HENG KIN CONSTRUCTION LTD v. EGOART DESIGN WORKSHOP LTD

HCA 1158/2022

[2024] HKCFI 1081

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1158 OF 2022

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J U D G M E N T

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1.  The Defendant is appealing against the decision of Master KW Wong dated 2 February 2023 in ordering summary judgment for the Plaintiff.

2.  The Defendant has also taken out the summons dated 18 May 2023 to adduce further evidence at the appeal under Order 58, rule 1(5)  of the Rules of the High Court (Cap. 4A).

Background

3.  The case is concerned with the construction contract at 48 Caine Road, Mid-Levels.  The Employer was Great Bonus Ltd, and the Main Contractor was Kin Shing (Leung’s)  General Contractors Ltd, subsidiary of Sundart Holdings Ltd.  The Defendant (“EgoArt”)  was the Nominated Sub-contractor for the internal Fitting Out Works, and the Plaintiff (“Heng Kin”)  was a sub-sub-contractor of the Defendant for the entire Fitting Out Works.  The Architect was L&N Architects Ltd.

4.  On 9 May 2018, the Defendant (Party A)  and the Plaintiff (Party B)  entered into a Surety Bond Agreement in Chinese (履約保証金協議書).  The relevant terms (translation)  of the Surety Bond Agreement were as follows:

“Clause 1 Whereas Party A and Party B have signed the relevant Sub-contract No. B07_2018/4/1371 of the work contract of the ‘Proposed Composite Building Developing (sic)  at 48 Caine Road, Mid-Levels, Hong Kong’, and in the circumstances that Party B has already had clear understanding of the terms of the construction work contract, and to guarantee the practical performance of its duties promised in the work contract, is willing to provide the surety bond as agreed in the contract.

Clause 2 In accordance with the Contract No. LN/CR/IFO-CTR/200418 and KS/B210/090 signed by Party A and the Employer/the representative and also the request to purchase the surety bond as endorsed and agreed by Party B, Party B shall provide HK$3,700,000 in cash to Party A to purchase on its behalf a surety bond from a bank for the Employer.

Clause 3  When after Party A has received from the Employer/ representative a Certificate of Completion of Making Good Defects issued, Party A shall apply to the bank for the return of the surety bond, and within 7 days of the return of the surety bond, the surety bond and interest (if any)  shall be remitted directly into Party B’s account.”

5.  On 15 May 2018, the Defendant received HK$3,700,000 from the Plaintiff, and took out the Surety Bond from a bank, and forwarded it to the Employer.

6.  On 21 September 2021, the Architect issued the Certificate of Making Good Defects.  Thereafter, the Employer and the Main Contractor agreed that the Surety Bond could be cancelled.

7.  On 22 November 2021, the Defendant informed the Plaintiff that they have received the original Surety Bond from the Main Contractor and submitted it to the bank for release of the Surety Bond.

8.  The sum of HK$3,700,000 was not returned by the Defendant to the Plaintiff.

9.  The Plaintiff issued the present action for the return of HK$3,700,000 pursuant to Clause 3 of the Surety Bond Agreement, and applied for summary judgment.

10.  The Defendant argued that they has a reasonably arguable defence and counterclaim (by affidavit and not pleadings)  exceeding the Plaintiff’s claim of HK$3,700,000.  Such counterclaim related to potential liability for liquidated and ascertained damages (“LAD”)  of HK$13,560,000 by the Defendant being 113 days’ delay in the Interior Fitting Out Works as assessed by the Quantity Surveyor.  Such sum is in turn the liability of the Plaintiff as all the relevant works were carried out by the Plaintiff as sub-sub-contractor.  The Defendant was appealing for Extension of Time (“EOT”)  against the assessment of delay.

11.  The Master found there was an arguable defence of set-off of HK$336,356.67 only, and entered summary judgment for the remainder of HK$3,363,643.43.  There is no issue on this set-off in this appeal.

New Evidence on Appeal

12.  The Defendant applied for leave to adduce two additional set of documents for the appeal:

(1)  Letter dated 10 March 2023 from the Defendant’s solicitors to the Plaintiff’s solicitors (with enclosures)  (Annex I);

(2)  Letter dated 2 May 2023 from the Defendant to the Plaintiff (with enclosures)  (Annex II).

13.  The first letter dated 10 March 2023 enclosed the letter dated 3 February 2023 (1 day after the hearing before Master KW Wong on 2 February 2023)  from the Main Contractor to the Defendant in that the in exercising the contractual right under the Sub-Contract to deduct LAD for 113 days’ delay at HK$120,000 per day totaling HK$13,560,000.

