MALAYA BANKING BERHAD v. CHINA INSURANCE CO. LTD.

HCCT48/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO.48 OF 1999

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D E C I S I O N

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1. There are two summonses before the court. By the first, the defendant seeks a dismissal of the action by a striking out application and, alternatively a ruling under Order 14A to the same effect. By the second, the defendant seeks a stay of the proceedings pending the addition of two new plaintiffs.

2. The first summons involves an attack by the defendant on the validity of the damages claimed in the action. Originally two main heads of damage were claimed. They have been referred to as the "Delay Damages" claim and the "Wasted Expenditure" claims. Prior to the hearing Mr R. Tong, SC who appeared for the plaintiff with Mr A. Chan, informed the court that he would not be pursuing the "Delay Damages" claim and that the Statement of Claim would be amended to that effect in due course. This concession shortened the first summons to the extent that the issues now before the court are :

"Striking out application/Dismissal of action

1. the following parts of the Re-Amended Statement of Claim be struck out as disclosing no reasonable cause of action and/or frivolous or vexatious and/or tending to embarrass the fair trial of this action and/or an abuse of process:

(1) ...

(2) the 3rd sentence, and Paragraph 4 of the Particulars, of Paragraph 15 of the Re-Amended Statement of Claim (the 'Wasted Expenditure Damages Claim'); or

(3) ...

2. if an order is made pursuant to paragraph 1(2)above, this action be dismissed;

Order 14A application

3. alternatively to the orders sought in paragraphs 1 and 2 above, the following questions of law and/or construction be determined:

(1) ...

(a) ...

(b) ...

(2) whether, on the true construction of Clause 24 of the said Development Agreement, the rights of United Trump International Limited following a valid termination of the Development Agreement are exclusively those provided for under Clause 24 and are limited to the recovery of additional costs (if any) of completing the Works following such termination;

(3) ...

4. ...

5. ...

6. if the answer to the question in paragraph 3(2) above is 'yes', the Wasted Expenditure Damages Claim be dismissed;

7. ..."

3. The plaintiff is one of three banks who lent money to United Trump International Limited ("UTIL") to buy and develop a building site. A firm called Molitoko became the contractors. The defendant insurance company (represented by Ms G. Li SC and Mr Thomas Lee) executed a performance bond in the sum of $30 million, in favour of UTIL, which guaranteed the performance of the contractor. After less than one year on site UTIL, in 1998, terminated Molitoko's contract. Molitoko has since gone into liquidation. In these proceedings the plaintiff's claim is limited to the value of the bond.

4. I now deal with the three issues in turn.

Order 14A application

5. If the question posed under the O.14A application is answered in the affirmative the effect would be that the plaintiff's claim be dismissed, there being no remaining claims.

6. The court's approach to such an application has been recently summarised by Ma J in Rockwin Enterprizes Ltd v. Shui Yee Ltd & others [2001] HKEC 1102. It involves a three step approach as follows :

"(1) is the relevant question one of law or construction?

(2) if so, is that question one that should be determined under the O.14A procedure? This step throws up three requirements:

(a) the court must have all necessary facts and matters before it in order to determine the question;

(b) if determined by the court, the question will finally determine the entire cause or matter or any issue or claim therein;

(c) the court must in its discretion be satisfied that the question is one that ought to be determined under O.14A; and

(3) if 'yes' to both steps above, what is the determination of the question and what orders should be made in consequence?"

7. Put simply the question posed in the application is - having terminated the contract under clause 24 (thus, a contractual termination) are the plaintiff's damages limited to the additional costs of completing the contract? If so, the plaintiff cannot claim any loss under the heading of "wasted expenditure."

8. In fact, the contract never was completed. The site is now a car park. The issue goes to the heart of the case because the defence claim that the contract was terminated for reasons other than Molitoko's poor performance. They say the contract was abandoned and there is no causal link between the losses incurred by the plaintiff and the alleged breach for which the surety is answerable.

9. The plaintiff, on the other hand, puts its case quite simply that they will seek to prove that Molitoko were in breach of contract, termination followed as a result and the damages claimed flow from that breach. The damages claimed which they say flow from the breach come under two heads. Firstly, construction costs and secondly, interest payments.

10. The material parts of the clause in question, namely clause 24, which it is accepted by the plaintiff is the clause under which the termination was made, are as follows :

"24.1 Without prejudice to any of its rights or remedies, the Owner may by notice to the Developer, which notice shall not be given unreasonably or vexatiously, terminate this Agreement if the Developer shall have committed any one or more of the following defaults, viz. :

((a)-(e) list of defaults) ...

