XCHRX KENWORTH ENGINEERING LTD. v. AIRPORT AUTHORITY

HCCT 72/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 72 OF 2000

(FORMERLY CIVIL ACTION NO. 4004 OF 2001)

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D E C I S I O N

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1. This is an application by the Airport Authority, the defendant herein ("the Airport Authority") to strike out various parts of the Amended Statement of Claim and the Amended Reply of Kenworth Engineering Limited ("Kenworth") and for dismissal of Kenworth's action under Order 18 rule 19 of the Rules of the High Court and/or the inherent jurisdiction of the court on the ground that the parts complained of disclose no reasonable cause of action, are frivolous or vexatious and/or an abuse of the process of the court. Alternatively, the Airport Authority seeks a determination under Order 14A of the following questions:

(1) whether the bond dated 19 April 1996 ("the bond") issued by the American Home Assurance Company ("the Bondsman") to the Airport Authority contained the implied term pleaded in paragraphs 7 and 20 of the Amended Statement of Claim;

(2) whether the bond contained the implied term pleaded in paragraphs 7A and 20 of the Amended Statement of Claim;

(3) whether any contract constituted by the Sub-contract Tender of Kenworth contained the implied term set out in paragraph 7 of the Amended Statement of Claim as pleaded in paragraph 6(ii) of the Amended Reply; and

(4) whether the agreement identified in the letter of 2 April 1998 (referred to in paragraph 10 of the Amended Statement of Claim, "the 2 April 1998 letter") contained the implied term pleaded in paragraphs 13 and 15 of the Amended Statement of Claim.

The background facts relevant to the application may be set out as follows.

Background

2. During the development of the Chek Lap Kok Airport, the Airport Authority entered into a contract known as C420 dated 25 June 1996 ("the Main Contract") with Nishimatsu Construction Co. Ltd. ("Nishimatsu") as the main contractor, for the construction of the Ground Transportation Centre for the Airport. The Main Contract included the building services works for the Centre, comprising the mechanical, electrical, hydraulic and fire services works.

3. Kenworth was nominated as the Nominated Sub-contractor for these building works. By a Sub-contract dated 24 July 1996 known as Nominated Sub-contract No. 423 ("the Sub-contract"), Nishimatsu sub-contracted the works to Kenworth at a price of HK$192,270,158.00.

4. Under clause 5.1(c) of the Sub-contract, Kenworth was obliged, within 14 days of the notification of acceptance of the Sub-contract Tender, to obtain and provide to Nishimatsu a performance bond for the amount and in the form as attached to the Sub-contract. Kenworth duly obtained the bond and provided it to Nishimatsu, and the latter in turn provided it to the Airport Authority to comply with its obligation under GCC Clause 64.1 of the Main Contract.

5. It is common ground that the bond is an on-demand bond. Clause 2 thereof provided as follows:

"If the Sub-Contractor [Kenworth] shall be in default in respect of any of his obligations under the Sub-Contract the Bondsman shall upon demand made by the Employer [the Airport Authority] in writing and without proof of the said default or conditions satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the Employer by reason of the default up to the amount of the Bonded Sum."

6. There were delays on some of the contracts for the construction of the airport and as it was of great importance for the airport to open on 6 July 1998, the Project Manager appointed by the Airport Authority instructed special measures to be implemented on a number of contracts, including the Main Contract, to achieve the opening date. It was in those circumstances that the 2 April 1998 letter was issued by the Project Manager to Nishimatsu. In summary, the letter recorded the terms of an agreement reached in March 1998 at the meetings attended by representatives of the Airport Authority, Nishimatsu and Kenworth and the effect of it was that Kenworth would take the special measures as agreed to achieve substantial completion of the Sub-contract works by 31 May 1998. The 2 April 1998 letter was counter-signed by Kenworth on 7 April 1998 but not by Nishimatsu.

7. It is Kenworth's case as pleaded that the Airport Authority and Kenworth were brought into a direct and immediate contractual relationship in that the 2 April 1998 letter was an agreement made between them. It is further pleaded that there ought to be implied a term into the alleged agreement that the Airport Authority owed a duty to Kenworth not to hinder, obstruct or prevent Kenworth from performing in accordance with the alleged agreement and that the Airport Authority was in breach of this implied term. The Airport Authority denies that what was agreed at the meetings attended by all three parties and as set out in the 2 April 1998 letter had created any privity of contract between Kenworth and the Airport Authority entitling Kenworth to sue the Airport Authority directly as alleged. It is the Airport Authority's case that the agreement as recorded in the 2 April 1998 letter was that the special measures to be implemented by Kenworth would be considered as a variation to the sequence and timing of the works under GCC Clause 52 of the Main Contract and the letter was an instruction of the Project Manager to Nishimatsu of this variation under the aforesaid provision at the valuation made under GCC Clause 54 in the sum of HK$49 million. In other words, the contractual mechanism under the Main Contract and the Sub-contract was being invoked, and there was no question of any extra-contractual arrangement that was to create any privity of contract between the Airport Authority and Kenworth.

8. The Project Manager had issued two instructions to Nishimatsu in identical terms dated 2 and 23 April 1998 under GCC Clause 52 asking the latter to instruct Kenworth to implement the special measures as identified in the 2 April 1998 letter.

9. Interim payments in respect of the work done by Kenworth to implement the special measures were certified in Main Contract Payment Certificates Nos. 420/26 dated 27 March 1998 and 420/27 dated 28 April 1998 in the sums of HK$25 million and HK$37,964,886.00 respectively. The entire sum of HK$49 million for these works was certified in Main Contract Payment Certificate No. 420/28 dated 25 May 1998. The certified sums were paid by the Airport Authority to Nishimatsu under the payment provisions of the Main Contract.

