defendants’ “reconfirmation of the premium at $191 million”.  A premium of about $1.05 billion would be “still 5 times more than the offer made by HYF”.  There was thus “no foundation for us [Government] to enter into a reasonable dialogue or negotiation with HYF”.

214.  The file note then continues:-

“There are other factors to be considered:-

(a)     The public is likely to see that there has been a drastic change of Government’s premium position in that we lowered the premium by as much as 40% [that is, from about $1.77 billion to about $1.05 billion] in three weeks.  The public is unlikely to be aware of the detailed background for this assessment but what the press will report is that there had been a catastrophic drop in premium assessment, leading to a ripple affect over other premium negotiations and assessments.

(b)     For those who may have some inside information on why we readjusted the premium this time, they would certainly say that Government had been very wrong originally in assessing the previous premium.  This again will not reflect well on the Government.”

215.  I find the file note a slim basis for supporting a serious allegation of some sort of cover-up by Government. 

216.  Mr. Leung was frankly recording his thoughts, right or wrong, in a file note mulling over whether there was any point to continuing negotiations with HYF in light of its insistence on a premium of $191 million. 

217.  As part of that internal debate, Mr. Leung considered (as he was duty-bound to do) a wider canvas than the instance case.  He thus reflected on the likely public reaction and the effect on other ongoing premium negotiations.  He then concluded that, given the gap with HYF, further negotiations were pointless and there was no need to broach the lower premium of $1.059 billion.

218.  In the premises, I reject the Defendants’ contention of a sinister decision by Government “to hide” the $1.059 premium figure.

219.  To conclude, none of the matters raised in sub-paragraphs (a), (b) and (c) of Question VI.2 amount to unreasonable or bad faith conduct on the part of Government.

VI.3   On the assumption that the Government was in breach of one or more of the said implied terms of the Indemnity Agreement in one or more of the respects set out in VI.2, did such breach cause the Defendants some loss (irrespective of the quantum of such loss)?

220.  This issue does not arise in view of the answer to VI.1(i).

VI.4   On the assumption that the Government was in breach of one or more of the said implied terms of the July 1995 Agreement, in one or more of the respects referred to above, did such breach cause the Defendants some loss (irrespective of the quantum of such loss)?

221.  This issue does not arise.

G.      Issue VII: Premium -- Breach of the implied terms of the Indemnity Agreement (pleaded in RRADC paragraph 64) as alleged in RRADC paragraph 123, breach of the collateral agreement (pleaded in RRADC paragraph 66) as alleged in RRADC paragraph 123, breach of the implied terms of the July 1995 Agreement (pleaded in RRADC paragraph 92) as alleged in RRADC paragraph 124, and causation of loss

VII.1  Did the Government breach:-

(i)     the implied terms of the Indemnity Agreement pleaded in RRADC paragraph 64;

(ii)    the collateral agreement pleaded in RRADC paragraph 66; and,

(iii)   the implied terms of the July 1995 Agreement pleaded in RRADC paragraph 92,

in the manner as pleaded and particularised in RRADC paragraph 123?

 VII.2 In particular, was the Government in breach of one or more of such terms in:-

(i)      failing to act fairly and reasonably and/or in good faith and/or using its best endeavours to consider review and negotiate the premium relating to the development under the HYF proposal with a view of getting it approved and implemented;

(ii)     without proper or reasonable care refusing to consider, review, negotiate and offer the full market premium payable;

(iii)    deviating from its normal practice and principles when assessing the full market premium payable; and/or,

(iv)    notwithstanding ExCo’s approval of the HYF proposal, failing to assess and offer the land premium in accordance with its normal practice and principles,

by failing, when assessing the land premium, to take into account in accordance with its normal practice and principles any of the 3 particularised matters, namely:-

(a)    a proper sum for the construction costs of the HYF proposal as alleged in RRADC paragraphs 123(I)(a)(1) and (II);

(b)    the cost of public items in the HYF proposal, as alleged in RRADC paragraphs 123(I)(a)(2) and (III); a reasonable construction period for the HYF proposal, as alleged in paragraph 123(I)(a)(3) and (IV)?

(c)     a reasonable construction period for the HYF proposal, as alleged in paragraph 123(I)(a)(3) and (IV)?

VII.3  In relation to the issue of premium:-

(i)      On the basis of the optimal development for the site considered by the Valuation Conference of 10 August 1998, namely:-

(a)    GFA for retail is 19,110 sq m; GFA for office is 18,530 sq m; GFA for service apartments is 18,100 sq m; and the total GFA is 55,740 sq m;

(b)    2 levels of retail;

(c)     1 office block above the retail;

(d)    1 service apartment block above the retail,

what would have been the full market premium?

(ii)     In particular:-

(a)    What were the appropriate construction costs to take into account in relation to:-

(1)      the basement;

(2)      the retail area;

(3)      the pedestrian bridge or walkway;

(4)      the office block;

(5)      the service apartment block?

(b)     What was the appropriate construction period to take into account (including phasing)?

(c)     What was the appropriate saleable ratio to take into account in relation to the retail area?

(d)     Was it appropriate to take into account a marketing period after completion of construction and, if so, what should have been the length of such marketing period?

222.  It is convenient to consider these 3 questions altogether. 

223.  Note first that, Issue I (implied terms in Indemnity Agreement) having been decided against the Defendants and the Defendants having dropped Issue II (collateral agreement alleged in RRADC paragraph 66), the 3 questions do not strictly arise.

224.  Nevertheless, since much time was spent at trial on premium assessment, I propose to comment briefly on whether Government acted unreasonably in assessing a premium.

225.  The Defendants essentially allege that in the calculation of premium Government failed to take account of the following:-

(1)     a proper sum for construction cost;

(2)     a reasonable construction period; and,

(3)     a reasonable saleable ratio for retail.

226.  The Defendants have devoted considerable space in their closing submissions to a discussion of the 19 June 1998 Lands Valuation Conference.  That discussion argues that the June 1998 Conference acted arbitrarily and unreasonably in assessing premium, especially when taking account of the likely construction cost, construction period, and retail area saleable ratio.

227.  Given that in August 1998 Mr. Burley proposed a premium of around $1 billion to Mr. Tam and Mr. Tam squarely rejected such figure as a waste, I do not think that what Government did and did not do (or ought and ought not to have done) at the June 1998 Valuation Conference can be relevant. 

228.  This is because any supposed breach by Government when assessing a premium of $1.77 billion in June 1998 cannot have been causative of a breakdown of negotiations.  Government indicated in August 1998 that it was prepared to go significantly lower, but the Defendants still rejected that subsequent offer.

229.  It is only if the Defendants can establish that the premium of $1.059 billion was unreasonable and Government should have gone even lower, that they have any case of causative breach.

230.  I will therefore confine my discussion to the August 1998 premium assessment of $1.059 billion.  Was that later assessment in any way unreasonable?

231.  Question VII.2(b) refers to a failure to take account of the cost of public items.  But on the evidence the complaint advanced is untenable.  Insofar as such costs were ignored in the assessment of premium in August 1998, that was done with the Defendants’ agreement.  Mr. Colin Lam withdrew that complaint in the course of his cross-examination.

(a)     Construction cost

232.  The August 1998 conference posited an optimal development having the characteristics identified in Question VIII.3(i)(a)-(d).

