SINOEARN INTERNATIONAL LTD v. HYUNDAI-CCECC JOINT VENTURE (a firm)

CACV 83/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 83 OF 2011

(ON APPEAL FROM HCA 3987/2003)

________________________

BETWEEN

________________________

_______________

J U D G M E N T

_______________

Hon Cheung CJHC:

Facts

1.  This is an appeal from the judgment dated 18 April 2011 given by Au J.  The Judge dismissed the Plaintiff’s claim but gave judgment on the Defendant’s counterclaim in the sum of HK$3,151,824 together with interest and costs.

2.  The dispute between the parties arose out of the construction works of the project for building Container Terminal 9 (“the CT9 project”) in Kwai Chung.

3.  In May 2000, the Defendant was awarded the contract for the construction works of the CT9 project and became the principal contractor.  The works involved in part the deepening of a depth of some 50 feet of the Rambler Channel, dredging of the Kwai Chung container port to accommodate large container vessels and various substantial dredging and reclamation works.  From the dredging works, massive amount of contaminated mud would be excavated.  The disposal of contaminated mud was governed by environmental requirements imposed by the relevant authorities.  It was therefore necessary for the Defendant to secure an approved dumping site for the disposal of the contaminated mud to be dredged.

4.  The cost of disposal of contaminated mud at an approved site in Hong Kong waters would be significant.  As indicated in the tender documents for the CT9 project, the Government would charge a fee of HK$55.4 per m³ of marine soil for the use of a disposal area near East Sha Chau (the East Sha Chau Marine Disposal Area) for dumping purposes.  On the other hand, dumping of contaminated mud in Mainland waters would be much cheaper.  It was the intention and expectation both of the employer and of the principal contractor that the bulk of the contaminated mud to be dredged would be dumped in an approved site to be found in Chinese waters.  Prices for the contract were based on such an assumption.

5.  In the meantime, the Plaintiff had set up and maintained a dumping site in South Erzhou in Chinese waters.  Prior to October 1999, the capacity of the South Erzhou site was only 1.8 million m³. To cater for the business opportunity under the CT9 project, by 20 October 1999, the Plaintiff had successfully obtained the approval of the Mainland State Oceanic Administration (“SOA”) to increase the capacity of the South Erzhou site to 8 million m³.

6.  According to the Defendant’s own tender documents, the estimated quantity of contaminated mud to be dredged was 6,823,030 m³, all but 0.5 million m^3.of which was intended to be dumped in Chinese waters.  But according to a Quotation Requisition Sheet issued by the Defendant to potential sub‑contractors (including the Plaintiff) for the provision of dumping ground for the contaminated mud to be dredged from the CT9 project in Chinese waters, the estimated quantity of mud was 6,410,770 m³.  Note 3 of the Quotation Requisition Sheet stated :

“On the other hand, you are now informed of the total volume of contaminated mud to be dumped. Will you be able to quote for the price per unit volume now.”

7.  That Quotation Requisition Sheet was dated 10 January 2000, before the Defendant was finally awarded the main contract.  Various quotes were obtained.  After the signing of the main contract in May 2000, the Defendant urgently looked for a suitable dumping ground in Chinese waters, as dredging works were amongst the first foundation works that the Defendant had to carry out to prepare the site for the construction of the container berth.

8.  Through middlemen, the Defendant entered into negotiations with the South Chinese Sea Branch of SOA (“SCSB”) and subsequently with the Plaintiff.  The crucial negotiations between the Plaintiff and the Defendant took place in mid July 2000.  After intensive negotiations, agreement was reached on 14 July 2000. According to the Judge, the parties entered into a binding agreement on that day whereby the Defendant agreed to engage the Plaintiff as its agent to apply for permission from SCSB for dumping the contaminated mud to be dredged from the CT9 project.  This agreement, referred to by the Judge as “the 14/7 Agreement”, was, so the Judge found, “contained in and evidenced by the 14/7 Documents” – two short agreements in Chinese signed by the respective parties’ representatives.  Paragraph 109(1) of the judgment below.

9.  The certified English translations of the 14/7 Chinese documents read :

“ Agreement on the Dumping of Dredged mud

Hyundai‑CCECC Joint Venture is the General Contractor of Container Terminal 9 Development of Hong Kong, and Sinoearn International Ltd is the Subcontractor of Hyundai‑CCECC Joint Venture. After friendly discussions, both parties have reached an agreement on cooperating in dumping the dredged mud from Container Terminal 9 Development to seawater at South Erzhou, Dangan, Wanshan, Zhuhai, China. Both parties have agreed on the following :

I. The price is HK$17.00/ m³, and the total quantity is subject to the final quantity confirmed by the Owner of Container Terminal 9 Development to Hyundai‑CCECC Joint Venture.