10. By a letter dated 15 May 1998 from Nishimatsu to the Airport Authority, Nishimatsu gave an account of the failures of Kenworth in performing the Sub-contract and requested the Airport Authority to give consent to terminate the Sub-contract under GCC Clause 64.1 of the Main Contract and to approve a call under the bond in accordance with clauses 9(c) and (d) of the Letter of Clarification from the Project Director appointed by Airport Authority to Nishimatsu dated 12 December 1995 ("the Letter of Clarification"), which formed part of the Main Contract. These provisions read as follows:

"We [the Project Director] confirm that:

...

(c) in the event of a termination of a nominated sub-contract, and upon you [Nishimatsu] demonstrating to the reasonable satisfaction of the Project Manager either that you were justified in terminating the sub-contract or that the Nominated Sub-Contractor has wrongfully terminated the sub-contract, the Authority [the Airport Authority] will make a call under the bonds provided on behalf of the Nominated Sub-Contractor and will pay you the sums received (without deduction or set-off) subject to you indemnifying the Authority against any liability incurred by the Authority arising out of a call made at your request provided that the Project Manager shall take any sums so paid to you into account if he is required to make a decision in accordance with clause 64.9;

(d) the Authority will not make a call under any of the bonds supplied by Nominated Sub-Contractors other than upon request by you;..."

11. The Airport Authority gave the consent as requested and Nishimatsu wrote to Kenworth on 19 May 1998 to terminate the Sub-contract on the ground that Kenworth had been persistently in breach of its obligation to proceed with the works with due diligence and had repudiated the Sub-contract. Kenworth replied by a letter dated 20 May 1998 refuting the allegation and alleged instead that Nishimatsu had repudiated the Sub-contract. Kenworth agreed to vacate the site but held Nishimatsu responsible for all its losses as a result.

12. By a letter to the Bondsman dated 21 May 1998, the Airport Authority made a call on the bond demanding payment of HK$19,227,015.80 "in respect of damages ... sustained by [the Airport Authority] by reason of [Kenworth's] default". On 23 May 1998, Kenworth obtained an ex parte injunction against the Airport Authority and the Bondsman in High Court Action No. 8431 of 1998 to restrain payment under the bond. The injunction was discharged by Suffiad J. on 19 June 1998 at the inter partes hearing.

13. The Airport Authority then brought proceedings against the Bondsman in High Court Action No. 17807 of 1999 as the latter had failed to pay under the bond. On 2 February 2000, Burrell J. gave summary judgment in favour of the Airport Authority in the amount of the sum demanded with interest. Following the judgment, HK$22,386,628.77 was paid to the Airport Authority by the Bondsman. After deducting HK$461,969.50 in respect of legal fees pending taxation, the Airport Authority paid the balance of HK$21,924,659.27 to Nishimatsu, pursuant to clause 9(c) of the Letter of Clarification.

14. Following the termination of the Sub-contract and on 27 May 1998, Kenworth served a notice of dispute on Nishimatsu and requested that the Sub-contract dispute be referred to arbitration. No arbitrator has been appointed and no progress has been made in that arbitration. Nishimatsu has submitted a revised claim against Kenworth on 17 September 2001 for the sum of HK$141,042,108.10 and this dispute is subject to arbitration between them.

15. In July 2000, Kenworth underwent a scheme of arrangement for the restructuring of its debts, which was approved by its creditors. This was subsequently sanctioned by an order of the court on 11 July 2000 and the petition for the winding up of Kenworth was dismissed on or about 21 August 2000. Similar schemes of arrangement were sanctioned by the court for the holding company of Kenworth, UDL Holdings Ltd., and 23 other subsidiaries.

16. On 31 May 2001, the Airport Authority and Nishimatsu entered into a settlement agreement in respect of the Main Contract. The settlement agreement included a provision for payment by the Airport Authority to Nishimatsu for work which Nishimatsu carried out in respect of the Sub-contract after the Sub-contract was terminated in the sum of HK$236,602,673.76. The Airport Authority considered it is a proving creditor of Kenworth under the scheme of arrangement by virtue of a warranty to the Authority by Kenworth dated 17 February 1996 by which Kenworth undertakes to execute the Sub-contract works in accordance with the terms of the Sub-contract and to indemnify the Authority against each and every liability which the Authority may have to any person and against any claims, loss and damages sustained or payable by the Authority to the extent arising from breach of the warranty by Kenworth. Hence, on 14 August 2001, the solicitors for the Airport Authority submitted documents to the administrator of the scheme of arrangement in respect of the Authority's claims against Kenworth.

17. On 23 August 2001, Kenworth wrote to the solicitors for the Airport Authority referring to the letter dated 14 August 2000 to the scheme administrator and urging the Airport Authority to withhold payment to Nishimatsu of HK$236,602,673.76 until the disputes between Kenworth and Nishimatsu have been resolved. Kenworth stated that if the Airport Authority should insist on releasing payment to Nishimatsu, it would consider taking legal proceedings against the Authority without further notice. The solicitors for the Airport Authority replied on 28 August 2001 stating that the sum in question had been paid to Nishimatsu in respect of the Sub-contract works completed by Nishimatsu after the termination of the Sub-contract and Kenworth's dispute with Nishimatsu does not in any way concern or involve the Authority. On 7 September 2001, Kenworth issued the writ herein against the Airport Authority.

Kenworth's claims

18. The claims of Kenworth against the Airport Authority fall into two broad categories. The first is in relation to the monies received by the Authority under the bond. The second arises from the alleged agreement for special measures to be implemented by Kenworth as set out in the 2 April 1998 letter. Both claims are founded on certain terms to be implied by law. The way that the causes of action are framed may be summarised as follows.

The bonded sum

19. It is pleaded that there should be an implied term in the bond issued by the Bondsman to the Airport Authority. Alternatively, there should be an implied term in the contract constituted by the Sub-contract Tender submitted by Kenworth. The content and effect of the term to be implied have been put in two different ways and I set them out in full for ease of reference as the actual terms of what should be implied are important in this application.