233.  On construction cost, the August 1998 conference thought that the optimal development would take about $1,988.72 million to build.  There was only some 10% difference between that estimate and the cost figure which HYF was advancing at the time.

234.  Premium assessment is not rocket science.  It is a broad-brush exercise.  It involves the exercise of professional judgment.  Different professionals acting reasonably in the assessment of premium can easily differ among themselves on relevant figures within (say) a range of plus or minus 10%.  It can hardly be said that Government was acting unreasonably in adopting its figure.

235.  Not surprisingly, the Defendants’ construction cost expert (Mr. Stephen Liu) accepted that the construction cost estimate adopted by the August 1998 Lands Valuation Conference was reasonable.

236.  I note that the Government’s cost expert (Mr. John Battersby) estimated that construction would require $1,766.328 million, a much lower amount than that actually used by Government.  I do not find Mr. Battersby’s figure to be arbitrary or capricious.  It seems to me that he was able to justify his result in cross-examination.  I believe that his figure simply reinforces the point that different persons may, acting in good faith, end up with varying estimates of the construction costs for a given project.

237.  In estimating cost, the August 1998 Conference assumed that loading and unloading bays would be situated on the ground floor of the development.  This would have the result of reducing the cost of building the basement.

238.  The Defendants say that locating loading and unloading bays on the ground floor would violate the Government’s own planning guidelines for the site.  Those guidelines stipulate that the bays should be placed in the basement.  The Defendants therefore suggest that the August 1998 Conference was not justified in moving the bays to the ground floor.

239.  I am unable to accept the Defendants’ contention on loading and unloading bays.  The planning guidelines are simply “guidelines”.  They have no mandatory effect.  In considering whether to give permission for a development, the Town Planning Board will take the planning guidelines into account.  But it will not regard itself as bound by them.

240.  Absent evidence that the Town Planning Board would definitely reject a development which situated loading and unloading bays at ground level, I cannot say that Government proceeded unreasonably.

(b)     Construction period

241.  A construction period is relevant to premium assessment because the longer the time of construction, the longer the period over which revenue inflows from a development are discounted.  Premium will consequently be lower.

242.  The August 1998 Conference calculated premium on the basis of a 4½ year construction period extending over 3 phases.

243.  The Defendants say that such period was unrealistic.  The Defendants suggest that 5 years 6 months (stretched over 3 phases) is the shortest time in which the optimal development might have been built.  They rely on the expert evidence of Mr. Jayananda Jesudason in support of this contention.

244.  On the other hand, the shortest construction period that Government’s expert (Mr. Battersby) thought possible for the optimal development was 5 months (running over 2 phases).

245.  Mr. Jesudason’s period is longer than that of Mr. Battersby primarily because Mr. Jesudason envisages problems in the building of a pedestrian bridge linking the HYF site with the neighbouring MTRC development.  Mr. Jesudason anticipates difficulties with the bridge for 3 reasons. 

246.  First, Mr. Jesudason believes that necessary works for the pedestrian bridge linking the HYF site to the adjacent MTRC development would not be ready on time (that is, by 31 December 2001). 

247.  Second, on Mr. Battersby’s scheme, ground work would be proceeding on the MTRC site at the same time as work on the pedestrian bridge. 

248.  Third, the road diversion work necessary to allow construction of the pedestrian bridge might not be achievable as Government permission for such works was likely to be refused.

249.  I am not persuaded by Mr. Jesudason’s 3 points.  In my view, Mr. Battersby’s scheme is realistic.

250.  First, the available evidence (in particular, a letter from MTRC to the Chief Estate Surveyor (New Airport Section/ Urban Office) dated 17 April 1997) suggests that it would be possible to connect the pedestrian bridge to the MTRC site by around 31 December 2001 or shortly thereafter.  In any event, Mr. Battersby allowed plenty of float in his programme so that 31 December 2001 was not a critical date for him.

251.  Second, it is common in Hong Kong for multiple teams of contractors to work on the same site simultaneously.  This “cohabitation” of contractors should not of itself render a programme unrealistic.

252.  Third, apart from Mr. Jesudason’s assertion based on his experience, there is no hard evidence that Government would absolutely refuse road diversion work necessary to bring Mr. Battersby’s programme into effect.  Mr. Battersby himself disagrees with Mr. Jesudason’s assessment.

253.  Now, as Mr. Battersby’s shortest programme exceeds that used by the August 1998 Conference by 6 months, can it be said that Government acted unreasonably in adopting a 4½ year construction period?

254.  I do not think so. 

255.  Premium assessment is of necessity a broad-brush process.  It may be that, acting in good faith, Government inadvertently over-estimates one element, while under-estimating another input into the premium assessment equation.  At the end of the day, what matters more is the bottom line or final premium figure attained. 

256.  As we shall see shortly, Government probably got it just about right in deriving a final premium figure of $1.059 billion.  If (on the basis of expert evidence) the end result is within an acceptable range, I do not think Government can be said to have acted unreasonably merely because the construction period input into the assessment equation was less generous than it might have been.

257.  Before leaving construction period, it is convenient to mention the question of marketing period.

258.  The question is whether a marketing period of (say) 6 months should be added on to the construction period so that revenue flows are discounted further.  With a marketing period tacked on, premium would be even lower.

259.  The rationale behind tacking on a marketing period is that the units of a development (whether retail, office or residential) will not all have been sold at the end of the construction period.  If that is right, why should premium assessment be predicated on a developer receiving all his revenue by the end of construction?

260.  The parties’ experts (Mr. Nicholas Brooke for the Government and Mr. Stephen Yip for the Defendants) both thought that it was right here to allow for a marketing period.  The August 1998 Conference, in contrast, did not take account of any marketing period.  This was consistent with the Lands Department’s normal practice.

261.  In my view, Government’s failure to allow for a marketing period cannot be held to signify bad faith or arbitrariness on its part. 

262.  Despite their views on marketing period in this instance, both premium experts agreed that the allowance or otherwise of a marketing period was a matter of judgment.  Different professionals might reasonably take different views.

263.  It is telling that, in a draft premium assessment for the Defendants, Mr. William Mok of LTA did not allow any discount over some marketing period.  Cross-examined on this, Mr. Mok himself accepted that allowance of a marketing period was a matter of professional judgment.  In preparing his draft, he had originally considered that no allowance was necessary.

(c)     Retail area saleable ratio

264.  In general, the higher is the retail saleable ratio, the greater is the premium payable.

265.  The August 1998 Conference assumed a saleable ratio of 98% for the retail area of its hypothetical optimal development. 

266.  Mr. Christopher Law (Government’s expert) thought that a ratio of 95% was feasible. 

267.  Mr. Li Man-ying (the Defendants’ expert) thought that 81% was the maximum possible.  But in that case (Mr. Li thought) the HYF development would no longer be a “Grade A shopping arcade”.  If the development was to remain Grade A, a saleable ratio of 75% was appropriate.

268.  Government assumed a high saleable ratio because of a provision within the draft Conditions of Grant for the HYF proposal. 

269.  By that provision, “Pedestrian Passages” (among other spaces) would be excluded from the calculation of GFA.  The Conditions defined “Pedestrian Passages” to include not just any pedestrian corridors shown in a Master Layout Plan for the development but “any access steps, stairways, escalators and ramps forming part thereof or pertaining thereto”. 

