DRAGAGES ET TRAVAUX PUBLICS (HK) LTD. v. DRAGAGES ET TRAVAUX PUBLICS (HK) LTD.

CACV 281/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 281 OF 2000

(ON APPEAL FROM HCCT 81/1999)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from an Order 14 judgment entered by Burrell J.

2. The plaintiff (Dragages et Travaux Publics (HK) Limited ("Dragages")) was the main contractor in relation to a contract with Hong Kong Aircraft Engineering Company Limited for the construction of a base maintenance facility at Chek Lap Kok Airport.

3. Dragages subcontracted some of the mechanical services plumbing and drainage works to Wah Tung (E&M) Ltd ("Wah Tung") who have since gone into liquidation.

4. The defendant Citystate Insurance Limited ("Citystate") issued a performance bond in relation to Wah Tung in favour of Dragages for HK$9,888,372. Dragages are in the present proceedings suing Citystate on the bond and applied for and obtained summary judgment.

5. One of the main issues for determination before the Judge was whether the bond was an "on demand" bond.

6. The relevant terms of the bond are set out at p. 235 of the appeal bundle:

"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.

WHEREAS:

(A) By a Contract in writing dated the 21st November 1996 ('the Main Contact') between the Main Contractor of the one part and Hong Kong Aircraft Engineering Co Ltd., a company incorporated in and in accordance with the laws of Hong Kong, whose registered office is situated at 60 Concord Road, Hong Kong International Airport, Hong Kong ('the Employer') of the other part, the Main Contractor agreed to provide certain building and other services ('the Works') as more particularly described in the Main Contract.

(B) Wah Tung (E&M) Limited, a company incorporated in and in accordance with the laws of Hong Kong, whose registered office is situated at 10/F., National Mutual Centre, 151 Gloucester Rd., Hong Kong ('the Sub-Contractor') has entered into a Sub-Contract of even date with the Main Contractor to perform certain building and other services forming part of the Works to be more particularly described in the Sub-Contract ('the Sub-Contractor's Works').

(C) At the request of the Sub-Contractor, the Surety has agreed to guarantee to the Main Contractor the due performance by the Sub-Contractor of the Sub-Contract.

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.

3. The obligations of the Surety hereunder shall remain in full force and effect and shall not be affected or discharged by (and the Surety hereby waives notice of) any variations to the Works and/or the Sub-Contractor's Works to be carried out under the Main Contract or the Sub-Contract or other amendments to the Sub-Contract and/or the Main Contract including extensions of time for performance or other concessions or waivers granted by the Main Contractor of any right or remedy the Main Contractor may have against the Sub-Contractor and/or by any other bond, security or guarantee now or hereafter held by the Main Contractor for all or any part of the obligations of the Sub-Contractor or by the release or waiver of any such bond, security or guarantee.

4. The liability of the Surety under this Bond shall commence on the date of the Sub-Contract and shall cease and terminate on whichever of the following events first occur:

(i) Payment by the Surety of this Bond in full.

(ii) Issue of the Final Certificate to be issued by the Architect in accordance with the Main Contract.

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 the 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.

..."

7. The correct approach to adopt in determining whether a bond is an "on demand" bond is to ascertain whether the commitment engaged is conditioned upon the presentation of documents or upon the actual existence of facts which are referred to in the documents.

8. In the former case the bond will be considered in a similar manner to a letter of credit or more accurately to adopt the words of Lord Denning at p. 171 of Edward Owen Engineering Ltd v Barclays Bank International Ltd and Another [1978] 1 QB 159:

"All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice."

9. Whether a bond is an "on demand" bond will depend upon the construction of the instrument in question.

10. So far as the competing claims in the instant case were concerned Mr Whitehead SC for Dragages placed heavy reliance upon the document which was the subject matter of the dispute in Esal (Commodities) Ltd. and Another v Oriental Credit Ltd and Another [1985] Vol. 2 Lloyd's Law Reports 546 and Miss Cheng SC for Citystate on the document considered in Kono Insurance Ltd v Tins' Industrial Co. Ltd [1987] 3 HKC 71.

11. The form of words adopted in Esal was:

"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 ..."

12. And for Kono:

"Now the condition of the above written bond is such that if the contractor shall duly perform and observe all the terms, provisions, conditions and stipulations of the said contract on the contractor's part to be performed and observed according to the true purport intent and a meaning thereof, or if on default by the contractor the surety shall satisfy and discharge the damages sustained by the employer thereby up to the amount to the above written bond then this obligation should be null and void, but otherwise shall be and remain in full force and effect."