20. The first version of the implied term in the bond is as follows:

"The Bond also contained the implied term as a matter of law and construction that if the Bond is called, the Defendant [the Airport Authority] must at some time produce an account and prove the amount of any actual damages, losses, charges, costs or expenses sustained by the Defendant by reason of the Plaintiff's [Kenworth's] default and in the event of the Defendant's failure to prove the Plaintiff's default, the whole amount paid under the Bond shall be repaid by the Defendant to the Plaintiff." (paragraph 7 of the Amended Statement of Claim)

21. The alternative version of the implied term in the bond reads as follows:

"... the Bond contained an implied term that if the Bond is called, the Defendant must at some time produce an account and prove the amount of any actual damages, losses, charges, costs or expenses sustained by the Defendant by reason of the Plaintiff's default and in the event of the Defendant's failure to prove the Plaintiff's default, the whole amount paid under the Bond shall be repaid by the Defendant to the Bondsman. The term is to be implied by operation of law or in order to give business efficacy of the Bond." (paragraph 7A of the Amended Statement of Claim)

22. The difference in the alternative version is that the repayment is to be made to the Bondsman.

23. The implied term in the contract constituted by the Sub-contract Tender submitted by Kenworth is alleged to be in the same terms as the implied term in paragraph 7 of the Amended Statement of Claim. As I understand it, the pleader would seem to be saying that it is to be implied in that contract that the performance bond (which is only to be provided when the Sub-contract is made on acceptance of the tender) is to contain the alleged implied term.

24. It is then pleaded in paragraph 19C of the Amended Statement of Claim that the Airport Authority is put to strict proof of its damages, losses, charges, costs or expenses actually sustained by the Authority as a result of Kenworth's alleged default in the Sub-contract. It seems to me that paragraph 20 must be a pleading in the alternative because here it is alleged that the Authority "having failed to prove [Kenworth's] default" or any damages sustained so that Kenworth is entitled to full repayment of the bonded sum received in the amount of HK$22,386,628.77, pursuant to the implied term in paragraph 7 and/or 7A of the Amended Statement of Claim.

25. The reliefs claimed in the prayer would also appear to be in the alternative. They are (1) an account of the actual damage, losses, charges, costs or expense sustained by the Airport Authority by reason of Kenworth's alleged default; (2) an assessment of the amount of any overpayment to the Airport Authority under the bond; and (3) repayment of HK$22,386,628.77 or such amount of overpayment as may be assessed by the court.

The "special measures agreement"

26. I have already set out the way Kenworth has pleaded its case how this agreement was alleged to have arisen and the implied term in this alleged agreement between the Airport Authority and Kenworth in the earlier part of this decision.

27. It is alleged by Kenworth that the Airport Authority was in breach of the alleged agreement in that the Authority had never adjusted the value of Cost Centre 30 of the Main Contract (which was the cost centre for the Sub-contract works) by the addition of the agreed sum of HK$49 million and Kenworth is entitled to recover HK$49 million as damages (paragraphs 14 and 17(1) of the Amended Statement of Claim).

28. It is further alleged that the Authority was in breach of the implied term of the alleged agreement in that (1) it had failed to procure additional payment to be made to Kenworth to compensate Kenworth for other special measures outside the alleged agreement (they were taken prior to 23 March 1998) and the costs associated with prolongation and disruption in the execution of the Sub-contract works; (2) it had delayed and disrupted the Sub-contract works by amendments to drawings or otherwise requiring additional and variation works to be carried out by Kenworth and in failing to issue or to procure Nishimatsu to issue prompt instructions for the execution of the Sub-contract works; (3) it wrongfully gave consent to Nishimatsu to terminate the Sub-contract. By reason of these breaches, Kenworth was unable to achieve substantial completion of the Sub-contract works in accordance with the alleged agreement and is entitled to recover from the Authority damages being extra labour costs of about HK$33 million and loss of profit to be assessed (paragraphs 15 and 17(2) and (3) of the Amended Statement of Claim).

29. I now turn to the parts of the pleadings complained of that the Airport Authority seeks to strike out.

The implied term in paragraph 7 of the Amended Statement of Claim

30. Before I deal with the arguments for and against this implied term, it would be appropriate to set out the general principles on which a term is to be implied into a contract as stated in the majority judgment of the Privy Council in B P Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 16 ALR 363 at 376. In their Lordships' view, for a term to be implied, the following conditions (which may overlap) must be satisfied:

"(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear express expression; (5) it must not contradict any express term of the contract."

31. It is pertinent to note the following about the term sought to be implied in paragraph 7 of the Amended Statement of Claim:

(1) It is a term to be implied in the bond, which is a contract between the Bondsman and the Airport Authority. Kenworth was not a party to this contract.

(2) The obligation to repay as implied in the bond is not to repay the Bondsman, but to repay Kenworth.

(3) The obligation to repay Kenworth is alleged to arise because the Airport Authority has, at some unspecified time before the issue of the writ, failed to prove default of Kenworth or damage sustained by the Authority as a result of such default.

32. How this implied term is said to arise is based on the decision of Morrison J. in Cargill International SA v. Bangladesh Sugar and Food Industries Corp. [1996] 4 All ER 563 which was upheld by the English Court of Appeal [1998] 2 All ER 406. That was a case in which the seller of goods was required to give an on-demand performance bond to the buyer. The buyer rejected the shipment due to the seller's breach and made a call on the bond. The seller sought an injunction to restrain the buyer from drawing on the bond on the ground that the buyer had suffered no loss. It was held that the buyer was entitled to make a call for the full amount of the bond even if the seller's breach of contract had caused it no loss and the justification for this lies in the commercial purpose of this kind of bond as explained by Morrison J. at 568e to 569c:

"Such a bond is, effectively, as valuable as a promissory note and is intended to affect the 'tempo' of parties' obligations; in the sense that when an allegation of breach of contract is made (in good faith), the beneficiary can call the bond and receive its value pending the resolution of the contractual disputes. He does not have to await the final determination of his rights before he receives some moneys....

