COSMIC INSURANCE CORPORATION LTD v. PROSPERITY CONSTRUCTION AND DECORATION LTD AND OTHERS

HCCT39/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.39 OF 2003

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D E C I S I O N

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1. The plaintiff and the 1st defendant are parties to a performance bond which relates to a development under construction in Beijing. The 1st and 2nd defendants are parties to supply and installation sub-contracts in that development.

2. The bond and the sub-contracts are currently the subject of litigation between the Beijing developer and the defendants. At the time the performance bond was taken out, the three defendants in these proceedings, in consideration of the plaintiff executing the bond, sealed and delivered three separate counter indemnities in favour of the plaintiff. It would have made no commercial sense for the plaintiff, a Singaporean Insurance Company registered in Hong Kong, to have agreed to the bond without the security of a counter indemnity from the defendants.

3. In simple terms the counter indemnities require the defendants either to make a payment or provide a deposit to the plaintiff of the bonded sum, interest and costs.

4. The plaintiff, by this summons, claims the said payments or deposits in Order 14 proceedings. At issue is the proper construction of the counter indemnities themselves I therefore set out the relevant clauses in full :

"1. I/We hereby unconditionally and irrevocably agree to indemnify the [Plaintiff] and keep the [Plaintiff] indemnified against all claims, demands, actions, liabilities, damages, costs, losses and expenses of whatever nature which the [Plaintiff] may incur in any way as a consequence of the [Plaintiff] giving the Guarantee and, without limiting the foregoing, to pay to the [Plaintiff] on demand all sums which may be claimed from the [Plaintiff] or which the [Plaintiff] may pay or become liable to pay under or by reason of or in connection with the [Bond] including, without limitation, all costs and expenses (including legal fees and other fees on an indemnity basis) incurred by the [Plaintiff] in defending or otherwise resisting any claim or threatened claim.

2. The [Plaintiff] may, without making prior demand, recover as a debt all sums which may be paid by it or by or on its behalf by its agents under or by reason of or in connection with the [Bond] and any other amounts payable hereunder and charge interest thereon calculated from the date on which the [Plaintiff] paid or incurred the relevant sum or other liability.

...

4. I/We undertake to deposit with the [Plaintiff] immediately on demand any amounts (i) for which the [Plaintiff] may consider it may be liable in connection with the [Bond] until such time as the [Bond] is released and returned to the [Plaintiff] or during the time any liability thereunder otherwise remains outstanding (ii) which the [Plaintiff] may consider necessary or desirable in its absolute discretion upon the occurrence of any circumstance or event which the [Plaintiff] considers might jeopardise this security or the [Plaintiff]'s ability to enforce the same. I/We hereby assign to the [Plaintiff] by way of additional security any such sum, together with interest accruing thereon, and hereby acknowledge that I/We shall not be entitled to withdraw, assign, change or otherwise dispose of or encumber such sum or interest until all of my/our liabilities owing to the [Plaintiff] hereunder have been discharged.

...

8. I/We agree to pay interest on all sums which are due but not paid hereunder (as well after as before judgement) at (8% per annum) from time to time to the date of full and final payment. I/We also agree to reimburse the [Plaintiff] on demand for all costs, charges and expenses (including legal and other fees on a full indemnity basis) incurred by the [Plaintiff] in exercising any of its rights or powers hereunder or in suing for or seeking to recover any sums due hereunder or in otherwise preserving or enforcing the [Plaintiff]'s rights hereunder.

...

16. A certificate by an officer of the [Plaintiff] as to the moneys, obligations or liabilities for the time being due, owing or incurred by me/us to the [Plaintiff] shall save for manifest error, be conclusive evidence thereof against me/us for all purposes."

5. The following brief chronology explains the present state of play between the Beijing proceedings and the Hong Kong proceedings.

6. In July 2000 the performance bond and the three counter indemnities were executed.

7. In October 2001 the Beijing developer made its first call on the bond against the plaintiff.

8. In November 2002 the Beijing developer commenced proceedings in Hong Kong. The plaintiff then made demands against the defendants on the counter indemnities which went unheeded. Thus, in April 2003 the plaintiff commenced this Order 14 application.

9. In May 2003 the Beijing developer's action in Hong Kong was stayed pending the outcome of the Beijing proceedings which are continuing.

10. The primary issues in this application concern clauses 1 and 4. Clause 1 calls for a payment of the bonded sum to the plaintiff; clause 4 calls for a deposit of the bonded sum to be made with the plaintiff.

Clause 1

11. Mr Thomas Lee, for the defendants, opposes the application. His primary argument in respect of clause 1 is that as it is described as an indemnity then the normal rules relating to indemnity should be followed, namely (from Andrews and Millett, Laws of Guarantees) :

"... a general rule that the right to an indemnity does not usually arise until the person entitled to the indemnity has been called upon to pay and his liability has been ascertained."

12. Whilst this may be so, as a general rule, the difficulty facing Mr Lee is that the words of this indemnity are clear and drafted for a specific purpose namely to permit the plaintiff immediately, upon a claim being made, to obtain sufficient sums to protect it in the event of it b eing liable to pay under the bond. It is in deliberately wide terms, designed for a specific commercial contingency and signed by all parties. The use of the word "may" on eight separate occasions in clauses 1, 2 and 4 suggests that this is an indemnity in which the "general rule" does not apply.

