SECRETARY FOR JUSTICE v. THE HONGKONG & YAUMATI FERRY CO. LTD. AND ANOTHER

HCA15329/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.15329 OF 1999

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D E C I S I O N

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1. Immediately before me is the plaintiff's summons brought under Order 14A and Order 18, rule 19 of the Rules of the High Court. Secondly, there is also the defendants' summons asking for leave to amend their Defence and Counterclaim. Before going into the substantive issues at hand, it is necessary to understand some of the background giving rise to these proceedings.

BACKGROUND

2. In April 1990, Government Gazette proposed reclamation along the Central/Wanchai waterfront which would affect the ferry piers currently being used by the 1st defendant, the Hongkong & Yaumati Ferry Co. Ltd ("HYF"). HYF lodged its objection on 23 June 1990. Authorization from the reclamation was gazetted on 3 April 1992, and HYF lodged a claim for compensation as one of the aggrieved parties on 2 April 1993.

3. Negotiations and discussions of the redevelopment of the ferry piers at Jubilee Street and Central continued between the parties. Eventually, the Central/Wanchai reclamation works was entrusted by the Government to the Mass Transit Railway Corporation ("MTRC") under the Entrustment Agreement which was entered into on 26 August 1993. Under this agreement, the MTRC was the employer under the contract for the reclamation works ("the Reclamation Contract") which was awarded by the MTRC to Dragage-Penta-BSG Joint Venture ("the Contractor"). Part of the Reclamation Contract involved relocating and re-provisioning certain ferry piers used by HYF. The new piers, being Piers 4, 5, 6 and 7, would be situated on the new waterfront on the northern edge of the reclaimed land.

4. In August 1993, HYF and its parent company, the 2nd defendant, the Hong Kong Ferry (Holdings) Co. Ltd ("HKF"), approached the Government with a proposal to permit development above the new piers by the construction of commercial and residential premises thereon ("the HYF Proposal"). HYF also proposed to the Government an alternative piling design in the event that the Government accepted the HYF Proposal, because the original piling design for the new piers would have been insufficient to support the superstructure under the HYF Proposal. The Government, MTRC and the Contractor at that time were acting under a tight timetable to meet the construction schedule. A decision whether or not to accept the HYF Proposal could not be made by the Government before the time a decision had to be made whether to proceed with the original piling design under the Reclamation Contract or with the alternative piling design. All parties involved recognized that to instruct a change from the original design to the alternative piling design after work had started based on the original design would cost much more than if the alternative piling design were adopted from the outset. Against such background, the Government agreed to implement the alternative piling design, but only upon HYF/HKF's agreement to indemnify the Government for any additional costs which may be incurred by the Government as a result of implementing it irrespective of whether the HYF Proposal would ultimately be accepted by the Government.

5. As a result, the Government entered into an Indemnity Agreement on 28 September 1993 with HYF/HKF. At the same time, the same parties also entered into a Side Letter dated the same date as the Indemnity Agreement. Pursuant to the Indemnity Agreement, the MTRC was instructed by the Government to, and did, enter into the Supplemental Agreement No.1 with the Contractor on 29 October 1993 under which the Contractor agreed to carry out, inter alia, additional works to implement the alternative piling design.

6. As matters turned out, the Government and HKF/HYF could not arrive at an agreement on the amount of premium payable by HYF for the development rights over the new piers. The final figure assessed by the Government was HK$1.77 billion but HYF was prepared to pay only HK$191 million. Ultimately, a decision was made by the Executive Council on 15 September 1998 to cease further negotiation with HKF/HYF regarding the proposed private treaty grant of development rights over the new piers. The plaintiff brought this action seeking to recover from HKF/HYF the amount of HK$55,434,929.73 under the 35th Demand Note and other sums due or payable by HKF/HYF to the Government under the Indemnity Agreement.

7. One of the defence raised in paragraph 10 of the Defence is as follows :-

"Further or in the alternative, the Indemnity Agreement contained the following implied terms, either by operation of law or alternatively in order to give business efficacy thereto :-

(a) The Government shall act fairly and reasonably in considering, reviewing and negotiating matters related to the HYF Proposal with the view of getting it approved and implemented.