II. Terms of payment and other provisions will be decided through further discussions.

[signatures]

14^th July 2000”

“ Agreement on the Dumping of Dredged mud

Hyundai‑CCECC Joint Venture is the General Contractor of Container Terminal 9 Development of Hong Kong, and Sinoearn International Ltd is the Subcontractor of Hyundai‑CCECC Joint Venture. After friendly discussions, both parties have reached an agreement on cooperating in dumping the dredged mud from Container Terminal 9 Development to seawater at South Erzhou, Dangan, Wanshan, Zhuhai, China. Furthermore, both parties have decided to jointly apply to the South China Sea Branch, State Oceanic Administration for the permit for dumping dredged mud. Relevant details of construction will be decided through further discussions.

[signatures]

14^th July 2000”

10.  In arriving at that agreement, the parties proceeded on the assumption and expectation that the bulk of the estimated 6 million odd m³ of contaminated mud to be dredged from the project would be dumped at the South Erzhou site.  This was reflected by what the parties did on the following day, ie 15 July 2000.  On that day, the parties agreed, for the purposes of making the application for the dumping permit to dump the mud at the site, to fix the total quantity of mud to be dumped at 6,410,770 m³, the figure supplied in the previous Quotation Requisition Sheet.  In fact, a copy of the Quotation Requisition Sheet as well as the 14/7 Documents were submitted together with the letter of application by the Plaintiff to SOA for the dumping permit.  However, the dumping permit applied for was only in respect of 1 million m³.  The reason was that if the parties were to apply for a dumping permit for 6.4 million odd m³ of contaminated mud, the dumping levy that had to be paid to SCSB upfront would have created a huge financial burden on the Defendant.  Thus, the dumping permits were to be applied for in stages.  Nonetheless in the application submitted on 17 July 2000, the Plaintiff undertook with SCSB that it would eventually apply for dumping permits for the entire dredged contaminated mud, which was estimated to be 6.4 million odd m³, as per the Quotation Requisition Sheet submitted.

11.  Besides, as the Judge found, the Plaintiff also entered into various “Back‑to‑Back Agreements” and a “Plaintiff’s Undertaking” which were essential to the discharge of the Plaintiff’s contractual duty owed to the Defendant, including, for example, the obtaining of the necessary permits for barges and vessels from Hong Kong, carrying the dredged mud, to enter and operate in Chinese waters.  At least some of them provided for payment by the Plaintiff for the rights so acquired by reference to the estimated quantity of 6.4 million odd m³, subject to a prescribed margin.

12.  The application for the first dumping permit was approved on 26 July 2000.  According to evidence undisputed, SCSB would only allow one dumping site to be used for the dumping of one source of material.  In other words, as a result of the grant of the first dumping permit and the beginning of dumping of mud dredged from the CT9 project at the South Erzhou site, the Plaintiff could not use the site for dumping materials from any other sources.

13.  In the meantime, the Defendant prepared a formal and detailed agreement for the parties’ signature.  It contained many terms and provisions not specifically mentioned in the 14/7 Documents. The Judge found that the 14/7 Documents contained (or evidenced) all the necessary essential terms to form a binding agreement. Under that agreement, the Defendant agreed to engage the Plaintiff to apply for permission from SCSB for dumping the contaminated mud coming from the CT9 project at an unit price of HK$17 per m³, leaving the parties to agree further on the other terms required to carry out and implement this principal agreement.  Those other terms, according to the Judge, were contained in this subsequent written document prepared by the Defendant on 21 July 2000, which the parties eventually signed on 24 July 2000.  At trial, the subsequent agreement was referred to as “the 21/7 Agreement”.  The 21/7 Agreement contained the detailed terms for carrying out the 14/7 Agreement.  Paragraph 109(2) of the judgment.

14.  The 21/7 Agreement was subsequently amended by two addenda.  Reference to the 21/7 Agreement in this judgment will be a reference to the agreement as amended.

15.  Given the importance of the terms of the 21/7 Agreement, I would set it out in full here :

“KWAI CHUNG CONTAINER PORT – TERMINAL 9 DEVELOPMENT

AN AGREEMENT made the 21^st day of July 2000 BETWEEN Hyundai Engineering & Construction Co., Ltd ... (hereinafter called ‘the Contractor’) of the one part and Sinoearn International Ltd … (hereinafter called ‘the Agent’) of the other part.

After consultation, the two parties set forth the following Articles of Agreement, to which both party’s [sic] shall adhere.

NOW IT IS HEREBY AGREED as follows:

1.0 GENERAL

The duties and performances of the Agent shall include but not necessarily be limited to the following.

1.1 To act on behalf of the Contractor, as Agent, in respect to all matters relating to the obtaining of Dumping Permits to dispose of contaminated mud and necessary permits for the Contractor’s vessels to enter/operate, in China waters.

1.2  To liaise and coordinate with all concerned Parties in China for smooth progress of the Contractor’s operations.

2.0  PARTICULAR

2.1  Dumping Fee: HK$17.00/m³ (Seventeen dollars) based on in‑situ volume and inclusive of all expenses whatsoever incurred relating to the dumping permit in mainland China.

2.2  Dumping Area: The contaminated mud materials shall be deposited in and around the dumping area South of Er Zhou, as stipulated in the Dumping Permit.

2.3  The Dumping Fee is inclusive of all costs and expenses whatsoever incurred in respect to obtaining the necessary approvals/permits and permissions in mainland China.

