BOUYGUES S.A. and Another v. SHANGHAI LINKS EXECUTIVE COMMUNITY LTD.

1998 No. A3259

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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The background

1. The Plaintiffs are construction companies. The 1st Plaintiff ("Bouygues") is a company incorporated in France, and the 2nd Plaintiff ("Pomerleau") is a company incorporated in Canada. They tendered for the construction of a development in the Pudong area of Shanghai. The initial phase of the development to which the Plaintiffs' tender related consisted of the construction of 50 residential villas and the carrying out of various infra-structure works. The Plaintiffs' tender was successful, and as a result they concluded a contract for the villas and the infrastructure works ("the construction contract") with the developers, Shanghai Pudong New Area Links Executive Community Ltd. ("SPNA"). The contract price was US$33.25m.

2. In due course, a sum equivalent to the contract price was placed, with other sums, in a segregated US dollar bank account in Hong Kong in the name of the Defendant (of which SPNA was a subsidiary), and payments due to the Plaintiffs under the construction contract were made from that account. However, there came a time when the parties fell out, and the construction contract was terminated. The Plaintiffs contend that SPNA failed to pay a sum amounting to almost US$3m., which was due and owing to the Plaintiffs as a result of the issue of an interim certificate. Accordingly, on 25th February 1998, the Plaintiffs terminated the construction contract, and they contend that they thereupon became entitled to a sum in excess of US$11m., being the balance payable to them in respect of works performed and materials supplied - after deducting such payments as had previously been made to them - together with a sum equivalent to the Plaintiffs' loss as a result of the termination of the construction contract.

3. For its part, SPNA contends that the Plaintiffs were themselves in breach of the construction contract in various respects. Those breaches were so serious that on 3rd February 1998 SPNA had itself terminated the construction contract, and when SPNA's set-offs and claims for liquidated damages are taken into account, it is likely, so it is claimed, that the Plaintiffs will be found to owe it money. However, these various issues are not be litigated in the courts of Hong Kong. That is because it is common ground that the parties agreed to resolve differences of this kind by arbitration.

The current action

4. The issue to which the present proceedings relate concerns the sums currently in the segregated account. The Plaintiffs' primary case is that those sums are being held by the Defendant on trust for the Plaintiffs. Accordingly, this action has been brought by the Plaintiffs to obtain a declaration to that effect, and for an order for payment to the Plaintiffs, out of that account, of the sums found to be due to the Plaintiffs in the arbitration. In case the present proceedings conclude before the conclusion of the arbitration, the Plaintiffs ask for an injunction which, in effect, will freeze the account, up to the amount claimed by the Plaintiffs in the arbitration plus interest, until a final award is made in the arbitration.

5. The Defendant strongly denies that it holds the sums in the segregated account on trust for the Plaintiffs. In the light of that denial, the Plaintiffs' secondary case is that the Defendant agreed that the sums in the segregated account would only be used to pay to the Plaintiffs the sums due under the construction contract. Accordingly, the Plaintiffs contend that even if they are not entitled to a declaration that the sums currently in the segregated account are held by the Defendant on trust for them, they are nevertheless entitled to the other relief sought in the action on the ground of breach of contract or by operation of the doctrine of promissory estoppel.

The history of the action

6. When the action was commenced, the Plaintiffs applied for an interlocutory injunction which had the effect of freezing the account, up to the amount claimed by the Plaintiffs in the arbitration, until the trial of the action or further order. The injunction was granted - even though it would have had the effect of preventing the sums in the segregated account from being used for the time being to pay the new contractors which SPNA had engaged. However, SPNA did not actually need the amount in the segregated account which the Plaintiffs wanted to freeze until June. Accordingly, granting the injunction would preserve the position of both sides, without causing either of them serious harm, if a speedy trial was ordered and judgment was given in the action early in June. In those circumstances, a speedy trial of the action was ordered, and I wish to pay tribute to the solicitors on both sides for their industry in enabling this action to be tried so quickly.

The relevant facts

7. The Plaintiffs' concerns about payment. SPNA is an enterprise established under the law of the PRC. It had no known assets apart from its interest in the development. Understandably, the Plaintiffs wanted to be assured that they would in due course be paid in full. The method by which those concerns would be met was agreed at a meeting to finalise the terms of the tender ("the wrap-up meeting"). It was agreed that the entry into force of any construction contract would be conditional on (a) the money necessary to pay the Plaintiffs being deposited into an "escrow" account, which would only be available for payments under the construction contract, and (b) an acceptable mechanism for the release of the sums in this account being agreed. Otherwise, a payment guarantee would have to be provided.