However, it seems to me implicit in the nature of a bond, and in the approach of the court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an 'accounting' between the parties in the sense that their rights and obligations will be finally determined at some future date. The bond is not intended to represent an 'estimate' of the amount of damages to which the beneficiary may be entitled for the breach alleged to give rise to the right to call. The bond is a 'guarantee' of due performance. If the amount of the bond is not sufficient to satisfy the beneficiary's claim for damages, he can bring proceedings for his loss. As far as I am aware, and no case was cited to me to suggest otherwise, the performance bond is not intended to supplant the right to sue for damages. Indeed, such a contention would conflict with what I believe to be the commercial purpose of these instruments....

Therefore, the question arises as to why, if the beneficiary can sue to recover what he has actually lost, the seller (in this case) should not be able to recover any overpayment. It would seem, in principle, correct that if a performance bond does not exhaust one party's rights, it should not exhaust the rights of the other party."

33. As to the basis upon which overpayment is to be recovered, Morrison J. has this to say at 573 d to e:

" The basis upon which recovery may be made in respect of an overpayment is, I think, contractual rather than quasi contractual. It seems to me that it is necessary to imply into the contract that moneys paid under the bond which exceeded the buyer's actual loss would be recoverable by the seller. I am content to adopt Mr. Males' formulation of the term which is to be implied into the sale contract, as a matter of necessity, or on the basis that the implication of such a term was so obvious that its incorporation in the contract went without saying: 'that the buyer will account to the seller for the proceeds of the bond, retaining only the amount of any loss suffered as a result of the seller's breach of contract." (emphasis supplied)

34. Thus, it would appear from that judgment that the term of an obligation to account for overpayment is to be implied into the underlying contract, the contract of sale in that case, and the term is not to be implied in the bond. That is also the view of the author of Keating on Building Contracts, the extract in the 6th ed was cited by Morrison J at 570g to j. The extract in the 7th ed relating to on-demand bonds reads as follows:

"It is submitted that, where in relation to a building contract a contractor has at the request of the employer procured an unconditional bond, the court may, depending on all the circumstances, be able to imply into the building contract a term that the employer should account to the contractor for the proceeds of the bond." (para. 10-46; emphasis supplied)

35. The decision of the English Court of Appeal was cited in Keating as authority for that proposition and I now turn to that. The obligation to account was not in issue on appeal and the point argued was whether there were clear words in the contract of sale that would exclude such an implied term. The position on accounting was stated by Staughton LJ in this manner:

"The general situation as to performance bonds is that they provide that the bank or other party giving the bond has to pay forthwith, usually on demand but subsequently there has to be an accounting between the parties to the commercial contract." (at 416b to c; emphasis supplied)

36. Miss Teresa Cheng, SC, who appeared for Kenworth, drew my attention to these other passages in the judgment of the court:

" ... the obligation to account later to the seller, in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties." (at 413h, per Potter LJ)

"[The bond] achieves the effect of an early payment against loss or possibility of loss without the need to resort to litigation, and if it is sufficient (or more than sufficient) to compensate the buyer, it places the onus of challenge and recovery upon the seller." (at 415c, per Potter LJ)

37. Miss Cheng submitted that the following propositions are to be derived from Cargill:

(1) The beneficiary of the bond must not be entitled to retain anything more than what he has actually suffered.

(2) The party providing the bond must be entitled to recover the overpaid amount from the beneficiary.

38. No one doubts that there ought to be an accounting to Kenworth after the bonded sum had been paid over. The question is by whom and under what contractual arrangement. As I see it, the flaw in Miss Cheng's submission is that it overlooks the fact that there is no privity of contract between the Airport Authority and Kenworth. The above propositions would be apposite in the situation in which the underlying contract (into which the term to account is to be implied) is between the beneficiary of the bond and the provider of the bond, as in Cargill. They cannot be applied in the present situation. If any term is to be implied at all, it would be implied in the Sub-contract between Nishimatsu and Kenworth, as pleaded in paragraph 8(2) of the Defence filed by the Airport Authority that "Nishimatsu would account to Kenworth for the proceeds of the Bond, retaining only the amount of any loss suffered as a result of Kenworth's breach of the Sub-Contract." And as Mr. Clayton who appeared for the Authority has submitted, there would have been another term to be implied in the Main Contract that the Authority would account to Nishimatsu for the proceeds of the bond, but for the fact that under clause 9(c) of the Letter of Clarification the Authority is obliged to pay to Nishimatsu the entire bonded sum received without deduction or set-off.

39. I would also say that the judgments in Cargill do not provide any support for the proposition that the term to account is to be implied into the bond, as Kenworth is seeking to do in this instance.

40. Miss Cheng submitted that the accounting could not have been done between Kenworth and Nishimatsu because under clause 2 of the bond, it is provided that the bonded sum is for "damages, losses, charges, costs or expenses sustained by the [Airport Authority]", not by Nishimatsu or any one else. I reject this submission. Firstly, by virtue of clause 9(c) of the Letter of Clarification, the Airport Authority is obliged to pay over the entire bonded sum received to Nishimatsu. Secondly, under GCC Clause 5.3 of the Main Contract, it is provided that Nishimatsu shall be liable to the Authority for the acts and omissions of its sub-contractors of any tier as if they were the acts and omissions of Nishimatsu. Hence, damages due to Kenworth's default under the Sub-contract would be damages recoverable by the Authority against Nishimatsu under this provision of the Main Contract. Nishimatsu would in turn claim against Kenworth under the Sub-contract for the latter's default. There is no problem with applying clause 2 of the bond to this situation.

41. I have considered the particulars pleaded in paragraph 7B of the Amended Statement of Claim, which are said to support the contention that the term in paragraph 7 is to be implied. I am unable to find any support for the term to be implied in the bond by virtue of the fact that Kenworth had provided a counter-indemnity to the Bondsman for the latter to issue the bond to the Authority. The allegation in paragraph 7B(7) is also factually incorrect in that the bond was provided after the Sub-contract was entered into, not before.