2.4  The Dumping Permit from the relevant Authority in China (State Oceanic Administration) for the dumping of contaminated mud shall be obtained within there (3) working days from the signing of this Agreement.

  However, should situation arises [sic] that are acceptable to the Contractor, the period, in Agreement with the Contractor, may be reasonably extended.

2.5  Quantity – The total dumping quantities is estimated to be in the region of 3,000,000 m³, under this agreement actual quantities will be those finally disposed of at the China dumping area through this contract.

2.6  Payment Schedule

  The first Dumping permit shall be for a quantity of 1,000,000 m³ of contaminated mud, equivalent to a Dumping Fee of HK$17,000,000.00 which shall be paid as follows:‑

a.  First Payment, Within five (5) working days of the Contractor receiving the official Dumping Permit.  The Contractor will deposit HK$8,000,000.00 (eight million dollars) directly to the Agents bank account, from this payment, HK$7,000,000.00 (seven million dollars) will be paid immediately to State Oceanic Administration Bureau, the remaining HK$1,000,000.00 (one million dollars) for the payment of Port charges at Zhuhai.

b.  Second Payment, Within one (1) working day of the Contractor receiving the official vessel license.  The Contractor will deposit HK$2,000,000.00 (two million dollars) directly to the Agents bank account, this payment shall be for the procurement of the Performance Guarantee Bond, which shall be effective for the whole period of dumping operation, in the same amount.

c.  Third payment, balance of HK$7,000,000.00 (seven million dollars) will be paid upon the quantity of dumping having reached 60% (600,000 m³) of the Permit total. Upon receipt of this payment the Agent shall immediately effect and secure a Performance Guarantee Bond in favour of the Contractor in the amount of HK$1,000,000.00 (one million dollars).

d.  All future payments, paid in respect to receipt of subsequent Dumping Permits shall follow the same general principle as set out in Items a, b & c of the above Payment Schedule, however the Agents’ obligations to effect and secure the respective Performance Guarantee Bond requirements shall be changed as follows:

i)  The HK$2,000,000.00 (two million dollars) Performance Guarantee Bond to be effected and secured upon receipt of the second payment shall be considered compulsory. However the Contractor if he so desires in consideration of all the matters in respect to his dumping operations proceeding in an efficient manner, may at his discretion decide to waiver the bond.

ii)  The HK$1,000,000.00 (one million dollars) Performance Guarantee Bond to be effected and secured upon receipt of the third payment will not be required.

2.7  The measurement for interim volume shall be on the basis of the current factor applied by the relevant China Authority but in no case shall this exceed 70% of volume of mud‑water mixture calculated by actual loaded ‘Barge Volume’.

2.8  The measurement of final volume shall be, based on the Bathymetric Survey data submitted by the Contractor to the Employer of the Project, calculated using the principle of Initial Survey less Final Survey less any other Survey quantities of contaminated mud dumped in other disposal areas.

2.9  The Agent shall be responsible for arranging the taking of samples for analysis by the State Oceanic Administration, the payment of all fees and expenses whatsoever incurred in respect to the obtaining of all necessary permits for the Contractor’s dumping operations and for liaising with all concerned parties including local people groups to ensure the smooth unhindered progress of the Contractor’s operations.

2.10   …..

2.11  …..

3.0  Performance Guarantee Bond – Pursuant to the period stated in Article 2.6a) above, the Agent shall provide to the Contractor, in wording to be agreed by the Contractor an irrevocable and unconditional Letter of Guarantee issued through a reputable bank in Hong Kong, for the sum of HK$5,000,000.00 (five million dollars).

4.0  …..

5.0  …..

[signatures]”

16.  Following the grant of the first dumping permit on 26 July 2000, the Defendant began dumping contaminated mud dredged from the CT9 project at the South Erzhou site.  However, in August and September 2000, due to concerns raised by green groups, the Environmental Protection Department refused to issue loading permits to the Defendant, without which the Defendant could not transport the dredged contaminated mud out of Hong Kong to the dumping site in Chinese waters.  An appeal against the Department’s decision failed in late May 2001.  In early September 2001, the Defendant instructed that the CT9 contaminated mud be dumped at an approved site in Hong Kong waters instead.  The South Erzhou site was all but abandoned by the Defendant.  This gave rise to the parties’ dispute and this litigation.

Judgment below

17.  At trial, the Plaintiff’s primary case was that the Defendant was contractually committed to dump exactly 6,410,770 m³ of the CT9 contaminated mud at the unit price of HK$17 per m³ at the South Erzhou site.  In other words, the dumping contract was a fixed sum contract, and the Plaintiff was entitled to be paid HK$108,983,090 under the contract.  The Judge rejected the Plaintiff’s case on the ground that neither the 14/7 Agreement nor the 21/7 Agreement provided for an exact quantity of 6,410,770 m³ of mud to be dumped at the Chinese site, and such a contention flew in the face of the expressed provisions in the contractual documents regarding final measurement of the mud.

18.  But the Judge allowed the Plaintiff to run two unpleaded alternative cases at trial.  The first alternative case was that instead of an agreed exact quantity (of 6,410,770 m³), the Defendant had contracted for the right to dump the entire quantity of mud dredged from the CT9 project at the South Erzhou site and had therefore contracted to pay for the entire quantity of mud so dredged, subject to a so‑called bad weather exception.  That is, if weather conditions did not allow and mud had to be dumped in Hong Kong waters instead, the quantity of mud so dumped in Hong Kong waters would not attract the unit rate of HK$17 per m³ in calculating the dumping fee payable.  The Judge rejected the first alternative case essentially on the ground that it was inconsistent with clause 2.8 of the 21/7 Agreement.

19.  The Plaintiff’s second alternative case was that its contractual duty under the dumping contract was to secure the right to dump for the Defendant and therefore it was entitled to receive payment for the right to dump so secured at the rate of HK$17 per m³, regardless of the actual dumped volume.  As the Plaintiff had successfully obtained the first dumping permit for the right to dump 1 million m³ of contaminated mud, it was thus entitled to receive HK$17 million, of which the Defendant had only paid HK$8.9 million.  The Plaintiff was therefore entitled to claim the difference of HK$8.1 million.

20.  The Judge again dismissed this second alternative case of the Plaintiff on the ground that it was simply inconsistent with clauses 2.7 and 2.8 of the 21/7 Agreement dealing with interim and final measurements of the quantity of mud dredged.

21.  The Judge therefore dismissed the Plaintiff’s claim, and upheld the Defendant’s counterclaim for overpayment on the basis that the contract entered into by the parties was a measurement contract, and there had only been a total of 338,128 m³ of contaminated mud actually dumped at the South Erzhou site, and thus an overpayment of HK$3,151,824.

22.  From the Judge’s judgment, the Plaintiff appeals.  In the appeal, Ms Teresa Cheng SC (Mr Adrian Lai with her) runs on behalf of the Plaintiff essentially the same three cases unsuccessfully run below.

Interpretation of commercial contracts

23.  The appeal turns on the construction of the dumping contract, comprising the 14/7 Agreement and the 21/7 Agreement.  No relevant oral agreement has been alleged.

24.  The interpretation of contract has generated a substantial body of case law.  Contracts are not made in a vacuum.  In construing a contract, it is important to bear in mind, amongst other things, the context or setting in which a contract was made, and the purpose for which it was made.  The test is invariably objective.

25.  In relation to a commercial contract, as has been pointed out by Lord Wilberforce in the well known case of Reardon Smith Line Ltd v Hansen‑Tangen [1976] 1 WLR 989, 995H to 996A, it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

26.  In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, Lord Steyn said at page 771A/B to B/C :

“ In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.”

27.  In the recent UK Supreme Court case of Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Lord Clarke, in giving the leading judgment of the Supreme Court, said :

“14. … I agree with Lord Neuberger (also at para 17) that those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case [1998] 1 WLR 896, 912H, the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

…..

21. The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.

…..

29. Finally, it is worth setting out two extracts from the judgment of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL [2011] 1 BCLC 336, paras 25 and 26:

‘25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards …

26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.’

30.    In my opinion Longmore LJ has there neatly summarised the correct approach to the problem.  That approach is now supported by a significant body of authority. As stated in a little more detail in para 21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense. …..”

28.  On the other hand, as the Court of Final Appeal has reminded us in the very recent case of Champion Concord Limited v Lau Koon Foo FACV Nos 16 & 17/2010 (23.11.2011), in the construction of a contract, one must confront the language used.  But the Court likewise placed emphasis on the purpose and objectives of the provisions in issue and stressed the importance of an interpretation making good commercial sense :

“72. The following passage from Lord Hoffmann’s judgment in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at §21 was cited in support:

‘When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties (‘12 January’ instead of ‘13 January’ in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; ‘any claim sounding in rescission (whether for undue influence or otherwise)’ instead of ‘any claim (whether sounding in rescission for undue influence or otherwise)’ in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896) is no reason for not giving effect to what they appear to have meant.’

73.       The persistent deficiency in the appellants’ argument is its failure to confront the language used in the contract.  As the citation from Lord Hoffmann makes clear, the Court’s task is to determine ‘what a reasonable person would have understood the parties to have meant by using the language which they did’.  In the present case, the language of clauses 13 to 17 leaves no room for doubt as to what the parties meant.  Those clauses addressed the uncertainties which they faced regarding the obtaining of consent, the amount of the premium and the time it would take to obtain a decision from the DLO.  The purpose of those clauses was to place a limit on the period allowed for completion of the transaction with different completion dates provided for against specified eventualities.  Those were objectives which made good commercial sense viewed from both sides of the contract.”

Known background facts in the present case

29.  In the present case, it is plain from the facts not in dispute now that it was not commercially viable to dump the contaminated mud to be dredged from the project in Hong Kong waters; dumping the bulk of it in Chinese waters was the only commercially workable option. Indeed, the Defendant submitted its tender and was awarded the project on that basis.  Furthermore, it was well known to those in the trade, including the Plaintiff, that the mud to be dredged would be most substantial in quantity. As mentioned, in the Defendant’s own tender documents, the figure of 6.8 million odd m³ was used.  In the Defendant’s Quotation Requisition Sheet sent to various potential subcontractors including the Plaintiff, a lower figure of 6.4 million odd m³ was used.  In the Plaintiff’s subsequent application for the first dumping permit, that figure was used as the ultimate quantity to be dumped at the South Erzhou site.  At the appeal, Mr John Scott SC (Mr Martin Wong with him) fully accepted on behalf of the Defendant that at all material times, the parties were proceeding on the hope and expectation that the entire quantity of contaminated mud to be dredged from the CT9 project would be dumped in Chinese waters.  That only makes commercial sense.

30.  Moreover, as the dredging works were amongst the first foundation works that the Defendant had to carry out to prepare the site for the construction of the container berth, securing an approved dumping site in Chinese waters was a matter of first priority for the Defendant, after it was awarded the main contract in May 2000.  Indeed, the Judge recognized and found that at the time of the making of the 14/7 Agreement, the Defendant was facing a tight timetable to secure a dumping permit from SCSB; sorting out the dumping permit was “very important and urgent” given that the Defendant had to continue with the dredging works by the end of July in order to avoid any serious delay.  Paragraph 86 of the judgment.

31.  The Judge specifically found, as part of the relevant factual matrix, that it was the Defendant’s hope to dump basically all the contaminated mud in the Mainland waters in order to save costs; and that at the time of negotiations, both parties proceeded with an estimate that the entire volume of the contaminated mud to be dredged would be in the region of 6.8 million m³, even though for very understandable reasons, no exact quantity of the mud was used as a basis for negotiations : paragraph 101 of the judgment.

32.  It is true that, as the Judge found (para 86(4) of the judgment), the parties had spent many negotiation sessions on the two days before the signing of the 14/7 Documents to reach an agreed unit price, which was a very important term for both parties.  Yet it is also true that the parties were able to reach that agreement on the unit price because they had proceeded on an estimate that the entire volume of the contaminated mud to be dredged under the CT9 project would be in the region of 6.8 million m³ : paragraph 101(3) of the judgment.

33.  Again that only makes commercial sense. In a contract of this nature, agreement on the unit rate would obviously be dependent on, amongst other things, the estimated volume of contaminated mud to be dredged from the project because, as explained, the parties’ expectation throughout was that the mud so dredged would be dumped in Chinese waters.  I therefore have no hesitation in rejecting Mr Scott’s submission that the fixing of the unit rate at HK$17 per m³ could have got nothing to do with the estimated quantity of mud to be dredged from the CT9 project and dumped in the South Erzhou site.

34.  In my view, this is a very important background fact to bear in mind when one approaches the contractual documents for construction.

The 14/7 Documents

35.  I now turn to the 14/7 Documents.  The second 14/7 Document is reasonably clear in stipulating for an engagement by the Defendant of the Plaintiff to obtain the necessary dumping permission.  As for the first 14/7 Document, it sets out in clause 1 the all important unit rate of HK$17 per m³.  But it does not stop there.  Nor is it silent on the question of quantity.  Clause 1 goes on to say that “the total quantity is subject to the final quantity confirmed by the Owner of Container Terminal 9 Development to Hyundai‑CCECC Joint Venture (“總數量以經9號碼頭發展的業主確認給現代 ‑ 中土聯營的最終數量為準”).

36.  Pausing here, this clause makes sense and accords well with the important background facts that I have described. The parties have reached an agreement on the unit rate, expressed in terms of HK dollar per m³. The quantity is to be determined not by reference to the volume of mud to be dumped at the South Erzhou site as such, nor to the quantity of dredged mud to be transported by vessels and barges from Hong Kong to Chinese waters for dumping purposes.  Rather, quantity is by reference to the amount of mud to be dredged, as to be verified by the owner of the CT9 project with the Defendant as principal contractor.  Unless that amount, that is, the amount of mud to be dredged to be verified by the owner with the Defendant should bear a relationship to the amount of mud to be dumped at the site, for which purpose the dumping permission is to be obtained, and for which purpose the service of the Plaintiff is to be engaged and to be paid for, the reference does not make sense.

37.  Taking one step further, unless it is the parties’ contractual intention that the mud to be dredged from the project (the quantity of which is to be verified by the owner) is to be dumped entirely at the site, the clause does not make commercial sense.

38.  Viewed in this light, the clause is in full accord with the known background facts, that is, the parties fully intend and expect that the entire contaminated mud to be dredged from the project, the quantity of which is to be verified by the owner, is to be dumped at the South Erzhou site, and the Plaintiff is to get paid for its services in securing the necessary dumping permission to enable the Defendant to do so.

The 21/7 Agreement

39.  Clause 2 of the first 14/7 Documents states that the terms of payment and other provisions will be decided through further discussions.  This brings me conveniently to the 21/7 Agreement.  But before doing so, it is important to bear in mind that as the Judge has held, the 21/7 Agreement was an agreement to work out and implement the agreement already reached under the 14/7 Documents, as the principal agreement.  There is no suggestion that the parties have by the 21/7 Agreement agreed to vary the terms already agreed in the 14/7 Agreement.  That is an important context to bear in mind when looking at the terms of the 21/7 Agreement, which must be construed together with that in the 14/7 Agreement as a whole.