24.2 Notice of termination shall be given in writing and, once given, shall be irrevocable. Such notice shall specify the default complained of the Developer and call upon the Developer to remedy, rectify or mitigate the default therein complained within 7 Business Days from the date of the notice. If the Developer still refuses or fails to comply with the Owner's demand under the notice within time, then the notice shall take immediate effect on its expiry and this Agreement wholly terminated if by the expiration of the period, the Developer still fails or wrongfully refuses to attend to and rectify, remedy or mitigate the matter therein complained.

24.6 On termination as aforesaid, the Developer shall allow and pay to the Owner the amount of any direct loss and/or damage caused to the Owner in such circumstances, including, without limitation, liquidated damages under Clause 18 if due to such termination, the Works has to be completed beyond the Completion Period.

24.7 Until after the completion of the Works under Sub-clause 24.4, the Owner shall not be bound by any provisions of this Agreement to make any further payment for the Price to the Developer. Upon such completion and upon verification within reasonable time of the accounts therefor, the Architect shall certify the amount of expenses properly incurred by the Owner and the amount of any direct loss and damage (including liquidated damage) caused to the Owner by the termination. "

11. Ms Li submits that the whole of clause 24 contemplated the completion of the project. If, on the other hand, the project was abandoned and not completed, as she submits is the situation here, and if the expenses have been wasted as a result of the abandonment there can be no clause 24 damages for which the surety might be liable.

12. Although the court has been assisted by both counsel on the O.14A issue in some detail, having considered the matter, I feel I can deal with it quite shortly. Following the three step approach in the Rockwin case, I am not persuaded that the question posed in a pure matter of law or construction; I do not consider that I have all the material facts and matters before me to determine the question and I am not satisfied that it is a question which is suitable for determination under O.14A. Ultimately, there is a discretion whether or not to make a ruling under O.14A. Any court would think long and hard before making a ruling which would have the effect of dismissing a $30 million claim. Ma J made the following remarks when considering the exercise of the discretion :

"26. It is of course not possible to set out all the circumstances which may be relevant in any given case to the exercise of the court's discretion. Much will depend on the perception and instinct of the Judge seized of the matter.

27. Of course, the residual discretion becomes exercisable really only where the two requirements (referred to in paragraphs 20(a) and (b) above) have been fulfilled. Here, it is important to emphasise that the question of law or construction is one that is suitable for determination without a trial. In other words, the court must have all the necessary facts and matters before it in order to determine the question of law or construction. Where the court is not seized of all relevant facts, it would be an extremely rare case (if ever) in which the procedure under Order 14A would be adopted."

13. I accept the plaintiff's submission that the question posed is not a question of pure law or construction. Whether or not the plaintiff is entitled to the damages it claims as a result of a termination under clause 24 is, in my judgment, likely to or may depend on findings of fact. Before a court can safely answer that question there would have to be, at least, some investigation into the circumstances of the termination. The plaintiff does not accept that at the time of the termination the project was being abandoned, which is at the heart of the defendant's submission. The issue of "abandonment" has been raised in the defence. The defence rely on it and to that extent there is a burden on them to prove it.

14. Moreover, even if the question posed under O.14A were pure law, as it involves an issue of construction of a contractual clause a court would be entitled to consider the factual matrix at the time of the contract to ascertain the true intentions of the parties.

15. In short, the bottom line is that I have no doubt that the court's discretion should be exercised to decline to answer the O.14A question. The legal argument alone does not equip the court to do so in this particular case. Mr Tong simply says - I will seek to prove the damages at trial. By that he means not merely that losses were incurred but that they were incurred as a result of Molitoko's defaults, thus making the bond payable. Regardless of the evidence, which the plaintiff submits it will be necessary to consider when the court ultimately decides the validity of the wasted expenses claim, Mr Tong points to clause 24.6 in support of his submission that as a matter of pure legal construction he has a plainly arguable case that the question posed should be answered in his favour. Clause 24.6 says : "On termination ... the developer shall pay ... any direct loss ... including without limitation, liquidated damages ...". The suggests that liquidated damages (which are now not claimed) is but one head of damage claimable.

Striking out application under O.18 r.19

16. This is an alternative application which seeks the same result but by a slightly different route. It is primarily a pleading point. Ms Li's submission is premised on the basis that the project was abandoned. She argues that the fact of abandonment may be assumed from the fact that the damage claimed is wasted expenditure.

17. It is submitted by the defence that the pleading is deficient in two important respects. Firstly there is no reference in the Statement of Claim (as amended) that the project was, in fact, abandoned. Secondly, there is no plea to the effect that the contractor's default (for which the defendant would be liable under the bond) caused the abandonment and thus that the wasted costs flowed therefrom. It is argued that these are more than merely technical defects in the Statement of Claim. They are fundamental defects because no reasonable cause of action is disclosed due to the lack of a causal link between the alleged breach and the claimed damages.