270.  Thus, for instance, fire exits and stairways pertaining to the pedestrian throughways of the retail area would be exempt from the calculation of GFA.

271.  It followed (Government reasoned) that almost the entire of floor area space designated for shops could be used for retail purposes. 

272.  This was because, in the optimal development, access steps, stairways (including fire exits), escalators and ramps could be designed so as to form part of or pertain to the pedestrian throughways.  The latter spaces would be ignored in the calculation of GFA and accordingly not affect the saleable ratio for the retail area.  The only areas that would reduce retail saleable ratio would be those needed for toilets and other utilities.

273.  In those premises, taking a rough and ready approach, Government adopted a saleable ratio of 98%, signifying near maximum efficient use of the retail area.

274.  I have difficulty with Mr. Li’s evidence and his critique of Government’s approach just described.

275.  First, Mr. Li’s conclusions of 75% and 81% are based on the Defendants’ instruction that he was to regard the retail area of the optimal development as having the same layout as that approved by the Town Planning Board on 3 April 1998 (that is, the alternative HYF proposal), save only that there would be 2 rather than 3 levels of shopping.

276.  In assessing premium, the Lands Department (in accordance with its practice) did not tie the optimal development to any particular layout.  The August 1998 Conference simply took a broad-brush approach of 2 levels of shopping, without assuming any specific layout.

277.  The Defendants in their closing submissions have suggested that the draft Conditions of Grant were tied to a specific Master Layout Plan (namely, that of the HYF proposal).  But I do not think that is right.  Government in fact dropped Special Condition 32 (requiring the submission of a Master Layout Plan to the Director of Lands) of the Conditions of Grant in relation to the alternative HYF proposal.

278.  Thus, assume (taking Mr. Li’s evidence at face value) that it is not possible to design sufficient access routes or staircases as forming part of or pertaining to the pedestrian arteries shown in the alternative HYF proposal’s layout plan.  It may still be possible to design the necessary access routes or staircases as forming part of or pertaining to some other layout.  Mr. Li’s evidence does not falsify Government’s approach which did not have any specific layout in mind.

279.  Second, on whether the HYF development would still be Grade A if a greater ratio than 75% was used, Mr. Li’s definition of a Grade A shopping arcade was highly personal and subjective. 

280.  Mr. Li, for example, thought that a double height atrium was necessary if an arcade were to qualify as Grade A.  But his own definition of what was or was not a double-height atrium was confused.  At one point, it seemed that on his definition any small opening between 2 levels of retail space occupied by an escalator could amount to such an atrium.

281.  Mr. Li acknowledged that there was no widely accepted literature on the subject of what was or was not Grade A standard.  Accordingly, I am unable to apply his categorisation in any objective manner.

282.  Third, most importantly, when preparing layout plans in 1998 for the alternative HYF proposal, Mr. Li himself proceeded on the basis that the efficiency ratio (which Mr. Li accepted was similar to saleable ratio) would be 98%.  Cross-examined, Mr. Li stated that he had merely taken the 98% from the 1995 HYF proposal.  Mr. Li said that he had not meant that the alternative HYF proposal would have a saleable ratio of 98%.

283.  But I find this explanation difficult to countenance.  Giving Mr. Li the benefit of the doubt, as a responsible professional, he would have taken care to see that his work was reliable and accurate.  He would not have mechanically copied a figure, apparently believing that accuracy did not matter because no one would take whatever figure he wrote seriously.

284.  Therefore, as between Mr. Li and Mr. Law, I prefer Mr. Law’s evidence.  In my view, Mr. Law was right to suggest that, if the starting point has to be the layout plan submitted for the alternative HYF proposal, then it may still be possible to achieve a 95% ratio.  This might possibly be done by narrowing the passageways of the east-west arms (as opposed to the north-south spine) of the retail area walkway, re-designing the ferry concourse suggested by Mr. Li, or slightly extending the arms of the retail area walkway.

285.  There is little difference between Mr. Law’s ratio of 95% and Government’s figure of 98%.  There is no difference between Government’s figure and Mr. Li’s efficiency ratio of 98%.

286.  On such basis, it cannot be said that Government was unreasonable in adopting its 98% figure.

(d)     A reasonable premium

287.  Given the foregoing, then save for construction period where the Government’s programme was 6 months too short, the values which the August 1998 Conference input into the premium assessment equation are well-supported by the expert evidence.

288.  The end result of the August 1998 Conference was a premium of $1.059 billion.  This is in line with Mr. Brooke’s premium figure of $1.058 billion. 

289.  Mr. Brooke’s premium was derived on the assumptions that loading and unloading bays were placed on the ground floor, that construction required the 2-phase 5 year period advanced by Mr. Battersby, and construction costs were the lower figures calculated by Mr. Battersby.  For the reasons discussed above, I do not consider Mr. Brooke’s assumptions to be unreasonable.

290.  It follows that Government cannot be faulted merely because one of its inputs (construction period) was too short, where the bottom line figure is more or less identical to Mr. Brooke’s reasonable calculation.

291.  In contrast, Mr. Yip suggested that a premium of about $385.41 million was appropriate.  This is radically different from the amounts derived by Government or Mr. Brooke.

292.  However, I doubt that Mr. Yip’s figure is reliable for various reasons.

293.  First, Mr. Yip adopts a single phase for his construction period of 5 years 6 months, even though his expert (Mr. Jesudason) posits 3 phases.  The use of a single phase would mean that cashflows are all discounted over a longer period.  With a 3 phase approach, some revenue is likely to be received before the end of the 5 year 6 month construction period and the discount to such receipt would not be as large as that resulting from Mr. Yip’s method.

294.  Second, Mr. Yip adopts a figure of 75% for saleable ratio.  In light of what I have already said above, this is probably far too low.  Mr. Yip’s method unjustifiably reduces the estimated GDV for the project.

295.  Third, Mr. Yip uses a higher construction cost than that which the August 1998 Conference used.  This is because Mr. Yip assumes that loading and unloading bays are located in the basement of the HYF development.

296.  Fourth, although claiming to accept the August 1998 Valuation Conference figures for retail GDV, Mr. Yip only uses some of the Lands Department’s figures.  It is unclear why he does so.

297.  Accordingly, on premium, I prefer Mr. Brooke’s evidence to that of Mr. Yip.

(e)     Conclusion on premium

298.  In summary, I would answer Questions VII.1 to VII.3 as follows:-

(1)     Question VII.1:-

(i)    No, there has been no breach of an implied term.

(ii)    This question is no longer pursued.

(iii)   This question is no longer pursued.

(2)     Question VII.2:-

There has not been any breach by Government.

(3)     Question VII.3:-

(i)    A full market premium would have been around $1.058 billion.

(ii)    (a)   The appropriate construction costs would have been as the August 1998 Conference took them to be plus or minus 10%.

(b)     The appropriate construction period would have been about 5 years, divided into 2 phases.

(c)     The appropriate saleable ratio would have been about 95%.

(d)     It would have been appropriate to allow a marketing period of 6 months.  But ultimately this would have been a matter of judgment for the Lands Department.