14.  The first letter also enclosed the letter dated 18 January 2023 from the Employer to the Main Contractor exercising the contractual right to deduct Liquidated Damages for 232 days’ delay (including other sub-contracts).  This letter was not before the Master because it was between the Employer and the Main Contractor and not addressed to the Defendant.

15.  The evidence before the Master was the letter dated 8 December 2022 from the Main Contractor to the Architect on the internal assessment of LAD of HK$13,560,000 urging the Architect to consider the Main Contractor’s EOT appeal relating to LAD.

16.  Mr Lung, for the Defendant, submitted that the letter dated 3 February 2023 showed that the deduction had actually been exercised.

17.  The second letter dated 2 May 2023 showed that the Plaintiff and the Defendant were then still trying to resolve the final account between then.  Mr Lung submitted that the final account had to be settled at trial and there was no reason why the Plaintiff was taking out the blinkered view to have part of the money back now.

18.  O.58, r.1(5)  of the RHC provides that:

“No further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made)  may be received on the hearing of an appeal under this rule except on special grounds.”

19.  Miss Lau, counsel for the Plaintiff, objected to the new evidence. The new evidence were received de bene esse at the hearing of the appeal.

20.  Mr Lung submitted that the two letters came into existence after the hearing before the Master.  The application is not made on “special grounds” under O.58, r.1(5)  of the RHC. Hence, considerations of reasonable diligence to obtain the document for use in the court below under Ladd v Marshall [1954] 1 WLR 1489; [1954] 3 All ER 745 is irrelevant.  The proviso “other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made” in O.58, r.1(5)  is relevant.  Hence, the two letters should be admitted.

21.  Miss Lau referred to Rise Tall Developments Ltd v Yeuk Man Co Ltd [2023] HKCFI 1237 per Cheng J, [47] and [48]:

“F. THE NEW EVIDENCE SUMMONS:

47. The Defendant submits that the court has a discretion to admit further evidence on appeal from a master’s decision. It says that whilst RHC O.58 r.1(5) provides that no further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made)  may be received on the hearing of an appeal under this rule except on special grounds, no special grounds need to be shown in the present case as the Defendant’s expert carried out his inspection, and prepared the Expert Report, only after the decision of the Master; the only consideration as to admissibility is the probative value of the report.

48.  However, it is only evidence as to ‘matters which have occurred after the date’ of the master’s judgment, order or decision which is not the subject of the requirement to show special grounds.  As the Plaintiff points out, in the context of O.59 r.10, the words ‘matters which have occurred after the date of the trial or hearing’ do not cover evidence coming into being after the trial but relating to matters occurring before trial: Wong To Yick Wood Lock Ointment Ltd v Kin Lam Medicine Co Ltd. CACV 82/2017,unreported, 20^th October 2017 at [30] (Kwan JA, as she then was).  The same interpretation must apply in respect of O.58 r.1(5), and indeed this is plain from the wording of the rule: the exception applies in respect of matters occurring after the date of the master’s judgment, order or decision, not evidence coming into being after such a date.”

22.  Miss Lau submitted that the so called new evidence did not relate to any new matter arising since the hearing before the Master, but was old matter as they related to the LAD for delay of 113 days.

23.  I am of the view that it is not sufficiently specific to refer to the matter as the LAD of 113 days’ delay.  At the hearing before the Master, the matter was the intimation of possible LAD for the delay, and the new evidence was the exercise of the right to declare LAD of HK$13,560,000.  Therefore, the evidence sought to be produced on the appeal is that of the new step taken to crystalize the LAD.

24.  Hence, I agree with Mr Lung that the new evidence is admissible.  In any case, the letter dated 3 February 2023 from the Main Contractor to the Defendant is necessary and sufficient.  The letter dated 18 January 2023 enclosed with the first letter and the second letter between the Defendant and the Plaintiff merely completes the picture.  They do not add to nor subtract from the first letter.

Defendant’s Case in the Appeal

25.  Mr Lung submitted that it is over simplistic to simply look at the issuance of the Certificate of Completion of Making Good Defects under Clause 3 of the Surety Bond Agreement, but one needs to look at the entire document, including the guarantee for the practical performance of its duties promised in the work contract by the Plaintiff under Clause 1, as well as the Letter of Nomination LN/CR/IFO-CTR/200418 issued by the Architect, especially the request to purchase the surety bond as agreed by and endorsed by the Plaintiff on the Letter of Nomination.

