DORFIT PROPERTIES LTD v. FUJITA CORPORATION

HCCT127/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.127 OF 1999

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J U D G M E N T

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1. The plaintiff ("Dorfit") is a Hong Kong based property developer. The defendant ("Fujita) is a Japanese based construction company. The third party, who has played no active role in these proceedings was a Hong Kong construction company. It was originally known as Franki Contractors Ltd but changed its name to B+B Construction Co. Ltd in January 1997. I shall refer to them as "B+B" throughout because nothing turns on the change of name.

Background

2. I shall outline the background to these proceedings as briefly and as simply as I can. In 1995 Dorfit acquired a site in Blue Pool Road for redevelopment. They decided to build a 25-storey residential block.

3. After negotiations, on 26 November 1996, Dorfit accepted a tender from B+B and on 28 November entered into a contract with themselves as the employer and B+B as the main contractor for the construction of the foundation and basement works of the project. Clause 17 of the contract stated that "The Main Contractor shall not assign the contract".

4. Fujita's appearance on the scene was earlier, in April or May 1996. Fujita were keen to establish a presence in Hong Kong and wanted to acquire experience and get some involvement in the Hong Kong construction industry. Again, after negotiations, B+B and Fujita signed a Joint Venture agreement dated 16 December 1996. The following are extracts from the Joint Venture agreement :

" BETWEEN

FRANKI CONTRACTORS LIMITED, a company incorporated in Hong Kong ...... of the one part.

AND

FUJITA CORPORATION, a company incorporated in Japan ...... of the other part.

WHEREAS :-

(I) Dorfit Properties Limited, a company incorporated in Hong Kong ...... (hereinafter referred to as 'the Employer') is the developer of the project, the construction of Foundation and Basement up to and including part of first floor at 5-7 Blue Pool Road, Happy Valley, Hong Kong. (hereinafter referred to as 'the Works').

(II) Franki submitted a tender proposal for the said Project and the Employer and Franki made a construction contract for the Works on 28th day of November, 1996 (hereinafter referred to as the 'Contract').

(III) Fujita is desirous of participating in the execution of the Works and the Parties have agreed to establish for the purpose of joint execution of the Works an unincorporated joint venture (hereinafter referred to as the 'JV') on the terms and conditions set out in this Agreement.

......

2. Participation

2.1 Subject to any subsequent change pursuant to this Agreement, the interest of the Parties in this JV are as follows :-

Franki : Seventy percent (70%)

Fujita : Thirty percent (30%)

and the Parties shall share the rights, profits, benefits and obligations, risks, costs liabilities and expenses, arising out of the Works or in any other way connected with the Works in such proportions.

2.2 The leading Party in this JV shall be Franki.

2.3 The Parties shall be jointly and severally liable towards the Employer in connection with the performance of the Works under the Contract and to third parties, without prejudice to the terms of this Agreement. In the event that the terms of the Contract are in conflict with the terms of this Agreement, then the terms of the former shall prevail.

......

2.6 Franki shall be responsible for the execution, completion and maintenance of the Works in accordance with the Contract."

The full document is eight pages.

5. On 20 December 1996 B+B asked for Dorfit's consent to assign the contract to the Joint Venture. Again after more negotiations (primarily concerned with the best way to proceed legally) Dorfit agreed subject to the provision of a satisfactory joint and several guarantee. By July 1997, the Joint Venture guarantee had been signed and sealed. It is the guarantee which is the centre piece of this litigation. The parties disagree fundamentally as to its construction and effect. It is sufficiently important and sufficiently short to set out in full :

" JOINT-VENTURE GUARANTEE

THIS GUARANTEE is made the 24th day of March, 1997 between B+B CONSTRUCTION Co Ltd whose registered address is at Franki Centre, 320 Junction Road, Kowloon Tong, Hong Kong and FUJITA CORPORATION, company incorporated in Japan whose registered address is at 4-6-15, Sendagaya, Shibuya-ku, Tokyo 151, Japan (hereinafter collectively called 'the Guarantors') of the one part and Dorfit Properties Limited whose registered address is at Suite 1006, 10/F., Two Exchange Square, 8 Connaught Place, Central, Hong Kong (hereinafter called 'The Employer').

