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

cacv 22/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 22 of 2007

(on appeal from HCA NO. 15329 of 1999)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Reyes J given on 22 December 2006. The matter before the judge was the trial on liability in respect of a claim by the Government against the defendants based on an indemnity agreement dated 28 September 1993 as subsequently modified by two separate amending agreements, the first dated 26 November 1993 and the other dated 20 June 1994. These agreements will hereafter be referred to collectively as “the Indemnity Agreement”. There were counterclaims by the defendants which are no longer relevant for the purposes of this appeal.

2.  This action arose out of the development of the Central Ferry Piers as part of the infrastructure and development works associated with the Chek Lap Kok airport. The first defendant was the operator of passenger ferries and was to take possession of what were referred to as Piers 4, 5, 6 and 7, which were to be built. For reasons explained in the judgment below, the defendants wished to exploit the development potential of the new piers in order to generate revenue which could be used to subsidise the ferry services. In order to do that modifications to the designs of the piers were required. The defendants had not obtained the necessary approvals for any such developments, nevertheless it was agreed between the parties that the plans for construction of the piers would be altered to accommodate the proposed development put forward by the defendants. If that had not happened matters would have been delayed and extra costs might have been incurred. It was in those circumstances that the Indemnity Agreement was entered.

3.  The Government’s first claim in this case is in respect of the primary liability under the Indemnity Agreement. That was referred to as the Part 1 claim. The second basis upon which a claim is made by the Government, referred to as the Part 2 claim, was in respect of additional costs to carry out outstanding and/or rectification works. That was also provided for under the Indemnity Agreement.

4.  A split trial of liability and quantum had been ordered and the judge heard that part related to liability only. He held that the defendants were liable to indemnify the Government in relation to both the Part 1 and Part 2 claims together with interest and made orders for the subsequent hearing of the trial as to quantum. As it transpired by the time this appeal came to be heard, there was no longer any dispute that the Government was entitled to have its claim under Part 2 assessed. The major part of this appeal related to the Part 1 claim. At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

5.  Some of the background to the matter has already been outlined above. It suffices to say that there was an original plan for the construction of the piers. The Government was to pay for the construction of the piers. The contract to construct the piers referred to as UA11/91 was entrusted to the Mass Transit Railway Corporation (“MTRC”).

6.  Because of the concern about keeping the, apparently nonprofitable, ferry services in operation the Government was prepared to consider proposals made by the first defendant to put buildings which would include commercial premises and service apartments above some or all of the piers. The intention was to provide a source of revenue which could then be used to subsidise the ferry services. As it transpired, the negotiations between the defendants and the Government never came to fruition. The most significant cause of the breakdown of negotiations appears to have been because there was a wide gulf as to the amount that the Government considered was appropriate for the premium and the amount that the defendants were prepared to pay.

7.  Nevertheless, at the relevant time, namely 1993, the negotiations between the parties were still on foot. The Government had not had sufficient time to consider the defendants’ proposals. Neither was it clear that the proposals would necessarily go ahead. At the time there was considerable pressure for the construction of the piers to go ahead otherwise other major projects would have been delayed. If the defendants’ proposals were to be implemented substantial changes to the designs of the piers was required. The Government agreed to have the necessary changes made on condition that the defendants should provide an indemnity in respect of the costs involved.

8.  Although there were two amendments to the initial agreement, there is no dispute between the parties that, at least for present purposes, the Indemnity Agreement should be read as one agreement. The relevant parts of the agreements when read together as required by the Amending Agreements are as follows:

“Recitals

[By the Amending Agreement No. 2 :]

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.

OPERATIVE PART

It is now agreed

9.  The recitals in the Indemnity Agreement set out sufficiently the background to the matter.  In the light of the recitals and the background facts outlined above the construction of the Indemnity Agreement is tolerably clear. The Government was to arrange that the works to be carried out under the UA11/91 contract between MTRC and the contractor would accommodate what was referred to as the Alternative Design, at least in so far as it affected the work to be carried out.  This would result in changes to the work that was required under the UA11/91 contract.  For the most part, those changes would require more expensive work to be done.  Initially, what appears to have been uppermost in contemplation was the expense incurred in changing the piling and construction of the piers.  Although there would have to be additional work carried out, some of the elements of the Original Design would be omitted as a consequence of accommodating the Alternative Design.