13. The plain meaning of the words in clause 1 are that it is more than an indemnity in the sense of a liability to reimburse on the happening of a particular event. It creates a liability to immediately provide security against possible future liabilities. It is simply not possible to argue that phrases such as "which the plaintiff may incur as a consequence of giving the guarantee" and "all sums which may be claimed ... or may pay or become liable to pay ..." and "... including without limitation..." do not mean precisely what they say. I further cannot accept the submission that as the outcome does not accord with commercial common sense the parties must have intended something different from that which appears on the face of the document. The main reason for rejecting this submission is that it does not flout business common sense.

14. Mr Lee expresses a further concern that if the defendants are required to pay the bonded sum now and they later become the successful party in the Beijing proceedings, what safeguards are there that the plaintiff will refund the money? This concern is understandable. However, it is met by the following undertaking offered by Mr Hill who represents the plaintiff :

"In the event that the Honorable Court gives judgment for the Plaintiff for payment of the Bonded Sum and any interest thereon, the Plaintiff undertakes :

(i) that the monies will be held by Lovells in an interest bearing client account pending the final determination, settlement or withdrawl of the demand made and proceedings commenced by BOP in respect of the Bonded Sum;

(ii) to account to the Defendants upon the final determination, settlement or withdrawl of the demand made and proceedings commenced by BOP in respect of the Bonded Sum;

(iii) not to oppose the implication of a term into the Counter-Indemnities providing that the Plaintiff would reimburse any overpayment upon the final determination, settlement or withdrawl of the demand made and proceedings commenced by BOP in respect of the Bonded Sum."

15. It should be noted that Mr Lee does not accept this undertaking. One of his objections to it is that it has the effect of converting an order for "payment" under clause 1, in effect, into an order for a "deposit" under clause 4. He contends that an order under clause 4 has further difficulties for the plaintiff and so it would be inappropriate to disguise a "deposit" order as a "payment" order.

16. I therefore turn to clause 4 to consider if the plaintiff does in fact face extra difficulties under this clause.

Clause 4

17. Clause 4 (see page 4 supra) contains two sub-paragraphs, referred to as (i) and (ii). Mr Lee submits firstly, that the plaintiff must satisfy both (i) and (ii) before any deposit can be ordered and secondly that as it has failed to satisfy (ii) therefore no deposit is payable.

18. I disagree with both submissions. In order to demonstrate that only proof of (i) and (ii) will suffice Mr Lee has invited the court to read clause 4 in a number of different ways; for example, by taking away "(i)" and "(ii)", or with the inclusion of the word "or" before "(ii)", or with the inclusion of the word "and" before "(ii)" or with a comma instead of "(ii)". By doing this, he submits, the true construction of clause 4 can be discerned. I find this unnecessary and prefer to read it as it is. I find no ambiguity or lack of clarity. It says that the defendants undertake to deposit money in two situations. Either or both will suffice. They are not alternatives, neither is it necessary to prove both.

19. For the sake of completeness, even if it were necessary to prove both I am persuaded by Mr Hill's submission that situation (ii) is also satisfied. He refers to letters sent to the plaintiff from the solicitors from the Beijing developer, in October and December 2001, making demands on the bond alleging default by the defendants.

20. In short, had this application been confined to clause 4 I would have found for the plaintiff. American Home Assurance Co. v. King Pacific International Holdings Ltd [2001] 3 HKC 673 was a case involving similarly but not identically worded counter indemnities. In that case Sakhrani J was only concerned with the "deposit" clause. His following remarks in that case have equal application in the present case (notwithstanding some differences in the wording of the relevant clauses) :

"The commercial purpose of cl 12 (the 'deposit' clause) was to provide the plaintiff with the deposit of cash or collateral security. As Mr Ma has correctly submitted, nothing in cl 12 requires the plaintiff or anyone else to evaluate the merits or demerits of HKHS's underlying claim against the second defendant under the building contract. There is no need to evaluate the merit or the merits of HKHS's underlying claim against the second defendant under the building contract. There is no need for the plaintiff to pay out on the performance bond until after liability against the second defendant has been established and damages have been proved."

21. To conclude, in spite of the carefully constructed submissions advanced by Mr Lee in opposition to this Order 14 application, I find Mr Hill's submission to be succinct and unanswerable. The plain and ordinary meaning of the indemnities are clear, commercially sensible and undefendable now that the Beijing proceedings have commenced. I do not agree with Mr Lee's submission that the construction of clause 4 is more stringent than clause 1, accordingly I will make an order under clause 1 together with the undertaking offered by the plaintiff which allays the defendants concerns.

Legal costs and interest

22. The plaintiff has an additional entitlement to costs and interest. The costs claimed to date, in this application are $536,091.23. If I were to award this sum in full it would be the equivalent of indemnity costs, being due, as it is, under an indemnity clause. It is open to the court to order a lesser sum, which I shall do.

23. Finally, I make no order in respect of interest at this stage. I consider it preferable for such an item to await a final account.

24. Upon the plaintiff's undertaking as set out in paragraph 14 herein, there will be judgment for the plaintiff against the 1st, 2nd and 3rd defendants for the bonded sum of $8,703,310.86 pursuant to paragraph 27(a) of the Statement of Claim dated 30 April 2003 together with a sum of $400,000 representing legal costs pursuant to paragraph 27(b) of the Statement of Claim. The costs of and occasioned by these summary judgment proceedings shall be to the plaintiff.