WEST KOWLOON CULTURAL DISTRICT AUTHORITY v. AIG INSURANCE HONG KONG LTD

CACV 82/2020

[2020] HKCA 778

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 82 OF 2020

(ON APPEAL FROM HCA 2039/2018)

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DECISION

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The Court:

1.  This is an application made by the Defendant for leave to adduce new evidence in its appeal against a summary judgment granted by Ng J (“the Judge”) in favour of the Plaintiff on 2 April 2020 (“the Judgment”).  The summons to adduce new evidence was issued by the Defendant on 28 May 2020 (“the Summons”).  This application is opposed by the Plaintiff.

2.  Having considered the documents and submissions of the parties, we took the view that it is appropriate to determine the application on paper without an oral hearing.

3.  We now give our decision on the Summons.

Background

4.  The material facts in the present action have been set out in the Judgment at §§6 to 18.  In gist, the present action concerns the Plaintiff’s engagement of Hsin Chong Construction Company Limited (“the Contractor”) as contractor for a construction project known as “M+ project”.  To guarantee the due performance of the Contractor, the Defendant issued a Bond No. H7478 (“the Bond”) on 8 October 2015 in favour of the Plaintiff.  The Bond was for the sum of HK$297,198,000. 

5.  On 17 August 2018, the Plaintiff issued a demand for payment in the sum of HK$297,198,000 (“the Demand”) followed by two subsequent demands made on 21 and 24 August 2018 respectively, under the Bond.

6.  Clause 2 of the Bond provides:

“ If, in the [Plaintiff’s] opinion, the Contractor is or has been in default in respect of any of his obligations under the Contract, the [Defendant] shall upon demand made by the [Plaintiff] in writing and without conditions or proof of the said default or amount demanded, pay the amount identified in the demand in respect of the damages, losses, charges, costs or expenses sustained by the [Plaintiff] by reason of the default, up to the amount of the Bonded Sum.” (emphasis added)

7.  On 17 August 2018, the Plaintiff issued a formal notice to the Contractor to terminate its employment as contractor under the relevant contract on the basis that a default had occurred as the Contractor had become insolvent.   

8.  The Demand was in these terms:

“ We refer to the above bond issued by you in our favour, under which you are the Bondsman.

We hereby demand that you pay to us the full bonded sum of HK$297,198,000.

We are of the opinion that the Contractor is and has been in default in respect of various of its obligations under the Contract between the Contractor and us, and by reason of such defaults we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses.”

9.  The Defendant did not comply with the Demand and the Plaintiff commenced the action in HCA 2039/2018 on 29 August 2018.  By a summons of 11 September 2018, the Defendant sought to strike out the claim, or alternatively a determination of preliminary issues.  By a summons of 14 September 2018, the Plaintiff applied for summary judgment.   

10.  The two summonses came before the Judge on 10 April 2019.  By a judgment of 2 April 2020, the Judge granted summary judgment in favour of the Plaintiff and dismissed the Defendant’s summons. 

11.  The Defendant appealed against the Judgment by a Notice of Appeal filed on 6 May 2020.  In the Notice of Appeal, the Defendant relied on three grounds, namely:

(1)  The Judge erred in law in his reliance on (and consequent application of) IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496, which was inconsistent with §18 of Nishimatsu Construction Co Ltd v AHA Co unreported, HCA 10416/1999, 20 September 1999 (“Ground 1”);

(2)  The Judge erred in finding the Demand was valid even though it plainly included a claim for losses which the Defendant had not yet sustained as at the date of the Demand (“Ground 2”); and

(3)  The Judge erred in finding that the Demand was not made fraudulently (“Ground 3”).

The application to adduce new evidence on appeal

12.  In the Summons, the Defendant seeks leave to adduce two affidavits as new evidence in the appeal:

(1)  the affidavit of Ronald Michael Randall, the Senior Legal Counsel of the Plaintiff, dated 24 October 2019 and filed on 8 November 2019 under HCCW 239/2018 (“the HCCW Affidavit”); and

(2)  the 3^rd affidavit of Ronald Michael Randall dated 22 March 2019 (“the 3^rd Affidavit”).

 (collectively, “the Affidavits”)

13.  The Defendant intends to use the new evidence to support Grounds 2 & 3 in the appeal.  By reference to the Affidavits, the Defendant intends to demonstrate inter alia that:

(1)  As at the date of the Demand, the Plaintiff had not sustained certain loss and damage as alleged, and either knowingly included, or wrongly assumed that such alleged loss and damage would be incurred without undertaking any verification before inclusion of the same in the sum demanded;

(2)  The figures of the alleged loss and damage provided in the HCCW Affidavit and the 3^rd Affidavit are inconsistent with each other and/or contradictory; and

(3)  The Plaintiff included items that were not and could not be loss and damage it had sustained.