8. The Plaintiffs submitted their tender to SPNA on 14th June 1996. It did not identify the conditions to which the entering into force of any construction contract would be subject. It merely stated that the Plaintiffs could not be required to commence work under the construction contract until

"receipt by the [Plaintiffs] from [SPNA] of satisfactory evidence of the entering into force of the financing arrangements for the Project."

Even that was ambiguous. The phrase "financing arrangements" is more apt to describe the arrangements which SPNA had made to fund the development, i.e. what SPNA's sources of funding were, rather than the arrangements relating to the making of payments to the Plaintiffs. Indeed, even on the Plaintiffs' case, the establishment of an account into which would be deposited the sums necessary to pay to the Plaintiffs the sums due under the construction contract, and which could only be used to pay to the Plaintiffs the sums due under the construction contract, was only raised a few days before the construction contract was executed.

9. The explanation given by Mr. Angus Cheng, Bouygues' China Development Director, for not raising this issue until so much later was that the Plaintiffs' strategy was not to do anything which might "put the client off". If SPNA were asked how the Plaintiffs could be assured that they would be paid, SPNA might be disinclined to accept the Plaintiffs' tender. As Mr. Cheng said:

"... we need[ed] to bring that issue up at the point where we [thought] we [could] strike and obtain what our original intended objective was."

In other words, the strategy was to close the deal, and raise the issue only when SPNA would be least resistant to providing security for the payments. I have no reason to doubt any of this, and I find that it was always the Plaintiffs' intention to raise what had been agreed at the wrap-up meeting when the time was thought to be right.

10. The funding of the development. The development was originally to be funded by the assignment of medium-term leases to multi-national corporations which needed housing for its expatriate staff in Shanghai. This method of funding became unavailable, and the upshot was that for the time being the Plaintiffs' tender was not considered further.

11. In due course, a number of investors were found who were willing to fund the development in return for equity participation in it. The terms on which they would invest in the development were included in a subscription agreement between the various investors and the Defendant dated 13th March 1997. SPNA was, as I have said, a subsidiary of the Defendant, which was itself a company incorporated in the British West Indies. Its only asset of any value was the right to use for 70 years the land to which the development related. It is registered in Hong Kong as an overseas company under Part XI of the Companies Ordinance (Cap. 32) and has a place of business in Hong Kong. It was run by Mr. Barry Hansen, one of its directors.

12. Under the subscription agreement, the investors agreed to pay an Aggregate Subscription Price, and Art. 9.4. identified how that price was to be paid:

"The Aggregate Subscription Price of the Subscribers shall be paid as follows: (a) US$43,000,000 to be applied to the Contract Price payable under the Construction Contract and other construction contract(s) for the infrastructure and for the first total of 100 houses shall be deposited into a segregated US$ account, such account shall have as joint signatories Barry Hansen and the Chief Financial Officer of the [Defendant], and while the office of the Chief Financial Officer of the [Defendant] is vacant, a director appointed by one of the Subscribers to be a signatory in accordance with the Annual Business Plan..."

It was pursuant to this provision that a US dollar account was opened at the Des Voeux Road branch of the Standard Chartered Bank, and on 1st April 1997 the sum of US$41,920,915.00 was transferred to it from sums provided by the investors.

13. The resurrection of the Plaintiffs' tender. The finding of investors who were willing to fund the development resulted in Mr. Hansen asking the Plaintiffs in the middle of February 1997 whether their tender was still valid. The Plaintiffs were still keen to win the construction contract, and on 15th March 1997 they submitted a revised tender. Mr. Hansen met Mr. Cheng on 17th March, and told him that he did not have any "particular problem" with the Plaintiffs' price. However, he told Mr. Cheng that he thought that the advance payment of 15% of the tender price which the Plaintiffs were seeking was high, and he proposed that the advance payment be 10%, and that a further 5% be held in what he described as an "escrow" account in Canada.

14. The negotiations over the terms of the construction contract. It was from 20th March that the negotiations over the detailed terms of the construction contract intensified Those negotiations took place in Hong Kong, which is where both Mr. Cheng and Mr. Hansen were based, at the offices of Messrs. Stikeman, Elliott, a firm of Canadian lawyers who were acting for SPNA and the Defendant. The lawyer at Stikeman, Elliott who was advising them was Mr. Clifford Ng. During the negotiations, Mr. Cheng was in contact with senior executives in Bouygues and Pomerleau, in particular the President of Pomerleau, Mr. Pierre Pomerleau. From the Defendant's point of view, the negotiations had to be conducted quickly, because the investors' funding of the development was conditional on a construction contract being signed by 26th March, unless the investors agreed to extend that deadline.