(b) The Government shall use its best endeavours to facilitate HYF and its pursuance of the HYF Proposal with the view of getting it approved and implemented."

8. Paragraphs 27 and 28 of the Defence go on to plead that the Government acted in breach of the alleged implied terms, in that :-

(1) it failed to fix a fair and reasonable land premium; and

(2) it unilaterally and without consultation terminated all negotiations with HYF regarding the alternative HYF Proposal.

9. In paragraph 68 of the counterclaim, it is pleaded as follows :-

"Further, the defendants averred that upon a proper construction of the Side Letter and the Indemnity Agreement as amended, the Government was obliged to ensure that MTRC would duly and properly supervise and the Contractor would duly and properly execute such works under the Supplemental Agreement No.1, or as would be required to implement the HYF Proposal."

10. The Counterclaim goes on to plead in paragraph 69 that the Government was in breach of the aforesaid obligation, in that, certain bored pile extensions (as particularized in Schedule B thereto) were defective.

THE PLAINTIFF'S APPLICATION UNDER ORDER 14A

11. The plaintiff, by its application, asks the court to determine two issues of law under Order 14A. Firstly, the plaintiff says that the implied term pleaded and relied upon by the defendants in paragraph 10 of the Defence ought not to be implied as a matter of law in all the circumstances and that paragraphs 10, 27, 28, 29 (save for the first sentence), 66, 67 and Table 8 of the Defence and Counterclaim ought to be struck out. Secondly, the plaintiff invites the court to rule that upon a proper construction of the Side Letter and the Indemnity Agreement, the alleged obligation pleaded in paragraph 68 of the Defence and Counterclaim does not and cannot exist. Therefore, paragraphs 68 to 77, Schedule B and Table 9 of the Defence and Counterclaim ought to be struck out.

Paragraph 10 argument

12. In respect of this point, the plaintiff submits that at the time of entering into the Indemnity Agreement, HKF/HYF knew full well that they were running a commercial risk of having to indemnify the Government for all additional costs which it might incur in implementing the alternative piling design even though the HYF Proposal might not come to fruition. Secondly, the plaintiff says that the whole object of the Indemnity Agreement was to protect the Government's position regarding any additional costs which it might incur in implementing the alternative piling design irrespective of the outcome of the negotiation regarding the HYF Proposal. Thirdly, the plaintiff contends that the purpose of the Indemnity Agreement was to indemnify the Government against loss, not to facilitate HYF in its pursuit of the HYF Proposal, which raised a myriad of issues for consideration by different government departments. As such, the plaintiff says that the implied term was not needed to make the Indemnity Agreement work. Finally, the plaintiff says that in fixing the land premium, the Government is in the same position as a private land owner and can act according to the landlord's interest, economic or otherwise.

Paragraph 68 argument

13. The plaintiff contends that upon a proper construction of the Side Letter and the Indemnity Agreement, the alleged obligation as pleaded in paragraph 68 of the Counterclaim cannot arise for the following reasons. Firstly, HKF/HYF have not specified which clause or provision of the Side Letter or Indemnity Agreement gave rise to such an obligation on the part of the Government. Secondly, since the Indemnity Agreement was not about the execution of works under the Supplemental Agreement No.1, therefore in no way can the Indemnity Agreement be construed to impose upon the Government the alleged obligation. Clause 3 of the Side Letter only obliges the Government to ensure that it will closely monitor claims for payment under the Reclamation Contract, the procedures for which are set out in clauses 84 and 85 of the General Conditions thereof. Moreover, as between the Government and the MTRC, the procedures regarding payment were set out in Schedule 3 (Terms and Conditions of Payment) to the Entrustment Agreement. The plaintiff further submits that essentially the responsibility for certifying the Contractor's claim of payment fell on the engineer appointed under the Reclamation Contract. Whilst it may appear that the Government undertook some additional obligation under clause 3 of the Side Letter, that obligation is plainly very different from one which requires the Government to ensure that the MTRC would duly and properly supervise the works, or that the Contractor would duly and properly carry out the works. In all the circumstances, the plaintiff contends that no proper construction of the Side Letter or Indemnity Agreement can produce the result contended for by HKF/HYF.

