HENRY BOOT FAR EAST LTD v. FAR EAST CONSORTIUM LTD AND ANOTHER

1986 No. A2189

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. On 12th November, 1981, Asia Terminals Ltd. entered into a contract with the 1st Defendant, Far East Consortium Ltd., ("FEC") a Hong Kong corporation, appointing the latter the main contractor for construction of a new container terminal.

2. On 5th June, 1982, FEC signed a contract with a Liberian corporation, Airedale Ltd. ("Airedale", also know as "BCC") under which it was agreed that Airedale would undertake the construction work. Airedale, although a Liberian corporation, has a substantial connection with FEC and operated from the same offices and through common officers in Hong Kong.

3. By an agreement dated 21st May, 1983 (the "sub-contract") Airedale subcontracted some of the construction work (the sub-contract works) to the 2nd Defendant ("Shine"). By an a agreement ("the guarantee") between FEC and Shine, dated the same day, the 21st May, 1983, and said to be supplemental to the sub-contract, FEC agreed to guarantee the due performance of the obligations under the sub-contract of Airedale and its "successors and assigns".

4. About the 30th March, 1984, Airedale and Shine agreed to add pile caps construction works to the sub-contract works. Around March or April 1984 the Plaintiff ("Boot") and Shine entered into an arrangement to carry out the pile caps construction work under the sub-contract. Boot says the arrangement was a joint venture agreement involving assignment of the pile caps work and the benefit of the sub-contract and the guarantee to the joint venture, and that Airedale was informed of this by Shine. Boot says the pile caps construction work was completed by the joint venture parties in December 1984. In payment for the pile caps construction work, Airedale gave to Boot seven post-dated cheques for half a million dollars each. Five of these cheques were dishonoured. Airedale also holds retention money of about $625,574.46. Airedale has not paid to the joint venture or to Boot the amounts of the five dishonoured cheques, of the retention money, or of the costs of obtaining judgment on two of the five dishonoured cheques (no legal proceedings having been taken in respect of the other three to save costs).

5. In the mean time, Shine has gone into liquidation under a winding-up order made on 2nd December, 1985. Boot now claims against FEC under the guarantee to be indemnified in respect of the amounts mentioned and costs. Shine's liquidator has refused to join in the action as co-plaintiff and Shine is accordingly sued as a co-defendant. Boot's claim in this action in substance is that Airedale is in default of its obligations to Boot under the sub-contract, and that FEC as guarantor should now indemnify it in respect of the amount claimed.

6. FEC denies that it is liable to indemnify Boot under the guarantee upon both legal and factual grounds.

7. With that short introduction I proceed to the first submission made by Mr. Edward Chan for FEC, which concerned essentially pleading points. The material provision of the guarantee provides that:

"The guarantor [FEC] will indemnify SCL [Shine], his successors and assigns against all losses, damages, costs and expenses suffered or incurred by him by reason of any act default or omission on the part of BCC [Airedale] in performing and observing his obligations under and in connection with the sub-contract." (Emphasis supplied)

Mr. Chan submits that "successors" means persons such as liquidators or receivers, which Boot is clearly not; and that Boot can be an assign in one of two ways. First, within the originally contemplated scope of the term "assigns" in the guarantee, i.e. an assign in consequence of assignment of the sub-contract, or alternatively and secondly, an assign by assignment of the guarantee itself. As to assignment of the guarantee, he quite correctly points out that there is no suggestion of a legal assignment and that paragraph 10 of the Statement of Claim pleads that Shine informed Airedale and not the guarantor (FEC) of the assignment of the guarantee so that there was no assignment by directions given to the guarantor as to payment of the proceeds. Therefore, he submits it is only an equitable assignment that can be relied upon by the Plaintiff. Such an assignment, it is not disputed, depends upon a sufficient expression of an intention to assign (Halsbury's Laws 4th Ed. vol. 6 para. 30; Snell 28th Ed. p.77) Mr. Chan submits on the evidence that the parties were not ad idem, and therefore there could not have been any intention to assign the guarantee. I shall return to this point in the context of the facts.