The approach on admission of new evidence

14.  Order 59 rule 10(2) of Rules of the High Court, Cap 4A provides as follows:

“ The Court of Appeal shall have power to receive further evidence on questions of fact, either by oral examination in court, by affidavit, or by deposition taken before an examiner, but no such further evidence (other than evidence as to matters which have occurred after the date of the trial or hearing) shall be admitted except on special grounds.”

15.  “Special grounds” require, in general, that the conditions in Ladd v Marshall [1954] 1 WLR 1489 at 1491 be satisfied.

16.  The three conditions in Ladd v Marshall [1954] 1 WLR 1489 at 1491 are as follows: (1) the evidence could not have been obtained with reasonable diligence for use at the hearing below; (2) the evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive; and (3) the evidence must be apparently credible, though it need not be incontrovertible.  All three conditions must be satisfied for new evidence to be admitted on appeal.

17.  Since the Judgment was granted in the context of an application for summary judgment, the following observations of Lord Bridge in Langdale v Danby [1982] 1 WLR 1123 at 1133B to F are relevant,

“ The classic statement of what amounts to ‘special grounds’ within the meaning of Ord. 59, r 10(2) comes from the judgment of Denning L.J. (as he then was) in Ladd v. Marshall [1954] 1 WLR 1489 …

In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification.  It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial.  The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue.  But I can see no injustice at all in requiring a defendant to use such diligence as is reasonable in the circumstances to put before the judge on the hearing of the summons, albeit in summary form, all the evidence he relies on in defence, whereas it would be a great injustice to the plaintiff to allow the defendant to introduce for the first time on appeal evidence which was readily available at the hearing of the summons but was not produced.”

18.  This approach is applicable in Hong Kong: Fortis Insurance Co v Lam Hau Wah Inneo, unreported,CACV 86/2010, 28 October 2010; Johnson Electric International Ltd v Bel Global Resources [2014] 5 HKC 504.  We shall discuss below whether each of the conditions of Ladd v Marshall has been satisfied in respect of the Affidavits. 

Condition (3) of Ladd v Marshall

19.  Condition (3), that is, the new evidence must be apparently credible, is not challenged by the Plaintiff as the deponent of the Affidavits Mr Randall is the Plaintiff’s legal counsel.

Condition (1) of Ladd v Marshall 

20.  Condition (1) requires that the new evidence could not have been obtained with reasonable diligence for use at the hearing below.  The degree of reasonable diligence which the court expects a defendant to have exercised when resisting a summary judgment application must be assessed against the overall circumstances of the case.  The court will take into account all relevant factors, such as the time available to the defendant to gather the evidence, the nature of the evidence, the difficulty encountered in obtaining the evidence, and the effort that the defendant had used in gathering the evidence (see Bank of New York Mellon v Sun Jiangrong [2016] 1 HKC 137 at §25)

21.  The 3^rd Affidavit was made available to the Defendant nearly 3 weeks before the hearing below.  At the time, it was the Plaintiff who wished to adduce it as evidence, but the Defendant objected to this by reference not only to delay, but also by reference to its contents.  Therefore, it cannot be said that the Defendant was not aware of its contents before the hearing below.  However, as the HCCW Affidavit was filed after the hearing below, the Defendant now says that because of alleged inconsistencies in the sums claimed in the two Affidavits, the 3^rd Affidavit has taken on a new significance and should be allowed to be used on appeal.  With respect, this seems to be an artificial argument, for the Defendant’s defence to the Demand is founded on the type of sums claimed by the Plaintiff (ex gratia payments, and forecast costs and expenses), not the difference in the quanta under these heads in the two Affidavits.  Accordingly, there is no real ground for allowing the 3^rd Affidavit to be adduced on appeal.   

Condition (2) of Ladd v Marshall   

22.  Be that as it may, in our judgment, the crucial consideration in the present application is in respect of the arguments concerning Condition (2), that is, the new evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive.

23.  We shall first discuss whether the Affidavits would probably have influenced that part of the Judgment which gave rise to Ground 2 i.e. the Judge erred in finding the Demand was valid even though it plainly included a claim for losses which the Defendant had not yet sustained at the date of the Demand. 

24.  This ground is founded on the express wording of the Demand: “… we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses” (emphasis added).  In other words, the Defendant’s argument in Ground 2 is that the Demand is, on its face, non-compliant.   

25.  In discussing this “formality” argument, the Judge held at §42:

“ It is true that the 1^st Demand also referred to damages, losses etc that the Plaintiff would continue to suffer and sustain by reason of the Contractor’s default. But the reference to future damages, losses etc does not vitiate or render nugatory that part of the 1^st Demand which did refer to the damages, losses etc sustained by reason of the Contractor’s default which are admittedly within the ambit of the Bond. Since Clause 2 does not require particularization or proof of the amount demanded as damages, losses etc sustained, the additional reference to future damages and losses is at most redundant and a surplusage and can be ignored………”

26.  Whether the Judge was correct in so holding can be debated at the hearing of the appeal.  However, it is clear that the issue whether the Demand was, on its face, non-compliant is a “formality” argument which stands or falls as a stand-alone issue.  The Affidavits would not add anything to the determination of that issue.  Therefore, as the new evidence would not have had any influence on that part of the Judgment which gave rise to Ground 2, Condition (2) of Ladd v Marshall is not satisfied.    