THE PLAINTIFF'S APPLICATION FOR STRIKING OUT UNDER ORDER 18, RULE 19

14. The plaintiff also seeks to strike out paragraphs 72 to 77 of the Counterclaim on the grounds that they disclosed no reasonable cause of action, or are frivolous or vexatious, or are otherwise an abuse of process of the court. Essentially, HKF/HYF alleged in these paragraphs of the Counterclaim that :-

(1) some of the bored pile extensions were defective;

(2) the defects were such that the foundation constructed by the Contractor would not be sufficient or suitable for implementation of the HYF Proposal; and

(3) hence, HKF/HYF was not obliged to indemnify the Government under the Indemnity Agreement and were entitled to be refunded all sums already paid to the Government.

15. For the purpose of this application to strike out, the plaintiff is prepared to assume that the bored pile extensions were defective and, as such, were not sufficient or suitable for the implementation of the HYF Proposal. However, it is contended that the Government's entitlement to be indemnified by HKF/HYF under the Indemnity Agreement is not dependent on the quality of the work carried out by the Contractor since the Government gave no warranty that the works would be free from defects, or would be sufficient or suitable for the implementation of the HYF Proposal. The plaintiff relies on the fact that the Government's entitlement to be indemnified by HKF/HYF is governed by clauses 1, 3 and 5 of the Indemnity Agreement under which HKF/HYF agreed to indemnify the Government for any additional costs which the Government becomes liable to pay to the MTRC or any other person as a result, directly or indirectly, of the Government ordering the MTRC to implement the alternative design. The plaintiff further says that whilst the scope of the "charging" provisions in clauses 1, 3 and 5 of the Indemnity Agreement and the precise amount of the "additional costs" may be open to argument, it is plain that HKF/HYF are not entitled to resist payment or claim any refund merely because the works carried out by the Contractor were defective, insufficient or unsuitable. It is therefore on this basis that the plaintiff seeks to strike out paragraphs 72 to 77 of the Counterclaim.

THE DEFENDANTS' CONTENTION

16. On the Order 14A application by the plaintiff, the defendants take two preliminary points. The first preliminary point taken is that on the question of whether a term ought to be implied into a contract and on the question of construction of a Contract, these are not pure questions of law but questions of mixed law and fact. In the present case, where there are disputed facts between the parties which affects the question whether the implied term as contended for by the defendants ought to be implied into the Indemnity Agreement and which also affects the proper construction of the Side Letter in the manner as argued by the defendants, these matters are therefore not suitable for determination under Order 14A.

17. The second preliminary point taken by the defendants is that the determination of the implied terms, even if it is in the plaintiff's favour, would not finally determine the entire cause or matter and would not fully dispose of the defendants' Counterclaim by reason of the fact that the defence would still be entitled to proceed in this case with their defence of set off and the counterclaim for overpayment. Moreover, it is submitted by the defendants that paragraphs 72 to 75 of the Defence and Counterclaim raises an argument which is independent of the implied term issue. Thus, say the defendants, criterion (b) in Order 14A, rule 1(1) is not met.

18. Apart from the preliminary points taken by the defendants, the defendants further rely on the following substantive arguments. Insofar as the implied term is concerned, the defendants accept that there was a commercial risk involved in entering into the Indemnity Agreement. However, the defendants say that that was a risk that the Government would not accept the HYF Proposal which has to go through and be approved by a number of different government departments. As matters turned out, the HYF Proposal was in fact approved by all the relevant government departments, such as the Town Planning and the Buildings Department. The obstacle to its being implemented was not the approval from these government departments but the failure to come to an agreement as to the premium to be paid to the Government. This, say the defendants, was not part of that commercial risk because the Government had not acted fairly and reasonably in assessing the land premium in that it did not follow its usual practice and principle in assessing such premium. In this respect, reliance is placed by the defendants on the affidavit evidence of Colin Lam of the repeated assurances by senior government officials given to him during the course of negotiations to "trust the Government". This, the defendants submit, shows that there was to be action by Government which the defendants will have to "trust". Therefore, it is argued by the defendants there must be implied into the Indemnity Agreement that the Government will act fairly and not arbitrarily.