VII.4  On the assumption that the Government was in breach of one or more of the implied terms of the Indemnity Agreement in one or more respects, did such breach cause the Defendants some loss (irrespective of the quantum of such loss)?

299.  This question does not arise. 

VII.5  On the assumption that the Government was in breach of the collateral agreement in one or more respects, did such breach cause the Defendants some loss (irrespective of the quantum of such loss)?

300.  This question does not arise.

VII.6  On the assumption that the Government was in breach of the July 1995 Agreement in one or more respects, did such breach cause the Defendants some loss (irrespective of the quantum of such loss)

301.  This question is no longer pursued by the Defendants.

H.      Issue VIII: Breach of the terms of the Side Letter concerning claims for payment, as alleged in RRADC paragraphs 127, 128 and 130 to 132, and causation of loss

VIII.1 Was the Government in breach of its obligation under the Side Letter in:-

(i)      failing to monitor the claims by the Contractor by not:-

(a)    itself assessing the validity of the Contractor’s claims and/or the quantification of such claims; and/or,

(b)    requiring the Contractor’s claims to be substantiated by MTRC and/or the Contractor;

(ii)    failing to direct MTRC to provide HYF with copies of all claims for payment submitted by the Contractor which arose directly or indirectly out of the implementation of the alternative design and Supplemental Agreement No.1;

(iii)   failing to assess the amount claimed by the Contractor and found to be payable by HYF; and,

(iv)    failing to assess the figures provided by MTRC, which build up the pleaded alleged value of additions at $454,356,470.51?

302.  In my judgment, the system of monitoring outlined in answer to Question IV.2 was adequate to meet Government’s obligations under the Side Letter.  The Side Letter did not impose on Government the more onerous obligations alleged by the Defendants.

303.  There was accordingly no breach of the Side Letter on the part of Government.  The answer to Question VIII.1 is “no”.

VIII.2 Was the Government in breach of its obligation under the Side Letter and/or its alleged duty to act in good faith in entering into a commercial settlement (as pleaded in RRADC paragraph 130(1)), and arbitrarily increasing the contribution to be made by HYF without any proper justification?

304.  MTRC’s April 1997 cost report estimated the cost of the Reclamation Contract to be $2.474 billion.  MTRC then explored the possibility of arriving at a commercial settlement with the Contractor to achieve an early final account.  At a meeting between the Contractor and MTRC on 20 May 1997, a commercial settlement at $2.475 billion was agreed in principle. 

305.  MTRC then submitted a proposal for such a settlement to Government.  But Government could not accept a settlement without the approval of other stakeholders, including the Defendants.

306.  A commercial settlement not being viable, the valuation of a final account was intensified in about July 1998.  Eventually, in 2000, the final account concluded that the reclamation contract was at least worth $2.475 billion.

307.  This latter sum having previously been acceptable to the Contractor, there was no point in continuing the final account.  Instead, MTRC and the Contractor simply agreed a final account at $2.475 billion.

308.  The Defendants do not agree with MTRC’s assessment of $2.475 billion.  But (as Government points out) this is of no consequence to the question of liability.  The Defendants’ objection simply goes to quantum.

309.  In light of all the above, I am unable to see how the final account reached between MTRC and the Contractor and Government’s agreement to its “settlement” can conceivably constitute a breach of the Side Letter.  Further, given that it remains open to the Defendants to argue quantum, I do not see how the settlement “arbitrarily increases HYF’s contribution without justification” as Question VIII.2 assumes.

VIII.3 If the Government was in breach of its obligation by not directing MTRC to provide HYF with copies of claims for payment submitted by the Contractor which arose directly or indirectly out of the implementation of the alternative design and Supplemental Agreement No.1, has HYF waived such breach on the part of the Government as pleaded in RRAR paragraph 133?

310.  This question does not arise.  Government is not in breach.

VIII.4 On the assumption that the Government was in breach of its obligations under the Side Letter and/or, in respect of the plea in RRADC paragraph 131, its alleged duty to act in good faith in one or more respects:-

(i)      did such breach cause the Defendants some loss (irrespective of the quantum of such loss)?

(ii)     is Government still entitled to be indemnified for the alleged additional costs?

311.  This question does not arise.  Government is not in breach.

I.       Issue IX: The Government’s claims for indemnity

IX.1   Part 1:  On the agreed factual basis that the items denoted as “Omitted Items” in paragraph 51 of HH Yeung’s 2^nd Supplemental Witness Statement were:-

(i)      omitted from the works;

(ii)     were not executed under the Reclamation Contract and Supplemental Agreement No.1; and,

(iii)    were not paid for by the Government to the MTRC,

upon the true construction of the Indemnity Agreement as amended and in the events which have happened, was the Government, in principle, entitled when issuing Demand Notes Nos.35 and 36 to exclude from the figures for omissions those “Omitted Items”?

312.  By the Indemnity Agreement as originally agreed, the Defendants agreed to reimburse the “Additional Costs” to the Government resulting from the change to the alternative design for piling.

313.  Clause 1 of the Indemnity Agreement defined “Additional Costs” as follows:-

“The expression ‘Additional Costs’ for the purposes of this Agreement shall mean and include the sum of all costs, charges, expenses, fees, loss and damage which the Government becomes liable to pay to the MTRC or to the Government’s Consulting Engineers or to any other person, firm or company as a result, directly or indirectly, of the Government ordering the MTRC to implement the Alternative Design, and without limitation to the generality of the foregoing, shall include:-

(i)      all direct and/or indirect costs and charges arising out of the implementation of the Alternative Design, including any payment to the Contractor for Additional Works under the Supplemental Agreement, but less the value of any omissions consequent upon the Alternative Design....”

314.  Recital E of the Indemnity Agreement defined “Alternative Design” as “a piling design proposed by HYF” in lieu of the original design for the New Piers.

315.  Later, Amendment No.2 noted in its Recital D that:-

“Further additions to the scope of the Works (‘the Further Additional Works’) are required to put the Works into a state where HYF will be in a position to implement the HYF Proposal and the parties have agreed to enter into this Agreement further amending the Indemnity Agreement....”

316.  Clause 2 of the Amendment No.2 expanded the definition of “Additional Costs” in the Indemnity Agreement as follows:-

“The Indemnity Agreement is hereby amended as follows:-

(a)     the expression ‘Alternative Design’ as defined in recital E shall be deemed to include a reference to designs for and construction of piling, seawall foundations, pier deck levels, the superstructure of the piers, utility diversions, E&M installations, finishing details of pier deck levels and all other design and construction work related to the piers proper and works affected by the footprints of the basement and concourse foundations in front of the piers, which are proposed by HYF and agreed by Government as being necessary to put the Works into a state where HYF will be in a position to implement the HYF Proposal.

(b)     the expression ‘Additional Costs’ as defined in Clause 1 is amended by the addition of the following:-

‘(vii)  Any cost, charge or expense, whether direct or indirect arising out of the HYF Proposal and implementation of the Alternative Design as defined above and in recital E of the Indemnity Agreement, including any variation instructed by MTRC pursuant to the Contract to put the works in a position to enable the implementation of the HYF Proposal and the alternative Design as defined above and in recital E of the Indemnity Agreement.”

317.  Clause 3 of Amendment No.2 then provided that the Indemnity Agreement was to remain in full force and “shall be read as if the provisions of ... this Agreement had been incorporated as at the date of execution thereof”.