18. After due consideration I have concluded that the application to strike out has not been made good, for the following brief reasons.

19. The test to be applied in a strike out application is to decide if the claim is uncontestably bad or is bound to fail. A claim for wasted expenses is not, of itself, bad in law.

" Sometimes, however, the plaintiff may be compelled by circumstances to frame his suit on a different basis as to damages, not on the basis of the loss of his bargain but on the basis of his out-of-pocket loss. In other words he is claiming not to be put into the position he would have been in had the contract been performed, but to be put into the position he would have been in had it never been made, which is a normal measure of damages akin to that in tort. In such cases expenses incurred in preparation or in part performance will be properly recoverable and will not involve an inconsistency of compensation."

(McGregor on Damages, 16th edition)

20. This particular claim for wasted expenses is arguably not bad in law either. Mr Tong has demonstrated this in part by his resistance to the O.14A application. Moreover, the plaintiff's pleaded case does not make abandonment the central element of the claim. In argument Mr Tong emphasized that it was not the central element of the claim. He stands by the pleaded case which fully particularizes breach followed by termination followed by claimed damages which he recognizes he must prove flow from the breach. I agree that framed as it is, there is no necessity to plead "why, when and by whom" the project had been abandoned. It is fundamental in a striking out application that the matters pleaded by the plaintiff must be assumed to be facts for the purpose of the application.

21. Looking at the pleading as a whole it adequately sets out the plaintiff's case. It is apparent from the pleaded defence that it is understood by the defence that the claim is based on allegations of default by Molitoko. The defence goes on to say that the claimed losses would have arisen irrespective of Molitoko's alleged defaults because in truth the project was abandoned. That is a matter of fact for the defence to prove. The amended Statement of Claim however avers that at the time of the termination it was UTIL's intention to continue the project. In any event, the pleadings still require some further amendments described by Mr Tong as "tidying up" arising out of this application.

Joinder summons

22. The plaintiff, Maybank, is only one of three banks which provided the loan to UTIL to embark on the project. They sue "as agent and on behalf of the syndicate of ... (the three banks)". Ms Li seeks an order that the proceedings be stayed until the other two banks consent to being joined as co-plaintiffs. In fact, they do not wish to be co-plaintiffs and have consented to being represented by Maybank.

23. The defence take no issue with Maybank's contractual right to represent the co-lenders. However they invite the court to exercise its residual discretion not to let the case proceed in its present form. In my judgment there are several reasons why this discretion should not be exercised.

(1) I am satisfied that the action has been properly constituted under O.15 r.12 as a representative action. The Hong Kong White Book states :

" The rule as to representative proceedings should be treated as being not a rigid matter of principle but a flexible tool of convenience in the administration of justice, and should be applied, not in any strict or rigorous sense, but according to its wide and permissive scope."

Thus, representative actions are not solely for cases where there are numerous plaintiffs.

(2) The defence contention that under O.15 r.4(2) that where persons are jointly entitled to relief they should all be joined as parties is not applicable to this case. The syndicated loan agreement makes the banks rights and obligations several not joint.

(3) The original Statement of Claim was served in May 1999. The fact that approximately three years have passed before this application is first made in a factor against exercising the discretion.

(4) A discretion should not be exercised without good reason. In this application the defence advance two main reasons neither of which are compelling.

(5) The first reason is described as a "continuing concern" over discovery and "a wish to probe ... with each of the three banks". The defence describe it as a "wish to probe", the plaintiff submits it is in fact a fishing exercise into the documents of a non-party. Part of the defence case is that the termination of Molitoko was vexations. If so, it was UTIL which acted vexatiously and not the lesser lending bank or banks. Maybanks discovery obligations have been discharged. I do not regard the defence's non specific "concern" as a sufficient reason to create two extra plaintiffs.

(6) The second reason is the defendant's "concern" over costs should they successfully defend the claim. This reason is without merit. Maybank is the largest Bank in Malaysia. Moreover it is a foreign plaintiff and there has been no application for security for costs.

(7) The Bond upon which the plaintiff sues has been assigned solely to the plaintiff, not all three banks. Maybank also has an "irrevocable" authority to sue alone as a representative of all three banks.

(8) By virtue of O.15 r.12(3) a judgment against the plaintiff is binding on all the parties it represents.

24. In conclusion both counsel invited the court to be silent on the question of costs in this decision. Even though both applications by the defence have been unsuccessful there remains an issue on costs arising out of the plaintiff's abandonment of its "Delay Damages" claim. The parties may now attempt to agree an appropriate costs order. If that is not possible a short hearing will have to be fixed in due course.

Remarks: