HONG KONG HOUSING SOCIETY v. TANG KAR HUNG

CACV 153/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 153 OF 1999

(ON APPEAL FROM HCCT NO. 91 OF 1998)

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J U D G M E N T

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Keith J.A. (giving the first judgment at the invitation of Leong J.A.):

Introduction

1. The Plaintiff, the Hong Kong Housing Society ("the Society"), engaged Hing Lee Construction Co. Ltd. ("Hing Lee") as the contractor under two construction contracts. In due course, the Society retained the sums of $12.8m. and $9m. which would otherwise have been due to Hing Lee under the contracts. On 26th November 1997, the Society and Hing Lee entered into two agreements ("the supplementary agreements") which recorded that those sums had been or would shortly be advanced to Hing Lee, and which required Hing Lee to repay those sums to the Society if it failed to complete the contract works according to an agreed schedule. The supplementary agreements also required the Defendant, Tang Kar Hung, a director of Hing Lee, to execute two guarantees in favour of the Society.

2. Mr. Tang executed those guarantees. It is said that Hing Lee failed to complete the works according to the agreed schedule. What is not disputed is that Hing Lee did not repay the $21.8m. to the Society. Accordingly, the Society required Mr. Tang to pay the sum of $21.8m. under the guarantees. When he failed to do so, the Society issued these proceedings against him, and applied for summary judgment under Ord. 14. On 11th May 1999, Findlay J. gave the Society summary judgment against Mr. Tang for the $21.8m. plus interest. It is from that order that Mr. Tang now appeals. He has represented himself on this appeal, and I wish to pay tribute to the courtesy with which he has presented his arguments.

The terms of the guarantees and the demands for payment

3. The two guarantees which Mr. Tang executed were in the nature of performance bonds. The central provision in the two guarantees was cl. 2, and it was in identical terms. It provided:

"If, in the [Society's] opinion, [Hing Lee] shall be in default of any of [its] obligations under the Contract and/or the Supplementary Agreement, [Mr. Tang] shall upon demand by the [Society] in writing and without conditions or proof of the said default or amount demanded satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the [Society] by reason of the default up to the amount of the Retention Advance."

In view of the only arguments which Findlay J. had to address, it is important to see the exact terms on which demands for payment were made under the guarantees. The demands were made by two letters from the Society's solicitors dated 6th August 1998. The letters were in almost identical terms. The differences appear in italicised print below:

"We act for Hong Kong Society [Hong Kong Housing Society] ('the Housing Society'). Our client instructs us to write to you [on its behalf] regarding the above-mentioned development for which works were carried out by Hing Lee Construction Co. Ltd. ('the Contractor') under a contract dated 18 [27] May 1995 [1996] ('the Contract').

On 19 September 1997 and 17 October 1997 [2 December 1997] the Housing Society made [an] advance payments [payment] to the Contractor of retention monies in the total sum of HK$12,800,000 ('the Retention Advance') to assist the Contractor with his financial difficulties. The terms upon which such payments of the Retention Advance were made were set out in an agreement dated 26 November 1997 ('the Supplementary Agreement') [in the sum of HK$9,000,000 ('the Retention Advance') on the terms set out in an agreement dated 26 November 1997 ('the Supplementary Agreement')].

On 26 November 1997 you executed a Deed of Guarantee, clause 2 of which provides as follows:

'If, in the Employer's opinion, the Contractor shall be in default of any of his obligations under the Contract and/or the Supplementary Agreement, the Guarantor shall upon demand by the Employer in writing and without conditions or proof of the said default or amount demanded 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 Retention Advance.'

On 23 March 1998 [31 March 1998] the Housing Society determined the employment of the Contractor under clause 25(1)(b) of the Conditions of Contract for failing to proceed regularly and diligently with the Works. On 12 May 1998 the Contractor appointed a liquidator. The Housing Society has lodged a provisional claim with the liquidator for damages estimated in excess of HK$201,000,000 [HK$108,000,000] for the additional cost of completing the Works and for delay in completion.

We are [The Housing Society is] of the opinion that the Contractor is in default of his obligations under the Contract and under the Supplementary Agreement and the Housing Society now demands payment from you under clause 2 of the Deed of Guarantee of the full amount of the Retention Advance of HK$12,800,000 [HK$9,000,000]. Payment may be made directly to the Housing Society or through this firm. If payment of the sum is not received by Friday 20 August 1998 we are instructed to issue writ proceedings in the High Court for recovery without further notice."

