XCHRX HONG KONG HOUSING AUTHORITY v. BANK OF CHINA GROUP INSURANCE CO. LTD.

HCCT103/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.103 OF 1999

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D E C I S I O N

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1. There are two applications before the court.

2. Firstly, there is an application by the defendant for a stay of proceedings. The plaintiff was the employer in relation to a re-development at Kai Tak. The main contractor was a company called Hing Lee Construction Company Ltd ("Hing Lee"). The defendant in this writ action was the bondsman who provided a bond in favour of the plaintiff in the sum of $39,880,000 in relation to the building contract between the plaintiff and Hing Lee. Hing Lee is now in voluntary liquidation. In the building contract, there is an arbitration clause (clause 35). The first notice of arbitration from Hing Lee was made in February 1998. It was revived by Hing Lee's liquidators by letter of 6 May 1999. An arbitrator was appointed in June 2000. Thus, apart from the appointment of an arbitrator, nothing has happened in the arbitration for 33 months. It is effectively "dead in the water". The defendant in the writ action, in which it is being sued on the bond, seeks a stay of these proceedings pending the final determination of the arbitration between the plaintiff and Hing Lee, to which it is not a party.

3. Secondly, there is an application by the plaintiff for a determination of two questions of law under Order 14A. The plaintiff submits the questions should be answered by this court regardless of its decision on the stay application. The defendant submits that if the stay is granted, they fall away. If the stay is not granted, they say they should not be answered because either they are not suitable for determination under Order 14A or they involve questions of mixed law and fact.

4. The two applications were originally set down for one day. In the event, three full days have been occupied. One day was optimistic. The issues are substantial and both counsel, Mr John Bleach SC for the plaintiff and Ms Teresa Cheng SC for the defendant have helpfully referred the court to a considerable volume of material on the background to and relevant issues on the two applications. Having now reviewed all the submissions, the contract documents, the correspondence and a number of authorities, I have concluded that the court's decisions on the two applications can be stated with relative brevity. I agree, firstly, with Mr Bleach that the court should grapple with the Order 14A questions, regardless of the outcome of the stay application. There is a likelihood of the questions having to be resolved, ultimately by the court, even if a stay is granted. I have however decided, for the reasons which follow, that a stay will not be granted. Turning to the Order 14A questions, both questions, again for reasons will follow, are answered in the negative.

The Stay Application

5. The defendant has offered certain undertakings to the plaintiff in an attempt to reach agreement that the writ action be stayed. The defendant has undertaken to be bound by the result of the arbitration up to the amount of the bonded sum. It has also undertaken not to rely on certain defences (paragraphs 17 and 18) pleaded in the Defence, in the arbitration.

6. Ms Cheng submits this demonstrates a reasonable attitude by the defence and should weigh in favour of a stay so as to avoid parallel proceedings, duplication of costs and the risk of inconsistent decisions. Mr Bleach however points out that the defendant is not willing to undertake to pay any interest on the bonded sum, to which it would be entitled in the writ action, if successful. The interest to date is over $8 million. Nor is the defendant willing to undertake to be liable for future orders for security for costs made against Hing Lee. Nor is the defendant willing to undertake either to not rely on other defences so far pleaded or to raise new ones. Nor do their undertakings deal with the costs of the arbitration. In these circumstances, I consider the plaintiff's present stance as set out in their solicitors' letter of 14 November, that "our client maintains the view that ... these court proceedings are the most practical forum for the resolution of the disputes between the parties and involving Hing Lee" is reasonable. The issue is therefore, taking into account the undertakings that have been given, is the overall justice of the case in favour of a stay or not. The court has a discretion.

7. Ms Cheng makes the following points which she submits favour a stay :

(i) The appropriate forum to determine the Hing Lee/plaintiff dispute is arbitration.

(ii) The trial will be lengthy and expensive.

(iii) The defendant will be bound by the result of the arbitration.

(iv) Parallel proceedings on identical issues are undesirable. There is also the risk of inconsistent findings.

(v) Duplication of costs.

(vi) It would be unjust to require the defendant to litigate in court issues between the plaintiff and Hing Lee.

(vii) The issues are more suited to arbitration.

(viii) Arbitration provides a speedy and economic resolution.

8. These points may point to arbitration being a more convenient forum for the defendant. However, a closer analysis, as advanced by Mr Bleach, demonstrates that the injustice which would be caused to the plaintiff by granting a stay outweighs the points made above in the particular circumstances of this case. It is a balancing act which, in my judgment, falls fairly and squarely on the plaintiff's side.