WHEREAS

1. This Guarantee is supplemental to the Contract for the construction of foundation and basement for the proposed residential development at 5-7 Blue Pool Road, Happy Valley, Hong Kong (hereinafter called 'the Contract') dated the 28th day of November 1996 and made between the Employer of the one part and Franki Contractors Limited (now incorporated as B+B CONSTRUCTION Co Ltd) the Contractor as defined in the conditions of Contract (hereinafter called 'the ex-Contractor') of the other part whereby the ex-Contractor agreed to execute and maintain the Works more particularly referred to in the Contract and in accordance with the provisions thereof :

2. In consideration of the Employer's consent allowing the ex-Contractor to assign the Contract to the Joint Venture ('FRANKI FUJITA JV') formed between B+B CONSTRUCTION Co Ltd and FUJITA CORPORATION on 16th December, 1996 (hereinafter called 'the Contractor'), the Guarantors hereby agree to guarantee jointly and severally the due performance of the Contract in the manner hereinafter appearing.

NOW the Guarantors hereby agree with the Employer as follows :-

1. The Guarantors hereby irrevocably and unconditionally guarantee to the Employer the due and punctual performance by the Contractor, its personal representative, its successors and assigns, under the Contract of each and all the obligations, and duties and undertakings of the Contractor under and pursuant to the Contract when and if such obligations, duties and undertakings shall become due and performable according to the terms of the Contract.

2. The Guarantors will indemnify the Employer against all losses, damages, costs and expenses suffered or incurred by it by reason of any act, default or omission on the part of the Contractor in performing and observing its obligations under and in connection with the Contract.

3. The Guarantors shall not be released from their obligations under this Guarantee by reason of the unenforceability, invalidity or termination of the Contract for any reason whatsoever.

4. The Guarantors shall be jointly severally liable for their obligations under this Guarantee and all references to the Guarantors shall take effect as references to all the Guarantors or any of them.

5. This Guarantee shall be construed and governed in accordance with the laws of Hong Kong."

6. The works on site were carried out by B+B. In June 1998 "short piling" was discovered. At about the end of June 1998, B+B ceased work and left the site with the contract unfinished and in need of urgent remedial work.

7. Not surprisingly, serious discussions ensued and correspondence was exchanged. On 29 September 1998 Fujita agreed to carry out the remedial works. By their letter of that date they made their position clear :

"We are now seriously concerned at the situation which has arisen and at the losses which the parties involved (including our joint venture) may suffer if it is not quickly resolved. Accordingly, we now write to confirm that we propose to perform the remedial works required by Engineer's Instruction No. 16 and that we shall proceed to do so as soon as we learn from you that consent has been obtained from the Building Authority for those works to proceed. We do so, however, without any acceptance on our part that we are under any contractual obligation to perform those works.

By way of explanation of our position, please note that our involvement in the project as the joint venture partner of B+B is confined to the provision of certain funds to assist with the financing of construction. In return, we received (under our joint venture agreement) an entitlement to a 30% share in the Contractor's profits arising from the project (and a corresponding obligation to contribute 30% of any losses suffered). It was never intended that we would take on responsibility for execution of the Contractor's work."

8. Fujita completed the remedial works on 22 December 1998. Later Fujita also agreed to complete the foundation and basement works. They began work on 25 January 1999 and completed those works on 29 June 1999.

9. The consequence of the short piling by B+B was that there was a delay in the completion of the contract works. Dorfit has recouped some of its loss by calling on a bond of $3.1 million in respect of B+B's performance. In this claim Dorfit is suing Fujita for liquidated damages and brings its claim under the Joint Venture guarantee. Fujita contends they are not liable to Dorfit for such losses under the guarantee. Dorfit contends that they are.