318.  Supplemental Agreement No.1 includes a Schedule 2 which is a “Pricing Document”.  That Schedule contains a Bill of Additions (setting out the prices of various additional work items) and a Bill of Omissions (setting out the prices of various omitted items).  The total of Additions and Omissions is set out in a Grand Summary which, by deducting the price of Omissions from that of Additions, shows the net sum payable by the MTRC to the Contractor.

319.  By a fax dated 14 October 1993 Mr. David Dumigan (then Project Engineer for Maunsell, later from January 1995 Project Manager for HKF) asked that certain items be included in the Bill of Omissions to be incorporated into Supplemental Agreement No.1.  These items (the Omitted Items) included curtain wall, suspended ceilings, roof garden, advertising frame structure, etc.  The rationale for the request was that there was no point in the Contractor carrying out the Omitted Items since they would or might subsequently have to be demolished and re-done in a different manner by HYF if its proposal were accepted.

320.  Government agreed to this request.  The Bill of Omissions to Supplemental Agreement No.1 was drawn up accordingly.

321.  In due course, Government issued Demand Notes Nos. 1 to 34 based on MTRC’s interim assessment of the additional costs of the works to implement the alternative design.  In assessing such additional costs, MTRC gave credit to HYF for all items appearing in the Bill of Omissions (including the Omitted Items).

322.  However, in Demand Notes Nos. 35 and 36, both of which were issued after negotiations with the Defendants fell through, Government sought to claim back the credit which it had previously given for the Omitted Items. 

323.  The Government’s reasoning for this was that the Omitted Items had not been incorporated into the Bill of Omissions in consequence of the Additional Works (as defined by the amended Indemnity Agreement).  The Omitted Items had simply been credited to HYF on the understanding that HYF would in due course carry out the Omitted Items (or some variant thereof) itself as part of its proposed development.  Since negotiations had proved unsuccessful and HYF was not going to do work in the nature of the Omitted Items, there was no reason why the Defendants should continue to be credited with the cost of the Omitted Items.

324.  By its Part 1 claim, Government in essence seeks to recover the balance of unpaid monies due under Demand Notes Nos.35 and 36, the bulk of which consists of the Government’s claim for the amounts originally credited to the Defendants for the Omitted Items.

325.  The Defendants disagree with Government’s stance.

326.  Question IX.1, therefore, asks whether in principle the Government is or is not entitled to claim back the credit originally given to the Defendants for the Omitted Items.

327.  Mr. Bathurst submits that Government’s contention is unsustainable for a number of reasons.

328.  First, Government has itself never paid for the Omitted Items.  In that case, how (Mr. Bathurst asks) can the Defendants be required to “indemnify” the Government for expense which the Government has never incurred?  The Part 1 claim is in reality contrary to the Indemnity Agreement.

329.  Second, Government’s stance ignores the clear wording of the amended Indemnity Agreement.

330.  “Additional Costs” in clause 1 of the Indemnity Agreement (as amended) refers to the value of Additional Works less the price of omissions consequent upon the Alternative Design.  The Omitted Items must be (Mr. Bathurst submits) omissions consequent upon the Alternative Design and should be credited to the Defendants on the express wording of the Indemnity Agreement (as amended). 

331.  The language of the Indemnity Agreement whether in its original form or as amended (Mr. Bathurst says) does not distinguish between items omitted in consequence of the inclusion of Additional Works and items which were omitted on the basis that HYF would in due course carry them out.  There is no basis (Mr. Bathurst suggests) for construing “consequent on the Alternative Design” in the Indemnity Agreement as incorporating some such distinction.

332.  Third, there is no commercial justification for Government’s position.  Government says that HYF should not enjoy the benefit of “credits” since it does not bear the burden of carrying out the development.  But this (Mr. Bathurst argues) ignores the fact that Government has come under no liability to pay for the Omitted Items. 

333.  Government’s argument (Mr. Bathurst complains) somehow assumes that the Defendant were under some obligation to complete the development to “earn” the credits.  This is inconsistent (Mr. Bathurst reasons) with the Government’s contention that it could withdraw from negotiations at any time.

334.  I am not persuaded by Mr. Bathurst’s submissions.

335.  First, the true issue is not whether Government should or should not be indemnified for costs which it has not incurred.  The question is whether the Omitted Items are omissions consequent upon the alternative design.

336.  Plainly, they were not consequent upon the alternative design.  The Omitted Items did not constitute works which were no longer required in consequence of Additional Works.

337.  On the contrary, the Omitted Items (or some variant thereof) were required.  The items were “omitted” at the request of (and solely in order to accommodate) the Defendants.  If negotiations had borne fruit, the Defendants would have wanted to re-do the Omitted Items to conform to their vision of what the completed HYF ferry development should look like. 

338.  By crediting the cost of the Omitted Items against the additional costs incurred on the alternative design, Government was in effect paying the Defendants to do what (had Mr. Dumigan not made his request) the Contractor would have done.

339.  This means that the Defendants (not the Government) would derive a windfall from the collapse of negotiations.  They would be credited with a sum for constructing that which (as a result of a deal falling through) they no longer had to construct.  Thus, implicit in the Government agreeing to the “crediting” of the Omitted Items, must have been the obvious understanding that the credit was reversible if negotiations failed.

340.  Second, the wording of the amended Indemnity Agreement does not support Mr. Bathurst’s contention.  As I have just pointed out, the Omitted Items are not “omissions consequent upon the Alternative Design”.

341.  There was some debate among counsel on whether the words “but less the value of any omissions consequent upon the Alternative Design” in clause 1(i) of the Indemnity Agreement were “otiose”.

342.  In that debate, Mr. Strachan referred to the following words in Recital F of the original Indemnity Agreement:-

“...  Supplemental Agreement No.1 has also been entered into between MTRC and the Contractor, by which the Contractor agrees to carry out Additional Works in consideration of payment in accordance with the terms and conditions of the Reclamation Contract, as varied by the Supplemental Agreement No.1.  It has been specifically agreed between MTRC and the Contractor under Supplemental Agreement No.1 that there will be no change to any Key Date as a result of the inclusion of such Additional Works.”

343.  The expression “Additional Works” in the Indemnity Agreement (Mr. Strachan submits) must mean the same thing as the like expression in Supplemental Agreement No.1.  In the latter the words “Additional Works” mean “the additional works and the consequent omission of works no longer required”.

344.  Recall that clause 1(i) of the Indemnity Agreement talks of:-

“any payment to the Contractor for Additional Works under the Supplemental Agreement, but less the value of any omissions consequent upon the Alternative Design.”

The underlined words (Mr. Strachan says) must be redundant because the expression “Additional Works” (and thus the costs of such works) has already factored out “the consequent omission of works no longer required”.

345.  Mr. Bathurst suggests that the underlined words are not otiose, but serve a practical purpose.  They cover (according to Mr. Bathurst) “all works omitted consequent upon the Alternative Design whether or not they were spelt out in the Supplemental Agreement”.

346.  I do not find the debate of much help one way or another.  I think that the key point is whether as a matter of fact the Omitted Items are or are not omissions consequent upon the alternative design.  I do not believe that they are.

