XCHRX DRAGAGES ET TRAVAUX PUBLICS (HK) LTD. v. AMERICAN HOME ASSURANCE CO.

1999, No. CT 5

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. In 1995, the plaintiff and UDL Dredging Limited (UDL) entered into a contract under which UDL was obliged to remove excavated material from a jetty and pay the plaintiff an agreed rate per tonne for this material. UDL was also obliged to provide a performance bond in a stipulated form.

2. Under clause 2 of this bond, the defendant undertook "Upon demand in writing made by the two authorised signatories . . . from time to time or at any time during the validity of this Bond without proof or contestation of further condition on the [plaintiff] the [defendant] shall forthwith pay to the [plaintiff] the sum mentioned in the said demand.".

3. The bond also provided that the obligations of the defendant under the bond "shall be continuing and shall remain in operation until [the contract] shall have been in every respect duly and properly discharged performed and completed to the true purport intent and meaning thereof . . .".

4. On 8 December 1998, a demand was made on the defendant for payment of the sum of $8,198,658. The defendant did not pay, so, on 15 January 1999, the plaintiff issued a writ.

5. The plaintiff's statement of claim alleges the terms of the bond I have mentioned above, that the demand was made on 8 December 1998 by two signatories authorised by the plaintiff on 7 December 1998, and, by paragraph 7, that -

"At the time the said demand was presented, the obligations of the defendant under the bond were continuing and remained in operation, as the sub-contract had not been 'in every respect duly and properly discharged, performed and completed' within the meaning of clause 4 thereof."

6. The defendant filed a defence on 20 February 1999. The substance of this defence is, in answer to paragraph 7 of the plaintiff's statement of claim, that "the bond had expired". The defence also denies that the signatories who made the demand were not the "authorised signatories" contemplated by the bond. There is nothing in this latter point, and Mr Barlow did not seek to say that it raises an arguable defence.

7. On 20 March 1999, the plaintiff issued a summons seeking orders that the defence be struck out and that, following the determination of two questions of law, the plaintiff be at liberty to enter judgment for the amount claimed. The first question of law relates to the authorised signatories point. As I have said, Mr Barlow does not seek to argue that the defendant's point is a good one. The second question of law is whether or not the defendant is entitled to rely on a contention that the contract has "in every respect duly and properly discharged, performed and completed" as a justification for not making payment, "or whether it is precluded from doing so by the terms of clause 2 of the bond."

8. In support of its application, the plaintiff has filed an affidavit by one of the authorised signatories. This confirms the truth of the statement of claim, and then deals with the authorised signatories point.

9. The defendant has filed an affirmation by Mr Li Kam Wa, the contracts manager of UDL. He says that the removal of the excavated materials was completed by 4 February 1998. Mr Radford told me that the plaintiff accepted that this was so. Mr Li goes on to say that "This date marked the completion of UDL's obligations under the Agreement, and the expiry of the Bond." On 6 March 1998, he wrote to the defendant to this effect. This letter does say that, but also says that a final account with the plaintiff was being negotiated, and that "Claims for additional payment from [the plaintiff] to [UDL] have been properly submitted." Mr Li says there is now a dispute between the plaintiff and UDL and that this has been submitted to arbitration. Mr Li is not right in saying that the removal of the excavated materials marked the completion of UDL's obligations, but it is clear from reading the letter mentioned that UDL does also say that no money is due to the plaintiff.

10. It is clear law, and Mr Barlow accepts this without demur, that, in respect of bonds that are payable on demand as this one is, the bondsman must, in the absence of fraud, honour the bond according to its terms; he is not concerned with whether or not, as between the contractual parties, any money is due. So, in this case, the defendant is obliged to pay upon demand "without proof or contestation of further condition". As I say, Mr Barlow accepts this, but he says that this is not really the question in issue. The duty is to honour the bond according to its terms, and, if its terms require the demand to be made during the validity of the bond, then the demand must be so made. The issue here, Mr Barlow argues, is whether or not, at the time of the demand, the bond was still in existence. That, he says, is a question of fact, and cannot be determined in these proceedings under Order 14A.