15. The negotiations relating to payment. It was on 26th March that Mr. Cheng first raised with Mr. Hansen and Mr. Ng the Plaintiffs' concerns about being paid in full. Mr. Hansen and Mr. Ng sought to meet those concerns by a letter from Mr. Hansen which Mr. Ng had drafted. It was faxed to Mr. Cheng that afternoon. The letter read:

"As you requested, I confirm that the Contract Price under the contract for the construction of certain portions of a development known as Shanghai Links Executive Community in ... an amount not to excess US$33,000,000 but not less than the contract amount will be held in a segregated bank account of [the Defendant] for payments under the construction contract."

This letter was unacceptable to the Plaintiffs, because it did not secure payment for the Plaintiffs of the sums due under the construction contract. That appears from the instructions which Mr. Cheng received from Mr. Pomerleau, to whom a copy of Mr. Hansen's letter had been faxed. Those instructions were contained in two faxes sent to Mr. Cheng on the afternoon of 26th March (Canadian time), and which arrived in Hong Kong in the early hours of the morning of 27th March. The first of the faxes contained the following passage:

"LETTER FROM BARRY HANSEN

Absolutely not enough, we need more information on the money flow and the release mechanism. Where will the money be held? We believe it should be in a trust account with Stikeman Elliott outside China. We are open to any other way that would be as safe as this one. We understand that the amount shown in this letter is $33m which is different from the contract amount of $33,250,000. It should be the same as contract value."

The second of the faxes identified as one of the "essential" conditions for the contract to be enforced:

"... evidence from the employer and Stikeman Elliott and the banks (investors) to the contractor that the money (US$33,250,000) is available for construction with a release mechanism satisfactory to contractor."

16. The negotiations over the terms of the construction contract reached their climax on 27th March. They carried on throughout the day, and the deal was finally struck in the early hours of the morning of 28th March. Those negotiations included negotiations over the Plaintiffs' concerns about being paid in full. At some stage on 27th March, Mr. Ng was informed of Mr. Pomerleau's dissatisfaction with Mr. Hansen's letter of 26th March. Accordingly, Mr. Ng sent a further letter by fax to both Mr. Cheng and Mr. Pomerleau. After reciting who his clients were, Mr. Ng wrote:

"We advise that under an agreement entered into by the [Defendant], all of the funds required to pay the US$33,250,000 Contract Price will be deposited in a segregated US$ account of the [Defendant] at Standard Chartered Bank in Hong Kong. Payment of the Contract Price under the Contract will be made from this account and funds can be paid out of this account by the signature of Barry Hansen and one other director of the [Defendant]."

Mr. Pomerleau thought that this letter could form the basis of an agreement which provided for the Plaintiffs the security which they sought. Accordingly, within a few minutes, Mr. Pomerleau sent a fax to Mr. Ng proposing that his letter be amended to state that the sums due under the construction contract would be held in a trust account in Hong Kong in the name of Stikeman, Elliott, and that Stikeman, Elliott, acting as trustee, would release to the Plaintiffs the sums due under the construction contract as they fell due.

17. The telephone conversations with Mr. Pomerleau. It is here that the parties' recollection of what occurred diverge. Mr. Pomerleau's evidence was that following this fax he spoke to Mr. Ng over the telephone. Mr. Ng said that although Stikeman, Elliott had agreed to act as trustee for the Plaintiffs' 5% advance fee (which was what the current draft of the construction contract provided for), Stikeman, Elliott was unwilling to act as trustee for all the funds intended to be used to pay to the Plaintiffs the sums due to them under the construction contract. Thus, Mr. Pomerleau's proposal was not rejected on the basis that the Defendant was unwilling to enter into a trust arrangement or some other contractual or enforceable obligation to secure payment to the Plaintiffs of the sums due under the construction contract.

18. However, Mr. Pomerleau still thought that Mr. Ng's letter could form the basis of an agreement which provided for the Plaintiffs the security which they sought. Accordingly, he told Mr. Ng that he would be willing "to accept the arrangement" in Mr. Ng's letter if the Defendant's investors

"... were also party to the arrangements and agreed to ensure that the funds in the Account could be used only for the purpose of effecting payment to [the Plaintiffs] of the payments that would be due to them under the terms of the Construction Contract." (My emphasis).

Mr. Pomerleau's evidence continued:

"After taking instructions Mr. Ng agreed to this."

19. Mr. Hansen's evidence was that it was he who spoke to Mr. Pomerleau following Mr. Pomerleau's fax. He told Mr. Pomerleau that the Defendant was unable to meet the requirement for an "overall trust". He informed Mr. Pomerleau that under the subscription agreement a sum in excess of US$40m. had to be set aside for the construction of the development. However, Mr. Pomerleau wanted to be assured that such funds were in place. Mr. Hansen told him that the provision of the funds was dependent only on the finalisation of the terms of the construction contract. He added that he might be able to obtain written confirmation of that from the investors. Mr. Pomerleau said that such a letter, subject to agreeing its wording, would appear to be acceptable.