The construction of the guarantee

10. When reading the documents before trial, when hearing evidence and legal argument during the trial and when considering the competing submissions since the trial, I have found this a very difficult issue to resolve. The two opposing constructions are :

(a) Dorfit contends that, by the guarantee, Fujita

(i) guaranteed the due performance of B+B's obligations under the Building Contract dated 28 November 1996 between Dorfit and B+B ("the Contract"), and

(ii) agreed to indemnify Dorfit against all losses, damages, costs and expenses suffered or incurred by Dorfit by reason of any act, default or omission on the part of B+B in performing and performing its (B+B's) obligations under and in connection with the Contract.

(b) Fujita, on the other hand, say that they

(i) guaranteed the due performance by the Joint Venture (consisting of both B+B and Fujita) of the Joint Venture's obligations under and Contract when and if such obligations became due and performable according to its terms, and

(ii) agreed to indemnify Dorfit against all losses, damages, costs and expenses suffered or incurred by Dorfit by reason of any act, default or omission on the part of the Joint Venture in performing the Joint Venture's obligations under and in connection with the Contract.

11. Having wrestled with the problem, I return to the fundamental principle that the terms of a guarantee should be construed strictly in favour of the surety. A construction which imposes a liability on a surety which is not clearly and distinctly covered by the guarantee is likely to be wrong. I think the correct approach is if, having considered the surrounding circumstances to try and establish what was the scope and object of the contract, there remains some uncertainty then the court should construe it strictly. The court in such a situation is not permitted to dig deep into extrinsic evidence in an effort to discern the subjective intentions of one or both of the parties to the guarantee. Rather, the court should act as the reasonable man and read and interpret the actual words of the guarantee whilst possessed of the background information which led to its signing.

12. In my judgment such an approach must result in a construction contended for by Fujita. Once broken down to its bare essentials the defence submission is straightforward. There is no need to go beyond it. The court's finding is that this guarantee does not make Fujita liable for liquidated damages which were the result of delay caused by B+B's defect.

13. The defence reasoning in support of this construction has been consistent throughout. Fujita themselves were always meticulously careful to make their contractual position clear. I do not believe that they are taking an advantage of a strict interpretation to avoid a liability which might otherwise morally be theirs. Coming closer to trial, Fujita, through their solicitors on 4 June 2002, set out their position and legal submissions fully by letter. Mr Adrian Huggins, SC for Fujita, both in his opening written submission and five days later in his closing address repeated the same argument. They say : "Look at what actually happened and then look at the actual words in the guarantee", which I now do.

The words of the guarantee

14. It must be remembered first of all that Dorfit can only sue Fujita on the guarantee. Fujita was never a party to the main contract. The defence makes the point, and the plaintiff agrees, that there was never any novation. Had there been a novation the original main contract between Dorfit and B+B would have been extinguished and replaced with another with the Joint Venture as a party but both sides agree that that never happened.

15. Further, it is not part of the plaintiff's pleaded case that B+B's liability under the main contract was transferred to either Fujita or to the Joint Venture. The defence's point, quite simply, is that the guarantee only makes Fujita liable if there had been, in fact, a transfer of B+B's rights and obligations under the main contract to the Joint Venture, of which Fujita was a key ingredient, but there was not.

16. The circumstances in which Fujita, as one of the guarantors, becomes liable is clearly set out in paragraphs 1 and 2 of the agreement ("the operational provisions"). Paragraph 1 states that it will guarantee the due performance by the Contractor. The contractor is specifically defined as the Joint Venture, B+B is specifically defined as the "ex-contractor". It was the ex-contractor's performance which caused the delay. Paragraph 1 continues that the guarantor will guarantee "all the obligations and duties and undertakings of the Contractor when and if such obligations, duties and undertakings shall become due and performable according to the terms of the contract".