347.  Third, contrary to what Mr. Bathurst suggests, there is nothing uncommercial about the outcome advanced by the Government.  To my mind, it would be the opposite result which would be uncommercial. 

348.  The Defendants’ position would lead to them enjoying a windfall (namely, retaining the benefit of a “credit” or “payment”, without the burden of having to do the work for which the “credit” or “payment” was made).

349.  Thus, I would answer “in principle, yes” to Question IX.1.

IX.2   Part 1 & Part 2:  Upon the true construction of the Indemnity Agreement (as amended) and in the events which happened, is the Government, in principle, entitled to recover from the Defendants:-

(i)      the outstanding balance of the additional costs already incurred as pleaded in Re-Amended Statement of Claim (RASOC) paragraphs 80-84;

(ii)     the additional costs to be incurred in respect of works to be carried out as pleaded in RASOC paragraphs 90 to 96 (credit being given to the Defendants for the savings in construction costs in respect of those items in the Bill of Omissions particularised in RASOC paragraph 97); and,

(iii)    interest as pleaded in RASOC paragraph 106?

350.  Question IX.2(i) essentially repeats Question IX.1.  I would answer both in the same way.

351.  Question IX.2(ii) concerns Government’s Part 2 claims.  That is various items of work which were either omitted or modified to accommodate the HYF proposal if it had been approved and implemented.  Since negotiations have proved abortive, it has become necessary for Government to complete or rectify such omitted or modified works.

352.  Examples are as follows:-

(1)     Under the original design, the New Piers were to be partially enclosed by a curtain wall.  The HYF proposal required curtain walling, but to a different design from that specified in the original design.  Pursuant to Mr. Dumigan’s request of 14 October 1993, the curtain wall in the original design was thus omitted.  Consequently, though now operative, the New Piers do not have a curtain wall and the Government now proposes to rectify such omission.

(2)     Under the original design, the floors of the New Piers were to use “Atom Gres” tiles (suitable for open spaces exposed to the weather).  The HYF proposal, however, called for “Graniti Fiandre” tiles (suitable for enclosed spaces not exposed to the weather).  The New Ferry Piers now have “Graniti Flandre” tiles, even though the piers are not wholly enclosed.  Doubts having arisen as to whether “Graniti Flandre” tiles are slippery when wet, the Government proposes to change the tiles to something else.

(3)     Under the original design, lighting was to be   distributed along the whole width of the New Piers.  In the New Piers as built, lighting is concentrated along passenger pathways.  The more limited lighting was installed to accommodate the HYF proposal.  Government says it is inadequate for the present situation.

(4)     The toilet facilities under the original design were reduced in accordance with the requirements of the HYF proposal.  Government says that, as a result, ventilation conditions in the toilets are not acceptable.

(5)     Government proposes to carry out landscape works which were omitted or changed to cater for the HYF proposal.

353.  Government claims that the Defendants are liable in principle to indemnify it for additional costs incurred (that is, over and above what Government would have incurred had the original design been followed) in completing or rectifying the relevant omitted or modified works.

354.  There may be overlap between the Omitted Items and the completion or rectification works items envisaged in Government’s Part 2 claims.  Since its Part 1 claim seeks to reverse the credit given to the Defendants for Omitted Items, in quantifying its Part 2 claims Government will give credit for various items in the Bill of Omissions so as to charge the Defendants with only the net increase in costs to be incurred by the Government.

355.  Mr. Bathurst submits that Government is not entitled to its Part 2 claims.

356.  First, Mr. Bathurst points out that, although the relevant completion or rectification work is said to be essential, the New Piers have been operating for many years now without apparent problem. 

357.  It is hard to see (Mr. Bathurst says) that Government would have accepted sub-standard works unsuited for public use from the Contractor.  Thus, since Government accepts that the Contractor completed its work, it must be assumed that the Contractor constructed piers which were suitable for public use.  If so, how (Mr. Bathurst asks) can it now be said that the piers as-built are below standard and additional works are necessary to put the piers in a proper state?

358.  Second, nothing in the Indemnity Agreement (as amended) (Mr. Bathurst submits) authorises the charge now being proposed by the Government.  The Part 2 works are not additional costs needed to bring the works to a state where HYF would be in a position to implement its proposal.  The Part 2 works are for maintenance and improvement purposes totally unrelated to any argument that could be based on the amended Indemnity Agreement.

359.  I am not persuaded by Mr. Bathurst’s submissions.

360.  In my view, the Part 2 works are covered by the Indemnity Agreement as revised by Amendment No.2.  Here Government is asking to be indemnified in respect of the costs of completing or rectifying works.  That such works require to be completed or rectified is a direct or indirect result of the Government ordering MTRC to implement the alternative design. 

361.  The Indemnity Agreement (as amended) is not limited to costs falling within the Reclamation Contract.  It includes all costs “which the Government becomes liable to pay to the MTRC or to the Government’s Consulting Engineers or to any other person, firm or company”.

362.  I do not see how the fact that the New Piers have been operational for a number of years affects the analysis.  The Defendants do not rely on any defence of limitation.  Thus, provided the Government can show that its claim for indemnity arises as a direct or indirect consequence of implementing the alternative design, Government must in principle be entitled to what it claims.

363.  I would answer “in principle, yes” to Question IX.2(ii).

364.  As far as interest in Question IX.2(iii) is concerned, Government should in principle be entitled to interest on a money claim, in the same manner as any other entity entering into a commercial contract. 

365.  I do not think, however, that it is appropriate to determine the appropriate rate(s) or period(s) of interest until after quantum has been assessed at a subsequent date.

366.  I would answer “in principle, yes” to Question IX.2(iii).

IX.3   Part 1A & Part 2A:  In the alternative to the Government’s claim mentioned in IX.2, upon the true construction of the Indemnity Agreement (as amended) and the events which have happened, is the Government, in principle, entitled to recover from the Defendants:-

(i)      the outstanding balance of the additional costs already incurred as pleaded in RASOC paragraphs 99-104;

(ii)     the additional costs to be incurred in respect of works to be carried out as pleaded in RASOC paragraphs 90 to 96; and,

(iii)    interest as pleaded in RASOC paragraph 106?

367.  Government’s Part 1A and 2A claims are advanced as alternatives to its Part 1 and 2 claims. 

368.  The total value of additional works already incurred is around $454 million.  The total value of omissions (excluding Omitted Items) is around $228 million.  This leaves a net amount of $252 million (including MTRC’s on-costs) payable by HYF under the Indemnity Agreement (as amended).  Of this, HYF has previously paid some $175 million.  That leaves about $77 million (that is, the amount claimed by Demand Notes Nos.35 and 36) outstanding.  This outstanding amount constitutes Government’s Part I claim.

369.  The Part 2 claim comes to about $40 million, giving credit to HYF as appropriate for various items in the Bill of Omissions.

370.  The Part 1A claim assumes that the Omitted Items are to be included in the total value of omissions to be subtracted from the total amount of additional works.  This means that about $293 million is to be deducted from approximately $454 million.  This would yield a net amount of around $180 million.  Given the Defendants’ payment of $175 million mentioned above, then $5 million would be outstanding under Part 1A.

371.  On the assumption that its Part 1 claim is rejected, Government by its Part 2A claim seeks to recover for the completion and rectification works comprising its Part 2 claim. 

