XCHRX DRAGAGES ET TRAVAUX PUBLICS (HK) LTD. v. CITYSTATE INSURANCE LTD.

HCCT81/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.81 OF 1999

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J U D G M E N T

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This is an Order 14 application for summary judgment. The plaintiff is suing the defendant on a performance bond ("the Bond") taken out as part of a construction contract between the plaintiff and a sub-contractor, Wah Tung (E & M) Ltd. The contract involved works at Chep Lap Kok, Hong Kong's new airport.

Three issues have been argued by Mr R. Whitehead, SC for the plaintiff and Miss T. Cheng, SC for the defendant insurance company. I will deal with each.

1. The status of the Bond

It is agreed that if the Bond is rightly described as an on-demand performance bond, then the defendant has no defence. Miss Cheng concedes that the Bond was properly "called", but submits that it is a conditional bond and issues of default and damages must be considered before summary judgment can be granted.

As to the status of the Bond, the competing submissions are finely balanced. Its terms, which are relevant to the issue of its status, are as follows :-

"BY THIS BOND we Citystate Insurance Ltd., a company incorporated in and in accordance with the laws of Hong Kong, whose registered office is situated at 2nd Floor, Eton Tower, 8 Hysan Avenue, Causeway Bay ('the Surety') are held and firmly bound unto Dragages et Travaux Publics (HK) Ltd., a company incorporated in and in accordance with the laws of Hong Kong, whose registered office is situated at 9th & 10th Floors, Tung Wai Commercial Bldg., 109-111 Gloucester Rd., Wanchai ('the Main Contractor') in the sum of Hong Kong Dollars Nine Million Eight Hundred And Eighty-eight Thousand And Three Hundred And Seventy-two Only (HK$9,888,372.00) ('the Bonded Sum') for the payment of which sum the Surety irrevocably and unconditionally binds itself, its successors and assigns by these presents."

"Now the conditions of this Bond are :-

1. The Surety hereby irrevocably and unconditionally guarantees to the Main Contractor the due performance by the Sub-Contractor of its obligations under the Sub-Contract.

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

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5. The liability of the Surety under this Bond shall not be avoided or invalidated by reason of any one or more of the provisions of the Main Contract or Sub-Contract being or becoming illegal, invalid or unenforceable nor shall the liability of the Surety be released on the termination of the Main Contract or the Sub-Contract for any reason whatsoever."

Performance bonds are drafted in a multitude of different ways. Some are plainly "on demand", some are plainly "conditional" and some (as in the one here) require analysis before its true status can be determined. Mr Whitehead says it is very similar to the bond in Esal (Commodities) Ltd & Reltor v. Oriental Credit Ltd & Wells Fargo Bank [1985] 2 Lloyds Law Report which was held to be an "on demand" bond. Miss Cheng says it is very similar to the bond in Kono Insurance Ltd v. Tins Industrial Co. Ltd [1987] 3 HKC 71 which was held to be conditional.

In the Esal (Commodities) case, the bond stated :-

"We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance."

The passage in the judgment upon which Mr Whitehead relies is :-

"If the performance bond was conditional then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never be safely made by the bank except on a judgment of a competent Court of jurisdiction, and the result would be wholly inconsistent with the entire object of the transaction which was to enable the beneficiary to obtain prompt and certain payment."

Thus, it is necessary to consider what the parties intended the purpose of the Bond to be, placed in its commercial context at the time. The commercial context in this case was the new airport, a high profile, massive project of great importance of Hong Kong worldwide. In this context, the purpose of such a bond, it is submitted, is to avoid delays which might otherwise be caused by cash flow problems. As such, the obligation to pay arises before liability has been proved and loss established.

The argument in favour of strict construction is further supported by Staughton LJ's remarks in the Esal case as follows :-

"The first principle which the cases establish is that a performance bond, like a letter of credit, will generally be found to be conditioned upon the presentation of one or more documents rather than upon the actual existence of facts which those documents asserts. ...

"I take this to show that there is a bias or presumption in favour of the construction which holds the performance bond to be conditioned upon documents rather than facts. But I would not hold the presumption to be irrebuttable, if the meaning is plain."