27.  We shall now discuss whether the Affidavits would probably have influenced that part of the Judgment which gave rise to Ground 3 i.e. the Judge erred in finding that the Demand was not made fraudulently.

28.  In gist, the Defendant contended that some loss and damage alleged by the Plaintiff, such as ex gratia payments to sub-contractors and forecast costs and expenses, were not loss and damage “sustained” by the Plaintiff at the time of the Demand, and that the figures for loss and damage alleged by the Plaintiff in the 3^rd Affidavit and the HCCW Affidavit are inconsistent and/or contradictory. 

29.  Counsel for the Defendant submitted that the Affidavits provided a “basis to suggest that [the Plaintiff] included the alleged loss and damage not sustained as at the date of the [Demand] with actual and/or blind-eye knowledge” (§19, the Appellant/Defendant’s Written Submissions in Support).  That apparently is the highest that counsel can put it.

30.  With respect, even if one were to examine the Affidavits against this assertion, when such an exercise is undertaken against the indisputable factual background of the case, there is nothing which remotely provides a proper basis for inferring fraudulent conduct on the part of the Plaintiff such as to absolve the Defendant from its obligation under the Bond.

31.  As held by the Judge (and we do not find any submission on the part of Mr Wong SC to suggest otherwise), the Bond is in the nature of an on demand bond.

32.  Performance bonds payable on demand are good security in the commercial world because the bondsmen’s liability to pay does not depend upon the determination of disputes in the underlying transaction.  It is sometimes said that such bonds, like letters of credit, are treated as cash.  Sir John Donaldson MR in Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 WLR 393 said:

“ The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank's customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met.”

See also United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 and Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800.

33.  There are authorities suggesting that a more stringent standard governs the advancement of the fraud exception in a claim based on a performance bond.  In Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31 at [59], Lord Clark held in the context of an interlocutory injunction restraining a bank from making payment, 

“ In summary, the Board concludes that it must be clearly established at the interlocutory stage that the only realistic inference is (a) that the beneficiary could not honestly have believed in the validity of its demands under the letter of credit and (b) that the bank was aware of the fraud.”

34.  Whilst the context of the present case is different and the second limb is obviously not relevant as the allegation of fraud is advanced by the issuer of the Bond in the present case, the first limb is relevant, at least in showing that a more stringent standard should be applied to give recognition to the commercial efficacy of such an instrument. The test was taken from the judgment of Ackner LJ in United Trading Corp SA v Allied Arab Bank Ltd [1985] 2 Lloyds' Rep 554 at 561, which was subsequently applied by Mance LJ in Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 in the context of a summary judgment application against the bank on a performance bond. 

35.  In Hong Kong, Deputy High Court Judge Lok (as he then was) referred to the relevant English cases in Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd [2012] 5 HKLRD 620 at [20] to [21].  At [21], the learned judge said,

“ … the [English cases] show that there are special considerations for a summary judgment application based on a performance bond, and that the Court should always scrutinise the defendant’s allegation to see whether there is sufficient evidence to support the allegation of fraud. I agree with Mr Pao that such approach should be no different from cases of dishonoured cheques or promissory notes where the defendants are seeking to rely on fraud as a defence.”

36.  It is for the Defendant to show clearly that the Affidavits reveal that the Plaintiff could not have honestly believed that it was making a valid demand.  The fact that ex gratia payments were made to sub - contractors is neither here nor there, as the Bond included not only damages, but also losses and expenses.  As for forecast costs and expenses, the Defendant has not shown that the Plaintiff could not honestly have believed at the time of the Demand that its accrued liabilities did not at least match the Bond sum.   

37.  In any event, Mr Randall has in his 4^th Affidavit explained that what the Defendant alleged were discrepancies/inconsistencies in the figures of loss and damages were mainly due to computations based on different dates, and the difference between liquidated damages and general damages.[1]

38.  We are not satisfied that the Affidavits provide the Defendant with a proper basis to contend that the only realistic inference is that the Plaintiff could not honestly have believed that it was making a valid demand.    

39.  Accordingly, we are not satisfied that the Affidavits would have an important influence on Ground 3 either, and Condition 2 of Ladd v Marshall is not satisfied. 

Conclusion and costs

40.  For the above reasons, we decline to admit the Affidavits as new evidence in the appeal and the Summons is dismissed. 

41.  There is no reason to depart from the rule that costs should follow the event.  We order the Defendant to pay the Plaintiff’s costs of this application.  After considering the Plaintiff’s statement of costs, we summarily fix such costs at $350,000.