20. Accordingly, the critical difference between the parties is that Mr. Pomerleau claims that what had been agreed was that there were funds in place from which the Plaintiffs would be paid, whereas Mr. Hansen claims that Mr. Pomerleau had merely been assured that there were funds in place from which the Plaintiffs could be paid. For the reasons which I shall explain later, it has not been necessary for me to resolve this conflict in the evidence.

21. The letters from the investors. Within an hour or so, Mr. Ng faxed a further letter to Mr. Cheng and Mr. Pomerleau. That letter was in identical terms to his earlier letter that day, but it included a draft of the confirmation which the representative of a number of the Defendant's investors was prepared to give. The draft read:

"The undersigned is the representative of several investors which has agreed to make an investment in the [Defendant]. We confirm that in accordance with the terms of such investment, the [Defendant] is required to place the US$33,250,000.00 Contract Price in a segregated US dollar account of the [Defendant] for payment of the Contract Price. Payment of the Contract Price will be made from the [Defendant's] account by signature of Barry Hansen and a director appointed by one of the investors as described above."

Mr. Pomerleau believed that this draft amounted to confirmation that US$33.25m. would be deposited in a segregated account, and that those funds could only be used to pay to the Plaintiffs the sums due under the construction contact. However, he amended the draft by adding various phrases which in his view re-inforced the Defendant's commitment and made the investors a party to the commitment which he believed he had obtained from the Defendant. Accordingly, within an hour or so of receiving the draft, he faxed his amended draft to Mr. Ng. The draft, with his amendments in italics, read:

"The undersigned is the representative of several investors which has agreed to make an investment in the [Defendant]. We confirm that in accordance with the terms of such investment, the [Defendant] is required to place the US$33,250,000 Contract Price in a segregated US dollar account of the [Defendant] for payment of the Contract Price. We agree that payment of the Contract Price will be made to you according to terms and conditions of the construction contract signed between the contractor and the developer from the [Defendant's] account by signature of Barry Hansen and a director appointed by one of the investors as described above."

These amendments were acceptable to the Defendant's investors, and were included in the three letters which the three groups of investors eventually signed. The only difference was that the first sentence of the letters in their final form read:

"The undersigned is the representative of one of several investors which have agreed to make an investment in the [Defendant]."

Also included in the investors' letters in their final form were two things which Mr. Pomerleau had mentioned to Mr. Ng over the telephone: the letters had to be addressed to the Plaintiffs, and had to be signed by Mr. Hansen confirming the arrangement set out in the letters on behalf of SPNA.

22. A later telephone conversation? Mr. Hansen claims that later on 27th March he received a telephone call from Mr. Cheng, in which Mr. Cheng raised again the question of an "overall trust". Mr. Hansen was annoyed that Mr. Cheng was trying to resurrect a suggestion which had already been rejected, and he claims that he threatened to return to another contractor who had tendered for the construction contract, and for whom the investors had in any event indicated a preference. Mr. Hansen claims that after a short break in the negotiations, he spoke again to Mr. Pomerleau and Mr. Cheng, who apologised for going back over the same ground. For their part, Mr. Pomerleau and Mr. Cheng do not accept that this later conversation took place. They recall Mr. Hansen's anger, but they say that that was when the proposal that the sums due under the construction contract should be held in a trust account in the name of Stikeman, Elliott was first raised. Again, I shall explain later why I have not found it necessary to resolve this conflict in the evidence.

23. The signing of the investors' letters. The construction contract was executed on 28th March, but backdated to 22nd March. Section 7 provided:

"The obligations of the Contractor to commence its work hereunder shall be subject to the following:

(a) payment arrangements of the Developer satisfactory to the Contractor acting reasonably;

(b) receipt by the Contractor of the payment of 10% of the Contract Price for mobilization fee as contemplated in the Construction Contract; and

(c) receipt by Stikeman, Elliott, in trust, of the payment of 5% of the Contract Price for equipment and material originating from Canada in accordance with the Construction Contract."

The reason for the inclusion of section 7(a) was that the representatives of some of the investors were not yet available to sign the letters, and it was contempleted that the parties' obligations under the construction contract would only arise once the investors' letter had been executed. Moreover, a side letter had to be signed by the Plaintiffs providing for a 10% performance bond once the Plaintiffs had been paid the sums to which sections 7(b) and 7(c) referred. Accordingly, until the execution of these letters, it had been agreed that the construction contract would be held in abeyance. In the event, the three letters from the representatives of the investors were signed and sent to the Plaintiffs a few days after 28th March. They were accompanied by Mr. Ng's letter of 27th March, now re-dated 28th March.