8. In the present context Mr. Chan submits that assignment of the guarantee is not pleaded in paragraph 12 of the Statement of Claim, upon which Boot relies. That paragraph is in the following terms:

        "12 In the premises, the Plaintiff contends that

 

It is upon the words "In the premises" that Mr. Chan relies, contending that they throw Boot back upon paragraph 10 which, as I have indicated, in his submission is confined in effect to reliance upon the guarantee in the sense originally contemplated. I will say at once that I reject that submission. I think paragraph 12 adequately pleads the joint venture parties as the beneficiary of the guarantee in all the ways or respects possible; and only three have been identified, all of which seem to me to be perfectly clear and, I have no doubt were equally clear to both parties. In my view Boot is entitled to rely upon paragraph 12(a) of the Statement of Claim in either of the senses the Court is concerned with i.e. the assignment of the guarantee flowing from assignment of the sub-contract, or the direct assignment of the guarantee itself. Had I arrived at a different conclusion I would certainly have granted Boot leave to amend its Statement of Claim, as manifestly necessary for the purpose of determining the real question in controversy, and no prejudice being occasioned to FEC. In the latter regard not only do I fail to see any prejudice that would be occasioned to FEC, but although invited to do so, Mr. Chan declined to draw my attention to any prejudice, that being unnecessary in his view.

9. It follows that I need not concern myself with Mr. Chan's submission that Boot has impermissibly sought to remedy its defective pleadings by setting up a new claim in its Reply. In any case I do not read the Reply as setting up a new claim.

10. To proceed, in reference to the operative words of the guarantee, Mr. Chan points to the confinement of "successors and assigns" in the first sentence to BCC (Airedale), and in the second sentence, to Shine. He points also to specific references to Shine and BCC elsewhere in the Guarantee. He submits therefore no person other than Shine could have been envisaged by those words. I do not read paragraph 1 and the other provisions of the guarantee as having such effect. In the context of the guarantee as a whole and also in the context of the sub-contract to which it is expressly stated to be supplemental, I think express and explicit words would be necessary to convey the restricted meaning contended for, and I reject this submission also.

11. Finally Mr. Chan contended that even if "successors and assigns" in the guarantee does embrace an assignee of the sub-contract, Boot is in law not entitled to sue. That, of course, is not to say Boot would not be entitled to sue as assignee of the guarantee itself. Nonetheless to return to the submission, Mr. Chan relies primarily upon Sacher Investments Pty Ltd. v. Forma Stereo Consultants Pty Ltd. [1976] 1 N.S.W.L.R. 5. Upon my reading of that report, the Plaintiff failed because it claimed to be able to sue upon the guarantee concerned under section 12 of the Act applicable, but had not had the benefit of an assignment that was necessary under that provision. True, mention is made of the principle that in general a person who is not a party to a contract cannot sue to enforce it. However that implicitly recognises the score for exceptions to the rule; moreover it does not decide that in the absence of assignment of the guarantee, an assignee of the related contract cannot sue. In any event an assignment of the guarantee would dispose of the point and I shall return to that question.

12. I turn then to the major matter in dispute between the parties, whether there was an assignment at all by Shine to the joint venture parties. As I have indicated Boot contends that there was an assignment of the sub-contract to the joint venture parties i.e. Boot and Shine. FEC denies this and says that Boot was simply a sub-contractor of Shine. Boot says the joint venture agreement was reached in documents and correspondence exchanged between the parties, Shine and Airedale, and in oral discussions and conduct between January and July 1984. Apart from the documentary evidence which consisted almost entirely of agreed documents, the only evidence adduced was that of two witnesses called by Boot, Mr. Myles its managing director, and Mr. Natras, who in 1984 was its Estimates and Planning Manager in Hong Kong. FEC did not call any evdience.

13. It is clear that in January 1984 or shortly before, Shine approached Boot, which is part of an overseas Group. Boot was told by Shine that it had completed the piling work under the main contract and soon expected instructions to proceed with the pile capping work, which it had the physical ability to carry out but lacked the finance. Discussions ensued between the two at different levels and Boot proceeded to work on pricing the pile capping work. In February Shine told Boot it had secured the much larger contract for the superstructure work on the container terminal and enquired if Boot was interested. Boot said it was.

14. Boot also says that it was told by Shine of the guarantee, which it regarded as being of considerable importance because Airedale was a Liberian corporation. It took advice from its solicitors and decided to proceed by way of assignment of the sub-contract, for which the solicitors prepared the necessary draft instrument.

