WEST KOWLOON CULTURAL DISTRICT AUTHORITY v. AIG INSURANCE HONG KONG LTD

CACV 82/2020

[2022] HKCA 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 82 OF 2020

(ON APPEAL FROM HCA NO 2039 OF 2018)

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REASONS FOR JUDGMENT
and
DECISION ON COSTS

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Hon Au JA (giving the Reasons for Judgment and Decision on Costs of the Court):

A.  Introduction

1.  This is the defendant’s appeal against the summary judgment granted by Ng J (“the Judge”)  in favour of the plaintiff on 2 April 2020 (“the Judgment”).  By the Judgment, the Judge also dismissed the defendant’s summons dated 11 September 2018, which sought to, inter alia, strike out the plaintiff’s writ and statement of claim (“Defendant’s Summons”).

2.  By way of a Notice of Appeal dated 29 April 2020, the defendant advanced three grounds of appeal, which are categorized in its skeleton submissions as “the Demand Grounds” (Ground 1 and Ground 2 in the Notice of Appeal)  and the “Fraud Ground” (Ground 3 in the Notice of Appeal).  In light of the decision dated 18 September 2020 by this Court (Lam VP (as he then was)  and Yuen JA)  refusing the defendant leave to adduce new evidence for this appeal (“Leave Decision”), Mr Lam SC for the defendant indicated at the hearing that it would no longer pursue the Fraud Ground in this appeal.  This appeal therefore is only concerned with the Demand Grounds.

3.  The plaintiff also filed a Respondent’s Notice on 12 May 2020 seeking to affirm the Judgment on additional grounds.  It has also asked for an alternative order that, in the event that the appeal is allowed, the defendant be given leave to defend on the condition that the defendant is to pay the plaintiff the Bonded Sum (as defined below)  (with interest)  by way of interim payment.

4.  After the end of the hearing, we allowed the appeal and indicated that we would hand down our reasons for judgment and the decision on costs in due course.  This is what we do now.

B.  Background

5.  The material facts leading to this appeal were comprehensively summarized at [6] - [18] of the Judgment and [4] - [9] of the Leave Decision.  We only need to set out the following which are relevant to this appeal.

6.  By way of a General Conditions of Contract of Building and Civil Engineering Works dated 26 September 2015 (“the Contract”), the plaintiff engaged Hsin Chong Construction Company Limited (“the Contractor”)  as contractor for its project known as “M+ project”.  To secure the due performance of the Contractor, the defendant issued a bond No.H7478 (“the Bond”), up to the sum (“the Bonded Sum”)  of HK$297,198,000 on 8 October 2015 in favour of the plaintiff.

7.  Clause 2 of the Bond (“Clause 2”)  provides as follows:

“If, in the [Plaintiff’s] opinion, the Contractor is or has been in default in respect of any of his obligations under the Contract, the [Defendant] shall upon demand made by the [Plaintiff] in writing and without conditions or proof of the said default or amount demanded, pay the amount identified in the demand in respect of the damages, losses, charges, costs or expenses sustained by the [Plaintiff] by reason of the default, up to the amount of the Bonded Sum.” (emphasis added)

8.  On 17 August 2018, pursuant to clauses 73.1(a)  and 74.1 of the Contract, the plaintiff terminated the employment of the Contractor on the basis that it had been in breach of its obligations under the Contract.  On the same date, the plaintiff issued and delivered a demand letter to the defendant, asking for payment of the entire Bonded Sum under the Bond (“1^st Demand”).

9.  The relevant parts of the 1^st Demand stated as follows:

“We refer to the above bond issued by you in our favour, under which you are the Bondsman.

We hereby demand that you pay to us the full bonded sum of HK$297,198,000.

We are of the opinion that the Contractor is and has been in default in respect of various of its obligations under the Contract between the Contractor and us, and by reason of such defaults we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses.” (emphasis added)

10.  On 21 and 24 August 2018, the plaintiff delivered to the defendant two further chaser letters demanding the payment of the Bonded Sum.  The contents of the chasers are in substance the same as that of the 1^st Demand.  For the purpose of this judgment, references to the demand made by the 1^st Demand should be treated as also references to the demands made by the subsequent chasers.

11.  In response, the defendant had by way of correspondence sought various clarifications from the plaintiff, including the proof of the Contractor’s default and whether the demanded Bonded Sum represented the amount of damages or losses said to have already been suffered by the plaintiff.  The plaintiff did not provide the requested clarifications as it was of the view that it was unnecessary under Clause 2 for it to prove or particularize both the Contractor’s breach and the losses[1].  The defendant therefore had not paid the demanded sum.

12.  In light of the non-compliance with the demands, on 29 August 2018, the plaintiff commenced the present action against the defendant seeking the payment of the Bonded Sum under the Bond.  By way of the Defendant’s Summons, the defendant sought to strike out the claim, or alternatively a determination of preliminary issues.

13.  On 14 September 2018, the plaintiff took out the summons (“the O14 Summons”)  seeking summary judgment against the defendant.

C.  The Judgment

14.  The Judge heard the Defendant’s Summons and the O14 Summons together.

15.  The defendant’s principal case under the Defendant’s Summons was that the demand for the Bonded Sum made in the 1^st Demand was invalid as it did not comply with the requirements under Clause 2.  This was so as (a)  the demand had failed to relate or identify the Bonded Sum with the damages said to have been sustained by reason of the Contractor’s default, and (b)  in any event, the demanded sum also covered and included future damages, losses, charges, costs or expenses which were not within the ambit of Clause 2.  For convenience, we will refer to these questions as the “Construction Issues”.

16.  The defendant further alternatively contended that the demands were made fraudulently as the plaintiff could have formed no bona fide opinion that the Contractor was in default of its obligations under the Contract between the two of them, or that by reason of such alleged default the plaintiff had sustained damages etc of or exceeding the Bonded Sum.  Again for convenience, we would refer to this issue as the “Fraud Issue”.

17.  On these bases, the defendant also opposed the summary judgment application.

18.  Under the Construction Issues, there was no dispute that to be valid, a demand made under the Bond must comply with the requirements as provided under Clause 2, and it was (a)  a matter of construction of Clause 2 as to what those requirements were, and (b)  a matter of construction of the 1^st Demand as to whether it complied with those requirements: see [20] - [25] of the Judgment.

19.  For the Construction Issues, the Judge concluded that on a proper construction, a demand would be in compliance with Clause 2 if[2]:

(1)  The demands were made by the plaintiff in writing (“the 1^st Requirement”).

(2)  In the plaintiff’s opinion, the Contractor was or had been in default in respect of any of its obligations under the Contract (“the 2^nd Requirement”).

(3)  The amount stated in the demand was in respect of the damages, losses, charges, costs or expenses sustained by the plaintiff by reason of the Contractor’s default (“the 3^rd Requirement”).

See [26] - [30] of the Judgment.

20.  The Judge found that the 1^st Demand complied with all three requirements.

21.  First, he held it was clear that the 1^st Demand complied with the 1^st Requirement, as it was in writing.  See [32] of the Judgment.

22.  Second, the 1^st Demand also complied with the 2^nd Requirement as the plaintiff did say in it that it was of the opinion that the Contractor was or had been in default in respect of various obligations under the Contract. In this respect, it was clear from Clause 2 that the plaintiff in making a demand was not required to prove the Contractor’s default or the amount demanded.  See [30] and [33] of the Judgment.

23.  As to the 3^rd Requirement, as mentioned above, counsel for the defendant[3] contended that it was not fulfilled since (a)  the demand had failed to relate or identify the Bonded Sum with the damages said to have been sustained by reason of the Contractor’s default, and (b)  in any event, the demanded sum also covered and included future damages, losses, charges, costs or expenses, as expressly stated at paragraph 3 of the 1^st Demand, which were not within the ambit of Clause 2.