10.  The Indemnity Agreement provided that the defendants would indemnify the Government in respect of the extra costs involved in having the work entrusted to MTRC adapted to accommodate the Alternative Design. Those costs would be occasioned by the contractor having to undertake Additional Works.  There would be some work that would have been required to be undertaken as part of UA11/91 if the Original Design had been implemented that would be omitted in order to accommodate the Alternative Design.  Those omissions would result in a corresponding reduction in the cost of the UA11/91 contract.  Hence Sub-clause 1(i) of the Indemnity Agreement referred to “any payment to the Contractor for Additional Works under the Supplemental Agreement, but less the value of any omissions consequent upon the Alternative Design”.

11.  Sub-clause 1(vii) covers the situation where the Government has proceeded to alter the works required under UA11/91 so that the Alternative Design could be implemented and as a result this has caused a cost etc. to be incurred. There is no limitation in that provision which confines the indemnity given to a situation where the Alternative Design is implemented in full.  Hence if the Government arranged for the work under UA11/91 to be varied the defendants would be responsible for any costs which would be occasioned as a result even if the Alternative Design did not come to fruition.

12.  What appears to have happened in practice was that the works required under contract UA11/91 were changed. Work under that contract progressed. From time to time Government required payments from the defendants in respect of the Additional Works but gave credit in respect of works which were not carried out.  Eventually, as already indicated the Government and the defendants could not agree on the premium that would be payable and the Alternative Design was never carried through to fruition.

13.  In essence, the Government’s Part 1 claim was phrased simply as a claim under what was said to be a ‘Final Account in respect of additional costs already incurred’.  That claim was made under sub-clauses 1(i) and (vii) of the Indemnity Agreement.  The Final Account was said to be Demand Notes Nos. 35 and 36.

14.  In essence the defence to that claim was that Demand Notes Nos. 35 and 36 sought to reverse the credit for omissions to the Original Design for which credit had been given in Demand Notes Nos. 1-34.  Those are set out in various Tables in the defence.  For the most part it is alleged that the items which were omitted were not compatible with the Alternative Design.  In respect of some items, which in themselves appeared to be of substantial cost, it is also alleged that what was in the Original Design had been replaced by other items.  In the reply the Government joined issue and denied defendants’ allegations.

15.  Although at the trial the defendants relied on a case of estoppel based on the initial credits given for what were said to be omissions, the judge rejected that argument and the question of estoppel has not been pursued on this appeal.

16.  In the judgment the judge refers to the parties having worked out a list of liability issues.  For the most part, those issues concerned matters which are no longer relevant as they related to questions arising concerning the negotiations for the premium.  In relation to the Government’s claim the first issue phrased was:

“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”?”

17.  The judge, in my view correctly, approached this question in paragraph 335 of the judgment by stating that the first matter to be considered was whether the Omitted Items were omissions consequent upon the Alternative Design.  He then went on to say:

“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.”

18.  A major point which arises on this is that it would appear to be a finding of fact by the judge.  As such it is challenged by Mr Chang SC, who appeared on behalf of the defendants, as being supported neither by the language of the Indemnity Agreement nor the pleadings nor the evidence.

19.  In relation to the pleadings, given their state including the Tables, to which reference has already been made, and the way in which the issues which the judge had to decide were formulated, apparently on an agreed basis, I would not hold that it was not open to the Government to take such a point.

20.  In relation to the construction of the Indemnity Agreement it can be said that if the Government had arranged for alterations to be made to the works with the result that there was a departure from the Original Design and those alterations were not consequent upon, and had no relevance to, the Alternative Design, then the defendants could not claim to be entitled to a credit on the basis that they were “omissions consequent upon the Alternative Design”.

