CHEUNG KEE FUNG CHEUNG CONSTRUCTION CO LTD v. PERMANENT INVESTMENT CO LTD

HCCT 8/2016

[2020] HKCFI 2561

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 8 OF 2016

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R U L I N G

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1.  On 1 February 2016, the Plaintiff obtained an ex parte order granted by Chow J (“Order”), compelling the Defendant to withdraw its demand made to the Shanghai Commercial Bank (“Bank”) under a Surety Bond dated the 11 December 2012 (“Bond”) for payment of HK$13.2 million, and prohibiting the Defendant from receiving payment under the Bond. On 2 February 2016, the Plaintiff issued the Originating Summons under section 45 (2) of the Arbitration Ordinance (“Ordinance”) and Order 29 of the RHC, for the injunctive relief.

2.  By consent, the Order was on 4 February 2016 discharged in exchange for undertakings given by the Defendant, (inter alia) to inform the Bank that despite the Defendant’s demand for payment under the Bond, the Bank should withhold considering whether or not to make any payment to the Defendant pursuant to the demand “until after the final determination of the issue as between the Plaintiff and the Defendant in arbitration and/or as between the Plaintiff, the Defendant and/or the Bank in court (as may be applicable) of whether the Defendant was entitled to and did make a valid Demand under and in accordance with the terms of the Bond and the Contract between the parties therein referred to”.  Further proceedings in the action were stayed, upon terms which included the order that the costs of the ex parte application and of the inter partes summons issued on 2 February 2016 (“Summons”) for continuation of the Order be reserved.

3.  The initial Order was made under section 45 of the Ordinance, as an interim measure in aid of the arbitration of disputes between the parties (“Arbitration”), which arose under a contract for the Defendant’s engagement of the Plaintiff as a contractor to carry out renovation and alteration works (“Contract”). The Arbitration had been commenced by the Plaintiff in December 2015, prior to the making of the Order, and an award was ultimately made in April 2019 for sums due and to be paid by the Defendant to the Plaintiff under the Contract (“Award”). The Plaintiff emphasized that it was less than 2 months after commencement of the Arbitration that the Defendant issued the demand to the Bank for payment under the Bond, necessitating the Plaintiff’s urgent application for the injunctive relief in February 2016.

4.  The Award on merits having been published on 10 April 2019, the parties sought (by their consent summons of 15 July 2020) the Court’s determination by paper disposal of the question of the costs of the ex parte application for the Order, the costs of the inter partes Summons, the costs of the consent summons to discharge the Order upon the Defendant’s undertaking, and the costs of and incidental to the entire action.  The Plaintiff argued that these costs should be paid by the Defendant on indemnity basis, and the Defendant argued that each party should bear its own costs.

5.  The basis of the Plaintiff’s claim for costs on indemnity basis is the Defendant’s allegedly underhanded and oppressive conduct of its defence to the Arbitration and to these proceedings.  The Plaintiff claims that the Defendant had no basis under the underlying Contract for the project to withhold the issue of the Certificate of Substantial Completion of the works, that it took advantage of its own wrong and breach of contract in refusing return of the Bond upon completion of the works, to make demand on the Bank for payment under the Bond, all with the ulterior motive of putting financial pressure on the Plaintiff to deter the Arbitration and obstruct the Plaintiff’s claims.  On the Plaintiff’s case, the circumstances of the Defendant’s making demand for payment under the Bond, when it was not entitled to do so, demonstrated the Defendant’s unconscionable conduct as part of “an oppressive game plan”, so as to entitle the Plaintiff to an order for the Defendant’s payment of costs on indemnity basis.

6.  It has to be borne in mind that the Order was sought and granted as an interim measure in aid of the Arbitration, and that the Order was discharged, and the action stayed, on the Defendant’s undertaking and the parties’ agreement that the undertaking was to be accepted in place of the Order, until the final determination of the issue between the Plaintiff and the Defendant in the Arbitration, as to the Defendant’s entitlement to make a valid demand under the Bond and the underlying Contract.  By the Award, the tribunal determined that dispute on the Bond, by holding that whilst there was no express requirement under Clause 33.2A of the General Contract Conditions for the Defendant to physically return the Bond, it was clear that the Bank was released from its obligation to provide surety upon issue of the Substantial Completion Certificate, and that the said Certificate should have been issued on 31 March 2015.  If the Certificate had been issued in accordance with the Contract, the Plaintiff would have been in a position to advise the Bank that it was released from the Board.  A declaration was made by the tribunal that the Plaintiff was entitled to a release from the Bond as of 31 March 2015.

7.  The tribunal found that the project manager and the Defendant had been wrong to consider the date of completion of the project to be other than 31 March 2015.  In the Award, the tribunal pointed out the Defendant’s erroneous belief that substantial completion could not be achieved until such time as certain events, such as the submission of certain documents, had been achieved.  The Defendant had also considered that it was entitled to call on the Bond as the Plaintiff was in culpable delay, and was liable for $44 million in liquidated damages.

8.  Although the Plaintiff sought a declaration in the Arbitration that it was entitled to the return of the Bond by virtue of the Defendant’s fraudulent demand on the Bond which was a breach of the Contract, the tribunal pointed out that no evidence had been adduced in the Arbitration that the Defendant’s withholding of the Bond was fraudulent.  The Plaintiff argued that no finding of fraud was necessary from the tribunal simply because it was not a relevant issue for determination in the Arbitration.  Even if that was true, there is the tribunal’s express finding in the Award, that the reason for the Defendant’s withholding the Bond was its genuine but mistaken belief as to (inter alia) the definition of “Substantial Completion” under the Contract.

9.  In view of the findings made by the tribunal, on the merits of the claims and the defence and the evidence adduced in the Arbitration, I fail to see how I can make a finding on costs on the basis of what the Plaintiff alleges to be either fraudulent conduct, or conduct with an ulterior motive. The tribunal has found to the contrary, ie that the withholding of the Bond and the demand made thereunder was under a genuine albeit mistaken belief on the Defendant’s part as to its entitlement under the Contract.  

10.  If the Plaintiff considered that the Defendant’s conduct was fraudulent, oppressive or in any other way justifying a particular order for costs to be made relating to the entire conduct of the Arbitration, then irrespective of the relevance of the issue of fraud to the merits of the questions in dispute in the Arbitration, it should have made submissions to the tribunal that the order for costs should reflect such conduct, and all other relevant circumstances, so that the costs order in the Court proceedings in aid of the Arbitration may correspond thereto.  I have not been referred to any evidence that the costs ordered by the tribunal were other than the usual order.

11.  In all the circumstances, and by virtue of the tribunal’s determination of the claims made in the Arbitration in favour of the Plaintiff, the appropriate order on costs in this action, which is ancillary to the Arbitration, would be that the costs of the action, including the costs of the ex parte application for the Order, the costs of the Summons, and the costs of the consent summons of 4 February 2016, should be paid by the Defendant to the Plaintiff, on the usual party and party basis, with certificate for Counsel.