24.  The Judge disagreed with the defendant.  He held at [37] - [40] of the Judgment that:

(1)  It was not a requirement under Clause 2 for the plaintiff to specify the particular breach / default by the Contractor, or to particularize the amount of damages, losses etc sustained;

(2)  If one read paragraphs 2 and 3 of 1^st Demand as a whole (as they should be), the plaintiff stated, expressly or at least in substance, that it claimed the full sum of the Bond due to the Contractor’s default and the damages and losses etc so suffered by the plaintiff were the full sum of the Bond, which was the only figure appearing in the 1^st Demand.

(3)  He also endorsed and applied IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 in that as long as the demand had stated in substance what was required in the bond and was understood by its recipient as such, the demand would be treated as a valid one.  Such proposition, the Judge held, was consistent with the importance of preserving the certainty and reliability of on demand bonds.  He remarked that being hypercritical of the wording of a demand and an overzealous insistence on strict compliance would undermine the rationale of an on demand bond and should be resisted.

25.  The Judge further held that the additional reference to the future damages and losses in paragraph 3 of the 1^st Demand, as heavily relied on by the defendant in support of its contentions, was at most redundant and mere surplusage that would not render the 1^st Demand invalid.  He explained his reasons at [42] as follows:

“42.  It is true that the 1^st Demand also referred to damages, losses etc that the Plaintiff would continue to suffer and sustain by reason of the Contractor’s default.  But the reference to future damages, losses etc does not vitiate or render nugatory that part of the 1^st Demand which did refer to damages, losses etc sustained by reason of the Contractor’s default which are admittedly within the ambit of the Bond.  Since Clause 2 does not require particularization or proof of the amount demanded as damages, losses etc sustained, the additional reference to future damages and losses is at most redundant and a surplusage and can be ignored.  It might be different if the 1^st Demand only referred to future damages and losses but omitted to mention damages, losses etc already sustained: cf AES-3C Maritza East 1 Eood v Credit Agricole [2011] EWHC 123 (TCC).  If that were the case, the Defendant’s argument that the 1^st Demand is thereby rendered defective would have more force.  But that is not the case here.”

26.  For the above reasons, the Judge concluded that the 1^st Demand complied with all the requirements of Clause 2, and was thus valid.

27.  The Judge then further rejected the defendant’s contentions made in support of the Fraud Issue for the detailed reasons given at [44] - [60] of the Judgment[4].

28.  Having decided against the defendant in relation to both the Construction Issues and the Fraud Issue, the Judge dismissed the Defendant’s Summons and granted summary judgment in favour of the plaintiff.

D.  This appeal

29.  As stated earlier, the defendant in this appeal only pursues the Demand Grounds, which are as follows:

(1)  The Judge erred in finding that the plaintiff’s failure to state that the amount demanded was in respect of losses, charges, costs or expenses sustained by reason of the Contractor’s default did not render the 1^st Demand invalid (“Ground 1”).

(2)  The Judge erred in finding that the 1^st Demand was valid even though it plainly included a claim for losses which the plaintiff had not yet sustained as at the date of the 1^st Demand (“Ground 2”).

30.  In relation to these, it is also important to note that in this appeal, the parties agree that:

(1)  The issues raised in this appeal under the Demand Grounds are matters of proper construction of Clause 2 and the 1^st Demand, which are questions of law for the court.

(2)  In this respect, authorities based on different bond documents and demands made in the context of the specific facts of each case are not of particular relevance to the question of construction relating specifically to Clause 2 and the 1^st Demand.

(3)  Properly construed, the requirements under Clause 2 are the three requirements as identified by the Judge and summarized at [19] above.

(4)  The 1^st Demand satisfied the 1^st and 2^nd Requirements.

(5)  The only real and substantive issue in this appeal is whether the 1^st Demand satisfied the 3^rd Requirement.

31.  Mr Lam SC (leading Mr Cheung)  has in gist advanced the following submissions to say why the 1^st Demand did not satisfy the 3^rd Requirement.