The nature of Mr. Tang's defence

4. Following the service of the Society's Statement of Claim, Mr. Tang's solicitors filed a Defence on his behalf. The defence set out in it was amplified in an affirmation which he subsequently made. The effect of it was that Hing Lee had not been in breach of any of its obligations under the construction contracts. On the contrary, it was the Society which was the defaulting party under the construction contracts, and which had wrongly terminated them. Arbitrations had been or were to be commenced by the provisional liquidators of Hing Lee against the Society, and pending the arbitrators' findings, the guarantees should not be enforced against him. In effect, Mr. Tang was saying that his liability under the guarantees was conditional upon it being established that Hing Lee had been in breach of the construction contracts, and that issue was to be determined in the arbitrations. Consistently with that argument, his solicitors filed a summons seeking a stay of the action pending the outcome of the arbitrations. That application for a stay of the action was ordered to be heard at the same time as the Society's summons for summary judgment.

5. However, at the hearing of the summonses on 7th May 1999, Mr. Tang's counsel abandoned the application for a stay, and the summons was withdrawn. Counsel also accepted that the guarantees had been expressed to be payable on demand without proof of actual default of contractual performance. In my view, counsel was correct to make that concession: the guarantees had been expressed to be payable on demand if, in the Society's opinion, Hing Lee had been in default of contractual performance. Thus, any argument based on the underlying construction contracts and any breach of them by the Society or Hing Lee was abandoned. In other words, the only defence which had hitherto been advanced was no longer going to be pursued. Mr. Tang has strongly sought to resurrect this defence on this appeal, but I would not allow him to do so in view of the fact that the defence had been expressly abandoned for reasons which seem to me to be undeniably correct.

6. So what were the defences which Mr. Tang sought to rely upon to resist summary judgment? Two defences were advanced. The first related to supposed deficiencies in the letters of demand. The second was that the guarantees were not enforceable because of economic duress and misrepresentation. The evidence in support of the defences of economic duress and misrepresentation was contained in an affirmation which Mr. Tang had made the previous day. Not only had that left the Society no time in which to respond to the allegations contained in it without an adjournment, but Findlay J. had over five months earlier laid down a timetable for the filing of evidence, and Mr. Tang's evidence should have been filed by 21st December 1998. Moreover, no explanation was offered by Mr. Tang either for the delay in filing the evidence or for not raising the defences of economic duress or misrepresentation before. In those circumstances, Findlay J. decided not to extend Mr. Tang's time for filing the affirmation. The consequence was that the defences of economic duress and misrepresentation could not be pursued because there was no evidential foundation for them. The summons for summary judgment proceeded, therefore, on the footing that the only defence which Mr. Tang had to the Society's claim related to the supposed deficiencies in the letters of demand.

The refusal to extend time

7. The refusal to extend Mr. Tang's time for filing the affirmation relating to the defences of economic duress and misrepresentation is challenged on this appeal. It is possible that Findlay J. regarded the absence of an explanation for why these defences had not been raised before and why the affirmation had been filed so late as decisive. The transcript of the hearing records him as saying the following:

"I have before me no explanation whatsoever for either why these factual points have never been raised before, or why the affirmation is now filed only yesterday. In the absence of material by which I can make some kind of exercise of judgment as to whether the defendant's behaviour should be condoned, I simply cannot exercise that discretion in his favour ... The court has to have some kind of material upon which it can work and upon which it can make some kind of assessment and make a meaningful exercise of judgment. The defendant has not put me in that position, and accordingly, I cannot make any real exercise of discretion, and certainly not an exercise of discretion in his favour. Accordingly, [the] application [for an extension of time] is dismissed."

8. In bothCostellow v. Somerset County Council [1993] 1 WLR 256 and Mortgage Corporation Ltd. v. Sandoes, 27th December 1996, unreported, the Court of Appeal in England expressly rejected the notion that the absence of a good reason for any delay can by itself justify the court in refusing to exercise its discretion to extend time. Those cases were expressly approved in Finnegan v. Parkside Health Authority [1998] 1 WLR 411, in which the Court of Appeal rejected the view expressed in Savill v. Southend Health Authority [1995] 1 WLR 1254 that there has to be "some material on which the court can exercise its discretion". Some of the other principles established in the Costellow and Sandoes cases have been followed in Hong Kong: see, for example, Lessy SARL v. Pacific Star Development Ltd. [1997] HKLRD 1248 and Po Kwong Marble Factory Ltd. v. Wah Yee Decoration Ltd. [1997] HKLRD 1341. But for my part I agree with the proposition that the failure to advance any reasons for the delay cannot by itself justify the refusal of an extension of time.

