LOMBARD GENERAL INSURANCE LIMITED v. EDWIN ENGINEERING LIMITED AND OTHERS

1988, No. A6381

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. The 1st defendant's company was under contract to erect a building in Macau for Shinryo Corporation. Before the signing of the building contract, the plaintiff insurance company was brought in together with the 1st defendant to stand as sureties in a Performance Bond.

2. The construction contract was over $4m. In consideration of a premium of $5,035, the plaintiff agreed to and did become a joint surety under the said Performance Bond.

3. The plaintiff caused its name to be changed from Lombard Alliance Insurance Company Limited to its present name by which these proceedings were instituted. No point was taken on the plaintiff's change of name.

4. The 1st defendant had, at the material time, two directors in the person of the 2nd and 3rd defendants.

5. One of the requirements of the plaintiff insurance company for becoming a co-surety with the 1st defendant under the said Performance Bond was to have Counter indemnity separately signed by the 1st defendant company and each of its then directors.

6. It was alleged by Shinryo Corporation that the 1st defendant defaulted in the construction contract causing loss and damage. Shinryo Corporation sought payment under the said Performance Bond from the plaintiff insurance company in the sum of $604,500. The plaintiff caused the complaint, including the quantum of Shinryo Corporation's claim to be investigated by a firm of adjusters. The plaintiff was satisfied that the claim of Shinryo Corporation was genuine, well-founded and accurate.

7. As far as the plaintiff is concerned, it may well be said that it has regarded the claim of Shinryo corporation is having been properly proved and established otherwise payment would not have been effected. But the fact remains that the 1st defendant company challenges the allegations of Shinryo Corporation. Issues substantial enough have been raised on affirmation. Disputes between Shinryo Corporation and the 1st defendant company under the construction contract shall have to be resolved in a court of law. Put another way: the claim of Shinryo Corporation against the 1st defendant company has not, to all intents and purposes, been conclusively proved in the light of the counter-allegations advanced by the list defendant.

8. Having paid Shinryo Corporation subsequent to the report of the adjusters, the plaintiff insurance company commenced this action against the three defendants. But only the 1st defendant was taken before the Master on an Order 14 application. At the conclusion of the hearing, the Master granted leave to the plaintiff to sign judgment against the 1st defendant hence, the instant appeal.

9. On behalf of the 1st defendant, M. Tang submits that his two limbs of arguments must necessarily raise a prima facie case for trial. First, the said Performance Bond was a conditional one as was the Counter Indemnity. The provision for conclusive evidence in the Counter Indemnity signed by the 1st defendant must be so counsel contends, construed with the earlier provision in that document as well as with the provisions of the said Performance Bond. The net result will be that the Counter Indemnity signed by the 1st defendant company would not enable the plaintiff, by the production of a voucher, to prove conclusively inter se the 1st defendant's liability.

10. The second limb of the argument as advanced by Mr Tang is that both the said Performance Bond and the Counter Indemnity were the plaintiff's documents and that the provision purporting to furnish conclusive evidence as to the liability of the 1st defendant is not free, from ambiguities. On the principle of contra proferentem, it is said that these ambiguities ought to be interpreted favourable to the 1st defendant and that in any case the matter should not be decided upon an Order 14 application, but in a proper trial.

11. The said Performance Bond, I believe is set out at p. 57 of the Appeal Bundle.

12. On behalf of the plaintiff, Mr West maintains that the said Performance Bond is arguably an unconditional bond. In my view, the language of the said Performance Bond is unobscure. It is expressly made subject to Conditions which are prefaced by the words "Now the Condition":-

"Now the Condition of the above-written Bond is such that if the contractor shall duly perform and observe all the terms provision conditions and stipulations of the said Contract on the Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if on default by the Contractor 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 but no alteration in terms of the said Contract made by agreement between the Employer and the Contractor or in the extent or nature of the Works to be constructed completed and maintained thereunder and no allowance of time by the Employer under the said Contract nor any forbearance or forgiveness, in or in respect of any matter or thing concerning the said Contract on the part of the Employer shall in any way release the Surety from any liability under the above written Bond."

13. There can be no doubt that the said Performance bond is conditional.

14. At p. 28 of the Appeal Bundle is set out the Counter Indemnity signed by the 1st defendant company. The obligation it indemnified was clearly made also conditional upon, inter alia, the act, default or neglect of the 1st defendant, its employees or agents causing inter alia, loss, costs, damages charges and expenses to the plaintiff. The crucial provision reads as follows:-

"We [i.e. the 1st defendant company, as signatory to the Counter Indemnity] do hereby further agree ..... to accept the vouchers or other evidence of any losses paid by the [Plaintiff], under the aforesaid obligation, ...... in" adjusting the said losses or in completing the said contract, as conclusive evidence against [the 1st Defendant] ............ of the fact and extent of our liability, under the said obligation to the [Plaintiff]."

15. Mr Tang submits that the provision I have just quoted must be construed together with the conditional Performance Bond and the earlier portion of the Counter Indemnity making it also conditional to indemnify on terms.