11. The bond states that the demand must be made "during the validity of the bond". The only provision governing the period of the validity of the bond is the provision that the obligations "shall be continuing and shall remain in operation until [the contract] shall have been in every respect duly and properly discharged performed and completed".

12. The defendant's argument is, therefore, that it may contend that the obligations of UDL "have been in every respect duly and properly discharged performed and completed" for the purposes of contesting the validity of the demand as not being made during the validity of the bond, but it may not raise any dispute between the contracting parties as a ground for contesting the validity of the demand made during the period of validity of the bond. The acceptance of that argument would, of course, rip the heart out of value of the bond as a demand bond, and render the words "without proof or contestation of further condition" largely otiose. This is because the defendant could raise this point to resist payment at any time until the plaintiff has established by trial that UDL has not "in every respect duly and properly discharged performed and completed" its obligations. It does not matter to the defendant on what basis it is able to resist the immediate payment that it undertook to make; an argument that the bond is no longer valid is as good as any other. It is probable that the plaintiff did not appreciate this would be the effect of the wording of the bond that it had stipulated, but, if that is indeed its effect, then I cannot answer the question in the plaintiff's favour.

13. I should say here that Mr Radford saw the second question of law as having changed somewhat since the defendant has revealed its hand. He says that, on the basis of the "defendant's concessions", the answer to the question must be that the defendant is not entitled to rely on the contention of complete performance, but I should consider, as a matter of construction, what events brought about complete performance. I do not see the matter that way. There is no doubt that complete performance means complete performance, but the defendant is alleging that there has been complete performance; in fact, the defendant is alleging that, far from UDL owing money to the plaintiff, the plaintiff owes money to UDL.

14. As I see it, the question remains essentially the same; namely whether or not the defendant is entitled to rely on a contention that the contract has "in every respect duly and properly discharged, performed and completed" as a justification for not making payment, "or whether it is precluded from doing so by the terms of clause 2 of the bond." That question must encompass the contention by the defendant that it is justified in not making payment because the demand was not made "during the validity of the bond", and it is not precluded from doing so by clause 2.

15. And the answer to that question must be that the defendant is entitled to say that the demand was not made during the validity of the bond, and, far from being precluded from doing so by clause 2, that clause contemplates this answer to the demand because it says, in essence, that the demand must be made during that period of validity. That this is clearly so is demonstrated by the fact that the plaintiff, rightly in my view, felt that it was obliged to plead in paragraph 7 of the statement of claim, as a matter of fact, that the demand was made when the bond was valid. There would have been no necessity to plead this if a contrary allegation of fact, and, in due course, evidence, would have been no answer to the claim.

16. I point out that the words ". . . made . . . during the validity of this Bond . . ." appear before the words "without proof or contestation of further condition" so it cannot be said that the latter words take away the effect of the former.

17. The effect of the way in which the bond is drafted is turn it from a demand bond into a conditional one, and this may not be what the plaintiff had in mind, but I must take the bond as it is. The bond says in clear terms that the demand must be made during the validity of the bond, and the defendant says that this was not done. There is no reason at this stage to suppose that this is not the case.

18. So, I am left with a situation in which there are conflicting allegations of fact, and the plaintiff's right to receive payment cannot be determined until that conflict of fact is resolved. Accordingly, this is not a matter in which Order 14A assists to bring an end to the matter.

19. Nor is this a case for striking out the whole of the defence. The defendant's allegation regarding the authorised signatories is not seen by Mr Barlow as being an arguable defence, and I agree. This part of the defence is struck out.

20. The matter of costs has not been argued, but it seems to me at this stage that the just order should be that the costs of this application be costs in the cause of the action. I make an order nisi accordingly.