Mr Whitehead also relies on the cumulative effect of many of the words used in the Bond itself as evidence that the parties knew they were not putting their names to a conditional bond. For example, "irrevocably and unconditionally" in the preamble and in Clause 1, "the surety shall ..." in Clause 2 and "for any reason whatsoever" in Clause 5. The sum effect being that when signing this Bond, the defendant never intended to place itself in a position of having to argue issues of delay, default and loss arising from a construction contract should the sub-contractor dispute liability. If the Bond is conditional, this situation does arise.

There is merit and force in Mr Whitehead's submission on the principles to be applied when construing this bond. Miss Cheng's submissions rely not so much on the general principles but on the actual words of the Bond. Her argument is that as the Bond contains words which would not normally appear in an unconditional bond, it cannot be construed as such.

Her submission continues that the key clause which determines the nature of the Bond is Clause 2. The key words in Clause 2 are "In the event of default ...", "... the surety shall satisfy any ... damages ...", "up to an aggregate of the bonded sum". In other words, the Bond envisages a sum to be determined as being payable for damages in the event of default. An "on-demand" bond would not be so drafted unless it contained additional specific words such as "without proof of the said default". Absent such words, what is left is an obligation on the party relying on the Bond to prove damages up to a maximum of the bonded sum. It is true that Clause 5 of the Bond is phrased in strong terms. The subject matter of Clause 5, however, does not affect the construction of Clause 2.

Not without some difficulty I have come to the conclusion that the proper construction of this bond is that it is an on-demand bond. In my judgment, the words upon which Miss Cheng relies in Clause 2 are not words of conditionality. The words "... damages ... up to the amount of ..." enable the plaintiff to make a "call" on the Bond in a sum less than its full amount if its written demand only requires a lesser sum.

Given the commercial context in which the Bond was taken out, the absence of the words such as, "proof of" weighs heavily against the Bond being conditional. The words in the preamble, Clauses 1 and 5 all point towards unconditionality. Clause 2 means that once the plaintiff has made a proper written demand specifying default then the Bondsman must pay whatever sum is called for, up to the full value of the Bond but not necessarily the whole amount. As such, the liability to pay depends on a proper demand being made based on the existence of documents in support of the claim and not proof of facts underlying the documents. In all material respects, our Bond is, indeed, indistinguishable from the Esal bond. Accordingly, I find in the plaintiff's favour on the first issue. Miss Cheng concedes there is no defence to an on-demand Bond. Judgment will therefore be entered.

For the sale of completeness, had I ruled the Bond to have been conditional, I would have made the following findings.

2. Triable issues raised by the Defence?

The onus is on the defence to show there are issues to be tried. Summary judgment will only be granted if plainly no Defence has been demonstrated or if that which the defence relies on is "practically moonshine". When considering these fundamental principles, there is a peculiar feature of this case which must be kept in mind. The plaintiff's claim against the contractor on site was originally for over $70 million. Once pleaded, it had been scaled down to about $45 million. The bonded sum, however, which the plaintiff claims in this action, is marginally under $10 million. The fundamental question of principle has therefore to be modified to fit the arithmetic of this case : Has the Defence raised triable issues which could result in the plaintiff's claim for the full bonded sum being unsuccessful? If so, summary judgment would be inappropriate. If not, and if the court is satisfied that such triable issues that have been raised, if tried and determined in the defendant's favour, could only result in a reduction of the plaintiff's claim against Wah Tung to a sum comfortably in excess of the bonded sum, it would be a waste of everybody's time and money for this court not to enter summary judgment.

A day or so prior to this application, an amended Defence was filed. The plaintiff had prepared its case on the basis of the pre-amended pleading. Mr Whitehead's stance was that it would not be a prudent use of time and money to seek an adjournment. He did not oppose the late amendments and dealt with them. Leave was granted to the defence to file and dispense with service of the Re-amended Defence. The Re-amended Defence denied any breach of the terms of the Bond. Miss Cheng therefore submits that if the Defence establishes triable issues, then the totality of the bonded sum is in issue and it would be inappropriate to consider, indeed the court would not be in a position to consider, the value of the claim against the contractor in relation to the value of the Bond and enter judgment on that basis, as hitherto described.