32.  First, he submits that paragraph 2 of the 1^st Demand only set out the demanded sum being the Bonded Sum, while paragraph 3 independently and separately set out and made reference to the default of the Contractor.  There is no reference or link between paragraphs 2 and 3 of the 1^st Demand.  In the premises, the 1^st Demand does not show that the demanded Bonded Sum was related to or was in respect of the Contractor’s default as required in the 3^rd Requirement.  It is therefore an invalid demand.

33.  We have no hesitation in rejecting this contention.

34.  There is no dispute that, as a matter of construction, the 1^st Demand (in particular paragraphs 2 and 3 thereof)  should be read and construed together objectively and in proper context.  Once so considered, it is surreal and unrealistic to read paragraphs 2 and 3 of the 1^st Demand in the manner as submitted by Mr Lam.  When reading the plain words of paragraphs 2 and 3 together and with common sense, the plaintiff was clearly stating in the 1^st Demand that it was demanding the Bonded Sum under the Bond as it related to the Contractor’s default under the Contract.

35.  Second, Mr Lam submits that given it was expressly stated at paragraph 3 of the 1^st Demand that, by reason of the Contractor’s defaults, the plaintiff “have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses” (emphasis added), it is obvious that it is the plaintiff’s own position that the demanded Bonded Sum related to damages which the plaintiff regarded as something it would continue to suffer by reason of the Contractor’ default.  The Bonded Sum thus included not only damages and losses the plaintiff had already suffered by the time of the demand (which are permitted under Clause 2)  but also future damages and losses (which are not within the ambit of Clause 2).

36.  We agree with Mr Lam.  In our view, the plain and express words of the 3^rd paragraph of the 1^st Demand objectively and reasonably inform the reader that the Bonded Sum as demanded related to damages and losses that had already been suffered by the plaintiff as well as ones that are yet to be suffered by reason of the Contractor’s default under the Contract.

37.  In this respect, it is important to note that Mr Maurellet SC (leading Mr Niehorster)  for the plaintiff has fairly and rightly accepted at the hearing that:

(1)  under Clause 2, the plaintiff can only validly demand payment for damages, and losses that they have already suffered and sustained at the time of demand, and

(2)  objectively, it is a permissible construction of paragraph 3 of the 1^st Demand that the demanded Bonded Sum included damages and losses which the plaintiff would continue to suffer after the time of the demand, ie, in the future.

38.  However, Mr Maurellet has submitted that the court should adopt the Judge’s construction and find that the Bonded Sum as demanded under the 1^st Demand related to only damages already suffered by the plaintiff at the time of demand, and that the words “will continue to suffer and sustain” in paragraph 3 are redundant and surplusage.  This is so as paragraphs 2 and 3 should be read in the following proper contexts:

(1)  The Contractor’s breach or default of the Contract is a one-off incident as they had already been removed as the contractor by the time of the demand.  A new replacement contractor had already been appointed.  As such, there would not be any further or future breaches or defaults by this Contractor covered by the Bond.

(2)  In the premises, by the time of the demand, all the actual damages and losses the plaintiff would have suffered by reason of the Contractor’s default had already been suffered and sustained.  All that was left was only a matter of detailed assessment and quantification.

(3)  Clause 2 on the other hand does not require particularization or proof of the amount demanded as damages, losses etc sustained.

39.  Once read in these contexts, says Mr Maurellet, it is clear that paragraphs 2 and 3 when considered together meant, as the Judge held at [42] of the Judgment, that the Bonded Sum as demanded reflected the plaintiff’s opinion that (a)  this was the amount of damages they already suffered at the time of the demand by reason of the Contractor’s default, (b)  the overall damages and losses the plaintiff would suffer as a whole must go beyond the Bonded Sum after final quantification, and hence the reference to the words “will continue to suffer and sustain”. These words are therefore, as held by the Judge, redundant and surplusage for the purpose of the demand.