9. I am very far from saying that Findlay J. did regard the absence of reasons for the delay as decisive. It may well be that he had other reasons for refusing to extend the time which he did not expressly refer to in his short extempore judgment. But in case he did regard the absence of reasons for the delay as decisive, and in case, therefore, this court would have had to exercise its own discretion in the matter, I have considered how this discretion would have been exercised. Undoubtedly, one of the factors which it is permissible to take into account is whether the affirmation would have revealed a defence in law if Mr. Tang's time for filing it had been extended. On that issue, it is necessary to analyse the affirmation with some care.

10. In it, Mr. Tang said that the guarantee to be provided by him was first suggested by the Society during a meeting on about 17th November 1997. He was told that the guarantee would be "a mere formality", and that it was "not designed to prejudice [him] unduly". He claimed that he had never been sent copies of the draft guarantees before he went to the Society's office to sign them. When he got there, no lawyer was present, and he signed the guarantees without having been given an explanation as to their nature or effect. He asserted that had he known their true nature and effect, he would not have signed them.

11. However, in the short time available before the hearing, the Society had managed to collate a number of documents which strongly indicated that significant elements in that account were untrue. The documents were placed before Findlay J. They showed that it was Mr. Tang who had first suggested draft guarantees from him, that the draft guarantees had been sent to Hing Lee marked for Mr. Tang's attention on 14th November 1997, and that they had been signed by Mr. Tang after someone within Hing Lee (presumably Mr. Tang) had suggested alterations to them, including an alteration to cl. 2 itself, and the deletion of the provision that his liability under the guarantees would not be affected by any breach of the construction contracts on the part of the Society. In the light of those documents, there was no realistic chance of Mr. Tang's assertions being believed at trial.

12. Moreover, even if there had been a realistic chance of the assertions being believed at trial, they would not have amounted to defences in law. Take the defence of non est factum. On his own case, Mr. Tang accepted that he knew that the giving of guarantees involved the creation of personal liability on his part. However, he did not say what he thought the true nature and effect of the guarantees were, and therefore he did not say in what way he thought that they were different from what he was subsequently advised their true nature and effect actually was. In any event, even if he was mistaken about the true nature and effect of the guarantees, he had failed to make his own inquiries or seek independent legal advice. In short, the conditions set out in Saunders v. Anglia Building Society [1971] AC 1004 for a successful plea of non est factum could not have been regarded as established in the affirmation.

13. As for the defence of misrepresentation, I do not see how the alleged representation that the guarantees were "not designed to prejudice [him] unduly" could have been regarded as untrue. It would have been different if he had been told that the guarantees did not prejudice him at all. Nor do I see how it could be said that that alleged representation, or the alleged representation that the guarantees were "a mere formality", led him to believe that he was not undertaking formal obligations. In his affirmation, he said that he had "reluctantly" agreed to sign the guarantees, thereby recognising that he understood that the giving of the guarantees could have legal consequences for him.

14. As for the defence of economic duress, to establish that defence Mr. Tang would have had to prove that he was forced into signing the guarantees in circumstances other than normal commercial pressure. It is, I think, sufficient for me to state that there is no evidential basis for saying that factors other than normal commercial pressures caused Mr. Tang to sign the guarantees.

15. For these reasons, therefore, this would not have been an appropriate case for Mr. Tang's time for filing the affirmation to be extended, because (a) there was no realistic chance that the facts set out in it would be believed, and (b) the facts relied upon, even if true, did not amount to a defence in law to the Society's claim.

The letters of demand

16. In his careful judgment, Findlay J. expressed the opinion that, where the giver of a performance bond is not an independent party, there is less need for the party to whom the bond is given to comply strictly with the terms on which the bond may be activated. He held that it was sufficient for there to have been substantial compliance with those terms. In addition, though, Findlay J. held that in the circumstances the question whether the Society's solicitors' letters of demand of 6th August 1998 substantially complied with the requirements of the guarantees should be looked at from the point of view of Mr. Tang. He concluded:

"If it conveys to him in clear terms, in the light of his own knowledge of the matter, that what is said in the demand is what is required to be said by the bond, that is sufficient."

This view of the law is challenged by Mr. Tang.