Criticisms of the defendant's pleaded case

Even in its re-amended form, Mr Whitehead highlighted a number of deficiencies in both the content and the timing of the defendant's pleaded case. The sufficiency or adequacy of the Defence should be viewed in the context of the chronology of events so far.

(i) Chronology

The first call on the Bond was made by written demand on 15 May 1998. In September 1998, the directors of Wah Tung placed the company into creditor's voluntary liquidation. In December 1998, the plaintiff's solicitors provided the defendant's solicitors with an 18 page schedule of default together with two box files of documents in support.

In April 1999, the completion of Wah Tung's sub-contract works were determined to be eight months late. A writ was served in August 1999 followed by the Statement of Claim in November. The first Amended Defence was filed in late November. Mr Whitehead submits it does not plead any defence. Order 14 proceedings were issued on 21 January 2000. Five months later, on 19 June, two working days before the hearing of the Order 14 summons, a summons for leave to file a Re-amended Defence was served. Mr Whitehead submits that, once analysed, this takes the defence case no further.

(ii) Content

In answer to the references in the Statement of Claim to the conditions and implied terms of the contract, the original Amended Defence merely stated that it did not have a copy of the sub-contract. Unchallenged affidavit evidence proves that the defendant did have a copy of it from 1 November 1999. The pleading claiming it did not have a copy was only deleted on the morning of the Order 14 hearing.

The original Defence is a mixture of bare denials and a complaint that it does not have sufficient documents to be able to plead to the plaintiff's claim.

The substance of the Re-amended Defence is contained in paragraph 8. There is some force in the submission that although fairly lengthy and skillfully drafted, it in fact adds little to the Amended Defence. Paragraph 8A claims that extensions of time should have been granted on a number of occasions. In fact, the unchallenged evidence is that extensions of time were never applied for. The high water mark of the Defence is that there was contractual provision for them to be granted. Paragraph 8B makes an unimpressive point that the Clause 14(2) notice is defective and therefore invalid because the contract provides a period of "not less than 14 days" shall be made available to remedy alleged breaches, whereas the Clause 14(2) letter of 23 February 1998 refers to "within the period of not less than 14 days" without specifying a period.

Paragraph 8C pleads that delays were beyond Wah Tung's control. The plaintiff in answer points to documents and correspondence which they submit, demonstrates this to be factually incorrect. The remainder of paragraph 8 amounts to little more than bare denials which do not constitute an adequate defence. In particular, the pleading in paragraph 8E(c) is surprising in view of the contents of the 18 page schedule and two boxes of documents, referred to above, which have been in the defendant's possession for six months.

The evidence upon which the defence relies in opposition to summary judgment is that contained in the affirmations of Ms Belinda Ng, the defendant's solicitor. As the solicitor acting for an insurance company, she has undoubtedly been handicapped, by having no direct knowledge of many of the material events. It is fair to say that the affirmation is speculative and contains little actual substance. Examples of the answers to the plaintiff's case as set out in the pleadings, the plaintiff's affidavit evidence (from Mr Alan Crerer) and the documents are as follows (as relied on by Mr Whitehead):-

"Para 9(b):-	'It is unknown whether there had been delays in the supply of approved WSD drawings to Wah Tung for its works ...'
Para 9(c):-	'It seems from the documents provided that the design for the works was continually being amended before the determination of the Sub-Contractor on the 11th of March 1998... We have yet to know the impact of the late variations and architects instructions on the progress of Wah Tung's works, as well as works of other Sub-Contracts which may be interwined with each other.'
Para 9(d):-	'Progress of works of other Sub-Contracts which may have impeded Wah Tung's works has not been provided.'
Para 9(e):-	'However the progress of negotiations is all unknown especially as to whether any extension of time or waiver was given to Wah Tung and, if so, the extent of the variations to the sub-contract.'
Para 9(f):-	'...we have no idea as to what time schedule Wah Tung was required to maintain by March 1998.'
Para 9(i):-	'If Wah Tung was given some tolerance such as in the form of extension of time to finish off the works the losses of the Plaintiff, if any, may be greatly reduced and if any such losses were indeed caused by Wah Tung is an issue to be determined.' 'The documents impress as if part (if not most) of the losses suffered by the Plaintiff may be self-induced.'
Para 10:-	'The Defendant has no idea as to what attributed to Wah Tung's vacation of the site.'" (emphasis added)

