XCHRX HONG KONG HOUSING SOCIETY v. CHINA INSURANCE CO. LTD.

HCCT104/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.104 OF 1999

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J U D G M E N T

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1. By this summons the plaintiff seeks summary judgment pursuant to Order 14 of the Rules of the High Court against the defendant in the sum of $32,460,000. The plaintiff contracted with Hing Lee Construction Company ("Hing Lee") in 1996 whereby Hing Lee became the main contractor in a housing development in Tseung Kwan O. The contract required Hing Lee to provide a surety bond to the plaintiff ("the Bond"). The defendant insurance company provided the Bond. The important clauses in the Bond are (3), (4) and (5) :-

"[3] NOW THE CONDITION of the above-written Bond is such that if the Main Contractor shall duly perform and observe all the terms, provisions, conditions and stipulations of the Contract and the Agreement on the Main Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if on default by the Main Contractor the Surety shall financially 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 alterations in terms of the Contract made by agreement between the Employer and the Main Contract [sic] or in the extent or nature of the Contract Works 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.

[4] Any claims under this Bond shall be payable by the Surety on first demand by the Employer, provided they are received in writing by the Surety at his above mentioned office within the validity of the Bond, accompanied by the declaration in writing of the Employer, stating that the Main Contractor has failed to perform and observe all terms, provisions, conditions and stipulations of the Contract or the Agreement on the Main Contractor's part to be performed and observed according to the true purport, intent and meaning thereof, and that the amount claimed represents full and total reimbursement of damages sustained by the Employer as a result of such default by the Main Contractor and such statement shall be accepted as conclusive evidence of such default and that amount claimed as damages is payable to the Employer under this Bond.

[5] This Bond shall remain valid for receipt of claims as aforesaid until the date of Practical Completion as certified by the Architect to the Contract (as evidenced to the Surety by presentation to him by the Main Contractor of a copy of the Certificate of Practical Completion issued by the Architect) after which date the Bond shall become null and void."

2. The bond was for the sum of $32,460,000.

3. Problems emerged between the plaintiff and Hing Lee and by a letter of 31 March 1998 they determined Hing Lee's employment under the contract. The letter stated :-

"We refer to the Notice of Default issued by Simon Kwan & Associates Ltd dated 5 March 1998 specifying that you have failed to proceed regularly and diligently with the Works.

We are satisfied that this default has continued during the fourteen-day period after receipt of such notice and has been repeated thereafter.

We therefore write to give you notice under Clause 25(1) of the Conditions of Contract that your employment under the Contract dated 27 May 1996 is hereby determined with immediate effect."

The letter of 5 March referred to in this letter detailed the alleged defaults in compliance with clause 25(1) of the main contract which provided as follows :-

"If the Main Contractor shall make default in any one of the following respects, that is to say:-...(b) if he fails to proceed regularly and diligently with the Works...then the Architect may give to him a notice...specifying the default, and if the Main Contractor either shall continue the default for fourteen days after receipt of such notice or shall at any time thereafter repeat such default (whether previously repeated or not), then the Employer without prejudice to any other rights or remedies, may within ten days after such continuance or repetition by notice...forthwith determine the employment of the Main Contractor under this Contract, provided that such notice shall not be given unreasonably or vexatiously."

After determining Hing Lee's employment, the plaintiff entered into a new contract dated 18 September 1998 with Yiu Wing Construction Co. Ltd ("Yiu Wing") to complete the works. The development continued. The architect to the project, Simon Kwan & Associates remained the same. The architect issued its "certificate of practical completion" to Yiu Wing on 21 June 1999 certifying completion on 23 March 1999.

4. The plaintiff's call on the Bond against the defendant, to which this application refers, was by a letter of 13 September 1999 in the following terms :-

"The Employer hereby declares that the Main Contractor under the Bond and the Contract referred to in the Bond has failed to perform and observe all terms, provisions, conditions and stipulations of the Contract or the Agreement on the Main Contractor's part to be performed and observed according to the true purport, intent and meaning thereof. This declaration is conclusive evidence of such default by the Main Contractor. Further, the damages sustained by the Employer as a result of the said default are as set out in the attached schedule. This amount exceeds the amount of the Bond. The amount of the damages set out in the Schedule represents the full and total reimbursement of the damages sustained by the Employer as a result of such default by the Main Contractor. This declaration by the Employer is conclusive evidence that these damages are payable to the Employer under the Bond.

Accordingly, the Employer now calls upon you, the Surety, to pay forthwith to the Employer the sum of HK$32,460,000.00 being the limit of the amount guaranteed by the Bond."

5. Because clause [4] (supra) of the Bond contains a conclusive evidence clause, the bond itself becomes, in effect, an unconditional on-demand performance bond, once the conclusive evidence clause has been complied with. There is no dispute that it was complied with.

6. The defence submits that it is at least arguable that there is no liability on it to pay under the Bond on either one of two grounds :-

(a) The Bond became null and void because it had expired on the architect giving a certificate of practical completion on 21 June 1999 pursuant to clause 5 of the bond (supra).

(b) The Notice of Determination was given late. The Notice was dated 31 March 1998. It should have been given no later than 29 March. Accordingly, the termination under the contract was unlawful.