17. I do not need to spend any time on this argument. As for the test to be applied to determine whether there was substantial compliance with the guarantees, Findlay J. did not in fact apply the subjective test. He said:

"I proceed to decide this matter on the basis that the demand must, looked at objectively, comply with the substance of the requirements of the bond."

Accordingly, whatever his view of the law, the test he applied was the one advanced on behalf of Mr. Tang by his counsel. On the first issue, though - i.e. whether strict or substantial compliance with the guarantees is the correct test - I do not need to express a view, because for the reasons which I now give, the letters of demand in my opinion satisfied the more stringent test, i.e. they were in strict compliance with the guarantees.

18. There are three grounds on which it is said that the letters of demand do not comply, whether strictly or substantially, with the guarantees, and I propose to deal with each in turn:

(i) The Society's opinion. Before it made the demand, the Society had to have held the opinion that Hing Lee was in default under the construction contracts or the supplementary agreements. That opinion did not have to be a reasonable one. Indeed, it did not even have to be correct. All that was required was that it was genuinely and honestly held. That was the basis on which the concession of counsel (to which I have already referred) was made. On the face of it, since the Society purported to terminate the construction contracts on the ground that Hing Lee had failed to proceed regularly and diligently with the construction works, the Society was of the opinion that Hing Lee had been in default of the construction contracts. It is theoretically possible, I suppose, that the Society was being devious, that it realised that the fault was all on its side, and that it was trying to steal a march on Hing Lee by purporting to terminate the construction contracts before Hing Lee did. But I have not discerned any evidence which would have justified such a conclusion at trial. Findlay J., in my view, was plainly correct to find that there were no grounds for saying that there was a triable question on this issue.

(ii) The obligations breached. It was contended that the letters of demand did not identity the obligations alleged to have been breached by Hing Lee. I am not convinced that the guarantees required those obligations to be identified. But even if they did, the letters of demand identified them by referring to cl. 25(1)(b) of the construction contracts and to Hing Lee's failure "to proceed regularly and diligently with the Works".

(iii) The identification of the loss caused by the breach. It was contended that the letters of demand did not identify the loss which the Society had suffered by reason of the breach by Hing Lee of its obligations under the construction contracts. I cannot go along with this argument. I read cl. 2 of the guarantees as requiring the Society to identify a sum of money, to state that that amount represented any damages, losses, charges, costs or expenses sustained by the Society, and to state that such damages, losses, charges, costs or expenses were sustained as a result of the breach by Hing Lee of its obligations. The letters of demand in my opinion cannot be said not to satisfy these requirements.

Breach of fiduciary duty

19. Mr. Tang filed a Supplementary Notice of Appeal, taking a new point which was not taken before Findlay J. He wished to argue that the release of the retention money to Hing Lee was in breach of "fiduciary duties" owed by the Society to Hing Lee's nominated sub-contractors, because part of the retention money related to work done by those sub-contractors. In my view, Mr. Tang should not be permitted to take that point. I say that for two reasons.

20. First, the point involves new facts which were not investigated below, and on which the Society would be entitled to file evidence. As it is, when the Society's solicitors became aware of this point, they obtained instructions from the Society, and incorporated those instructions in a further affidavit which was placed before the court. That affidavit purports to show that all but $630,000.00 of the $21.8m. related to retention money belonging to Hing Lee, and that the $630,000.00 was returned to Hing Lee to enable nominated sub-contractors to be paid. Mr. Tang disputed that. He contended that much more than $630,000.00 relates to payments due to nominated sub-contractors, but the point is that none of this can be investigated on appeal.

21. Secondly, even if part of the retention money relates to work done by nominated sub-contractors, that does not necessarily mean that the Society was in breach of any fiduciary duty in paying the money to Hing Lee. Cl. 30(4)(a) of the construction contracts provided that the Society's interest in the retention money was as "fiduciary as trustee for [Hing Lee]", not for the nominated sub-contractors as well. In Hsin Chong Construction Co. Ltd. v. Yaton Realty Co. Ltd. [1987] HKLR 229, Hunter J. (as he then was) held that the employer's right of recourse under an identically worded clause extended to the whole retention fund without distinction between the main contractor's and the nominated sub-contractor's proportion of it. Without purporting to decide the point finally, I much prefer that view over authority to the contrary in England.

Conclusion

22. For these reasons, therefore, I would dismiss this appeal. At present, I see no reason why the costs of this appeal should not follow the event, and the order nisi which I would make is that Mr. Tang must pay to the Society its costs of the appeal to be taxed if not agreed.

Leong J.A.:

23. I agree.