17. By paragraph 2, the guarantor agrees to indemnify Dorfit against all losses, damages and so on "incurred by it by reason of any act default or omission on the part of the Contractor in performing and observing its obligation under and in accordance with the contract". As before, references to the "contractor" and "its obligations" are references to the Joint Venture.

18. In short, the guarantee contemplated a contract which never came into existence. That is, a contract in which the Joint Venture would perform the contract and acquire obligation etc. which would be performable by the Joint Venture. In fact, B+B performed the contract on its own until it left the site and Fujita finished the works by agreement without accepting any contractual liability to do so. Obligations etc. never became performable by the Joint Venture and B+B's obligations under the contract were never transferred effectively to the Joint Venture. The contract under which B+B carried out its defective works remained a contract between Dorfit and B+B. Fujita did not guarantee the performance of that contract. The rhetorical question is : why should Fujita guarantee the performance of a contract to which it was not a party and over which it had no control?

19. As mentioned earlier, the defendant's solicitors wrote to the plaintiff's solicitors before trial setting out their argument openly and crisply. Inter alia, the letter states :

"The Plaintiff has not pleaded that there was any transfer of liability under the Main Contract by B+B to either the Defendant or to the Joint Venture.

The Defendant's case in relation to the Joint Venture Guarantee is that as a matter of construction that Guarantee would only operate on the factual premise that there had been or was to be a transfer by B+B of its rights and obligations under the Main Contract to the Joint Venture, but that never happened. ....

Since there was no novation nor any effective assignment by B+B of its obligations to the JV, then, .... Fujita never had any obligations duties or undertakings which ever became due and performable according to the terms of the Contract.

The Plaintiff is stuck with the fact that it has always regarded B+B as the Main Contractor and has always treated it as such throughout. It has never once suggested that B+B has effectively assigned its rights or obligations to either Defendant or to the JV or that there has been an extinguishment of B+B's original contract and the creation of a new contract between Dorfit and the JV or between Dorfit and the Defendant.

Another way of putting the defendant's case is that the JV Guarantee guaranteed the performance of a different contract to be carried out by the JV (not simply by B+B) and that different contract never came into being."

20. Given the court's acceptance that there was neither any novation nor effective legal assignment by which obligations could have been transferred, it is unnecessary to analyse the matter any further (even though both counsel, Mr N. Cooney for the plaintiff and Mr Huggins for the defendant, helpfully did so, to cover all eventualities). The court's ruling on the construction issue is that the "operational provisions" (i.e. paragraphs 1 and 2 on page 5 supra) do not make Fujita liable. This renders an analysis of the preceding recitals unnecessary. My judgment simply is that as drafted and in the circumstances that actually prevailed, the guarantee does not bite to make Fujita liable for liquidated damages which flowed from B+B's defective work under the original contract.

The estoppel issue

21. I will however briefly deal with the second major issue in the trial. As a second string to their bow the defence rely on the doctrine of promissory estoppel. In fact this issue is only relevant if I had decided the "construction issue" in the plaintiff's favour. As I have found in the defence favour they do not need to pull their second string. However, given the difficulties in the construction issue and with an eye to the future, should I be wrong, I will state in outline, what my conclusion is on the factual issues arising from the estoppel argument.

22. To a large extent the issue turns on what was said and understood at a meeting on 17 February 1999. Representatives from both sides were present. Mr Samuel Tak Lee, the principal witness for Dorfit and Mr Suganuma, a Fujita witness, were amongst those present and they both took notes. It is Fujita who have raised estoppel and so it is Fujita who must persuade the court that the answer to all of the following three question is yes :

(i) Did Mr S.T. Lee represent to Fujita that if they were to carry out the remaining works after B+B left (after Fujita had completed the remedial works) Dorfit would not seek any liquidated damages for delay against Fujita?

(ii) If he did, did Fujita rely on the representation when it decided to take on the remaining works?

(iii) If they did, is Dorfit estopped from seeking liquidated damages against Fujita under the Joint Venture guarantee?