24. Three documents. In the interests of completeness, I should refer to three other documents. First, the draft of the investors' letter which Mr. Pomerleau returned to Mr. Ng was sent under cover of a fax sheet on which Mr. Pomerleau had written: "Commitment... on financing". Secondly, an internal memo. written by Mr. Cheng within an hour or so of the execution of the construction contract referred to the investors' letters as

"... demonstrating that the employer has the moneys equivalent to the Contract Price for the payment of the Contractor."

It is argued on the Defendant's behalf that these documents show that both Mr. Pomerleau and Mr. Cheng realised that the commitment was only that funds were in place, from which the Plaintiffs could be paid, rather than a commitment that the Plaintiffs would be paid from those funds.

25. Thirdly, a note made by Mr. Cheng of what was said at a meeting a few months later on 27th June 1997 records Mr. Hansen as acknowledging that "the entire amount of the project is escrowed which is earning very low interest for the client." It is argued on the Plaintiffs' behalf that this was a recognition by Mr. Hansen that sums up to US$33.25m. in the segregated account were being held by the Defendant on trust for the Plaintiffs.

The nature of the agreement

26. There is no doubt that, to use the words of section 7(a) of the construction contract, the Plaintiffs were satisfied with the "payment arrangements". There is equally no doubt that the parties regarded those payment arrangments as having been set out in (a) Mr. Ng's letter of 28th March, and (b) the three letters from the representatives of the investors received a few days later. Accordingly, the agreement relating to the payment arrangements (if agreement it was) was not (a) an oral agreement made between Mr. Pomerleau and/or Mr. Cheng with Mr. Ng and/or Mr. Hansen in the course of the negotiations on 27th March, and evidenced by Mr. Ng's letter of 28th March and the investors' letters, but rather (b) a written agreement contained in Mr. Ng's letter of 28th March and the investors' letters. In particular, Mr. Pomerleau was content for the documents to represent the agreement, because he believed that the documents in their final form meant that up to US$33.25m. of the funds in the segregated account could not be used for any purpose other than for the payment of the sums due to the Plaintiffs under the construction contract. For his part, Mr. Hansen was also content for the documents to represent the agreement, because he was prepared to take the chance that if the parties ever fell out, the letters would not be interpreted as doing anything more than reflecting the obligations of the Defendant and its investors under the subscription agreement.

The Defendant's case

27. Against that background, the Defendant's case is that the letters were "letters of comfort" only. They did not establish any trust in favour of the Plaintiffs, nor did they create a binding contractual obligation on the Defendant. They merely provided the Plaintiffs with the comfort of knowing that, pursuant to the subscription agreement, a sum equivalent to the amount due to the Plaintiffs under the construction contract would be set aside, and could be used for making payments to the Plaintiffs. Alternatively, the Defendant's case is that, even if the letters did create a binding obligation, that obligation was a binding obligation on the part of the Defendant's investors and not on the part of the Defendant, and in any event the obligation was only to pay out of the segregated account "the Contract Price", not the sums which the Plaintiffs are now claiming, namely the sums due to them on the termination of the construction contract.

Letters of comfort or contractual promises?

28. The letter of comfort is a tool of commerce developed to provide an alternative to a guarantee or surety. The writer will more often than not be a parent company unwilling to give a more conventional form of security for its subsidiary's liabilities. Accordingly, letters of comfort are issued when the parent company does not want to incur legal liability, or when it wishes to protect its own credit rating, or when it wants to avoid showing a contingent liability on its balance sheet.

29. Two modern cases have addressed the question whether statements contained in a letter written by a parent company to a creditor of its subsidiary company amount to letters of comfort conferring no legal liability. They are the decision of the Court of Appeal in England in Kleinwort Benson Ltd. v. Malaysia Mining Corp. Bhd. [1989] 1 WLR 379, and the decision of the Supreme Court of New South Wales in Banque Brussels Lambert S.A. v. Australian National Industries Ltd. (1989) 21 NSWLR 502. The outcome of each case was different, but the approach of both courts was the same. The question was whether the letters contained simply statements of fact regarding the parent company's current policy or whether they amounted to contractual promises as to the parent company's future conduct. If the former, the letter is a letter of comfort with no legal effect. If the latter, the promise it contains is enforceable (provided that the other elements of enforceability are satisfied, such as consideration).

30. If the letter contains express words of promise, no difficulty arises. But as the Court of Appeal in the Kleinwort Benson case noted at p.392E:

"...the absence of express words of promise does not by itself prevent a statement from being treated as a contractual promise."