40.  With respect to Mr Maurellet, we are unable to accept his submissions.

41.  First, the rather convoluted construction advanced by Mr Maurellet goes against the plain meaning of the words used in paragraph 3.  In this respect, as a matter of construction, the court normally expects the drafter to use words chosen to express a meaning and would not lightly find that he intended to add or use redundant and surplusage words.

42.  Second, as pointed out by Barma JA at the hearing, the operative words used in Clause 2 are “damages, losses, charges, costs or expenses”.  These are words or terms referring to actual or quantified amounts.  Hence, it is intended under Clause 2 that when the plaintiff makes a demand, it should be by reference to damages, losses etc which have already been suffered and quantified, but not unquantified sums arising from or by reason of the Contractor’s default.  This intention is underlined by the fact, as confirmed by Mr Maurellet and Mr Lam, that under the Bond, the plaintiff can make multiple and subsequent separate demands[5].

43.  Third, there is nothing before the court which would show and support the position that at the time of the 1^st Demand, there was an objective context or basis to say that the quantified damages were already well beyond the Bonded Sum.

44.  In the premises, we reject Mr Maurellet’s construction as the preferred construction since that would go against the plain and obvious meaning of the words used in paragraph 3 and also the nature of the demand intended to be made under Clause 2.

45.  For these reasons, with respect to the Judge, we find him to have erred in his construction and conclusion at [42] of the Judgment.  We accept Mr Lam’s submissions that, on a proper construction, the Bonded Sum as demanded under the 1^st Demand included future damages and losses which were outside the ambit of Clause 2.  Therefore, the 1^st Demand was not made in compliance with Clause 2 and was thus invalid.

46.  We therefore allowed the appeal on this basis.

47.  Given this basis, it is not necessary for us to deal with Mr Lam’s further submissions relating to whether the court should adopt a strict compliance[6] or in substance compliance[7] test or approach in an on-demand bond situation in determining whether the 1^st Demand had complied with Clause 2[8]. This is so as both Mr Lam and Mr Maurellet have fairly accepted that the question of whether there was in substance compliance by the 1^st Demand simply does not arise if this court concludes (as we have)  that, as a matter of construction, the Bonded Sum as demanded included future damages and losses etc.

E.  Disposition

48.  For the above reasons, we allowed the appeal at the hearing and set aside the Judgment.

49.  In the Notice of Appeal, the defendant has also asked for the O14 Summons to be dismissed and that the sum already paid by the defendant to the plaintiff to be repaid together with interest at judgment rate from the date of the defendant’s payment to the plaintiff. 

50.  Mr Lam at the end of the hearing also asked for the Defendant’s Summons to be allowed and that the action be struck out.  However, as pointed out by Yuen JA at the hearing, the defendant did not in its Notice of Appeal ask for these orders.  Mr Lam therefore asked for leave to amend the Notice of Appeal to include this relief, which was not opposed by Mr Maurellet as he accepted that this should follow if the appeal was allowed.  Mr Maurellet also confirmed at the hearing that the defendant would not pursue an alternative order that the defendant be given conditional leave to defend as sought in the Respondent’s Notice.

51.  In light of the above, we would therefore also grant leave to the defendant to so amend the Notice of Appeal[9] and further order that (a)  the O14 Summons be dismissed, (b)  the Defendant’s Summons be allowed and the writ and the statement of claim be struck out, and (c)  the sum already paid by the defendant to the plaintiff pursuant to the Judgment to be repaid together with interest at judgment rate from the date of the defendant’s payment to the plaintiff.

52.  As to costs, Mr Maurellet accepts that costs of the appeal should follow the event.  As to the costs below, he submits that, as reflected in the Judgment, up to 20 - 30% of the time had been spent at the hearing before the Judge on the Fraud Issue raised by the defendant, which the Judge had rejected and the defendant has abandoned on appeal.  In the premises, counsel says the defendant should not be entitled to all the costs before the Judge.

53.  We agree with Mr Maurellet. We therefore order that costs of this appeal (with certificate for two counsel)  and 80% of the costs below be to the defendant, to be taxed if not agreed.