YOUNG'S ENGINEERING CO LTD v. THE HONG KONG AND SHANGHAI BANKING CORPORATION LTD

HCMP 2676/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2676 OF 2002

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REASONS FOR RULING

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1. At the hearing on 3 June 2004, I ruled that the 1st Third Party should be permitted to raise the issues set out in the draft Defence prepared by Mr Chain in opposition to the Plaintiff1st Third Party to file and serve the affirmation 's claim. Leave was granted to the of Mr Liu out of time and be joined as Defendant to the Plaintiff's claim. I now give 2nd reasons for my ruling.

2. The Plaintiff claims against the Defendant bank for declaratory relief regarding the validity of a performance bond dated 16 January 2002. The Plaintiff claims to be beneficiary under a bond allegedly issued by the Defendant. The bond was to guarantee the performance of a construction contract between the Plaintiff and the 2nd Third Party. The 1st Third Party was, at part of the material time, the parent company of the 2nd Third Party and it had signed a counter indemnity to the Defendant concerning liabilities in respect of the bond.

3. Although usually performance bond should operate independently from the underlying disputes between the parties to the construction contract, this is an exceptional case and there are complicated issues of fact and law in the present case even if one were confined to questions pertaining to the bond. In the first place, there are disputes as to whether the bond had actually been delivered. The Plaintiff had never got the original of the bond. What it had got was only a faxed copy of the same. It was not faxed to the Plaintiff by the Defendant. The copy was faxed by a Mr Liu on behalf of the 2nd Third Party on 21 January 2002. The Defendant bank gave the bond to the 1st Third Party who in turn gave a copy to the 2nd Third Party for reference. There are complicated issues as to whether the Defendant had the intention to deliver the bond to the Plaintiff when such copy was faxed and whether the 2nd Third Party could be regarded as agent of the Defendant to effect delivery.

4. According to the case of the 1st Third Party, the 1st Third Party had not yet decided to deliver the bond to the Plaintiff as there were some outstanding enquiries about the construction contract and some concern about its viability. It was also their case that the Plaintiff was aware that the 1st Third Party had no intention to deliver the bond to the Plaintiff at that stage and Mr Liu had no authority to do so. Subsequently, the 1st Third Party decided not to deliver the bond and in late January 2002, the Plaintiff was informed that the 1st Third Party would cease to be a holding company of the 2nd Third Party. The bond was cancelled by the 1st Third Party on 24 January 2002 and its original had been returned to the Defendant bank.

5. Further, the situation is complicated by the relationship between the 2nd Third Party and the Plaintiff. There were allegations in the evidence that after the 1st Third Party expressed an intention to withdraw from the 2nd Third Party, Mike Cheung of the 2nd Third Party had agreed with Stewart Cheung of the Plaintiff that the 2nd Third Party could be allowed to continue with the contract without any bond. There were also evidence suggesting that some sort of arrangement had been worked out between the Plaintiff and the 2nd Third Party. The Plaintiff was and is a member of the New World Group. In April 2002, S Y Wong, the general manager of Kentfull Engineering Services Limited, another subsidiary of the New World Group, was allegedly seconded to the 2nd Third Party in contemplation of injection of fund into the latter by the New World Group. Another company called Kentfull Engineering Company Limited ["KECL"] was set up with 40% of its shares held by the 2nd Third Party and 60% held by Kentfull Engineering Services Limited. KECL allegedly took over the operation of the 2nd Third Party and the human resources of the 2nd Third Party were deployed for other works.

6. These allegations are relevant to at least two issues,

(a) the Plaintiff's knowledge and acceptance, notwithstanding the faxing of a copy of the bond to it by the 2nd Third Party, that there was no performance bond to guarantee the 2nd Third Party's performance under the construction contract;

(b) the so-called intermeddling by the Plaintiff and its parent company to the operation of the 2nd Third Party leading to the discharge of the construction contract and/or the bond.