15. Mr. Myles testified that Shine agreed to the assignment of the sub-contract in the context of a joint venture agreement whereby Boot would provide the finance, Shine would provide on-site supervisory staff and carry out some of the work themselves, and the profits would be shared equally. Mr. Natras confirmed that over a period of time an agreement was reached between Boot and Shine for the assignment of the sub-contract, though he did not know all the details. Mr. Myles and Mr. Natras were closely cross-examined by Mr. Chan, particularly in relation to the documentary evidence. Some of this, (particularly minutes and notes kept by Boot of some of its meetings with Shine, correspondence between Boot, Shine, Airedale and FEC, and drafts of the agreement to be signed between Boot and Shine) it must be said, were not as confirmatory of the agreement and assignment contended for by Boot as might have been expected. And, indeed, the written form of agreement was never actually signed by Shine. Moreover, there were some equivocal references by Shine to both assignment and sub-contracting. Equally, some of the parties' conduct could be thought to be indicative of Shine not having assigned the sub-contract e.g. Boot pursued the arrears due not directly with FEC or Airedale but through Shine; Shine appeared to act on occasion in its own behalf; and Boot possibly might have been minded to risk the lack of an assignment for the chance of participating in the looming superstructure contract which was very much larger.

16. Having given careful consideration to the foregoing and to the risks inherent in the oral evidence of interested witnesses, I have nonetheless had no hesitation in concluding that both Mr. Myles and Mr. Natras are honest, reliable and credible witnesses. Both admitted the limitations of their knowledge and did not seek to gild their evidence. I have no hesitation in accepting their evidence that because Airedale was a Liberian corporation, Boot regarded the guarantee of importance and in consequence also the desirability of proceeding by tray of assignment as advised by their solicitors. I do not in the circumstances believe that Boot would have commenced and completed the pile capping work without having reached an oral agreement which it believed would enable it to rely upon the guarantee. While Shine may, in the event, when it came to formally recording the agreement in written form, have regarded the detailed requirements as being over-complicated and have therefore declined to sign it, that, and the other matters urged upon me by Mr. Chan for that purpose, do not in my view warrant the rejection of the evidence of Mr. Myles and Mr. Natras. On the contrary, that evidence, which as I have indicated I accept, is strongly supported by much of the documentary evidence and the conduct of the parties. In particular Boot would not have instructed its solicitors to prepare the detailed written instrument of agreement unless agreement to that affect had been reached. In my finding therefore between January and July 1984, Boot and Shine did reach agreement orally under which the sub-contract was assigned by Shine to the joint venture parties.

17. The evidence is less clearly related to assignment of the guarantee. I am nevertheless satisfied that in the whole context of the joint venture, Shine agreed not only to assignment of the sub-contract but also to Boot having the benefit of the guarantee. Mr. Chan has submitted strenuously that if Shine agreed or had the intention to assign anything in the particular content, it must have been only the proceeds under the guarantee. I do not accept that. I think the probability on the evidence and having regard to the background to the joint venture, and the very nature of the joint venture, that Shine's intention was to assign the benefit of the guarantee to Boot and that such intention was expressed to Boot.

18. Clause 33(1) of the sub-contract provided that Shine "shall not assign the whole or any part of this sub-contract ... without the previous written consent of BCC". In my finding, a letter from Airedale to Shine dated the 25th May, 1984 constituted such written consent in the circumstanes it was sent, notwithstanding that such consent was not couched in express terms. But, of course, the oral agreement to assign the contract may have been concluded before then. I therefore record that in my judgment Airedale waived the requirement for prior consent, that requirement being solely for its own benefit (see Chitty 25th Ed. para. 1496, 1500, 1501). That is clear, from Airedale's letter of 26th May,1984, and from Airedale's conduct in the light of the knowledge of Shine's and Boot's activities of which it was clearly aware. It must follow that the assignment of the sub-contract by Shine to the joint venture parties was valid.

19. I turn then to Mr. Chan's submission that the assignment of the sub-contract by Shine to the joint venture parties discharged the guarantee. He relies upon the general proposition stated in the first paragraph at p. 77 of Rowlatt, of which I need set out no more than the first sentence: "A guarantee will only extend to a liability precisely answering the description contained in the guarantee". Rowlatt goes on to deal with variation at p. 86 in the following way:

"Variation Of Terms Of Principal Liability Not Set Forth In Guarantee.