9. The answers to Ms Cheng's submissions are premised on the inescapable truth that Hing Lee is, to use Mr Bleach's description, "hopelessly insolvent" and their arbitration proceedings are, to repeat the court's description, "dead in the water". If a stay is granted, the plaintiff would feel rightly aggrieved because it would be holding an extremely valuable performance bond which it might not be able to enforce for a very long time. Even at the conclusion of the arbitration, and if they are successful, they would then have to come back to court for the inevitable arguments which flow from the Order 14A issues. For the present, it seems the arbitration will remain motionless because it has been stayed pending the payment by Hing Lee of a security for costs order in the sum of $1.2 million. By a letter dated 23 October 2000, the liquidators of Hing Lee wrote to the plaintiff's solicitors as follows :

"Hing Lee will be in a position to provide the security required in the sum of HK$1.2 million in the form of a bond or a bank guarantee if the application taken out by BOCG in HCCT 103/1999 to stay that action is allowed by the Court. Such security will be provided within 14 days from the date on which any such Court Order is made in HCCT 103/1999 provided that the form of the bond or the bank guarantee can be agreed among the relevant parties in time."

10. Thus, the engines will only start to turn if a stay is granted. Even if the engines do start, it is highly probably that they will stall again when the next security for costs application is made, which it certainly will be, at the close of pleadings. The reality is that the arbitration will either remain stayed, if this stay application is refused or it will proceed haltingly if the stay is granted. On the other hand, the writ action will be plaintiff-driven and is already in top gear.

11. Mr Bleach makes the following specific answers to the defendant's submissions (above). As between the plaintiff and Hing Lee, arbitration is the forum dictated by the contract. It does not follow that it is the most appropriate forum. An arbitration will not render this writ action unnecessary. The plaintiff is not obliged to bind itself by the result of the arbitration as against the defendant. The defendant's argument here only has force if both parties will be bound for the purposes of the writ action. Hing Lee however will be bound by the result of the trial by virtue of a court order dated 22 February 2000. The notion of "parallel proceedings" is only of concern if they are both moving forwards. Not so here. In any event, as the issues in the two sets of proceedings are virtually identical, the preparation for each will be very similar. Costs will not be doubled. It is a non-point to suggest that the defendant is not the right party to be defending the issues which are in reality between the plaintiff and Hing Lee. The risk of being in the position they are is an inevitable consequence of providing the bond in the first place. They will have the full co-operation of Hing Lee's liquidators when preparing for trial.

12. In short, I am satisfied there would be no injustice in refusing a stay. The defendant is well equipped to defend the writ action, it will not be funding two sets of proceedings because one has been stayed and because Hing Lee is insolvent. The reality is that all issues will probably be resolved in one set of proceedings only. The justice of the case is that the plaintiff should have the opportunity of getting on with it.

The Order 14A application

13. The two questions for which the plaintiff seeks an answer of either "Yes" or "No" are as follows :

Question 1

"Whether an Architects certificate issued pursuant to clause 25(3)(d) of the Building Contract made between the Hong Kong Housing Society and Hing Lee Construction Co. Ltd is a pre-condition to the Defendants liability under the Contract Bond dated 9th February 1995 to discharge (up to the amount of the contract Bond) the expenses, loss and/or damage caused to the Hong Kong Housing Society by the determination of the Building Contract, or is irrelevant thereto."

Question 2

"Whether the advance release of retention monies under Certificates B-31 and B-32, if made without the consent of the Defendant as surety under the Contract Bond, has discharged the Defendant from all its liabilities under the Contract Bond."

14. Order 14A, rule 1 provides as follows :

"(1) Determination of questions of law of construction

(1) The court may upon the application of a party or of its own motion determine any question of law or construction of any documents arising in any course or matter at any stage of the proceedings where it appears to the court that :-

(a) Such question is suitable for determination without a full trial of the action; and

(b) Such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein."

15. Before dealing with the questions themselves, Ms Cheng advances a preliminary argument. It is submitted that Question 1 is not appropriate for determination primarily because, even if it is answered in the plaintiff's favour, it may not shorten the trial. I consider this to be speculative and not a relevant consideration to the exercise of the court's discretion. Further, it is submitted, the question has been raised prematurely and should be dealt with by the arbitrator. I reject this contention also. The question concerns the defendant's liability under the bond which is not an arbitral issue.

16. As to the second issue, it is submitted that it is a question of mixed law and fact. The defence case is that the defendant neither knew nor consented to the release of retention moneys. Their knowledge is a question of fact and so the question should not fall within Order 14A. I do not agree. The fact of their consent is not a relevant consideration to the question posed. The fact is that monies were released. If the contract permits such a release, the question is : what are the legal consequences of such a release to the defendant's liability to the plaintiff? That is a pure question of law.

17. With regard to both questions, it is submitted that their determination will not finally determine any cause or matter. In fact, Order 14A, rule 1(1)(b) finishes with the words "or any claim or issue therein". I am content that both questions come within the spirit of Order 14A rulings and will dispose of important issues at trial which will very probably have a significant effect on the length and costs of the trial.