42. Furthermore, as Mr. Clayton has submitted, it is trite law that a contract between two parties for the benefit of a third party is not enforceable by the third party, who is a "stranger to the consideration", see B + B Construction Ltd. v. Sun Alliance and London Plc [2000] 2 HKC 295. As stated by Godfrey VP at 391F to G, in Hong Kong, the law remains as "magisterially stated" by Viscount Haldane LC in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847 at 853 in these terms:

"My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam."

43. Hence, even if the term were to be implied in the bond which is between the Bondsman and Airport Authority, the term would be ineffective as Kenworth cannot enforce the implied term in these proceedings. See also Ermis Skai Radio & Television v. Banque Indosuez SA & Anr., 24 February 1997, Thomas J, Commercial Court Transcript, p. 12.

44. It is pleaded in paragraph 19A of the Amended Statement of Claim that "by an agreement made on 13 October 2000 between, inter alia, the Plaintiff [Kenworth] and the Bondsman, the Plaintiff undertook to the Bondsman that the Plaintiff would pursue any claims which the Plaintiff considers that it may have against the Defendant [Airport Authority] for monies due from and/or paid by the Plaintiff to the Bondsman under the counter-indemnity arising by virtue of payment by the Bondsman to the Defendant in respect of the Bond. Further, the Plaintiff undertook to the Bondsman that if in pursuing such claim, it is held that the Defendant has been overpaid by virtue of the payment made by the Bondsman to the Defendant under the Bond being in excess of the proper entitlement of the Defendant under the Bond, the amount of such overpayment awarded to and recovered by the Plaintiff shall be applied in the order of priority set out in paragraph 3(c) of the agreement made on 13 October 2000." It is not alleged that the Bondsman has assigned any of its rights to pursue the Airport Authority under the bond to Kenworth. I do not think what is pleaded in paragraph 19A or any term in the Restructuring and Settlement Agreement dated 13 October 2000 would have given Kenworth a right to enforce a term in a contract to which it was not a party.

45. I accept the submission of Mr. Clayton that applying the conditions in B P Refinery, the term pleaded in paragraph 7 of the Amended Statement of Claim should not be implied in the bond. Firstly, it is not reasonable or equitable: the proper place for the term to be implied is the underlying Sub-contract as that was the contract under which the bond was given, it was default under that contract that gave rise to the entitlement for the bond to be called and it was that contract that provided the contractual foundation for the rights and liabilities of Kenworth and Nishimatsu to be determined. Secondly, it is not necessary to give business efficacy to the bond, as the bond works perfectly well without this implied term. Thirdly, it is ineffective, as it cannot be enforced by Kenworth who was not a party to the bond. Fourthly, it is not obvious that it goes without saying that an officious bystander would have said that such a term must be implied.

46. On any view, it seems to me that the implied term in paragraph 7 of the Amended Statement of Claim is wholly untenable and this does not found any claim against the Authority. The offending parts in the pleading should be struck out.

47. The Authority has sought in the alternative a determination under Order 14A whether the bond contained the implied term as alleged. I am satisfied that this is an appropriate question for determination under Order 14A. A less stringent test would be applied in that I do not have to be satisfied it is plain and obvious that the implied term is unsustainable. I need only to be satisfied on the balance of probabilities that the question should be decided in favour of the Authority. If I were wrong in the striking out application, I would determine the question in the Authority's favour that no term should be implied in the bond as alleged in paragraph 7 of the Amended Statement of Claim.

The implied term in paragraph 7A of the Amended Statement of Claim

48. This is an implied term in the bond with the difference that the repayment is to be made to the Bondsman instead of to Kenworth.

49. For the reasons given above, this implied term is likewise unsustainable as it is not reasonable or equitable, it is not necessary to give business efficacy to the bond, it is not effective in that it cannot be enforced by Kenworth in these proceedings, and it is not obvious to an officious bystander.

50. I will order that the offending parts in the Amended Statement of Claim be struck out. If I were wrong in applying the more stringent test in striking out pleadings, I would determine the question in the Authority's favour and hold that no such term as alleged should be implied in the bond.

The implied term in paragraph 6(ii) of the Amended Reply

51. This term is to be implied in the contract constituted by the Sub-contract Tender and it is that a term should be implied in the bond to be provided in the terms as pleaded in paragraph 7 of the Amended Statement of Claim.

52. How this term is said to arise from the contract constituted by the Sub-contract Tender is not clear from the Amended Reply or in the submission made on Kenworth's behalf. Mr. Clayton has referred me to the authorities showing that any contract which may be constituted by a tender is of a limited nature in that there may be just an express or implied obligation not to withdraw the tender for a set period with the consequent express or implied obligation to consider all conforming tenders (Blackpool and Fylde Aero Club Ltd. v. Blackpool Borough Council [1990] 1 WLR 1195; City Polytechnic of Hong Kong v. Blue Cross (Asia-Pacific) Insurance Ltd. [1995] 2 HKLR 103). He submitted that there is simply no basis to imply such a term into the limited implied contract which can arise under a tender. I agree. Besides, once Kenworth's tender was accepted, Nishimatsu then called on Kenworth to enter into a sub-contract and that was duly done. The obligation to provide the bond arose under the Sub-contract.

53. In my judgment, no such term should be implied in the contract constituted by the Sub-contract Tender for the above reason and for the reasons I have given earlier in relation to the implied term under paragraph 7 of the Amended Statement of Claim. The offending parts in the pleading should be struck out as being obviously untenable. If I were wrong about this, I would decide in the Authority's favour and rule that no such term should be implied in the contract constituted by the Sub-contract Tender as alleged.