13. The Esal form of wording was found to amount to an "on demand" bond and the Kono wording to a conditional bond.

14. Hunter JA described the characteristics of the two different types of bond at p.74 of his judgment in Kono:

"The first issue here is the nature of this bond, and it is common ground between counsel that the outcome turns upon the true construction of the bond. Bonds are conveniently categorized in 12 Halsbury's Laws of England (4th Ed) paras 1386 and 1387 into two different species. The first is what the editors call a single bond, and they go on to say that those 'had become rare'. A single bond is a simple demand bond, which is payable on demand, or on production of whatever additional evidence the bond itself nay specify. This may be no more than the mere 'say-so' or ipse dixit of the beneficiary under the bond. They can be oppressive documents. Perhaps the most notorious, or should I say infamous, bond was that given by Antonio, the 'merchant of Venice', to Shylock, which is in fact referred to in the footnote to para 1386. Shakespeare got it right. He wrote of 'Your single bond'. We all know what happened to that. Perhaps that may account for the fact that they fell into disuse over the years.

They were revived - I think to the surprise of English judges - in 1977, as a result of the practice of purchasers in the Middle East in effect seeking to obtain a built-in discount on the purchase price. The first case to come before the court, came before Kerr J (as he then was) in 1977, RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146. He described the document as 'astonishing' at p 150. The matter was then further considered by the Court of Appeal in the next case in the same volume of the law reports, Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159. There Lord Denning MR said that they were 'virtually the same as a promissory note payable on demand' p 170.

The effect of those decisions is that the court allied these performance bonds payable on demand with confirmed letters of credit. They said that you have to look to the terms of the separate contract between the bankers, in the same way as you do in looking at confirmed letters of credit, and that for those reasons you were not concerned with the underlying contract. Those cases came before this court in the Guangdong Transport case by analogy, so that when the trial judge here said he could not distinguish the cases referred to in Guangdong Transport, he was in effect treating this bond as a simple on demand bond.

The second type of bond is dealt with in para 1387 of Halsbury's, and is called a 'double or conditional bond':

This form of bond is called a double or conditional bond and consists of two parts: first, the obligation, and secondly, the condition. The condition ... specifies the real agreement between the parties.

One of the best known bonds of this nature was that given by the Trade Indemnity Co Ltd to the Workington Harbour and Dock Board, which came before the House of Lords on two separate occasions. The terms of that bond we can see from the report of that case Workington Harbour and Dock Board v Trade Indemnity Co Ltd (No 2) [1937] 3 All ER 139. At p 144 in the judgment of Slesser LJ, he sets out the terms of that bond in full. I am not going to read it all. It is sufficient to say that the bond in its effect is indistinguishable from the first part of the bond here, namely, the contractor's part of our bond. In the course of his judgment in that case, Greer LJ, on the preceding p 143, says this in relation to this bond:

The plaintiff bringing an action has not merely to prove a breach of contract; he has to prove the damages which he suffered by reason of that breach of contract.

The matter went to the House of Lords, where for the second time in this litigation, the main speech was given by Lord Atkin [1938] 2 All ER 101. He says this, at p 105:

My Lords, both actions were brought on the money bond [that is the first and second actions]. It is well established that in such an action the plaintiff has to establish damages occasioned by the breach or breaches of the conditions, and, if he succeeds, he recovers judgment on the whole amount of the bond, but can only issue execution for the amount of the damages proved."

15. In our opinion Hunter JA was fully justified in describing "on demand" bonds as potentially "oppressive" documents. It is accordingly the case that the wording of these bonds must be drafted in clear and unambiguous terms.

16. Miss Cheng submitted that the operative wording of the clause in Kono was for all practical purposes the same as the clause in the instant case save that the words "on demand in writing" were not included. She argued that these words which were commonly used in simple guarantees did not take matters any further and certainly by themselves could not transform a conditional bond into an "on demand" bond.