40.  Clause 1.1 of the 21/7 Agreement stipulates for the Plaintiff’s duty to act as the Defendant’s agent in respect of all matters relating to the obtaining of the dumping permits to enable the Defendant to dump contaminated mud dredged from the CT9 project in Chinese waters.

41.  Clause 2.1 provides for a dumping fee of HK$17 per m³  “based on in‑situ volume”; it is inclusive of all expenses whatsoever incurred relating to the dumping permits in Chinese waters.  There is no dispute that in‑situ volume refers to the volume of mud to be dredged in Hong Kong.  As such, clause 2.1 mirrors clause 1 in the first 14/7 Document.  So, again, the unit rate is by reference to the quantity of mud to be dredged in Hong Kong.

42.  Clause 2.5 deals with “quantity”.  It gives an estimated dumping quantity in the region of 3 million m³. There is no specific evidence on why this lower estimate was used in the 21/7 Agreement.  But whether it be 3 million m³ or 6 million m³ or more, it does not detract from the analysis that I am embarking on.  Clause 2.5 goes on to say that “under this agreement actual quantities will be those finally disposed of at the China dumping area through this contract”.

43.  Mr Scott contends that this is fatal to the Plaintiff’s case.  The Plaintiff is to be paid by reference to the quantity of mud to be dumped in Chinese waters, applying the unit rate of HK$17per m³.

44.  Yet even if this be a correct reading of clause 2.5, still it says nothing on whether, as a matter of proper construction of all the contractual documents, the quantity to be dumped at the site is to bear any relationship to the quantity to be dredged in Hong Kong.  Nor does it tell one how the reference to the quantity to be dumped in Chinese waters in clause 2.5 is to be read together with the references both in clause 1 of the first 14/7 Document and in clause 2.1 of the 21/7 Agreement to the quantity of mud to be dredged in Hong Kong.

45.  This is not at all difficult to do if one bears in mind the known commercial background of the dumping contract, that is, the parties were proceeding on the basis that the entire contaminated mud to be dredged from the CT9 project would be dumped at the site in Chinese waters for good commercial reasons.  In other words, subject to exceptions which I will presently turn to, the reference to the quantity to be dredged in Hong Kong and the reference to the amount to be dumped in Chinese waters are, in effect, used interchangeably in the contractual documents, as I will continue to seek to demonstrate.

46.  Returning to the 21/7 Agreement, the next clause is 2.6, payment schedule for the first dumping permit and for subsequent dumping permits of 1 million m³ each. Significantly, the third and last instalment of payment (HK$ 7 million) for the permit is to be made upon the dumped quantity having reached 60% (0.6 million m³) of the permit total : clause 2.6(c) and (d).

47.  This has to be read together with clause 2.7 which provides for taking measurement of the interim volume, on the basis of the current factor applied by the relevant Chinese authority, provided that in no case should this exceed 70% of the volume of mud‑water mixture calculated by actual loaded “barge volume”.

48.  As a matter of proper construction of the dumping contract, it makes little commercial sense if the Defendant is not obliged to dump the mud dredged at the South Erzhou site so as to enable the Plaintiff to receive payment under clause 2.6(c) and (d).

49.  Then comes clause 2.8 dealing with final volume measurement.  Clause 2.8 provides that that will be done on the basis of the Bathymetric Survey data submitted by the Defendant as principal contractor to the employer of the project, calculated using the principle of Initial Survey less Final Survey “less any other Survey quantities of contaminated mud dumped in other disposal areas”.

50.  Leaving aside for the time being the reference to mud being dumped “in other disposal areas”, clause 2.8 returns to the familiar theme of measuring the quantity of mud to be dredged from the CT9 project in Hong Kong.

51.  The Judge thought that the reference to “in other disposal areas” in clause 2.8 changed the picture entirely.  Mr Scott’s submission was to the same effect.  Essentially, the point was that clause 2.8, as a contractual term, clearly stipulated that the Defendant could at its discretion dispose of the mud to be dredged from the CT9 project at other disposal areas, and given the reference in clause 2.5 to the volume of mud to be dumped at the South Erzhou site, the dumping fee payable to the Plaintiff was only to be calculated by reference to the quantity actually dumped by the Defendant at the site in Chinese waters based on the agreed rate.  For those dumped elsewhere, no dumping fee would be payable even though the corresponding dumping permit had been obtained by the Plaintiff as the Defendant’s agent.

52.  In fact that was the only substantive reason given by the Judge for rejecting the Plaintiff’s first alternative case : paras 118 to 124 of the judgment.

53.  I do not accept the argument.  The reference to “other disposal areas” in clause 2.8 is in itself ambiguous.  There is no description in the 21/7 Agreement of what these other possible disposal areas may be or are intended to be.  The circumstances contemplated by the parties, under which the Defendant may, despite the Plaintiff’s obtaining of dumping permits for disposal at the South Erzhou site pursuant to the elaborate provisions in the agreement, choose to dump the mud at these other disposal areas, are also not stated.