26.  By the letter dated 24 April 2018 from the Defendant to the Plaintiff and signed by both of them, the Plaintiff accepted the Nominated Sub-contract for the Fitting Out Works in the sum of HK$36,876,970, less 7% management charged by the Defendant, based on “back-to back conditions in the drawings and specifications and scope of works as stipulated in the tender document.  It was specified in the letter that the following documents should be considered as part of the contract:

(1)  Letter of Nomination issued by the Architect to the Main Contractor LN/CR/IFO-CTR/200418 dated 20 April 2018 (as referred to in Clause 2 of Surety Bond Agreement);

(2)  Full set of Tender Documents (between the Main Contractor and the Defendant)  for the Interior Composite Building Development at 48 Caine Road, Mid-Levels, Hong Kong for the Employer with contract sum of HK$36,876,970.

27.  The “back-to back conditions” included that the interior fitting out works shall be completed by the Plaintiff within the timeframe specified in the Tender Documents.

28.  Further, the Plaintiff has appended their company chop on every page of the Letter of Nomination LN/CR/IFO-CTR/200418 issued by the Architect to the Defendant.  Clause 5 of the Letter of Nomination provided that the Defendant was required to submit the Surety Bond (as per the specimen in Appendix B to the Form of Tender of Sub-Contract).

29.  The specimen of the Surety Bond in Appendix B to the Form of Tender of Sub-Contract contained, amongst others, the following provisions (sub-paragraph numbers added herein):

“(1)  … the Surety shall satisfy and discharge the damages sustained by the Employer thereby up to the amount of the above-written Bond, then this obligation shall be null and void but otherwise shall be and remain in full force and effect…

(2)  This Bond shall remain valid for receipt of claims as aforesaid until the date of issue of the Certificate of Completion of Making Good Defects pursuant to the Conditions of the Contract and any release of the Surety from the Bond shall be expressly subject to any claims made before this date.”

30.  Mr Lung submitted that by endorsing on the Letter of Nomination by the Architect to the Defendant, the Plaintiff must be taken to have agreed to the incorporation of the “back-to back conditions” in the Letter of Nomination to the sub-sub-contract between the Plaintiff and the Defendant.

Plaintiff’s Case in the Appeal

31.  Miss Lau submitted that Clause 3 of the Surety Bond Agreement was a separate and independent contract.  It was akin to a loan by the Plaintiff to the Defendant.  And as for the “back-to back contract”, the Employer and the Main Contractor were will to have the Surety Bond cancelled and refunded to the Defendant.  Hence, the Defendant should in the same manner refund to the Plaintiff.

32.  In any case, the Defendant is still appealing for EOT against the LAD.  There is no finality on the sum of HK$13,560,000.

Analysis

33.  The Defendant’s case was two-fold:

(1)  The Surety Bond Agreement was subject “back-to-back” to the terms of the Letter of Nomination between the Main Contractor and the Defendant as endorsed by the Plaintiff;

(2)  Further or in the alternative, there is a good arguable defence and counterclaim by the Defendant against the Plaintiff of HK$13,560,000 exceeding the sum of the Surety Bond.

34.  In a summary judgment application, the Court is to see if there were any triable issues raised in the defence or counterclaim such that the matter should proceed to trial.  It is not necessary to make any finding on the counterclaim or interpretation of the contract as they involve questions of fact or mixed question of fact and/or law which ought to be dealt with at the trial.

35.  From the factual matrix of the tiers of contracts and sub-contract, I find Mr Lung’s submission on the interpretation of contract reasonably arguable and triable issues have been raised.

36.  Alternatively, there is also a triable issue as to a good arguable counterclaim.  Notwithstanding that the Defendant is appealing for EOT and against the LAD, it must be looked at in the context of a construction contact where LAD are ordinarily assessed by the Architect and/or Quantity Surveyor professionally rather than arbitrarily. 

37.  Regards must also be had to the quantum of the LAD vis-à-vis the amount of the Surety Bond.

Conclusion

38.  In the premises, the appeal against summary judgment is allowed and leave to defend is granted.

39.  I make the order nisi that the Plaintiff do pay the costs of the appeal as well as the summons for the new evidence at the appeal, to be taxed if not agreed, with certificate for counsel.

40.  I wish to thank Miss Lau and Mr Lung of counsel for their helpful submissions.