17. She went on to consider the wording of the bond in Trafalgar House v General Surety [1995] 3 All ER 737 which was in this form:

"Bond
GENERAL SURETY & GUARANTEE CO. LIMITED

By THIS BOND WE K.D. CHAMBERS LIMITED whose Registered Office is at 1 London Road Sittingbourne Kent (hereinafter called 'the Subcontractor') and GENERAL SURETY & GUARANGEE CO. LIMITED whose registered office is at Hawthorn Hall Hall road Wilmslow Cheshire SK9 5BZ (hereinafter called 'the Surety') are held and firmly bound unto A. MONK BUILDING AND CIVIL ENGINEERING LIMITED (hereinafter called 'the Main Contractor') in the sum of ￡101,285.00 (One hundred and one thousand two hundred and eighty five pounds) for the payment of which sum the Subcontractor and the Surety bind themselves their successors and assigns jointly and severally by these presents

SEALED with our respective Seals and dated this twenty seventh day of November 1989

WHEREAS

1. The Main Contractor has entered with THE MAIDSTONE BOROUGH COUNCIL for the construction of LEISURE CENTRE AT MOTE PARK MAIDSTONE KENT (hereinafter referred to as 'The Main Contract Works')

2. The subcontractor by subcontract agreement evidenced by subcontract order no. SC1839/C5495 dated the Thirty first day of October 1989 made between the Main Contractor of the one part and the Subcontractor of the other part has entered into subcontract (hereinafter referred to as 'the said Subcontract') for the construction and completion of the Subcontract Works (being part of the Main Contract Works) as therein mentioned in conformity with the provisions of the said Subcontract.

NOW THE CONDITION of the above-written Bond is such that if the Subcontractor shall duly perform and observe all the terms provisions conditions and stipulations of the said Subcontract on the Subcontractor's part to be performed and observed according to the true purport intent and meaning thereof or if on default by the Subcontractor the Surety shall satisfy and discharge the damages sustained by the Main Contractor 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 alternation in terms of the said Subcontract made by agreement between the Main Contractor and the Subcontractor or in the extent or nature of the Subcontract Works to be constructed and completed thereunder and no allowance of time by the Main Contractor under the said Subcontract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the said Subcontract on the part of the Main Contractor shall in any way release the Surety from any liability under the above written Bond.

Any proceedings against the Surety to recover any claim hereunder must be served within six months after the fourth day of February 1991 or such other date as may be certified by the Architect as the date of Practical Completion of the Main Contract Works.

The Common Seal [etc]. (My emphasis.)"

18. As can be seen it was in very similar terms to the form of the wording of the bond in Kono.

19. Lord Jauncey at p. 743 accepted that this was the case and gave his reasons on p. 743 of the report on why a bond in this form could not be considered to be an "on demand" bond:

"In this case the Court of Appeal by determining that the appellants' liability under the bond arose on the failure of Chambers to complete the contract followed by a demand in good faith for the amount of the damages which they claim to have suffered were effectively treating it as a type of on demand bond. Mr Beloff, not surprisingly, adopted as an alternative argument the reasoning of the Court of Appeal albeit not with the greatest enthusiasm. However, he maintained that he did not require to go so far as the Court of Appeal as he had amply vouched the damages which he had sustained. In this connection it is interesting to note that in Tins' Industrial Co Ltd v Kono Insurance Ltd [1988] LRC (Comm) 464 at 471, (1987) 42 BLR 110 at 121 Hunter JA giving the judgment of the Court of Appeal of Hong Kong in a case concerning a bond in virtually identical terms to the Chambers bond stated that 'a claimant under the bond has to prove first breach, and secondly damages'.

My Lords, I have no doubt that the Court of Appeal were in error in concluding that the bond was not a guarantee but was akin to an on demand bond. No distinction can, in my view, properly be drawn between the effect of this bond minus the second part of the condition and the bond considered by Lord Atkin in the Workington case and other bonds using this or similar wording which have for many years been generally treated as guarantees (see Hudson's Building and Engineering Contracts (11th edn, 1995) vol 2, pp 1499 - 1500, para 17-007). Thus in a second action arising out of the bond in the Workington case, Workington Harbour and Dock Board v Trade Indemnity Co Ltd (No 2) [1938] 2 All ER 101 at l05 Lord Atkin said:

'My Lords, both actions [that is the first and second actions] were brought on the money bond. It is well established that in such an action the plaintiff has to establish damages occasioned by the breach or breaches of the conditions, and, if he succeeds, he recovers judgment on the whole amount of the bond, but can only issue execution for the amount of the damages proved.'

This dictum makes it clear beyond doubt that proof of damage and not mere assertion thereof is required before liability under such a bond arises."