 

Where the terms of the principal contract are not set forth in the bond or guarantee of a surety, the rule is laid down in Holme v. Brunskill (1878) 3 Q.B.D. 505, that a material variation in the contract will discharge the surety - a material variation meaning for this purpose any variation which cannot be seen without inquiry to be insubstantial, or one that cannot be otherwise than beneficial to the surety."

20. Mr. Chan submits that the assignment contended for by Boot is not a variation. It is clear from Bradford old Bank v. Sutcliffe (1918) 2 KB 833; 841, and Wheatley v. Bastow 44 ER 102 that assignment of an existing debt will not discharge a guarantee. But it was observed in Bradford Old Bank at p. 842 that the position would be different if it was sought to make the surety liable for a debt arising out of dealings between the new creditor and the debtor. It seems to me that in the latter case assignment is to be treated in the same way as a variation. The matter is dealt with at p. 88 of Rowlatt:

 

Application of Rule Where Guarantee Is For Liability Under Future Transactions Not Precisely Specified.

 

"The application of the rule in Holme v. Brunskill, presents, no difficulty, where ... the guarantee, though in general terms, was given with reference to a principal contract then already negotiated, of the existence of which (though not perhaps of its exact terms), the surety was aware. ...

 

However, where a guarantee is given in general terms to cover liabilities which are to result from a future course of dealing generically specified in the guarantee, the creditor can vary the course of dealing under which successive liabilities arise, so long as the course of dealing continues to be of the character coming within the scope of the guarantee, and no change is made in the terns of any liability after it is actually incurred and the guarantee is attached to it."

21. The sub-contract and guarantee in this case are both dated the 21st May, 1983, and the latter is expressly stated to be supplemental to the former as I have said. Mr. Chan has been at pains to point to particular references to Shine in both, and to certain provisions which I do not consider necessary to set out, with the object of demonstrating that material alterations are involved in assignment to a third party. The burden of proving that that is not so lies upon Boot, but having regard to all such evidence as there is and to the circumstances, I consider that the alterations were not material. In substance all that FEC had and has to do is pay for the construction work when completed in accordance with the specific terms of the contract.

22. However, that may be, it is plain that FEC was fully aware of the precise terms of the sub-contract. Furthermore, the "course of dealing" i.e. assignment, was within the express scope of the sub-contract. There is no suggestion that any change has been made in the terms of liability since Airedale's cheques were dishonoured and the retention moneys said to have become due.

23. There is also the matter of FEC's assent to the assignments. Rowlatt at pp. 90 and 91 sets out the legal position in the following way, which I adopt:

        "Assent Of Surety To Variation

 

A surety will not be discharged by a variation to which the creditor (on whom the onus lies) can show he assented, or which is provided for in the guarantee. .... Where the surety takes any active part in the transaction constituting the variation, he is clearly not discharged; as where solicitors, who were sureties, prepared documents referable to the variation. Similarly, if the surety permits the creditor to think he has assented. ...

 

Assent B Surety Without Fresh Consideration

 

A surety is not discharged by a variation to which he assents afterwards, even though there may be no fresh consideration for the assent.”

24. I have already mentioned the substantial connection between FEC and Airedale. At one stage during the pile capping work, Airedale got so far behind in its payments to the joint venture parties, that the latter stopped work, whereupon FEC made three payments. There were also site meetings and visits by FEC representatives which were also attended by representatives of Boot, Shine and the architect. Mr. Myles' view that Airedale was a shell is supported by an Airedale statement of account exhibited. Cheques issued-by Airedale and FEC sometimes had the same signatories, and in at least one instance a letter addressed to Airedale and copied to FEC was answered only by FEC. Shine's letter to Airedale seeking its agreement to the assignment of the pile capping work to the joint venture was sent to Airedale care of FEC. Shine was known to be in financial straits; there was a pause in the progress of the works between completion of the piling work and commencement of the pile capping work. FEC welcomed the involvement of Boot as being a large international contractor. Mr. Myles testified that Airedale was regarded and dealt with as being FEC and, indeed, the evidence does point to Airedale being the alter ego of FEC. It would be incredible on the evidence and in the circumstances if FEC did not know of and welcome the assignment of the pile capping work to the joint venture parties, notwithstanding its letter of 31st August, 1984 to Shine in which it sought to claim that it had not approved Boot as a party to the contract on the pile capping work adding "however, we are prepared to be in good spirit on whatever agreement signed between Henry Boot and Shine" and sincerely hoping that Boot would continue its construction. In my finding that FEC did assent to the assignment. In addition, FEC'S very active part in conjunction with Airedale, in the pile capping work by the joint venture parties, must mean that it is not discharged by the assignment. Furthermore, in my finding, FEC permitted Boot to think FEC had assented to the assignment, which is yet another reason why FEC is not discharged. For all the foregoing reasons, in my judgment the assignment did not discharge the guarantee.