16. The provision in the Counter Indemnity for conclusive evidence against the liability of the 1st defendant is clear and admits of no ambiguity. There is no justification for linking that provision to either the conditional Performance Bond or the conditional obligation to indemnify in the earlier part of the Counter indemnity.

17. The premium of $5,035 was small compared to the maximum ceiling of the said Performance Bond of $604,500. Evidently, the provision for conclusive evidence as to liability is highly desirable. Donaldson, J., as he then was, in General Surety v. Francis Parker 6BLR 16 at p. 21 explained the practicality of a situation such as that facing this Court today:-

"There is a simple and well-known way of achieving the result which the plaintiffs say that they have achieved. That is to provide that, as between the plaintiffs and the defendants, a demand by the Corporation shall be conclusive evidence of the plaintiffs' liability to the Corporation".

18. Mr Tang relies Harbottle Ltd. v. National Westminster Bank Limited [1978] 1 Q.B. 146. The clause there under condsideration is decidedly different. At p. 149,letters D and E, it is set out verbatim:-

"You are hereby irrevocably authorised and directed to pay forthwith on any demand appearing or purporting to be, made by or on behalf of the beneficiary (i.e. the buyers) any sums up to the limit of your liability which may be demanded of you from time to time without any reference to or any necessity for confirmation or verification on the part of the undersigned, it being expressly agreed that any such demand shall as between the undersigned and you be conclusive evidence that the sum stated therein is properly due and payable, and you are further authorised to debit any account of the undersigned ......"

19. Kerr, J., as he then was, said of this provision as quoted at p. 149, Letters F/G thus :

"Despite the wide wording of these indemnities it is clear that they only became operative if and when the bank received a demand in accordance with the terms of the guarantees"

The language of that provision requires a demand to activate the conclusive evidence clause. It is wholly different from the provision in the Counter Indemnify.

20. Counsel further relies on Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978]1 Q.B. 159. At p.167 the relevant clause is set out:-

"In consideration of your procuring the giving by Barclays Bank International Ltd. of a ...... guarantee in terms of the cop ...... attached hereto that is the one of November 15, 1976 - ..... we ....... agree to keep you indemnified ..... and ....... irrevocably authorise you to make any payments and comply with any demands which may be claimed or made under the said ......... guarantee ......... and agree that any payment which you shall make......shall be binding upon ...... us and shall be accepted by....... us as conclusive evidence that you were liable to make such payment or comply with such demand."

21. Again, very obvious, the provision is tied to the making and receipt of a demand, and that accounts for the observation of Lord Denning, M.R. made at p. 171, Letters A/B to B/C:-

"All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice."

22. Mr Tang, counsel for the 1st defendant, leans heavily on a reference to demand as material in support of his proposition that in a conclusive evidence clause it must necessarily be construed together with or with reference to an earlier provision in the document or previous inter-related documents imposing conditions for contractual obligations to attach. That is not the case here in the instant appeal with the provision for conclusive evidence as to the liability of the 1st defendant. In my view, the provision for conclusive evidence as to the 1st defendant's liability must be independently construed. There is no justification for linking this provision with other material as suggested by MrTang, counsel for the 1st defendant. The case of Bache & Co. (London) Ltd. v. Banque Vernes et Commerciale de Paris SA, [1973] L1.L.Rep. 437 provides a parallel illustration of a binding conclusive evidence clause.

23. I turn next to the second limb of Mr Tang's arguments that the Counter Indemnity, as it is in the case of the said Performance Bond, is a document of the plaintiff and to be construed against the maker. Mr Tang submits that the words "the said obligation" in the second line before the end of that passage, could convey more meanings than one. The construction contract was one between the 1st defendant company and Shinryo Corporation for the erection of premises in Macau. The plaintiff was not directly involved. The said Performance Bond was a document whereby both the plaintiff and the 1st defendant bound themselves to the extent of $604,500 for the performance by the 1st defendant under the construction contract. The 1st defendant had no obligation to discharge towards the plaintiff under it. I hardly need say, therefore, when the words "the said obligation" appear in the Counter Indemnity as an obligation to the plaintiff, that is what it says in the Counter Indemnity. These words could only refer to and be understood to refer to the 1st defendant's obligations to the plaintiff under the Counter Indemnity. There can be no obscurity in these words complained of by Mr Tang as they appear, in the context of the Counter Indemnity. If indeed these words "the said obligation" could at all bear other meanings than the one attributted to it by this court, conclusive proof of the 1st defendant's liability to the plaintiff, if any under the construction contract or under the said Performance Bond, would inevitably be also against the same interest of the 1st defendant. However its liability towards the plaintiff arose, any conclusive evidence as to that liability could only have provided cold comfort to the 1st defendant's appeal against the Master's decision. Obscurity or not, the 1st defendant could gain no real advantage in the words "the said obligation" in the Counter indemnity.

24. For all the reasons I have given, the 1st defendant company's appeal against the decision of the Master cannot succeed and the same is therefore dismissed with costs to the plaintiff. I so order.

25. In passing I should add : the decision of the Master on the premium sought by the plaiantiff against the 1st defendant in the sum of $5.035 was not a matter in dispute today. The 1st defendant has conceded its liability to pay premium under the said Performance Bond to the plaintiff.