372.  The difference between Part 2 and Part 2A is that Part 2A does not give credit for Omitted Items.  That is because the benefit of the Omitted Items has already been incorporated into the calculation of Part 1A.  Government’s Part 2A claim is thus greater than its Part 2 claim.  Part 2A comes to about $57 million.

373.  In light of my answer to Questions IX.1 and IX.2, Question IX.3 does not arise.

IX.4   Part 1/1A & Part 2/2A:  Whether compliance with the requirements laid down in Indemnity Agreement cl.5 is a pre-condition for the Defendants’ liability to arise under the Indemnity Agreement (as amended) (RRADC paragraph 173A)?

374.  The Indemnity Agreement provides:-

“5.     Any reimbursement of Additional Cost to be made by HYF to the Government under this Agreement shall immediately become due and payable upon the presentation to HYF of a letter of demand from the Project Manager, Special Duties, Territory Development Department (The ‘Project Manager’) from time to time stating the portion of Additional Costs which have become payable by the Government as a result of implementation of the Alternative Design and setting out the amount demanded to be paid pursuant to that letter of demand, together with details sufficient to verify and properly explain the nature and extent of such additional costs.

6.      In the event that any amount of Additional Costs reimburseable by HYF under this Agreement which has become due and payable has not been paid for a period of 21 days from the date of the relevant letter of demand from the Project Manager HYF shall become liable to pay the Government interest on the unpaid amount at the rate payable on judgment debts from time to time.”

375.  The Defendants say that clauses 5 and 6 make it clear that a letter of demand is a condition precedent to liability.  They argue that the obvious intention of clauses 5 and 6 was to provide the Defendants with an opportunity to ascertain whether the amount claimed by the Contractor was an amount for which the Defendants were properly liable.  This (the Defendants suggest) is consistent with the terms of the Side Letter.

376.  Mr. Bathurst stresses the words “become due and payable” in clause 6.  This must mean (Mr. Bathurst submits) that the Defendants only “become” liable when a proper letter of demand is despatched.  Otherwise, clause 6 would merely refer to amounts which “become payable” (as opposed to “become due and payable”).

377.  I do not think that the Defendants are correct.

378.  In my view, Mr. Strachan correctly points out that, according to the authorities, where a party has a primary obligation (such as where a party has assumed liability as a principal debtor) a cause of action may arise without demand being made, even if there is a contractual provision that payment is to be made on demand in writing.  See, for example, MS Fashions Ltd. v. BCCI [1993] Ch 425, at 435H-436F (Hoffmann LJ (first instance)); 447B-448E (Dillon LJ (on appeal)).

379.  Here HYF’s liability to indemnify the Government for additional costs was a primary (not a secondary) obligation.  Thus, clause 3 of the Indemnity Agreement baldly states that HYF “agrees to reimburse the Additional Costs to the Government without deduction”.  Further, according to clause 7, HYF “shall reimburse the Government the Additional Costs ... whether or not the Government accepts or rejects the HYF Proposal”.

380.  HKF, on the other hand, expressly undertook by clause 8 of the Indemnity Agreement to be guarantor “as a primary obligation and not as a surety”.  HKF’s obligation was consequently also a primary one.

381.  The function of a letter of demand would then merely be to give the Defendants an opportunity to verify the precise amount for which, demand or not, they stand liable under the Indemnity Agreement.

382.  I am unable to read much into the words “become due and payable”.  All that means, I think, is that the Defendants’ heretofore unliquidated liability crystallises into (“becomes”) a liquidated sum within 21 days of the presentation of a letter of demand.

383.  I would answer “no” to Question IX.4.

IX.5   Part 1:  Did:-

(i)      the letter dated 9 September 1999;

(ii)     the letter dated 21 October 1999; or,

(iii)    the letter dated 24 March 2000,

together with their respective enclosures (including, as the case maybe, Demand Notes 35 or 36), fail to comply with the requirements of Indemnity Agreement cl.5, in that they failed to set out details sufficient to verify and properly explain the nature and extent of the additional costs claimed therein?  If so, what is the consequence of such non-compliance?  In particular, whether the Government is nevertheless entitled to pursue its Part 1 claim in these proceedings?

384.  Demand Note No.35 was sent to the Defendants by letter dated 9 September 1999.  The Defendants having sought further information about the sum demanded, Demand Note No.35 was re-sent with copious supporting and explanatory material on 21 October 1999.

385.  Demand Note No.36 was sent to the Defendants by letter dated 24 March 2000.

386.  The letters of 21 October 1999 and 24 March 2000 plainly complied with the clause 5 requirement of providing sufficient information for verification. 

387.  The Defendants rely on a Table A prepared in about 28 June 2000 and entitled “Particulars of Missing Details and Explanations for Amount Demanded in 35th and 36th Demand Notes” as setting out inadequacies in the information provided by Government.  Those inadequacies (the Defendants contend) mean that the requirement of specificity in clause 5 was not met.

388.  But an examination of the particulars in Table A shows that the Defendants in fact had no difficulty in identifying what specific items Government was claiming from them and why.  By Table A the Defendants were merely disputing liability for identified items either because they disagreed with Government’s rationale for such items, or because they thought that there was not enough evidence supporting the items.  In other words, there must have been at least enough information in the letters of 21 October 1999 and March 2000 for the Defendants to engage in a process of verification.

389.  As for the letter of 9 September 1999, it is true that the information contained there was much scantier than that eventually provided.  Essentially, Demand Note No.35 as despatched on 9 September 1999, simply identified specific cost centres and certain broad activities within those cost centres. 

390.  But the original form of Demand Note No.35 was little different from that of Demand Notes Nos. 1 to 34 which the Defendants accepted.  If the earlier Demand Notes were previously deemed sufficient by the Defendants, it is difficult to see why the original Demand Note No.35 should have been thought inadequate for the purposes of clause 5.

391.  In my view, the letter of 9 September 1999, although more sparing in details than the later letters, was adequate for the purposes of complying with clause 5.

392.  I would answer Question IX.5: All 3 letters complied with the requirement in clause 5 of the Indemnity Agreement.  So answered, the sub-questions to Question IX.5 fall away.

IX.6   Part 1/1A & Part 2/2A:  If the Government was in breach of the implied terms as pleaded in RRADC paragraphs 123, 124, 125 and/or 126, whether the Government is still entitled to enforce the Indemnity Agreement (as amended) against the Defendants to claim for any alleged outstanding additional costs?

393.  Since I have not found any breach by Government, Question IX.6 does not arise.

IX.7   Part 1/1A:  Is the Government not entitled to claim against HYF for indemnity in respect of the costs of those additional works merely because no valid CRC Change Form had been issued or alternatively no authorisation had been granted by TDD for those works as pleaded in RRADC paragraph 134?

394.  By their closing submissions, the Defendants accept that Government may still make its claims despite the absence of a valid CRC Change Form.  But the Defendants say (I think correctly) that they are not precluded from querying the validity and quantum of any particular alleged claim.

395.  I would answer “no” to Question IX.7.

IX.8   Part 1/1A:  Are the Defendants liable to indemnify the Government in respect of “on costs” at the rate of 11.6% payable by the Government to MTRC by reason of the matters pleaded in RRADC paragraph 139?