The answer to Question 1

18. Clause 25(3)(a) of the contract states as follows :

"In the event of the employment of [Hing Lee] being determined as aforesaid and so long as it has not been reinstated and continued, the following shall be the respective rights and duties of [the Plaintiff] and [Hing Lee]:-

(a) [The Plaintiff] may employ and pay other persons to carry out and complete the Works and he or they may enter upon the Works and use all temporary buildings, plant, tools, equipment, materials and goods intended for, delivered to and placed on or adjacent to the Works, and may purchase all materials and goods necessary for the carrying out and completion of the Works."

This is precisely what happened in this case. The next relevant sub-clause is 25(d) :

"(d) [Hing Lee] shall allow or pay to [the Plaintiff] in the manner hereinafter appearing the amount of any direct loss and/or damage caused to [the Plaintiff] by the determination. Until after completion of the Works under paragraph (a) of this sub-clause [the Plaintiff] shall not be bound by any provision of this Contract to make any further payment to [Hing Lee], but upon such completion and the verification within a reasonable time of the accounts therefor the Architect shall certify the amount of expenses properly incurred by [the Plaintiff] and the amount of any direct loss and/or damage caused to [the Plaintiff] by the determination and, if such amounts when added to the monies paid to [Hing Lee] before the date of the determination exceed the total amount which would have been payable on due completion in accordance with this Contract, the difference shall be a debt payable to [the Plaintiff] by [Hing Lee]; and if the said amounts when added to the said monies be less than the said total amount, the difference shall be a debt payable by [the Plaintiff] to [Hing Lee]."

19. The material part of the bond states :

""BY THIS BOND WE, (a) HING LEE CONSTRUCTION COMPANY LTD. ... (hereinafter 'the Main Contractor') and BANK OF CHINA GROUP INSURANCE CO., LTD. ... (hereinafter 'the Surety') are held and firmly bound unto HONG KONG HOUSING SOCIETY (hereinafter 'the Employer') in the sum of ... (HKD39,880,000.00) for the payment of which sum the Main Contractor and Surety bind themselves their successors and assigns jointly and severally by these presents ...

NOW THE CONDITION of the above-written Bond is such that if the Main Contractor shall duly performed and observe all the terms provisions conditions and obligations stipulations of the Contract on the Main Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if on the default by the Main Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby up to the amount of the above-written Bond then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alteration in the terms of the Contract made by agreement between the Employer and the Main Contractor or in the extent or nature of the Works to be executed thereunder and no allowance of time by the Employer under the Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Contract on the part of the Employer shall in any way release the Surety from any liability herein."

20. It is the defendant's liability under the bond with which we are concerned. The contract requires the architect to certify an amount of money which may be due to the plaintiff as a result of a determination. The amount is described as a debt payable by Hing Lee upon certification. The bond, on the other hand, imposes an obligation on the surety to pay damages sustained by the employer up to a certain amount, upon proof of default and damage. It makes no reference to the obligation to pay being conditional on the issuance of an architect's certificate. The promise of the defendant under the bond is not merely to remedy any failure by Hing Lee to pay debts as defined in clause 25(3)(d) and as certified by the architect, but to guarantee payment of damages as a result of a failure of Hing Lee to proceed diligently with the works up to the maximum of the bonded sum. The contract regulates the relationship between the plaintiff and Hing Lee. Ms Cheng is correct when she says that the debt between those parties only arises on the issuance of a certificate. The liability of the bank, however, to the plaintiff is under the bond. The starting point for the answer to Question 1 is, as submitted by Mr Bleach, the bond and not, as submitted by Ms Cheng, the contract.

21. Of the several authorities to which the court has been helpfully referred, a prudent approach is to look at one, if there is one, where the words of the bond and the contract are the same or similar to the words in the present case. There is such an authority and it is one which this court considers to be directly on point. Mocatta J's judgment in Nene Housing Society Ltd v. The National Westminster Bank Ltd (1980) 16 BLR contains the following passage at page 31 :

"Mr Keating, in his address, dealt first with question (a), submitting that the plaintiffs' claim was premature until the architect had issued his certificate under Clause 25(3)(d). He gave various instances drawn from the scheme of the conditions of the contract, such as, for example, the withholding of retention money, and submitted that until these had all been taken into account, including any direct loss or damage caused to the employer by the determination, and the architect had finally certified, there could be no striking of an account as between the contractor and the plaintiffs.