25. As to the $6,500 costs of securing judgment on two of the five dishonoured cheques, I did not understand the amount to be disputed. In my view, these costs would be payable under the guarantee as part of the obligations of Airedale.

26. There remains Boot's claim for payment of the retention money. Clause 31(4)(c) of the sub-contract provides that "within fourteen days after the expiration of each Defects Liability Period or after the issue of the Architect's or BCC's certificate of completion of making good defects, whichever is the later, BCC shall pay to the Sub-Contractor [Shine] from the sums retained ........" the retention moneys.

27. The "Defects Liability Period" is defined in the sub-contract as "the period of six months commencing on the date of completion ...... named in the relevant completion advice sent by the Architect or by BCC to the Sub-Contractor in accordance with Clause 19".

28. The relevant part of Clause 19 provides for the Sub-Contractor to complete the Sub-Contract Works and to "receive a written completion advice from the Architect or BCC and submit a duly-completed Building Authority Form 21 ..... to the Architect ..." by the completion date specified.

29. On 11th April, 1985 Shine wrote to Airedale enclosing an undated "Form 21" certifying that the construction of the vile capping work was completed, and asked Airedale to forward it to the Architect for his completion and onward submission to the Building Authority. It is common ground, however, that no completion advice was ever sent by Airedale or the Architect.

30. Mr. Chan submits that in the absence of such written completion advice, no obligation arises on the part of Airedale to pay the retention money, nor therefore, on the part of FEC as Guarantor.

31. Miss Eu points to a letter written to Shine by FEC on 14th December, 1984 in the following terms:

"Since all works relating to the captioned sub-contract work will be completed within one week's time, you are required to carry out the enlisted outstanding works prior to final clear (sic) from site:

 

 

Please note that all the above works have to be carried out to the satisfaction of parties concerned before the final certificate of payment will be issued.

Miss Eu submits that that letter in conjunction with Shine's letter of 11th April, 1985 forwarding "Form 21" clearly establishes that the pile capping work has been completed. In the context of the limited other evidence presented to the court, that on the probabilities is so, although the actual date of completion is not clear. She submits that read with Shine's letter of 11th April, 1985, FEC'S letter of 14th December, 1984 constitutes the requisite completion advice. She points to the fidiciary duty of Airedale as trustee for the Sub-Contractor, of the retention money, which is provided for in express terms by Clause 31(4) of the sub-contract. Furthermore, she submits that it was never the intention that Airedale could refuse completion advice and hold on to the retention money. I do not think that upon the proper construction of the provisions to which I have referred a written completion advice is a condition precedent to payment of the retention money. Such a provision would have to be provided with a degree of clarity that is clearly lacking.

32. Moreover, in my finding the pile capping work has not only been completed, but was completed on probabilities in December 1984; and there are no defects. When one of the joint venture parties i.e. Shine, sent in "Form 21" there was no reason, and none has even been suggested, for the completion certificate to be withheld by the architect or by Airedale. It is clear from the authorities that that such conduct absolves the joint venture parties from the necessity of obtaining such a certificate (see Panamena Europea Navagacion (Compania Limitada) v. Fredrick Leyland & Co. (1947) A.C. 428; 435; 436). It follows that Airedale is obliged to pay the retention money under the sub-contract and that as guarantor FEC is also liable.

33. I come then to Mr. Chan's final submission. It is that if the Court holds against FEC, it is the joint venture that should be entitled to the money payable and not Boot. I find that a strange submission, to say the least. It is easily disposed of because Shine, the other joint venture partner, has been made a party to Boot's claim, being named and duly served as the 2nd Defendant. In addition, the evidence clearly establishes that the arrangement between Boot and Shine was that moneys due to the joint venture were to be paid to Boot, although ultimately any profits realised would have to be shared equally.

34. For the foregoing reasons there will be judgment against the 1st Defendant in respect of the five dishonoured chegues, the retention money and the amount of $6,500 expended by Boot in the earlier action on two of the five cheques dishonoured. I will now hear counsel on interest and costs.