7. I shall deal with each point in turn.

(a) Expiry of the bond

8. I find this argument to be unsustainable. Both a common sense reading of the relevant clause and a recent U.K. authority combine to relegate this submission to the unarguable.

9. Mr Westbrook for the defendant argues that the words in the clause "Architect to the Contract" could be construed in the following way. The "architect to the contract" between the plaintiff and "Hing Lee" was Simon Kwan & Associates. They issued a practical completion certificate in June 1999 because the same architect continued under the new regime with "Yiu Wing". It is submitted that as the architect, Simon Kwan & Associates, issued a certificate and they had been the architect when Hing Lee had been employed, then the Bond comes to an end in accordance with clause 5.

10. I find this submission to be wholly without merit and unarguable. There is no dispute that the certificate in June 1999 was issued to the new contractor, Yiu Wing. It can only have related to a certification of the works completed by them and can only have been given by the architect in its capacity as the architect to the later contract which had nothing to do with Hing Lee.

11. If this conclusion requires any support by authority, it is found in the case very properly and helpfully brought to the court's attention by Mr Westbrook, De Vere Hotels Ltd v. Aegon Ins. Co. (U.K.) Ltd, C.I.L.L. February 1998. He valiantly sought to distinguish it on the facts but the inescapable reality was that on the issue in point, it was on all fours with the case before the court. There were no material differences in the wording of the bonds in question and the argument advanced by the defence was identical. The judge in the Official Referees Business in London, His Honour Judge Lloyd concluded :-

"... In my view they can only reasonably be read as referring to the statement of practical completion to which Pentagon would have been entitled had they completed the works which they undertook to do and reject the submission that they should be read as referring to 'any' certificate of practical completion."

12. Mr John Bleach SC for the plaintiff correctly relies on the commentary to this case when it was said that the judge had little difficulty in :-

"... rejecting the Bondsman's argument that the expression 'statement of practical completion' under the bond did not mean any certificate or statement finding that it must relate to the certificate issued under the contract for which the bond was to provide security for in the event of non-performance. This must make sense otherwise in this particular case the bondsman would have been able to escape liability for the very eventuality for which the bond was put in place."

(b) Late notice of determination

13. I find this argument also to be unsustainable. Mr Westbrook's submission is as follows.

14. The notice of determination pursuant to clause 25 stated that the alleged failure "has continued during the 14-day period after the receipt of such notice and has been repeated thereafter". The 14-day period therefore runs from 5 March to 19 March. The 10-day requirement in clause 25 therefore runs to 29 March whereas the notice was dated 31 March.

15. He submits that if it is alleged that the defaults were repeated after the 14-day period, the notice should say so and say when. Thus, if the notice, on either view, was late, it is invalid and of no effect.

16. The submissions must fail for the following reasons. The reference to the defaults being "repeated thereafter" can only refer to after 19 March, the end of the 14-day period. The 10-day period in clause 25 is stated to be after the "continuance or repetition". If as alleged, the default is on-going, the 10-day period must also be on-going whilst the default is being repeated.

17. By virtue of the wording of clause 4 of the Bond itself, read together with the wording of the call on the Bond in September 1999, there is conclusive evidence of the default being repeated. The call attached a schedule of damages. The schedule listed the damages caused by the determination of Hing Lee. Thus, the plaintiff's compliance with clause 4 triggers the defendant's inescapable liability. For the sake of completeness, the call on the Bond states :-

"By this letter the Employer under the above mentioned Bond makes demand to you, the Surety, for payment under the Bond. The terms defined in the Bond are used in this letter.

The Employer hereby declares that the Main Contractor under the Bond and the Contract referred to in the Bond has failed to perform and observe all terms, provisions, conditions and stipulations of the Contract or the Agreement on the Main Contractor's part to be performed and observed according to the true purport, intent and meaning thereof. This declaration is conclusive evidence of such default by the Main Contractor.

Further, the damages sustained by the Employer as a result of the said default are as set out in the attached schedule. This amount exceeds the amount of the Bond. The amount of the damages set out in the Schedule represents the full and total reimbursement of the damages sustained by the Employer as a result of such default by the Main Contractor. This declaration by the Employer is conclusive evidence that these damages are payable to the Employer under the Bond."

18. I find it unarguable to suggest that this does not comply with clause 4 of the Bond. Once triggered, the conclusive evidence clause must be given effect.

19. Finally and in any event, the defendant has no defence to the plaintiff's claim for the following additional reason. A proper determination of the contract between the plaintiff and Hing Lee is not a condition precedent for payment under the Bond between the plaintiff and the defendant. It is proof of Hing Lee's default which creates the liability under the Bond, not the validity of the determination by the plaintiff as against Hing Lee.

20. For these reasons, I am satisfied that the plaintiff has crossed the high threshold necessary for judgment to be entered in its favour in Order 14 proceedings. There are no arguable defences. The defendants were parties to a strict on-demand performance bond. On the facts of the case, there are no conditions upon which they can rely to avoid liability.

21. Counsel also addressed the court on the question of costs and certificates for counsel. I make the following order :-

Summary judgment in the sum of HK$32,460,000 together with interest at the rate of 1% above prime rate from 13 September 1999 to the date of judgment and at the judgment rate thereafter until full payment, together with costs to be taxed and certificate for two counsel.