54.  But more importantly, if this little phrase “in other disposal areas” should be interpreted generally to mean that the Defendant had a complete discretion to dispose of the mud to be dredged elsewhere, it would have serious consequence on the position of the Plaintiff in terms of the amount of dumping fee payable to it.  Yet, for such a (supposedly) wide discretion which carries with it such serious implications, one can find no apparent commercial purpose and reason.  Why should the Defendant have wanted to dump the mud elsewhere given the known background?  What was in the contemplation of the parties when they agreed to this little phrase “in other disposal areas”?

55.  All this flies in the face of the known commercial context, that is, the Defendant was urgently seeking to secure through the Plaintiff’s services an approved dumping site in Chinese waters to dump the contaminated mud that was being dredged from its project, as no approved dumping site in Hong Kong waters would be commercially viable.  That being the case, it is difficult to see objectively what was in the parties’ (reasonable) contemplation when they provided for the disposal of the dredged mud “in other disposal areas” – if that phrase were to be given the meaning ascribed to it by Mr Scott.

56.  But not only that.  It is not in dispute that in order to obtain the dumping permit, a huge amount of money would have to be expended by the Plaintiff; that money was to be funded by the Defendant. That, as explained, was indeed the reason why instead of applying for one single dumping permit for the entire estimated quantity of 6 million odd m³, the Defendant eventually opted for obtaining dumping permits for one million m³ each and the Plaintiff proceeded accordingly.  The interpretation proffered by the Defendant now would mean that strictly speaking, the Defendant need not pay the Plaintiff a single dollar for the right to use the dumping site in Chinese waters, even though the Plaintiff had incurred substantial amounts in obtaining the relevant dumping permit, if it (the Defendant) for its own reason, should thereafter choose to dump the dredged mud elsewhere.  Again, that does not make commercial sense and serves no apparent commercial purpose.

57.  Then what does the phrase “in other disposal areas” refer to?  In other words, what was in the contemplation of the parties (objectively viewed) when they used this phrase in clause 2.8? First, there is the known and undisputed fact that prior to the Plaintiff’s securing the dumping permit for the Defendant pursuant to their dumping contract, the Defendant had already started dredging works and the mud so dredged had been dumped in Hong Kong waters.  Secondly, there was evidence to the effect that after the making of the 14/7 Agreement, the parties did discuss the odd occasion when bad weather in Hong Kong or in South China Sea would prevent dumping operation at the South Erzhou site in which event the dredged mud would have to be dumped in Hong Kong waters.

58.  In my view, the reference to other disposal areas in clause 2.8 can easily be construed as a reference to the pre‑contract dump as well as these odd bad weather occasions.  This interpretation does not do an unacceptable violence to the language of clause 2.8 and, more importantly, it does not flout the commercial sense of the transaction.  Equally importantly, this reading of clause 2.8 brings it into complete harmony with clause 1 in the first 14/7 Document, and clauses 2.1, 2.5 and 2.6(c) and (d) of the 21/7 Agreement.

True construction

59.  All this leads me to the ultimate question in terms of liability in this case : when the dumping fee payable by the Defendant to the Plaintiff is expressed in the unit rate of HK$17 per m³, does it refer to the quantity to be dumped in Chinese waters, or does it refer to the quantity to be dredged in Hong Kong (to be verified by the employer with the Defendant) less the quantity dumped elsewhere under the type of limited circumstances described above?

60.  In my view, on a true construction of the contractual documents, bearing firmly in mind the commercial purpose and context of this case, the answer must be that it is a reference to both, in the sense that the two are, in fact, in the peculiar circumstances of the present case, interchangeable and have been used by the parties interchangeably.  In other words, the Defendant is contractually obliged to dump the dredged mud at the South Erzhou site, subject to the limited exceptions described.  That accords fully with the intention and expectation of the parties when they entered into this dumping contract.

61.  Mr Scott argues that having a common expectation or hope is one thing, to elevate that expectation or hope to a contractual commitment is another.  In theory, I agree that there is this fine distinction.  But on the facts of the present case, that distinction is an artificial and unreal one, for the reasons already explained.  The “expectation or hope” that counsel refers to actually forms the underlying premise on which the whole dumping contract rests.  Without it, the contract does not make commercial sense.

62.  For all these reasons, I would uphold the Plaintiff’s first alternative case.

63.  On the other hand, I reject the Plaintiff’s primary case as well as the second alternative case.  I agree with the Judge that the parties never proceeded on an exact quantity of contaminated mud to be dredged in Hong Kong.  For that reason, the primary case of the Plaintiff must fail.  As for the second alternative case, it is quite inconsistent with clause 2.6 of the 21/7 Agreement which contains elaborate provisions governing payment by instalment for the first dumping contract.