396.  The Defendants accept liability for an “on costs” element if they are otherwise liable for the base amount claimed. 

397.  The answer to Question IX.8 is “yes”.

IX.9   Part 1A:  Is the Government entitled to claim against the Defendants for the alleged additional costs, or the alleged “net amount outstanding and payable”, without issuing any letter of demand in accordance with Indemnity Agreement cl.5 (RRADC paragraph 172)?

398.  The issue here is apparently whether it is open to the Government to pursue its Part 1A claim, even if the sum thereby sought is different from the amounts claimed by Demand Notes Nos. 35 and 36.  I say “apparently” because the Defendants in their closing submissions appear to have understood Question IX.9 as being equivalent to Question IX.10.

399.  As Mr. Strachan points out, there is a substantial line of authority establishing that a demand for an incorrect (excessive) sum does not invalidate the demand.  See, for example, Bank of Baroda v. Panesar [1987] 1 Ch 335, at 345B-347E (Walton J).

400.  I would answer “yes” to Question IX.9.

IX.10 Part 2/2A:  Whether the Government is entitled to claim against the Defendants for the alleged additional costs without issuing any letter of demand in accordance with Indemnity Agreement cl.5?

401.  I would answer “yes” to Question IX.10.  See the discussion above in relation to Question IX.4.

IX.11 Part 1 & Part 2:  If the Government pursues both Parts 1 and 2 claims against the Defendants at the same time, whether there would be double recovery for the Government?

402.  There should in principle be no double recovery.  Part 1 incorporates a retraction of a credit for the Omitted Items.  On the other hand, Part 2 credits the Defendants with what the Government would have incurred had the New Piers been built according to the original design.

403.  I would answer “in principle, no” to Question IX.11.

IX.12 Part 2/2A:  Whether, as a matter of discretion, the Court should grant any declaratory relief to the Government, whether in the form as pleaded or at all?  Whether the Government is entitled to an Order for payment?

404.  The Government seeks a declaration in the following terms:-

“[T]he 1^st and 2^nd Defendants are liable to pay to the Government the costs, expenses and fees which will be incurred by the Government in carrying out, or in connection with the carrying out of, the outstanding and/or rectification works referred to in [its Part 2 claim]”.

405.  I undoubtedly have a discretion to make the declaration sought.  But what point would such a declaration serve? 

406.  In my view, Mr. Bathurst rightly suggests that the declaration sought is too general and vague to have much utility.

407.  Mr. Strachan says that a declaration would give the parties an idea of where they stand at the end of the day, once the liability questions at issue here have been answered.

408.  A declaration might have that result.  But I believe that the same objective could more effectively be reached by my stating in the conclusion to this Judgment what I think the outcome of this trial on liability is.

409.  I therefore refuse a declaration in the exercise of my discretion. 

IX.13 Part 1/1A & Part 2/2A:  Upon the true construction of the Indemnity Agreement as amended and in the events which have happened, is the Government entitled to recover from the Defendants interest as pleaded in RASOC paragraph 106?

410.  I would answer “in principle, yes” to Question IX.13.  But the precise rate(s) and period(s) of interest should be determined as part of the trial on quantum.

J.       Issue X: The Counterclaim

X.1    On the assumption that:-

(i)     all 17 bored pile extensions were defective; and,

(ii)    the reasonable cost of repair of the 17 bored pile extensions would have been $15.9 million,

is the Government obliged to pay HYF the sum of $15.9 million as pleaded in RRADC paragraphs 191A to 191C?

411.  This claim for $15.9 million is premised on the Government only being entitled to an indemnity for the value of works which have been properly executed and completed in accordance with the alternative design and the Reclamation Contract.  Where Government has failed to ensure that works were properly constructed, HYF contends that it should only be obliged to indemnify Government for the reduced value of the work.

412.  Thus, if 17 bored pile extensions were defective and it would cost $15.9 million to put such piles into a proper state, HYF claims that (insofar as it has paid for sound bored pile extensions) there should be a refund of $15.9 million representing the difference in value between sound (repaired) pile extensions and the defective ones actually constructed.

413.  Although this question refers to the pleading in RRADC paragraphs 191A to 191C, I think that the claim in paragraph 191A is a matter for the trial in quantum.  If I understand their closing submissions correctly, counsel on both sides agree on this.

414.  Paragraph 191A contends that $15.9 million should be deducted from the value of the piling works, so that the Defendants are only under a liability to indemnify the Government by reference to this reduced amount.  That is a matter of quantum for later consideration.

415.  In contrast, paragraph 191B posits that the Defendants are entitled to the return of the $15.9 million in consequence of Government’s breach of implied terms.  I can answer that question now.

416.  Since I have not found in favour of the implied terms alleged by the Defendants, paragraph 191B must be bad.

417.  Paragraph 191C simply states the consequence of a finding in the Defendants’ favour on paragraph 191B.  It follows then that, if paragraph 191B is bad, so is paragraph 191C.

418.  Thus, I would reply to Question X.1 as follows: Insofar as RRADC paragraphs 191B and 191C are concerned, the answer is “no”.  Insofar as RRADC paragraph 191A is concerned, the treatment of the $15.9 million repair cost must await the trial on quantum.

X.2    The invisible issue

419.  It transpired during Mr. Bathurst’s closing submissions that there was an issue between the parties which had inadvertently been omitted from the agreed list.

420.  Mr. Bathurst submitted that, if the Government had breached an implied term of the Indemnity Agreement (as amended) by failing to negotiate reasonably or in good faith, the Government was liable to compensate the Defendants for the lost chance of developing the site.

421.  Mr. Strachan points out that the Defendants have not specifically pleaded a case based on the loss of a chance.  Nonetheless, I am prepared to deal with the invisible issue, since in light of my previous conclusions the answer is self-evident.

422.  I have rejected the Defendants’ case on implied terms.  I have also held against the Defendants insofar as they have alleged that Government acted unreasonably in the course of negotiations.  It must therefore follow that there is no basis for the Government being liable to the Defendants for any damages representing the loss of a chance.

IV.     CONCLUSION

423.  The Government has substantially prevailed on the issue of liability. 

424.  The net effect of the answers to the questions posed by the parties is that the Defendants are liable to indemnify the Government in relation to its Part 1 and Part 2 claims. 

425.  On the other hand, the Defendants have failed to establish liability on the part of the Government for breach of any implied term.  Even if I had found in the Defendants’ favour as far as the existence of implied terms was concerned, I would not have found the Government’s conduct unreasonable.  I do not believe that the Government acted capriciously or arbitrarily in the course of negotiations generally or in assessing a premium in particular.

426.  There will be an Order Nisi that the Government is to have the costs of the trial on liability (with certificate for 3 counsel), such costs to be taxed if not agreed.  I do not say “in any event” because it seems to me that the trial on liability is the relevant event for the purposes of determining when taxation may take place.  All other costs are reserved.

427.  There will be the following Directions Nisi:-

(1)     Within 56 days the parties are to agree and file:-

(a)   directions for the disposal of the trial on quantum; and,

(b)   a List of Outstanding Issues for the trial on quantum.

(2)     If they are unable to agree directions or a List of Outstanding Issues, the parties are to restore this matter before me for appropriate directions.

428.  There will be liberty to apply.