21.  If, as would seem to be the case on the judge’s finding, these were omissions that arose because of the way in which the Alternative Design was being implemented, in other words the relevant work was delayed for practical reasons, then they were in truth omissions to the work which the Government had to have carried out under contract UA11/91 caused by implementation of the Alternative Design but they were not changes “consequent upon the Alternative Design”.  In this respect there is a clear distinction in sub-clause 1(i) between the “costs and charges arising out of the implementation of the Alternative Design” and the “value of any ommissions consequent upon the Alternative Design.”  The result of such a distinction may be that if in practice the defendants chose to do themselves some of the work which would have been done in accordance with the Original Design under contract UA11/91 then they would not receive credit for it, because that would be a matter of implementation and not of the design itself.  On the other hand, if that work had been no longer required under the Alternative Design, the defendants would receive a credit for it.  However, if the Government chose to make necessary rectifications consequent upon the Alternative Design not having been pursued through to completion and the piers having been left in an uncompleted state, then the defendants would come under an obligation to bear the cost of the work in that respect, particularly because of sub-clause 1(vii) of the Indemnity Agreement.

22.  On the judge’s finding of fact in paragraphs 336 and 337, the various items that were omitted were items that the Government was entitled to have rectified if it so chose because they not only formed part of the Original Design but also the Alternative Design.  The reason why the piers were left in the state they are now is because the Government had taken steps to enable the implementation of the Alternative Design.

23.  A considerable difficulty arises as to whether there was evidence to support the factual finding by the judge.  It is a serious matter for this court to overrule a finding of fact by a judge at first instance.  In this case the trial lasted for some 23 days.  However, what proportion of that time was spent in relation to the Government’s claim, as opposed to the defendants’ counterclaim in relation to the negotiations with the Government and the premium that was asked for, is not clear, at any rate at the moment.

24.  Having considered the evidence that was shown to this court by Mr Strachan, who appeared on behalf of the Government, I do not consider that there was sufficient evidence to support the judge’s findings in paragraphs 336 and 337.  Some of the evidence goes some of the way to supporting that, but given the large number of items that were involved it would appear that without going through each item sequentially and considering whether each item had not been constructed or implemented for reasons other than that the changes were consequent upon the Alternative Design (as opposed to the manner in which the defendants set about causing it to be implemented), it is impossible to come to any concluded view.

25.  It follows, therefore, that any assessment of the Government’s Part 1 claim has to involve a consideration as to whether works which would have been carried out under contract UA11/91 on the basis of the Original Design were omitted for reasons other than they were consequent upon the Alternative Design.  As the matter stands at the moment, I consider that the Government is entitled to have its claim assessed under Part 1, although if the judge’s finding of facts in paragraphs 336 and 337 proves to be incorrect in respect of some or all of the items, then that part of the Government’s claims would be under Part 2, if at all.

26.  The final point on this appeal was whether the Demand Note 35 was sufficient to satisfy the requirements of clause 5 of the Indemnity Agreement.  The judge considered that that Demand Note was little different from that of Demand Notes Nos. 1-34 which the defendants had accepted.  That may be true but this court was not aware of what other documents and information was supplied with or prior to those other Demand Notes.  More importantly, Demand Note 35 sought to make very substantial claims which would clearly have to be supported by a large number of other documents.  Whether or not the defendants already had sufficient information to be able to test the veracity of Demand Note 35 is not known.  What is known is that the Government subsequently did provide what this court has been told was something in the order of 300 pages of supporting documents.  Whilst, again, expressing diffidence about not accepting the judge’s conclusion on this matter, I consider that the enclosures which were sent together with Demand Note 35 were insufficient to satisfy the terms of clause 5 that there should be “details sufficient to verify and properly explain the nature and extent of such additional costs”.

27.  In the circumstances the parties should submit a draft order.  In default of agreement the matter should be restored for argument.

Hon Le Pichon JA:

28.  I agree.

Hon Hartmann J:

29.  I agree.