Nature of the Plaintiff’s claim

64.  Having resolved the question of construction at the heart of this case, I move on to consider its implications.  If the dumping contract had been performed by both sides to its logical conclusion, the Plaintiff would of course have been entitled to a total dumping fee calculated by applying the unit rate to the total volume of mud that had been dredged from the CT9 project less that which was disposed of elsewhere under circumstances already described.  However, that never happened.  The Defendant did not dump the contaminated mud at the South Erzhou site due to its failure to obtain the necessary licences from the Hong Kong authority (its defence based on frustration having been rejected by the Judge).  The Plaintiff, on the other hand, had not applied for further dumping permits beyond the first permit.  In those circumstances, the Plaintiff’s claim can only be for the outstanding dumping fee payable in respect of the first dumping permit that it has successfully obtained for the Defendant pursuant to the dumping contract, and for damages for breach of contract as a result of the Defendant’s unilateral cessation of dumping activities in Chinese waters.  The Plaintiff has chosen to accept the Defendant’s wrongful repudiation of the contract by not applying for further permits.

65.  In other words, the Plaintiff is entitled to the dumping fee in respect of the first dumping permit for one million m³ as a matter of contractual entitlement.  The fact that the Defendant has chosen not to make use of the permit to any significant extent is neither here nor there.

66.  For the first dumping permit, the dumping fee payable is therefore : HK$17 per m³ x 1 million m³ = HK$17 million.  Less the amount already paid (HK$8.9 million), the outstanding claim is HK$8.1 million.

67.  However, in respect of the subsequent dumping permits that were never applied for and the loss of the corresponding dumping fees, the Plaintiff’s claim must only be one for damages, rather than for the dumping fees as a matter of contractual entitlement.  This gives rise to a question of assessment of damages.  Such an assessment would require one to look not only at the total amount of dumping fees payable if the permits had been successfully obtained, but also to the Plaintiff’s own costs and expenses in so obtaining the permits, as well as any other issues of mitigation.

68.  Ms Cheng submits that the Court can grant interlocutory judgment with damages to be assessed, in relation to this part of her claim.

69.  I disagree.  There having been no direction for a separate trial on liability and quantum, the Plaintiff ought to have brought its entire case, supported by all the evidence it wished to rely on, before the Judge.  Any lacuna in evidence cannot be remedied by seeking a direction for assessment of damages after completion of the trial.  Born Chief Co v George Tsai [1996] 2 HKLR 188.

70.  In the present case, apart from some evidence on the total quantity of mud dredged from the CT9 project up to January 2001, and on the quantity of pre‑contract dump, evidence is lacking on all other aspects required to be examined for a proper assessment of damages due to the Plaintiff.  In the absence of sufficient evidence to prove substantial damages, only nominal damages for breach of contract would be awarded.

71.  Ms Cheng seeks to distinguish Born Chief by referring this Court to a number of authorities, none of which really assists her.  Mak Kang Hoi v Ho Yuk Wah (2007) 10 HKCFAR 552 was a case on pleadings.  It did not turn on whether the court can, without a previous direction for a spilt trial, hive off the assessment of damages to another day.  Born Chief was not even mentioned in the judgment.

72.  Liu Peggy v Alfa Com Technology Ltd [2007] 1 HKLRD 528 was a Small Claims Tribunal appeal.  What the judge did there was simply to remit the case to the Deputy Adjudicator of the Tribunal, from which the appeal arose, to carry out further investigation to ascertain the actual loss and damage that the defendant had suffered because of the claimant’s breach involved in that case.  It had nothing to do with the Born Chief point.

73.  Finally, Yuen Ching Yuen v Union Insurance Society of Hong Kong Ltd [1998] 1 HKLRD 650 was a case where the plaintiff sought an order of account and inquiry.  It had nothing to do with ordering a separate assessment of damages after a full trial.

74.  In the circumstances, insofar as the Plaintiff’s claim is one for damages, due to the lack of sufficient evidence, the Plaintiff simply cannot prove any loss in terms of the dumping fees beyond the first dumping permit.

75.  However, as regards the Plaintiff’s liabilities under the Back‑to‑Back Agreements and the Plaintiff’s Undertaking, as per the Judge’s findings (see paragraphs 139 and 152(2)(b) to (e) and footnote 34 of the judgment), the Plaintiff is entitled to be indemnified by the Defendant for the same.

Outcome

76.  For the reasons given, I would :

(1)  allow the appeal;

(2)  set aside the judgment entered below;

(3)  enter judgment for the Plaintiff in the total sum of HK$8,100,000 together with interest thereon at the rate of 1% per annum over the prime rate from the date of writ to the date of judgment and thereafter at the judgment rate until full payment;

(4)  grant the Plaintiff a declaration that it is entitled to be indemnified by the Defendant against all liabilities under the Back‑to‑Back Agreements and the Plaintiff’s Undertaking;

(5)  dismiss the counterclaim.

77.  As for costs, I would make a costs order nisi that the Plaintiff shall have the costs of the action and of the appeal, to be taxed if not agreed, together with a certificate for two counsel.

Hon Cheung JA:

78.  I agree with the judgment of the Chief Judge.

Hon Yuen JA:

79.  I agree with the judgment of the Chief Judge.