HYUNDAI ENGINEERING AND CONSTRUCTION CO LTD v. VIGOUR LTD

cacv 128/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 128 of 2004

(on appeal from HCCT NO. 100 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Reyes J given on 14 April 2004.  The matter before the judge was the hearing of an originating summons by which declarations were sought in relation to an agreement dated 28 March 2003.  The judge made various declarations along the lines which had been sought by the plaintiff, discharged an interim injunction which had been granted previously and gave directions as to the hearing of the remainder of the issues on the originating summons, in particular the disposal of the counterclaim.  At the conclusion of the hearing of this appeal this court reserved its judgment which we now give.

The background

2.  The plaintiff was the main contractor in respect of construction work at the KCRC 5 Ha Site Topside Development-Hotel and Office Project.  There were altogether some 5 contracts in respect thereof.  The contract works were originally due for completion in 2001.  The completion dates for most of the contracts were extended.  Practical completion date of the majority of the contracts appears to have been in June 2002 although in respect of one of the contracts it was January 2003.

3.  Inevitably, the parties were not in agreement as to the causes of the delays.  The plaintiff considered that it was entitled to extensions whereas the defendant considered that it was entitled to damages for the delay.  In respect of this aspect the architect had issued various certificates.  The plaintiff was not content with the certificates which had been issued and indeed, the defendant does not seem to have been either.

4.  Under the contracts disputes between the parties were covered by clauses 86 which appear to have been identical.  This court was informed that a clause along these lines was commonly included in KCRC contracts.  The clause is somewhat lengthy.  It is set out in full in the judgment below.  For present purposes it is sufficient to say that it provides that if either of the parties to the contract should be dissatisfied with any matter or wished any decision in connection with or arising out of the contract to be decided the matter should be referred to the architect.  The architect would then have 28 days in which to give his decision.  Should he fail to do so, or should either of the parties be dissatisfied with the decision, it may then take the matter to arbitration.  The notice requiring arbitration could also include a request for conciliation.  The clause provides that the conciliator may himself issue a decision if no agreement could be reached.  However, the matter in dispute could still be referred to arbitration for a number of reasons, one of them being that either of the parties rejected the conciliator’s determination.

5.  The plaintiff had provided performance bonds to secure the due performance of the various contracts.  As regards this case only one performance bond is relevant, namely, that in respect of contract B which was for the sum of $60,017,000.  It is the defendant’s evidence that it regarded the performance bond as being of some importance.  Although that performance bond was initially due to expire on the issuance of the certificate of practical completion, it was replaced by a replacement bond which was scheduled to expire on 31 December 2002.  Immediately prior thereto, however, solicitors on behalf of the defendant served notice claiming under the performance bond on the basis that the defendant was entitled to a sum that was slightly more than double the value of the performance bond as liquidated damages in accordance with the architect’s certificates.  Following that, the parties then agreed to extend the term of the performance bond to 31 March 2003.

6.  In January 2003 the plaintiff submitted claims exceeding $550 million in respect of contracts A and B and in March they submitted a further claim of over $152 million in respect of further contracts.  There were a series of meetings between representatives of the plaintiff and the defendant.  Importantly, however, on 18 March 2003 the plaintiff served a notice of arbitration in respect of contract B and on 25 March 2003 a notice of arbitration in respect of contract A.  It is clear that the meetings that had taken place had been arranged with a view to settling the matters in dispute between the parties.  Therefore, I consider that, even for these purposes, what transpired at those meetings are matters which are impermissible to be taken into account.  Moreover there was a telephone conversation between Mr Victor Li, the managing director of Cheung Kong (Holdings) Limited, of which the defendant is a subsidiary, and Mr Kim on behalf of the plaintiff, whose title was also managing director.  That telephone conversation took place on 27 March 2003.  Again, I consider that this conversation was directed to achieving a settlement.  In so far as it is relevant to refer to this conversation for the purposes of considering the background, or factual matrix, it is sufficient to say that those two persons spoke.  The contents of the conversation itself cannot, in my view, be admissible as evidence in aid of interpreting a later written agreement.  It is not suggested that the conversation itself constituted an agreement and in so far as there was an agreement that was reduced to writing it is that writing to which reference must be made.

7.  On the following day, 28 March 2003, three persons namely Mr Kim, Mr Chung, Mr Ng on behalf of the plaintiff met two persons namely Mr Kwong and Ms Shen on behalf of the defendant.  Ms Shen wrote out an agreement there and then at the meeting.  Subsequently this was exchanged in typewritten form.  It was signed by Mr Kim, Mr Chung and Mr Ng on behalf of the plaintiff and Mr Kwan and Ms Shen on behalf of the defendant.  The material parts of the final document (which will be referred to as the March agreement) are as follows:

“Re: KCRC 5 Ha Site Top Side Contracts: A, B, SA, RAC & Supplemental Agreements

The parties will not continue arbitration and will not bring any arbitration or court action forever, and any right to sue each other will not be exercised any more mutually and the parties will start to discuss together to resolve any differences under or in connection with the above Contracts and any arguments that may come up now and in the future for anything about the above Contracts that can not be finalized will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level, provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure, which shall be conducted and completed as soon as possible and in any case no party will exercise the right to sue against each other. To demonstrate this private settlement is in place, the Employer will let this relevant bond for Contract B expire.”

8.  There was a meeting on 3 July 2003 which took place between Mr Kim and Mr Victor Li.  Apparently, nothing fruitful came out of that meeting and it appears from the correspondence which ensued that Mr Kim attempted to encourage Mr Li and the defendant to engage in mediation.  Reference had previously been made to an apparently successful mediation in respect of the Hok Un Redevelopment.  In the ensuing correspondence the defendant stated that that proposal was not in accordance with the 28 March 2003 agreement. 

9.  On 8 October 2003 the plaintiff wrote to the defendant saying that the period for conciliation had long since expired and that they proposed to revive the arbitrations and suggest an arbitrator.  That was followed on 16 October by a letter from the plaintiff’s solicitors putting forward the name of an arbitrator in respect of the two arbitrations which had been commenced in March.

10.  Although the correspondence had been somewhat protracted, it was not until a letter from the defendant of 16 October 2003, no doubt prompted by the plaintiff’s stand, that the defendant spelt out the reason why it was said that the March agreement was not being adhered to.  That letter emphasised that the defendant considered that the plaintiff should act in what was said to be compliance with the March agreement by arranging a meeting of the managing directors of the ultimate shareholders group of the highest level.  The letter requested the plaintiff to provide the identity of the managing director of the ultimate shareholders group of the highest level of the plaintiff’s side.

11.  That letter was followed swiftly by a letter of the following day, 17 October, from the plaintiff’s solicitors.  In that letter the solicitors protested that Mr Kim was the managing director “made, constituted and appointed by the President and CEO Chairman of the board of directors, with absolute power to officiate all business in the respective region.”  The letter then went on to say that the managing directors had already had their first meeting but that had been unsuccessful as a result of which the plaintiff had proposed mediation.  Since no positive response had been received, the plaintiff considered that it had no option but to proceed with the original arbitration.

12.  Although there was a considerable amount of further correspondence it takes the matter no further.  The only matter to which I would refer is that in a letter of 6 November 2003 the plaintiff’s solicitors referred to the March agreement and said that it was a dispute resolution agreement and one that was either incapable of enforcement or one that would fall away in the event that the dispute resolution mechanisms set out in the agreement were exhausted or became inoperable.  The letter went on to say that the provisions purporting to exclude court action were contrary to public policy and would be struck down and that the provision for negotiation was unenforceable for lack of certainty and that the provision for mediation was either unenforceable for lack of certainty or no longer enforceable in circumstances, as existed, where one party refused to participate in the mediation.  That letter concluded with the statement that the plaintiff considered that the defendant had no intention of abiding by the March agreement with a view to resolving the differences that existed between the respective parties and that the dispute resolution mechanisms set out in that agreement had, in so far as they had ever been operable, broken down.

13.  That was followed a few days later by the issuance of the originating summons in which the plaintiff sought 4 declarations which were substantially similar to the points made in respect of the March agreement in the letter of 6 November.

14.  In the originating summons, as originally filed, there was no prayer for relief on the basis that the defendant had repudiated the March agreement.  An amendment to include a prayer, on the alternative basis that the March agreement was valid, that the defendant had repudiated the agreement and that the repudiation had been accepted by the plaintiff, was put forward shortly before the hearing of the originating summons.  Although no order was made allowing that amendment, it appears that the question of repudiation was argued on behalf of the plaintiff.  Counsel on behalf of the defendant in the court below, who did not appear in this court, took the point that whatever the defendant had done, or had not done, it did not constitute repudiation.  On that basis he was prepared for the court to deal with the matter.  Having considered the contemporaneous correspondence and the transcript of the argument in the court below, I consider that the matter of repudiation was argued in the court below but that the defendant is perfectly entitled to take the points that the matters alleged do not constitute repudiation and that, in any event, the court should not decide that the defendant had repudiated the contract without hearing oral evidence.

The judgment below

15.  There were a number of issues relating to the interpretation of the March agreement which were raised in the court below.  In summary, the judge came to the conclusion that the March agreement was a valid and enforceable agreement.  It did not bar access to the courts and the opening words relating to not continuing arbitration or court action were simply an undertaking by the parties that they would forbear from engaging each other in arbitration or suing each other in court proceedings whilst negotiations or mediation were pending.  The judge came to the conclusion that there was nothing imprecise or unenforceable about the provisions relating to negotiation or mediation.  On the contrary, he came to the conclusion that the defendant had repudiated the March agreement by failing to reply in any helpful way to the plaintiff’s letters and by failing to advance the negotiations or mediation in a timely fashion.  He commented adversely on the defendant’s protestations that the plaintiff had failed to negotiate by an appropriate officer and he held that the plaintiff had accepted the defendant’s repudiation in the letter of 17 October from the plaintiff’s solicitors.  He concluded by making the following declarations at paragraph 118:

“	(1)	That the March agreement does not bar recourse to the Courts by the parties.
	(2)	That the submission to arbitration under Clause 86 of the Contracts was unaffected by the entry of the parties into the March agreement.
	(3)	That Vigour repudiated the March agreement and Hyundai accepted Vigour’s repudiation by the October Letter, thereby terminating the March agreement.
	(4)	That in consequence of the termination of the March agreement, Hyundai is entitled to pursue arbitration under the March and November Notices or commence other arbitration proceedings, to the extent that such Notices or other arbitration proceedings are allowed by the Contracts (including Clause 86).
	(5)	That no estoppel by convention arises on the facts of this case.”

16.  It was a feature of this appeal that in respect of some of the issues the parties were in agreement that the judge had misinterpreted parts of the March agreement.  In view of the fact that I have come to the clear conclusion that the March agreement was unenforceable primarily because, in a number of important aspects, the provisions were unenforceable and in some respects the meaning was not clear, I will consider these points as they arise.  It is clearly important to consider the meaning of the March agreement before going on to consider whether it can be enforced by preventing the continuance of the arbitrations.

17.  The opening words of the March agreement are important.  They import a concept of a permanent bar to the continuation of the arbitrations and a prohibition of action in court in respect of the five contracts.  The use of the word “forever” in the context of an agreement such as the present would appear to be unusual.  Nevertheless the finality imported by the phraseology used is reflected in the closing words of the penultimate sentence of the agreement “and in any case no party will exercise the right to sue against each other”.  In this court, as in the court below, both parties argued that the words imported a permanent restraint in the exercise of the right to arbitrate and litigate.  Indeed, the judge observed as much in paragraph 43 of his judgment.  Nevertheless, as referred to above, he still went on to hold that the restraint imported by those expressions was simply a restraint that would last whilst the negotiations and mediation continued.

18.  In my view the words are clear to the extent that both parties were agreeing to forego arbitration and litigation on a permanent basis.  However, they are ambiguous and thus not clear as to what the effect of that prohibition really was.  I will revert to that aspect later in this judgment.

19.  The next matter which arises is whether it is possible to give any sufficiently definite meaning to the provision that any arguments which might arise now or in the future in relation to the contracts would be “resolved and decided by the managing directors of the ultimate shareholder group of the highest level, provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure.”

20.  Obviously one must attempt to construe a contract or agreement in a way that gives it meaning and effect, in so far as it is possible.  Nevertheless, I have my doubts about one aspect of the matter but no doubt about the other.

21.  The first aspect to which I would draw attention is the meaning of the provision relating to managing directors of the ultimate shareholder group of the highest level.  Strictly speaking there is no managing director of a group, there can only be a managing director of a company.  In this respect, however, it would be possible to understand that expression to mean a managing director of the ultimate holding company if there were a chain of holding companies in a pyramid or similar structure.  Whether or not Cheung Kong (Holdings) Limited would fall into the category of the ultimate holding company when there appears to have been two companies both of which held the defendant’s shares equally is, perhaps, a matter of only academic interest.  The more difficult point arises in relation to the plaintiff.  Here, it is evident that there is no ultimate shareholder group of any higher level.  The shareholding of the plaintiff appears to be (fairly evenly) divided. 

22.  It is somewhat surprising that an attempt to identify the negotiating person in an agreement relating to contracts involving over $1 billion should be made in such a haphazard way without any attempt to name him or his precise title.  Although it is clear on the evidence that Mr Kim does indeed hold the title of managing director of the plaintiff, that does not seem to me to make him the managing director of the ultimate shareholder group of the highest level.  In this respect, however, I would be prepared to resolve any doubts which I have on the basis that what is imported by these words is that the person who should negotiate on behalf of each party should be the person who can ultimately take the decisions without having to refer to or obtain the consent or approval of any other party.  If that construction were applied, it would seem to me that Mr Kim does fulfil that role and, were there no other difficulties, I would be prepared to hold that the March agreement was sufficiently precise in this respect. 

23.  It is the aspect that the differences between the parties will be resolved and decided by those managing directors and in default submitted to Third Party Mediation that I consider causes difficulty.  In essence I consider that it is no more than an agreement to agree.

24.  The judge considered a number of authorities in this respect.  Although he acknowledged the fact that apart from a statement by Lord Wright in Hillas and Co. Limited v Arcos Limited (1932) 147 LT 503 at page 515, which statement was criticised by Lord Denning in Courtney & Fairbairn Limited v Tolaini Brothers (Hotels) Limited and another [1975] 1 WLR 297, the English authorities starting with the Courtney case and continuing through to the decision of the House of Lords in Walford v Miles [1992] 1 AC 128 were consistent.  As was said in that later case by Lord Ackner, with whom the other Lords agreed, at page 138C:

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty.”

25.  In his speech Lord Ackner referred to the decision of the United States Court of Appeals, Third Circuit, in Channel Home Centers, Division of Grace Retail Corporation v Grossman (1986) 795 F. 2d 291.  That case had, apparently, been referred to the House of Lords on the basis that it was the “clearest example” of the American cases showing that an enforceable agreement to negotiate does not offend against the general principles of contract law.  Lord Ackner did not accept the approach of the United States Court of Appeals in so far as it equated an agreement to negotiate in good faith as being synonymous with an agreement to use best endeavours. 

26.  In considering the Channel case it is clear that the court there equated the use of best efforts with negotiating in good faith.  That might have been relevant in that case because there was clear suspicion that the defendant had been acting in bad faith.  The Channel case was somewhat unusual, to say the least.  There had been negotiations between the plaintiff and the defendant who was in the course of purchasing a shopping mall.  In order to assist the defendant to negotiate with bankers who might be financing the purchase, the plaintiff had signed a letter of intent to rent large parts of the shopping mall.  The letter of intent was detailed and had, for example, specific rental provisions covering 25 years rental.  The defendant had countersigned the covering letter for that letter of intent which stated that to induce the plaintiff to proceed with the leasing of the store the defendant “will withdraw the Store from the rental market, and only negotiate the above described leasing transaction to completion.”  There was thus more than a simple undertaking to negotiate, there was an undertaking to withdraw the store from the rental market.  It was the plaintiff’s case that the defendant had been in gross breach of that provision.  As a result the plaintiff applied for an interlocutory injunction.  On the 10 minute hearing of the interlocutory injunction application, the injunction was not only refused but the action was struck out and hence the appeal to the Court of Appeals against the striking out.  It is little surprise that their Lordships did not find the case of any great assistance.

27.  In this case, at paragraph 83 of the judgment, the judge expressed difficulty in reconciling what Lord Ackner said at page 138C:

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty.  The same does not apply to an agreement to use best endeavours.”

The judge took Lord Ackner as saying that an agreement to use best endeavours to negotiate was enforceable.  I do not read Lord Ackner as saying that.  His words were general.  He simply referred to an agreement to use best endeavours.  He did not specify that it was best endeavours to negotiate.  When taken as a whole it is clear that what was being said was that a court is not in a position to determine the good faith or otherwise of negotiations because a party is entitled to negotiate in any way it feels fit.  In the first place it is inevitably acting in its own best interests and in the second place the tactics of negotiation may vary from person to person.  In some cases part of a negotiating tactic maybe to call off the negotiations hoping that better terms would be offered.

28.  The judge appears to have been attracted by the judgment of Kirby P in the case of Coal Cliff Collieries PTY Ltd and another v Sijehama PTY Ltd and another (1991) 24 NSWLR 1.  In that judgment, with which Waddle AJA agreed, Kirby P expressed the view, at page 26D, that:

“… I do not share the opinion of the English Court of Appeal that no promise to negotiate in good faith would ever be enforced by a court.”

However when the judgment is further considered it would seem that the examples and references to which Kirby P made reference were, for example, cases where an identified third-party had been given the power to settle ambiguities and uncertainties and other cases where there was a readily ascertainable external standard.  It is noteworthy that in the Coal Cliff Collieries case Kirby P held that a statement “to proceed in good faith to consult together upon the formulation of a more comprehensive and detailed Joint Venture Agreement” was not binding as a contractual promise.  When properly analysed I do not consider that the Coal Cliff Collieries decision leads to the conclusion that the provision in the March agreement that the managing directors should resolve and decide any issues is enforceable.

29.  The next question turns on whether the words “submit to Third Party Mediation procedure” add anything further.  In my view they do not.  Although, as was pointed out in the course of argument, mediation is likely to be a matter which is increasingly encouraged in Court procedure, the mediation referred to in the agreement does not have any precision to the extent of defining any specific steps which must be taken.  This is in contrast to the situation that Colman J was dealing with in Cable & Wireless Plc. v IBM UK Ltd. [2003] BLR 89, where there were specific details laid down for a formalised alternative dispute resolution procedure. 

30.  Effectively the reference to mediation in the March agreement consists of the negotiation assisted by some unspecified third party, whoever that may be.  In some instances mediation may involve a timetable specifying when various steps must be taken.  That, however, is not the case here and, indeed, even if recourse were had to clause 86 of the contracts, that still does not resolve the matter.  That clause relates to something different and, furthermore, the procedure described in that clause leads to mediation or arbitration at the instance of either party.  In the context of the March agreement, I consider that the provision to submit to Third Party Mediation procedure is no more enforceable than the provision that the managing directors should resolve the disputes.  It is, in my view, imprecise and unenforceable.

31.  Having come to this conclusion as to the aspect of the agreement relating to the resolution of the disputes, the question then arises as to the provision that the parties will not continue arbitration and will not bring any arbitration or court action forever.  It was the plaintiff’s case on this appeal that that provision ousted the jurisdiction of the court and was for that reason unenforceable.  It was the defendant’s case that if the discussions between the managing directors were to fail and the mediation procedure was for some reason ineffective, the parties would be left in their original position with the architect’s certificates.  However, in the course of argument it was pointed out that if the provision as to barring access to the courts were effective, it would not be possible to enforce the existing architect’s certificates by making a monetary or other claim.

32.  In my view, it might be feasible to enforce a provision such as is in the opening words of the agreement (viz. that there should be no resort to court proceedings in respect of a previous agreement) if the agreement within which that exclusion provision was contained itself resolved any issues arising from the previous contract between the parties.  Since, in my view, the crux of the agreement that the disputes arising from the previous contracts should be settled by agreement between the managing directors has fallen away as being unenforceable, it appears to me that the whole agreement is itself unenforceable.

33.  In reaching the conclusion that the agreement is unenforceable because it lacks certainty, it follows, in my view, that the aspect of repudiation falls away.  Clearly, a party cannot be held to have repudiated a contract if that contract lacks the necessary elements of certainty in respect of the actions which the party should have taken and in respect of which he is alleged to have been in dereliction.  I would simply add on this aspect that it would be unusual to hold a party to have repudiated a contract simply on documentary evidence, primarily in correspondence, without hearing oral evidence.

34.  The question of estoppel by convention was argued, but in my view cannot arise if the agreement was unenforceable.  The basis of the argument for estoppel was that the defendant had suffered detriment by not enforcing payment of the bond.  In any event, any detriment suffered by the defendant would only have been temporary since an accounting would have had to have taken place once the respective rights of the parties had been determined by arbitration.

35.  In conclusion, I would uphold the judgment below in so far as declarations (1) and (2) in paragraph 118 of the judgment are concerned.  Since the effect of this result would be the same as the effect of the judgment, I consider that there should be an order nisi that the plaintiff should have its costs of this appeal.

Hon Le Pichon JA:

36.  I agree with the judgment of the Vice President and the order he proposes.

Hon Yuen JA:

37.  I agree with the order proposed by the Vice-President.  In my view, there were two sides to the coin when the parties executed the document of 28 March 2003: the “to do” side and the “not to do” side.  I do not consider that there could be severance given the way the document was expressed, with the two sides being mutual consideration.  The “to do” side required them to proceed to discussions and failing agreement, Third Party Mediation.  The “not to do” side required the parties not to sue or arbitrate against each other, not only in respect of existing disputes but also all future disputes.

38.  Since they were two sides of the same coin, they stood or fell together.  Regarding the “to do” side, I gratefully adopt the analysis of the Vice-President regarding the unenforceability of agreements to negotiate in good faith.  Here, there was a bare agreement to negotiate followed by an unspecified mediation procedure.  Insofar as “Third Party Mediation” was a reference to clause 86, that clause provides ultimately for arbitration if mediation fails, which would be inconsistent with the first sentence in the document that “the parties ... will not bring any arbitration or court action forever ...”.  It is not necessary to go further to see that the agreement could not work for uncertainty. 

39.  In any event, as for the “not to do” side, I do not consider that it was a “drop hands” settlement in respect of existing disputes only.  The words of the document are clear that it applied to “any differences under or in connection with the above Contracts and any arguments that may come up now and in the future for anything in the above Contracts that cannot be finalized will be resolved and decided by the Managing Directors [etc]”.  If necessary, I would have held that it was an ouster of the jurisdiction of the courts and contrary to public policy.

40.  I would also add that I do not consider that evidence of what transpired at all meetings arranged with a view to settling matters in dispute must necessarily be inadmissible.  It is a matter of fact in each case.  Where a meeting concludes with an oral agreement, or an agreement partly oral and partly in writing, or where the parties used ambiguous language in a document with words or phrases which had been identified at the meeting, what transpired at the meeting would be admissible. 

41.  In the present case however, the document executed on 28 March 2003 was intended to be the conclusive agreement and in my view, there were no ambiguities in the language such as to permit the introduction of extrinsic evidence of the meetings prior to that date.  However, clarity of language is different from certainty of concept and it is the latter that was lacking in the agreement leading to its unenforceability.

Hon Rogers VP:

42.  The appeal is therefore dismissed save that declarations 3 and 4 of the order of 14 April 2004 are deleted.  There will be an order nisi of costs in favour of the plaintiff.