20. Miss Cheng then contrasted the wording of the bonds in Kono and Trafalgar with the wording adopted in bonds which had been found to be "on demand" bonds. We take these conveniently from her most helpful skeleton argument:

"(1) Cargill International SA v. Bangladesh Sugar & Food Industries Corp. [1996] 4 All ER 563; [1998] 2 All ER 406, (CA): '... we unconditionally and absolutely bind ourselves : I) To make payment of USD526,273.15 ... to the corporation [the defendants] or as directed by [the defendants] in writing without any question whatsoever ... The Guarantee is unconditional and it is expressly understood that the sole judge for deciding whether the suppliers have performed the contract and fulfilled the terms and conditions of the contract will be the [defendant] ...'

(2) Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 QB 159 '... we confirm our guarantee ... payable on demand without proof or conditions'; '... it is understood that the said amount will be paid on your first demand ...'.

(3) Airport Authority Hong Kong v. Amercian Home Assurance Co., HCA 17807/99, 2/2/00 '... the Bondsman shall upon demand made by the Employer in writing and without proof of the said default or conditions satisfy ...'

(4) IE Contractors Ltd. v. Lloyds Bank Plc and Rafidain Bank [1990] 51 BLR 1 : '... we undertake to pay you, unconditionally, the said amount on demand, being your claim for damages ...' "

21. What is immediately evident is that the operative parts of the relevant clauses are all expressed in a more explicit form than the form of words adopted in the instant case.

22. As indicated earlier in this judgment Mr Whitehead placed heavy reliance upon the Esal case and the fact that according to him the form of wording adopted in the bond and in that case was very similar to the wording in this case.

23. With respect we disagree. The wording in that case is clearly distinguishable.

24. The undertaking in Esal is to pay "the said amount". This was the amount payable under the bond. Put another way it amounted to a requirement to "pay now and recover any excess amount later".

25. This is in stark contrast to the requirement laid down in the present case. What is guaranteed here is for the surety to "satisfy and discharge any claims, actions, damages, losses, charges, costs or expenses ..." which may have been incurred.

26. Another way of looking at this matter is that it is necessary to look to the underlying contract as well as the terms of the bond.

27. For the reasons given by Lord Jauncey and Hunter JA, the amounts which will be payable under the bond will have to be determined as a separate exercise.

28. Mr Whitehead also took us through the terms of a number of the bonds which had been found to be conditional bonds and pointed out in each case the conditional words upon which the bonds were exercisable.

29. With respect we do not think that this assists Dragages' case. If the words "if there is default" are substituted for the words "in the event of default" in clause 2 of the bond in this case it will be seen that the point which is being made by Mr Whitehead is no more than a question of semantics. If the bond is read as a whole it is clear that the amount payable has to be determined and the words "payable on demand in writing" do not take matters any further.

30. Mr Whitehead contended that it was necessary for us to consider the intentions of the parties at the time when the bond was entered into. He referred us to correspondence which certainly emphasised the importance of the airport project being expeditiously proceeded with in accordance with a detailed time schedule.

31. While all of this is undoubtedly true there must be a definite limit to the extent to which it is permissible to have regard to the parties intentions. Whatever these intentions may or may not have been the most important consideration for us is to determine what the text of the bond means. As can be seen it is imperative that there should be clear and unambiguous words to establish that a bond is an "on demand" bond. We are satisfied that the wording of the bond in this case was not such as to lead us to this conclusion. The appeal must accordingly be allowed.

32. The next question which has to be considered is the nature of the order to be made. At the hearing below the Judge did consider the nature of the order to be made if the bond was not an "on demand" bond. He held after considering all of the affidavit evidence that in that eventuality Citystate should be given leave to defend conditional upon the whole of the amount of the bond being paid into court within 7 days. Mr Whitehead has indicated that he would not oppose a similar order being made in the event that his primary claim was rejected. We therefore make an order in these terms.

33. The final matter which was considered was the question of costs. Miss Cheng complained that the Judge had been in error when he had indicated that if leave to defend was given Dragages should have their costs. This had been on the basis that it had only been on account of the filing of an amended defence at the last minute that he had been disposed to consider even granting conditional leave to defend.

34. With respect this approach was mistaken. The application before the Judge either could or could not be proceeded with in those circumstances. Mr Whitehead for no doubt good and sufficient reasons did not apply for an adjournment of the application. That should have been the end of the matter so far as costs were concerned. In our view an order that costs should be in the cause should have been made for the hearing before Burrell J and that is the order which we make. So far as the costs of this appeal are concerned as Citystate has been successful we make an order nisi that costs will follow the event. That is Citystate will get their costs of the appeal.