19. It was further submitted that when viewed from all the facts of the case, the objective intention of the parties must be that the Indemnity Agreement was intended by them to facilitate the implementation of the HYF Proposal for otherwise the additional works would not have been ordered by the Government and to be paid for by the defendants. It was also submitted that the implied term was necessary to give business efficacy to the Indemnity Agreement and to ensure that the Government cannot, having entered the Indemnity Agreement, thereafter unreasonably and arbitrarily reject the HYF Proposal.

20. It is further submitted by the defendants that the Government is not entitled to depart from its usual position in assessing land premiums and that if it does, it may be subject to judicial review. In this respect, the defendants seek assistance from the following cases : Hong Kong & China Gas Co. Ltd v. Director of Lands [1997] 3 HKC 520; Mercury Energy Ltd v. Electrical Corporation of New Zealand Ltd [1994] 1 WLR 521 and Matteo Grassi SPA v. Airport Authority [1998] 3 HKC 25. Moreover, the defendants submit that departure from the usual practice and guidelines in assessing land premium by the Government was not an assumed risk of the defendants in entering the Indemnity Agreement as that would make no commercial sense for the defendants to do so.

21. Insofar as the issue of the defective bored piles are concerned, the defendants submit that Supplemental Agreement No.1 is part and parcel of the deal between the parties, resulting into the entering of the Indemnity Agreement by them. Reliance is placed by the defendants on clause 3 of the Side Letter whereby the Government undertakes to "ensure that it will closely monitor all such claims by the Contractor in order to ensure that any payment by MTRC is justified, and is strictly in accordance with the terms of the Reclamation Contract and Supplemental Agreement No.1.". By this, the defendants say that the Government has an obligation to ensure payment by the MTRC to the contractors under the Reclamation Contract and Supplemental Agreement No.1 is justified. That presupposes that the works have to be executed in accordance with the Reclamation Contract and the Supplemental Agreement No.1. The defendants say that paragraph 68 of their Defence and Counterclaim merely pleads one particular aspect of that obligation of the Government under clause 3 of the Side Letter.

22. As for the Entrustment Agreement referred to by the plaintiff in its argument, the defendants say that it is a matter for the Government to ensure that appropriate changes are made to the Entrustment Agreement to implement its obligations under clause 3 of the Side Letter. That is not a matter for the defendants to dictate to Government but that the defendants can only relied on the obligation as contained in clause 3 of the Side Letter vis-à-vis the Government.

23. Turning now to deal with the defendants' arguments as to the striking out issue, it was submitted that a court should not strike out any part of any pleading unless it is clearly unarguable. Moreover, it was also submitted that a pleading should not be struck out if the validity of the action depends on facts which are in dispute. Here, there are factual disputes as to what constitutes the "additional works" as defined in the Supplemental Agreement No.1. There is also evidence that the piles were found to be defective (the voluntary particulars given by the defendants referred). There is also factual dispute as to whether the rectification works were sufficient to remedy such defects. There is also evidence to show that the HYF Resident Structural Engineer thought that the pile extension was so defective that he had to put on record with the Buildings Department. Lastly, to what extent such defects were rectified is a matter depending on the evidence to be presented at the trial.

24. On the assumption that the bored piles were defective (as conceded by the plaintiff for the purpose of this present application), it is argued by the defendants that even though the Government did not give any express warranty as to the quality of the works, the fact that the Government undertook to monitor the claims and to ensure that payment made by MTRC to the contractors were justified must mean that the works must not be defective before the defendants would be under an obligation to pay for them. It is further submitted by the defendants that if, for example, no additional works had been done or that the wrong type of work was done, in that event, the defendants would not be obliged to pay for them. Therefore, whether the works that was actually done was so defective that the defendants were not obliged to pay must be an issue of fact for the trial.