Since the issue is ultimately one of construction, the absence of express words of promise means that it is necessary to consider carefully the context in which the letters were written. Thus, at p.392G-H, the court said:

"The context in which the comfort letter was requested and given is before the court without dispute as to the relevance or admissibility of that context. That concession was, in my view, rightly made. The evidence showing the context in which the comfort letters were produced... was evidence of the factual background known to the parties at or before the date of the contract and of the 'genesis' and 'aim' of the transaction (see Prenn v. Simmonds [1971] 1 WLR 1381)..."

However, I agree with Mr. Barrie Barlow for the Plaintiffs that this exercise is probably unnecessary if it is clear from the language of the relevant letters that they contain express promises of future conduct.

31. Mr. Ng's letter and the three letters from the investors must be read together. There are a number of things which show that. They were all printed on Stikeman, Elliott notepaper and were addressed to the Plaintiffs. The investors' letters all have the number 2 at the top (indicating that they are page 2 of the instrument). One of the terms defined in Mr. Ng's letter ("the Owner") is used in the investors' letter. And all the letters deal with the same subject-matter, namely the deposit of funds provided to the Defendant by the investors in a segregated US dollar account, and the method by which "the Contract Price" under the construction contract is to be paid.

32. The relevance paragraph in Mr. Ng's letter is the second paragraph. For ease of reference, I repeat it here:

"We advise that under an agreement entered into by the [Defendant], all of the funds required to pay the US$33,250,000 Contract Price will be deposited in a segregated US$ account of the [Defendant] at Standard Chartered Bank in Hong Kong. Payment of the Contract Price under the Contract will be made from this account and funds can be paid out of this account by the signature of Barry Hansen and one other director of the [Defendant]."

Mr. Peter Clayton for the Defendant argued that this paragraph did no more than identify the obligations of the Defendant and the investors under the subscription agreement. Thus, the paragraph simply informed the Plaintiffs of three things:

(i) Under the subscription agreement, the Defendant's investors were required to deposit the sum of US$33.25m. in a segregated US dollar bank account at the Standard Chartered Bank in Hong Kong in the name of the Defendant.

(ii) Under the subscription agreement, the Defendant was required to pay "the Contract Price" under the construction contract from that account.

(iii) The subscription agreement provided a mechanism for those payments to be made, namely by instruments signed by Mr. Hansen and another director of the Defendant.

I cannot go along with this argument. The paragraph used language which can only sensibly be construed as amounting to a promise of future conduct - namely that the obligations of the Defendant and the investors under the subscription agreement would be performed. Thus, the letter reads: "... under [the] agreement..., ... the funds ... will be deposited", not "under [the] agreement..., ... the funds ... are required to be deposited". Again, the letter reads: "Payment... will be made from this account", not "Payment... is required to be made from this account".

33. The position is even clearer with the investors' letters. Again, I repeat them here for ease of reference:

"The undersigned is the representative of one of several investors which have agreed to make an investment in the [Defendant]. We confirm that in accordance with the terms of such investment, the [Defendant] is required to place the US$33,250,000 Contract Price in a segregated US dollar account of the [Defendant] for payment of the Contract Price. We agree that payment of the Contract Price will be made to you according to terms and conditions of the construction contract signed between the contractor and the developer from the [Defendant's] account by signature of Barry Hansen and a director appointed by one of the investors as described above."

The first reference to the Defendant in the second sentence should be a reference to the investors, and I accept that the language of the second sentence is consistent with the Plaintiffs merely being informed of the investors' obligations under the subscription agreement - namely to deposit the sum of US$33.25m. in a segregated US dollar bank account in the name of the Defendant. The language in that sentence is "is required to", rather than "will". However, the third sentence is another matter entirely. That can only be construed as a promise of future conduct - namely that "the Contract Price" will be paid to the Defendant from that segregated account, and that the signatures of Mr. Hansen and a director of the Defendant appointed by one of the investors would be required before sums could be paid out of the segregated account. The words "we agree that payment... will be made to you..." permit of no other sensible construction.

34. For these reasons, I have concluded without much difficulty that Mr. Ng's letter contained promises of future conduct on the part of his clients, one of whom was the Defendant, and that the investors' letters contained promises of future conduct on the part of the investors. Accordingly, these letters were not merely letters of comfort: they were intended to have, and had in fact, contractual effect. As Mr. Barlow accepted, that makes it unnecessary for me to consider the Plaintiffs' alternative case based on the doctrine of promissory estoppel. What the true nature of the promises were, however, is a more difficult question, and it is to that that I now turn - with the caveat that since it is the Defendant and not the investors who is being sued, it is the nature of the Defendant's promise in Mr. Ng's letter which has to be addressed.