In conclusion, it is significant that, given the defendant's conjecture that the plaintiff may be responsible for delays themselves and may have wrongly terminated the contract, no proceedings have been commenced by separate claim or counterclaim. There has been no shortage of time for them to gain possession of the documents they say they need, either by taking them from the site at the time, or by discovery.

3. The plaintiff's case

The plaintiff plainly has demonstrated a strong case. It is well established that a court should avoid a "trial by affidavit" in Order 14 proceedings. When, however, the competing evidence in affidavit form is very one-sided in terms of quality and content, it must be taken into account. Criticisms of the defendant's evidence have already been made. In contrast, the plaintiff's evidence is detailed, supported by documents and answers the speculation posed by the defence. In total, it amounts to an abundance of credible evidence.

Mr Whitehead submitted that the overall circumstances of this case are similar to those which prompted the following two remarks. First, Megarry VC in Lady Anne Ternant v. Associated Newspapers [1979] FSR 298 :-

"A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the plaintiff. You do not get leave to defend by putting forward a case that is all surmise and Micawberism."

Secondly, Keith JA in Mirage Casino Hotel v. Tao Hui Ming William, CACV 159/1999 :-

"None of these facts have been admitted by the Defendants but the crucial point for the present purpose is that none of them have been denied. It is for a defendant to satisfy the court that there is 'an issue or question in dispute which ought to be tried'. Thus the fact that the defendant has not disputed these facts means that there is no issue to be tried in relation to them."

Conclusion

It is well established that the courts should be careful before denying a defendant his day in court. Refusing a party his right to defend is a serious and draconian step. The principles and authorities lean in favour of summary judgment not being entered. Having emphasized this as the court's starting point, it must also be recognized that the procedure serves an important function in civil litigation. Where the court is satisfied that the application has been brought in good faith and on strong grounds and that it is not merely a "shot in the dark", then the court is entitled to take an overall view and ask - has the Defence demonstrated it has any chance of resisting the plaintiff's claim? There has been criticism recently of Order 14 applications which have been brought in a somewhat cavalier or "have a go" way in the hope that the defendant may not be able to do itself justice, or because even if leave to defend is granted, costs will usually be in the cause, so probably nothing will be lost. Such criticism is entirely merited and such cases should be watched out for. This is not one.

It is a case, however, where the Defence, although "paper thin" on the face of the material presently before the court, it is not so unsustainable as to refuse them an opportunity to present it. Being in the difficult position of an insurance company Bondman, their complaint of lack of information and documents is understandable. Further, discovery may cast fresh light on the Defence, one way or the other. It would be premature to enter summary judgment on a conditional bond.

The court's agreement, in general terms, with the criticisms made of the Defence and the strength of the plaintiff's claim, leads me to conclude, without difficulty, that this defence clearly falls into the category described as "shadowy", upon which summary judgment was "very nearly entered". In short, it would have been a case for conditional leave being granted. The condition would have been that, the full amount of the Bond be paid into court within seven days with leave to enter judgment forthwith in the event of the condition not being complied with.

Order

Given the Bond is an on-demand bond and given that Miss Cheng accepts that the "call" on the Bond in proper form, there is no defence and I enter summary judgment in the bonded sum, plus interest at prime, plus 1% and costs to the plaintiff.

Had the outcome of this case been that conditional leave be granted, I would still have awarded the plaintiff its costs because the Re-amended Defence was the one matter which tipped the balance against entering summary judgment and that pleading was only served at the 11th hour, and Mr Whitehead would have been entitled to an adjournment with costs had he asked for one.