25. Lastly, it is submitted on behalf of the defendants that upon a proper construction of the Indemnity Agreement, the Side Letter and the Indemnity Agreement No.2, "additional cost" and "additional works" must mean the additional works which would be in a position to put the works of the Reclamation Contract in a state sufficient to receive the HYF Proposal when implemented. Since the defective bored piles cannot be in such a state as to implement the HYF Proposal, therefore, it is submitted that the defendants' liability to pay cannot arise.

DECISION

26. Accepting that whether or not a term is to be implied into an agreement and also what is the proper construction of a term in a contract are matters of law for the court to decide, nevertheless in so deciding, a court must have regard to all the surrounding circumstances known to the parties at the time the agreement was entered into in order to determine the true intention of the parties in entering that agreement. Therefore, where there are disputed facts which may affect the surrounding circumstances and which may be relevant for the court's consideration in dealing with such questions, there must necessarily be a determination of such disputed facts before the question of implied terms or proper construction of a contract can be decided.

27. In the present case, one area of factual dispute concerns the telephone conversation which Mr Colin Lam, Vice Chairman of Henderson Land Development Co. Ltd (both defendants being part of the Henderson Land Group since June 1981) had with Mr Kevin Mak on 21 September 1993, in which phone conversation, Mr Mak, being the deputy to the Secretary for Transport, is alleged to have told Mr Lam that Mr Lam should "trust the Government". Not only is this allegation a fact in dispute, but that the plaintiff have attempted to negate that allegation in the second affirmation of Hung Hei Yeung where in paragraph 5.2, Mr Yeung states that Mr Mak told him that he (Mr Mak) was unable to recall precisely what was said to Mr Lam, but that Mr Mak thought it would have been most unusual for him, a civil servant, to have given such an assurance. Whilst it may be permissible for an affidavit used in interlocutory proceedings to contain statements of information or belief with the source and grounds thereof (see Order 41, rule 5(2)), however, proceedings under Order 14A are not interlocutory proceedings since such an application will decide the rights of the parties or may even terminate the action or finally dispose of it. In this respect, I agree with Mr Tang for the defendants that that part of the affidavit of Mr Yeung stating what he was told by Mr Mak is not admissible for the present application.

28. A second area that needs to be determined on the facts at the trial concerns the assessment of land premium by the Government. Was there a usual practice and normal guidelines for such assessment? Were the defendants aware of such a practice? Did the defendants have in mind such practice and guidelines, and did they believe that the Government would follow such practice and guidelines at the time they entered into the Indemnity Agreement? These are all matters that the trial judge will have to hear evidence on and determine at the trial of this action. They are matters that are relevant to the determination of whether or not there should be the implied term as alleged by the defendants or what should be the proper construction of clause 3 of the Side Letter in this case.

29. Lastly, it is also factually disputed between the parties as to the defective bored piles extension. What was the extent of the defect and to what extent had those defects been remedied? Were the defects such that the HYF Proposal could not be implemented even if approved? These are again matters which the trial judge must decide upon after hearing evidence.

30. For these reasons, as well as the fact that I agree with the submissions put forward by Mr Tang and which I have endeavoured to set out in gist above, I have come to the conclusion that the two issues of law relating to the implied term, relied on by the defendants in respect of the Indemnity Agreement and the proper construction to be placed on clause 3 of the Side Letter, are not matters which could be properly determined by court under Order 14A at this stage.

31. It follows from this conclusion that the striking out application under Order 18, rule 19 cannot succeed either since the subject matter of the striking out application is dependent upon the determination of the two issues of law under Order 14A. Accordingly, the plaintiff's summons is dismissed.

32. I shall now hear the parties on costs, the defendants' application to amend as well as the summons for directions.