In answer to this, however, Mr Rokison emphasised that the plaintiffs' claim was under the bond against the defendants and there was no provision in the bond to the effect that the surety should not, in the case of default by the contractor, satisfy and discharge the damages sustained by the plaintiffs until the issue of a certificate by the architect. For the purposes of deciding the three preliminary issues the facts as alleged in paragraph 11 of the statement of agreed facts had been accepted. It followed that as for present purposes it was to be assumed that in each of the four periods of six months mentioned in the bond the contractors had failed to carry out their work as stated in paragraph 11(a) and that after the determination the plaintiffs had carried out or arranged to have carried out works to remedy the defects caused by such failure and had incurred expenditure in respect of the failures occurring in each of the four periods of six months exceeding ￡58,160, the Architect's Certificate under Clause 25(3)(d) was irrelevant.

I accept Mr Rokison's arguments on this matter. If the plaintiffs can prove before the Official Referee the allegations in paragraph 11, the absence of the Architect's Certificate is in my view immaterial to the plaintiffs' claim under the bond."

22. In the Nene case, clause 25(3)(d) was identical. The words of the bond had no material differences and the question posed for determination was the same. I answer Question 1 in the negative.

The answer to Question 2

23. An answer to this question is sought because of paragraphs 17 and 18 of the Defence which plead as follows :

"17. Further and in the alternative:-

(a) in or about late 1997, the Plaintiff had, contrary to clause 30(2) of the Contract, prematurely released part of the retention fund under the Contract in the sum of HK$12,800,000.00 to Hing Lee and HK$630,000.00 to nominated sub-contractors in payment of Architect Certificates B-31 and B-32;

(b) the said payments were made without the knowledge or consent of the Defendant as surety under the Bond.

18. In the premises, the Plaintiff has materially and prejudicially altered the Defendant's position as a surety under the Bond and the Defendant was discharged from all its liability thereunder."

24. It is an agreed fact that the sum of $12,800,000 was released to Hing Lee from the retention monies pursuant to clause 30 of the contract.

25. Clause 30(2) states :

"(2) The amount stated as due in an Interim Certificate shall, subject to any agreement between the parties as to stage payments, be the estimated value of the work properly executed and of the materials and goods delivered to or adjacent to the Works for use thereon up to and including a date not more than seven days before the date of the said certificate less any amount which may be retained by the Employer (as provided in sub-clause 30(3) of this Condition) and less any instalments previously paid under this Condition. Provided that such certificate shall only include the value of the said materials and goods as and from such time as they are reasonably, properly and not prematurely brought to or placed adjacent to the Works and then only if adequately protected against weather or other casualties." (emphasis added)

The word "may" is also used in clause 30(3) which permits the plaintiff to retain money otherwise payable to Hing Lee :

"(3) The Employer may retain the percentage of the total value of the work, materials and goods referred to in sub-clause (2) of this Condition which is named in the appendix to these Conditions as Percentage of Certified Value Retained." (emphasis added)

26. It is the defendant's case that because the plaintiff did an act which it was permitted to do under the contract which has or may have prejudiced it, it is therefore discharged from its liabilities under the bond. Clearly, and there can be no serious dispute on this, as the plaintiff had a discretion to retain money, it also had a corresponding discretion to release monies not retained. Ms Cheng submits, however, that such a discretion to release has to be exercised reasonably, and if it is not, it amounts to a material alteration of the contract which would, as a consequence, discharge the bondsman from its obligation under the contract. The reasonableness of the release is, she submits, a matter which could only properly be investigated at trial. On this issue, the knowledge and/or consent of the defendant to the release would be a material fact.

27. I cannot see the merit of an argument which states that a bondsman's obligation (which was taken out at a time when all the terms of the contract between the plaintiff and Hing Lee were known) is discharged in toto when the plaintiff has acted in accordance with the contract. May means may. May means it can. It did.

28. The defendant's position is further weakened by reminding ourselves of the clear words, in strong terms, of the bond itself :

"no alteration in the terms of the contract made by agreement between the employer and the main contractor ... nor any forbearance of forgiveness in or in respect of any matter or thing concerning the contract on the part of the employer shall in any way release the surety from any liability herein."

29. Thus, even if the early release of retention money constituted a material alteration, the defendant is still faced with this part of the bond. The right to be discharged under the bond is expressly waived. The only real basis upon which the defendant could be discharged is if the plaintiff has acted in breach of the contract. Such a contention does not begin to arise in the present case. The plaintiff is even able to rely on authority in support of the proposition that even "irregular conduct on the part of the plaintiff which is prejudicial to the defendant" does not discharge the surety (Bank of India v. Transcontinental Commodity Merchants Ltd [1983] 2 Lloyd's Rep.298). Even if there was prejudice to the defendant in our case, which is denied, it cannot have resulted from "irregular" conduct for the reasons already stated. The Bank of India case has been followed in Hong Kong in Bank of Credit and Commerce Hong Kong Ltd (in liq.) v. Quadrutec Hotel Management & Development Ltd [1996] 4 HKC 316.

30. I answer Question 2 in the negative.

31. In relation to both summonses before the court, I make an order that the costs be to the plaintiff.