The nature of the Defendant's promise

35. The true nature of the Defendant's promise turns on the proper construction of Mr. Ng's letter. The reference to Prenn v. Simmonds in the court's judgment in the Kleinwort Benson case is relevant here as well, because as Lord Wilberforce said in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 WLR 981 at pp.995H-996A:

"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

However, this does not make it necessary for me to make findings about the course which the negotiations between the parties took. The relevance of the course which they took is very limited. It is well worth reminding ourselves of Lord Wilberforce's classic statement on the topic of the relevance of contractual negotiations to issues of contractual construction in Prenn v. Simmonds at pp.1384H-1385H:

"By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back; indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact... And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can easily be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to the common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get 'agreement' and in the hope that disputes will not arise. The only course then can be to try to ascertain the 'natural' meaning. Far more, and indeed totally, dangerous is to admit evidence of one party's objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised... In my opinion, then, evidence of negotiations, or of the party's intentions, ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction."

That is why it has not been necessary for me to make any findings about what the parties say was actually agreed in the course of the negotiations. It would be wrong for me to do so in view of those observations and of my finding that Mr. Pomerleau and Mr. Hansen were content for the language of the letters to do the talking for them.

36. The reference to the possibility that the parties may be accepting a form of words because that is the only way to get agreement was echoed in an unreported case in England cited at first instance in the Kleinwort Benson case. The case was Chemco Leasing SpA. v. Rediffusion Plc., 19th July 1985, and in his judgment Staughton J. (as he then was) had said:

"When two businessmen wish to conclude a bargain but find that on some particular aspect of it they cannot agree, I believe that it is not uncommon for them to adopt language of deliberate equivocation, so that the contract may be signed and their main objective achieved. No doubt they console themselves with the thought that all will go well, and that the terms in question will never come into operation or encounter scrutiny; but if all does not go well, it will be for the courts or arbitrators to decide what those terms mean. In such a case it is more than somewhat artificial for a judge to go through the process, prescribed by law, of ascertaining the common intention of the parties from the terms of the document and the surrounding circumstances; the common intention was in reality that the terms should mean what a judge or arbitrator should decide that they mean, subject always to the views of any higher tribunal."

I suspect that there was a strong element of that in Mr. Hansen's thinking at the time.

37. The relevant contractual promise made by the Defendant was the promise contained in Mr. Ng's letter that payment of "the Contract Price" under the construction contract would be made "from [the segregated] account". Two questions of construction arise:

(i) Although payment had ultimately to be made from that account, was it open to the Defendant to use that part of the money in the account which represented the US$33.25m. eventually payable to the Plaintiffs for other purposes in the meantime?

(ii) Does the phrase "the Contract Price" refer merely to the sums payable to the Plaintiffs in the event of the Plaintiffs performing all their obligations under the construction contract, or does it also refer to such sums as would be payable to the Plaintiffs on the termination of the construction contract in the event of SPNA's breach of it?

38. As to (i), there is nothing in any of the letters or in Art. 9.4. of the subscription agreement which expressly required that part of the money in the segregated account which was destined for payment of "the Contract Price" under the construction contract to remain in the account until such time as payment of "the Contract Price" became due. However, the promise that payment of "the Contract Price" would be made from that account would be meaningless if it had been intended to permit the Defendant to use the money for other purposes in the meantime. It must therefore have been intended that so long as there was a liability on SPNA to pay "the Contract Price" to the Plaintiffs, sums sufficient to pay "the Contract Price" up to a total of US$33.25m. had to remain in the account. Any other view would have made commercial nonsense.

39. I appreciate that this amounts to a finding that sums up to a total of US$33.25m. were secured for the Plaintiffs so long as there was a liability on SPNA to pay "the Contract Price" to the Plaintiffs, but that accords entirely, not merely with commercial good sense, but also with "the 'genesis' and 'aim' of the transaction". The genesis of the letters was the Plaintiffs' desire to ensure that they would actually be paid the sums due to them under the construction contract. The aim of the transaction is more difficult to discern without straying into the forbidden territory of ascertaining the parties' objectives. But what I can say is that Mr. Pomerleau would not have been happy with a form of words which he believed did not meet that objective, whereas Mr. Hansen was content with a form of words which he could subsequently argue did not give the Plaintiffs the security which they had originally sought. The aim of the letters therefore was to adopt a form of words which satisfied both parties' aspirations.

40. But if, as I find, the promise in the letter was to provide the Plaintiffs with security, the question then is: security for the payment of what? The answer is: security for the payment of "the Contract Price", and that gives rise to the second question of construction: what does the phrase "the Contract Price" refer to?