7. Issue (a) is clearly relevant to the Plaintiff's claim as it stands. Issue (b) is at least relevant to whether payment should be made under the bond even if it had been validly delivered in the first place. Whilst it is correct that payment under the bond is not a relief claimed by the Plaintiff in the present proceedings, Mr Scott SC could not deny that was the ultimate objective of the Plaintiff. In my judgment, it would be unrealistic to assume the intermeddling issues would not be the subject of any litigation and the disputes between the parties could be settled merely by determining whether the bond had been validly delivered. Declaration is a discretionary relief and it is at least arguable, on the unusual facts of the present case, the court should take into account of these subsequent developments in deciding whether declaratory relief should be granted. It may also be arguable (and I put it no higher than that) that should the Plaintiff press for payment under the bond, the 1st Third Party may seek injunctive relief to prevent that. Further, on the facts of the present case, it would not be in the interest of justice to segregate the intermeddling issues from other disputes already before the court.

8. It is quite apparent that the real protagonists in the present proceedings are the Plaintiff and the 1st Third Party. Given the nature of the issues raised, it would not be right to expect the Defendant bank to take up the sole responsibility in resisting the Plaintiff's claim. Neither would it be fair to the 1st Third Party. I do not think it would be in the interest of justice to bar the 1st Third Party from raising these very important issues notwithstanding the late stage at which they were raised. Mr Chain had offered some explanation for the delay on behalf of the 1st Third Party. Mr Scott made some criticism to that explanation. I took these into account. But what is more important is that Mr Scott could not show that the Plaintiff would suffer any prejudice that could not be compensated by costs. Moreover, I have reservations whether the case should be allowed to proceed to trial without any pleadings.

9. Even putting aside issue (b), it seems to me that the disputes surrounding the validity of the bond is of sufficient complexity to warrant directions for pleadings to be filed before the court is asked to adjudicate on the matter. There are certainly complicated disputes of fact and law involved and the evidence filed by the parties are voluminous. Practitioners who chose to proceed by way of originating summons should reflect on its appropriateness not only when the proceeding is launched but also when the case progresses with evidence filed by parties involved. The sentiment expressed by Cheung J (as he then was) in Wing Hang Bank Ltd v Crystal Jet International Ltd HCMP 5014 of 1999, 15 April 2000 (endorsed by the Court of Appeal in CACV 140 of 2000, 9 June 2000) should be borne in mind. The lack of pleadings in complicated case can often cause difficulties to the trial judge as well as on appeal, see China State Bank v Fung Chin Kan CACV 178 of 2000, 4 July 2001, Para. 3; Bank of China v Fung Chin Kan (2002) 5 HKCFAR 515 at Paras. 3 and 25.

10. I am satisfied that it is just and convenient that all these issues between the parties should be decided in one go and the 1st Third Party should be given leave to contest the Plaintiff's claim as a defendant.

11. It is fair to say Mr Scott very properly accepted that pleadings are necessary once the 1st Third Party is allowed to rely on the issues raised by Mr Chain in opposition to the Plaintiff's claim.

12. It is unfortunate that parties have not listed the matter before a judge for directions in accordance with Order 28 Rule 4 before the matter is set down for hearing. What happened was that instead of doing so, there was a hearing returnable before a Master for directions. That took place on 25 September 2002 and the Master adjourned the matter sine die with liberty to restore. Third Party and Fourth Party Proceedings were issued after that date. On 21st and 22nd May 2003 respectively, the parties filed two consent summons asking, inter alias, for a direction that "the action forthwith be set down for hearing before a judge without a jury and listed in the fixture list with an estimated length of 6 days ...". The Consent Orders were made by two masters. Hence, the question whether the matter should be tried without any pleadings has never received any attention by a judge.

13. I doubt whether it is appropriate for the masters to give such directions even with the consent of the parties. Order 28 Rule 4 expressly provides that the direction hearing should be before the court by whom the originating summons will be heard. The substantive matter in question should clearly be heard by a judge instead of a master. It should therefore be considered by a judge whether directions should be given for pleadings to be filed and the case should not be set down for hearing until that has been adequately considered. Practice Direction 5.8 is applicable.

14. I intend to grant leave for publication of these Reasons for Ruling. Although the matter is set down for hearing in chambers, judgments resulted from hearings in chambers form part of the case law in Hong Kong and I consider that they should normally be available to the public unless there are good and cogent reasons to the contrary (see Forbes v Smith [1998] 1 All ER 973; Clibbery v Allan [2002] 1 All ER 865). If parties have any comments in that regard, they should be sent to this court in writing within 5 days from the handing down of the Reasons for Ruling.