The implied term in the alleged "special measures agreement"

54. This is an implied term not to hinder, obstruct or prevent Kenworth from performing the alleged "special measures agreement". This kind of "hinder or prevent" implied term is not unusual in a construction contract (see for example London Borough of Merton v. Leach (1985) 32 BLR 51; Jardine Engineering Corporation Ltd. v. Shimizu Corporation (1992) 63 BLR 96). Indeed, it is pleaded in the Defence filed by the Authority that such a "hinder or prevent" term should be implied in the Sub-contract between Nishimatsu and Kenworth. What is in dispute is whether there was an agreement between the Airport Authority and Kenworth for such a term of hindrance or prevention to be implied in this agreement.

55. I should first go to the Amended Statement of Claim to see how it is pleaded that the agreement was made between the parties and what were the terms of the alleged agreement. This is in paragraph 10 and it reads as follows:

"The terms of the agreement reached at the said meetings were as set out in the Defendant's [the Airport Authority] letter to the Main Contractor [Nishimatsu] dated 2 April 1998 which was counter-signed by the Plaintiff [Kenworth] on 7 April 1998 to confirm the Plaintiff's acknowledgment and acceptance of the terms set out therein whereby in consideration of the Defendant's agreement to adjust, prior to the issue of the next payment certificate, the value of the Sub-Contract Works in Cost Centre 30 by the addition of an agreed sum of $49 million, the Plaintiff agreed to take the Special Measures so as to complete the Sub-Contract Works progressively and diligently in accordance with the programme as set out in Schedule 1 hereto with substantial completion being achieved by 31 May 1998 ("the Special Measure Agreement")." (emphasis supplied)

56. Thus, it is to be noted that on the pleaded case of Kenworth, the terms of the alleged agreement were as set out in the 2 April 1998 letter and no other matter is relied on as constituting the express terms of the alleged agreement. Kenworth filed its Amended Statement of Claim on 10 December 2001, the day before this hearing. There was no application to further amend its pleading. As the 2 April 1998 letter is important, I set this out in its entirety. The letter was written by the Project Manager employed by the Airport Authority to Nishimatsu and is as follows:

"Dear Sir,

New Airport at Chek Lap Kok
Contract 420 Ground Transportation Centre
Special Measures to Complete the NSC423 Building Services by 31 May 1998

Further to recent meetings between representatives of the Authority, Nishimatsu and UDL Kenworth Engineering Limited, this letter sets out the terms of our agreement reached in March 1998, that the Nominated Sub-Contract works under NSC423 are to be completed progressively and diligently to meet the target dates necessary for the FSD Inspection Programme (attached), with substantial completion being achieved by 31st May 1998.

It is recognised that in order to achieve completion by the target dates, "Special Measures" will have to be taken by Kenworth and their first tier domestic subcontractors with immediate effect. The agreed "Special Measures" that will be taken are also attached.

Subject to my receipt from you of a copy of this letter counter-signed by you and UDL Kenworth Engineering Limited, this letter shall be considered to be an instruction to vary the sequence and timing of the Building Services Works, pursuant to General Conditions of Contract Clause 52.1(b), upon the terms set out in this letter.

I confirm that the value of Cost Centre 30 will be adjusted prior to the issue of the next payment certificate by the addition of an agreed sum of $49 million, being the Project Manager's fair valuation of this variation order under GCC Clause 54 with respect to the Special Measures to be taken by the Nominated SubContractor and his domestic subcontractors.

If and to the extent that UDL Kenworth Engineering Limited fail to diligently implement these Special Measures, I reserve the right to review my valuation at a later date.

Please confirm acknowledgment and acceptance of the terms of this letter by Nishimatsu and UDL Kenworth Engineering Limited signing the duplicate copy enclosed herewith and return to this office.

Yours faithfully,

Project Manager under the Contract"

57. On the wording of the 2 April 1998 letter, is there any basis to suggest that the Airport Authority had made an agreement directly with Kenworth? It seems to me that all the indications are plainly to the contrary. It is clear from the terms of the letter that the special measures to be undertaken by Kenworth would be by way of an instruction for variation under GCC Clause 52.1(b) of the Main Contract and there would be a valuation of the variation under GCC Clause 54 in that an adjustment would be made to Cost Centre 30 of the Main Contract. The only basis for Kenworth to get paid for the special measures undertaken is under the Sub-contract and not by virtue of an extra-contractual arrangement. There are provisions in the Sub-contract for variations and valuations in Clauses 19.1, 19.2, 20.1 and 20.2. The wording of the letter provides no support for the allegation that there was to be an arrangement outside the existing contractual mechanism that would create an immediate contractual relationship between the Authority and Kenworth. There would appear to be no need for an extra-contractual arrangement.

58. I was referred by Mr. Clayton to the following extract in Hudson's Building Contracts, 11th ed, para. 13-016:

"It cannot be over-emphasised that no privity of contract between an owner and another contractor can arise out of a sub-contract concluded between the owner's main contractor and the other contractor. Where the sub-contractor has been selected by the owner, as in the case of nominated sub-contracts, early attempts were made to argue that the main contractor or the architect/engineer had on the facts contracted as an agent or trustee of the owner, and at one time this view appears to have prevailed in the courts, at least in relation to nominated or selected sub-contractors. However, the later cases make it clear that only the most special and unusual facts, showing that the owner expressly or by some unusual conduct authorised the main contractor or the architect/engineer so to contract, would justify such a finding, which is contrary to the purpose of the usual main contract and the practice and expectation when negotiating contracts informally between the various parties in the construction industry." (emphasis supplied)

59. It is also pertinent to note the evidence on affidavit filed on behalf of Kenworth when it applied for an injunction in High Court Action No. 8431 of 1998. The affirmation in question was made by Mr. Cheung King Kit. He was the General Manager of Kenworth and he had counter-signed the 2 April 1998 letter on its behalf. Mr. Cheung was at pains to explain why there was no contractual obligation on the part of Kenworth to achieve substantial completion of the Sub-contract works by 31 May 1998 notwithstanding that he had counter-signed the 2 April 1998 letter. More importantly, what Mr. Cheung had deposed to in his affirmation is entirely in accordance with the usual practice and expectation of the parties where there is a main contract between the employer and the contractor and a sub-contract between the contractor and the nominated sub-contractor, and is totally different from the allegation advanced for the first time in the present proceedings. The material parts of his affirmation read as follows:

"9(v) As the 1st Defendant's [the Airport Authority] letter 2nd April 1998 was essentially a proposed agreement between itself and the Main Contractor [Nishimatsu], the counter signature required of the Plaintiff [Kenworth] was to signify the Plaintiff's willingness to implement the requested special measures subject to a separate agreement with the Main Contractor and it was not to bind the Plaintiff directly to the 1st Defendant with whom only the Main Contractor has a direct contractual relationship. It was my understanding that the 1st Defendant's letter, albeit signed by the Plaintiff, would not be signed by the Main Contractor or sent to the 1st Defendant unless and until the separate agreement between the Main Contractor and the 1st Defendant was executed....

10. ... since the Plaintiff did not sign to confirm acceptance of the Proposed Agreement [the agreement to take special measures as set out in the 2 April 1998 letter], the Plaintiff could not be bound by its terms and could not be in default of the obligations imposed under the Proposed Agreement. My signature on the 1st Defendant's letter dated 2nd April 1998 makes no difference since the terms set out therein are matters between the 1st Defendant and the Main Contractor and the Plaintiff cannot be bound by such terms especially since the Main Contractor never signed the letter to confirm its acceptance of its terms ..."

25. ...I signed on the 1st Defendant's letter dated 2nd April 1998 only to signify the Plaintiff's willingness subject to separate agreement with the Main Contractor to implement the Special Measures. The terms set out in the 1st Defendant's letter were not extended to the Plaintiff and there is no question of the Plaintiff agreeing to these terms. They were only open for acceptance by the Main Contractor."

(emphasis supplied)

60. I should mention that Kenworth was represented in the injunction proceedings by the same counsel and solicitors as in this action. Mr. Cheung has not made any affirmation in the present proceedings to retract what he had said in his affirmation in the injunction proceedings, nor has anyone from Kenworth done so in any affirmation filed in this action. The only person who has made affirmations on behalf of Kenworth in these proceedings is Mr. Chan Man Shing, a senior quantity surveyor employed by Kenworth. He did not say in his affirmations what involvement, if any, did he have in the Sub-contract works and he has not provided any factual evidence as to the events in March and April 1998.

61. What then are the special and unusual facts in this case that would suggest that the Airport Authority had entered into a separate contract directly with Kenworth notwithstanding there was contractual mechanism provided in the Main Contract and the Sub-contract that could be invoked for the special measures to be undertaken? Miss Cheng has relied on the following matters.

62. Firstly, she submitted that on a proper construction of the various provisions of the Main Contract, the Airport Authority is not entitled to rely on GCC Clause 52.1(b) so as to instruct a variation for the special measures to be undertaken with substantial completion by 31 May 1998 as this would be changing a "key date", which is defined in the contract to mean "a date identified as such in the Specification as the same may be changed pursuant to clause 44 or, by agreement, clause 46". If the change to the key date is effected pursuant to clause 44, under clause 44.3 the Project Manager is required to assess and decide whether the Contractor "may fairly be entitled to an extension of any of the Key Dates." If the procedure for acceleration provided in clause 46 is adopted, the Project Manager may notify the Contractor of the measures or request the Contractor to submit proposals on the measures to be taken. Clause 46.4 provided that the Project Manager may then instruct the Contractor to take any measure agreed between the Project Manager and the Contractor or, in the absence of agreement, other measures to accelerate the execution of the Works to achieve any Stage or substantially complete the Sub-contract works or any Section by a specified date earlier than the relevant key date and the Contractor shall carry out the measures as instructed with due diligence. Clause 46.6 provided that the price to be paid for the measures, if the price is not agreed between the Project Manager and the Contractor, shall be assessed and decided by the Project Manage as such revisions to the Cost Centre values as shall, in the Project Manager's opinion, be fair in all the circumstances.

63. Mr. Clayton submitted that the wording of GCC Clause 52.1(b) is wide enough to encompass a variation in the present situation as this provided that "the Project Manager may instruct any variation to the Works that is in his opinion desirable in connection with the Works or the Airport Core Project. The variations may include but shall not be limited to:- ...(b) changes to any sequence, method or timing of construction specified in the Contract other than changes in programming requirements necessary for the Contractor to comply with his obligations apart from this clause 52.1(b)."

64. I do not think it is necessary for me to resolve the disputed construction of clause 52.1(b). It is not in dispute that clause 46 relating to acceleration could have been used by the Airport Authority. The fact that the Authority did not make use of the correct provision is of little or no consequence. Measures for acceleration were certainly instructed by the Project Manager in the 2 April 1998 letter. This could be done even in the absence of agreement, by virtue of clause 46.4(a). Revisions to Cost Centre 30 were made. If this could not be done under clause 54.1, this could be done under clause 46.6 instead.

65. For the above reasons, I do not think the first ground relied on by Miss Cheng as indicating that the arrangement proposed in the 2 April 1998 letter must have been done extra-contractually is of any substance.

66. The second matter relied on by Miss Cheng is that in the interim payment certificates issued, the work done in respect of the special measures was described as "other items" instead of "variations". I am quite unable to see how this would provide any support to the case of Kenworth that it had a direct contract with the Airport Authority for the special measures. The interim payment certificates would seem to me to indicate the contrary, as these were documents issued in accordance with the provisions in the Main Contract.

67. Thirdly, Miss Cheng submitted that instructions of the Project Manager must be confirmed to the Sub-contractor by the Contractor, under clauses 8.1 and 8.3 of the Sub-contract. Reliance was also place on clauses 19.1 and 19.2 of the Sub-contract dealing with variations. As there was no such confirmation, this would provide support for Kenworth's case that the special measures were instructed by an extra-contractual arrangement. I also reject this submission. The evidence placed before me is to the contrary. There was a letter dated 15 May 1998 from Mr. Cheung King Kit to Nishimatsu in which he stated that the acceleration and special measures "were instructed by your company and the Airport Authority".