41. The phrase "the Contract Price" was a term of art. It was the phrase used in the construction contract to denote the "Price for all Works inclusive of Separately Priced Items and exclusive of Excluded Items". Nine Separately Priced Items and five Excluded Items were then set out. The use of this phrase in Mr. Ng's letter and those of the investors strongly suggests that this was the meaning which the phrase "the Contract Price" was to have in the letters - especially as the initial letters C and P were in capitals. Thus, the phrase "the Contract Price" in the letters should be construed as meaning the totality of the sums payable to the Plaintiffs for the performance of their obligations under the construction contract.

42. That construction accords with the intention of the Defendant and the investors as revealed by Art. 9.4. of the subscription agreement. The investors were going to invest considerable sums in the development. They were anxious to ensure that the sums which they invested were going to be used for the payment to the contractors for the construction work. That is why Art. 9.4. required the sums to be deposited in the segregated US dollar account

"...to be applied to the Contract Price payable under the Construction Contract and other construction contract(s) for the infrastructure and the first total of 100 houses."

It is true that the phrase "the Construction Contract" was defined in the subscription agreement as referring to a construction contract to be entered into between SPNA and contractors other than the Plaintiffs, but the phrase "the Construction Contract" was subsequently treated by the Defendant and the investors as applying to the construction contract which was subsequently entered into between SPNA and the Plaintiffs. The point is that neither the investors nor the Defendant could ever have intended the funds which the investors were to provide to secure payment for the Plaintiffs if the construction contract was terminated. In that event, it must have been contemplated that the funds were to be used to pay any new contractors engaged in place of the Plaintiffs to complete the construction of the development. Otherwise, funds which were specifically earmarked to pay for the construction of the development could not be used for that purpose, and in the absence of other sources of funding the construction of the development would grind to a halt.

43. This construction also accords with the Plaintiffs' thinking at the time. I do not believe that either Mr. Pomerleau or Mr. Cheng ever thought about what should happen if the construction contract was terminated. What they were concentrating on was what should happen if the construction contract was performed. What they wanted the negotiations to achieve was the obtaining of security for the sums payable to the Plaintiffs for the performance of their obligations under the construction contract.

44. Mr. Barlow beguilingly argued that this construction was far too narrow and literal. The phrase "the Contract Price" should be construed as including, not merely the sums payable to the Plaintiffs for the performance of their obligations under the construction contract, but all the sums which the construction contract provided would be payable to the Plaintiffs, including the sums payable to the Plaintiffs in the event of termination of the construction contract by reason of SPNA's breach of it. He relied in particular on the words "according to terms and conditions of the construction contract signed between the contractor and the developer" which were included in the investors' letters at Mr. Pomerleau's request.

45. I agree with Mr. Barlow that these words, although included only in the investors' letters and not in Mr. Ng's letter, should be treated as applying also to the Defendant's contractual promise in Mr. Ng's letter: that is because, for the reasons I have given, the four letters must be read together. However, the words which Mr. Barlow relies on qualify "payment": they relate to how the payments are to be made, not to what payments are to be made. Para. 2.17 of the outline of Mr. Barlow's closing address virtually accepts that. Thus, the words relied on by Mr. Barlow have the effect of requiring "the Contract Price" to be paid "according to [the] terms and conditions of the construction contract", i.e. by such advance payments as the construction contract provided for and thereafter by stage payments pursuant to such interim and final certificates as the engineer issued.

46. It follow that, in my judgment, the phrase "the Contract Price" in Mr. Ng's letter does not relate to the sums which the Plaintiffs are claiming in the arbitration, i.e. the sums payable to them pursuant to cl. 69.3 of the FIDIC Conditions of Contract for Works of Civil Engineering Construction (4th ed.) which were incorporated into the construction contract in the event of termination of the construction contract by the Plaintiffs as a result of SPNA's breach of it, but the sums payable to the Plaintiffs for the performance of their obligations under it. Since the Plaintiffs' security related only to the latter and not to the former, the Plaintiffs are not entitled to any of the relief sought in the action - whether for breach of trust or breach of contract.

Conclusion

47. For these reasons, judgment must be entered for the Defendant on the Plaintiffs' claim, and the Plaintiffs' claim must be dismissed. At present, I see no reason why costs should not follow the event, even though the basis on which the Plaintiffs have lost the action was a very narrow one. Accordingly, I make an order nisi that the Plaintiffs should pay to the Defendant its costs of the action, to be taxed if not agreed, including the costs reserved on 4th March, 20th March and 22nd April. In the normal course of events, I would also be discharging the injunction which was granted on 3rd April, but I shall hear argument as to whether there should be a stay on its discharge for the time being, so as not to frustrate any appeal by the Plaintiffs from this judgment to the Court of Appeal. Although this judgment is being handed down, it was made available to the parties' solicitors yesterday on a confidential basis, so that on the occasion of its handing down, any representations on that issue could be made to me.