68. Fourthly, Miss Cheng relied on some of the correspondence subsequent to the 2 April 1998 letter to support Kenworth's case that there had been a direct agreement between the Airport Authority and Kenworth. Among these are the letters dated 8 April 1998 from the Project Manager to Nishimatsu, 14 April 1998 from Nishimatsu to the Airport Authority, 21 April 1998 from Nishimatsu to the Airport Authority 19 May 1998 from Nishimatsu to Kenworth. It does not appear to me that any of these letters provide the kind of support relied on by Kenworth. On the contrary, they support the Authority's case that there was no extra-contractual arrangement in that these letters showed that the instruction was issued under the Main Contract and the payment was made under the Main Contract. The fact that Nishimatsu did not counter-sign the 2 April 1998 letter did not affect the position as it is clear from the subsequent correspondence that Nishimatsu had accepted that the Authority was to issue an instruction for variation under the Main Contract for the special measures to be carried out. Thus, in the letter dated 14 April 1998 from Nishimatsu to the Authority enclosing the 2 April 1998 letter counter-signed by Kenworth, whilst Nishimatsu stated that they declined to sign the letter as there was no requirement under the Main Contract for them to do so (which is correct), Nishimatsu went on to say that "it is agreed that the sum of HK$49 million excludes our [Nishimatsu] overhead and direct costs associated with the implementation of these special measures, and it is understood that a separate instruction will be issued to cover these costs." Nishimatsu then requested the Authority to "issue an instruction directing [Nishimatsu] to implement the special measures as set out in [the Authority's] letter [of 2 April 1998]." It would appear from the evidence filed by the Authority that by the arrangement proposed in the 2 April 1998 letter, Nishimatsu would in addition under the Main Contract be entitled to 1% for profit and other charges on the agreed valuation of HK$49 million. In my view, the position could not have been clearer.

69. The last matter relied on by Kenworth is an estoppel pleaded in paragraph 8A of the Amended Reply. There it is pleaded that the Authority is estopped from denying the alleged special measures agreement because "the Defendant [the Authority] has relied on such agreement in order to persuade the Court in HCA8431 of 1998 and has called upon the Bond on the basis that the Main Contractor [Nishimatsu] was entitled to terminate the Sub-Contract by reason of, inter alia, the Defendant [this should read "the Plaintiff"] not having complied with its obligations under the Special Measure Agreement. The Plaintiff [Kenworth] has suffered loss and damages by reason of the counter-indemnity provided to the Bondsman upon the Defendant calling on the Bond."

70. Miss Cheng has clarified that this is an estoppel by representation. I do not think there is any proper basis for it. The Authority did not advance any case or make any representation in the injunction proceedings that it had a direct contractual relationship with Kenworth regarding the special measures. There was no ruling or finding at the inter partes hearing of the interlocutory injunction that there was such an agreement between the Authority and Kenworth.

71. To conclude, the pleaded case of Kenworth that there was a direct contract between itself and the Authority is unsupported by the evidence relied on and contradicted by its own evidence being the affirmation of Mr. Cheung in the injunction proceedings. I agree with Mr. Clayton that the case of Kenworth in respect of the alleged special measures agreement and the term to be implied into it is obviously untenable and an abuse of process and the offending parts in the Amended Statement of Claim and the Amended Reply should be struck out.

72. If the more stringent test on striking out were not satisfied, I would be prepared to make a determination under Order 14A in the Authority's favour that there was no implied term in the alleged agreement between the Authority and Kenworth as set out in the 2 April 1998 letter. I regard the question as suitable for determination under this procedure. The wording of the letter clearly showed that the contractual mechanism under the Main Contract and the Sub-contract was to be invoked, not an extra-contractual arrangement. Kenworth's rights and obligations in respect of the Sub-contract works are governed by the Sub-contract. There would be no implied term as alleged as there was no alleged agreement.

73. It was submitted for Kenworth that the question is not suitable for determination under Order 14A as this would depend on a large amount of documentary evidence which at the moment is only partly disclosed and oral evidence which is not available now. I do not accept this submission. I have already dealt with the affidavit evidence of Kenworth or rather the lack of it concerning the events in March and April 1998 and the inconsistent affidavit evidence of Mr. Cheung in the injunction proceedings. "Respondents to an application under Order 14A are not entitled to contend that they should be allowed to hunt around for evidence or something that might turn up on discovery which could be relied upon to explain or modify the meaning of the relevant document. If there were material circumstances of which the Court should take into account in construing the document, they must be taken to have been known, and could only be such as were known, to the parties when the agreement was made. In the absence of such evidence the Court should not refrain from dealing with the application." (Hong Kong Civil Procedure 2001, para. 14A/2/4). The above statements are entirely apposite to the present situation.

Conclusion and orders

74. For the above reasons, the Airport Authority succeeds both in its application to strike out and in the determination under Order 14A of the four questions I set out at the beginning of this decision.

75. I make an order in terms of paragraphs 1, 1A, 2, 2A, 3 and 4 of the Amended Summons of the Airport Authority filed on 12 December 2001, striking out the various paragraphs of the Amended Statement of Claim and the Amended Reply mentioned therein. I also make an order that the questions set out in paragraph 5 of the Amended Summons are all determined in the negative in that none of the implied terms were contained in any of the contracts as alleged. Lastly, I make an order in terms of paragraph 6 of the Amended Summons that the relief claimed in the Amended Statement of Claim be struck out and the action of Kenworth be dismissed.

76. The Airport Authority seeks costs on an indemnity basis. I am not prepared to so order in the order nisi. The order I make is that the costs of this action and of this application be paid by Kenworth to the Airport Authority, to be taxed on a party and party basis if not agreed.