23. Both Mr Lee's notes and Mr Suganuma's notes were the subject of careful examination and cross-examination. In Mr Lee's notes there is a single reference to liquidated damage. This note is that "liquidated damage will stop". In Mr Suganuma's notes there are three references. On the first page "L.D stop. call bond" is written. (The "bond" is a reference to Dorfit's performance bond of $3.1 million against B+B which it successfully recovered later). On the second page "Call bond. stop L.D" appears. On the third page "guarantee completion LD=0" is written. Mr Suganuma said in evidence that "LD=0" notes Mr Lee's actual words which were "L.D will be zero".

24. Mr Lee's evidence was that Mr Suganuma's notes must be referring to his (Mr Lee's) statement at the meeting that liquidated damages "will stop". As to what he meant by "liquidated damage will stop" in his witness statement he explains it by saying "Mr Okumura knew that liquidated damages would stop running once Fujita had completed the outstanding works". In evidence however he enlarged on this by saying that he was informing Fujita of the legal advice he had received. He said :

"Dorfit by then had been advised legally that if Dorfit took the legal action mentioned above (suing B+B worldwide) then the liquidated damage of that contract would stop, once the legal action commenced. That is what I meant. It was a process of law. Dorfit was advised by its legal advisors."

25. On the other hand Mr Suganuma's notes record twice "L.D stop. call bond" quite separately from his note that "LD=0" which is recorded later. The first two references must be the same as Mr Lee's note that "liquidated damages will stop". The third references is in a different context namely that - if Fujita guarantees completion L.D will be zero.

26. Mr Lee was an earnest and sincere witness but on this issue I felt compelled to rely on the evidence of Mr Suganuma and Mr Okumura. I found all Fujita's witnesses to be most impressive. I found them to be very careful businessmen of integrity. Witnesses whose evidence could be relied on.

27. In coming to the conclusion that "L.D will be zero" was said in the context of Fujita agreeing to complete the contract I have considered and gleaned support from an analysis of the state of affairs which prevailed at the time of the meeting, as follows.

28. As at 17 February 1999 Fujita had successfully completed the remedial works. B+B were out of the picture for good. B+B's defects had already disrupted the programme. No other contractor had been approached as a possible replacement to finish off the foundation and basement contract. Fujita were on site and competent. It was entirely in Dorfit's interest for Fujita to step into B+B's shoes as the contracting party on site. It was likely to be the best solution for them from both a time and a money perspective. Dorfit would have been, or at least should have been keen to persuade Fujita to complete the works. Fujita also would be keen to agree to do so but not at any cost. It is unimaginable that they would have agreed to start the work with a financial deficit in the form of a liability to pay $7 million worth of liquidated damages. There is no suggestion that they accepted that they were obliged to do the work under the Joint Venture. They had made their contractual position clear in their letter of 29 September 1998 when they agreed to carry out the remedial works. It is apparent also from the notes that Dorfit did not think that B+B would only be good for the $3.1 million bond and no more. The notes refer to Dorfit suing B+B "worldwide" for the further $7 million worth of liquidated damages.

29. When this scenario was put to Mr Lee in cross-examination, his response was unimpressive. He said, in a nutshell, that he had not really thought about it. He suggested that one of his options was to sell the site in its unfinished state. However there was neither documentary evidence nor oral evidence from any of the plaintiff's witnesses that this option was ever considered. I am satisfied that the true situation was that Dorfit wanted Fujita to do the remaining works, Fujita were keen to do them provided they were not taking on the liquidated damages caused by B+B. They sought an assurance to this effect from Mr Lee, they got such an assurance, they relied on it, it formed the basis of their legal relationship thereafter and they proceeded with the works without further delay. I further reject Mr Lee's evidence that he did not appreciate that at the meeting Fujita were seeking this very assurance.

30. As well as looking at the commercial realities at the time, it is also important to consider subsequent events. In support of its contention that the assurance was not given, Dorfit points to four letters which it sent to both B+B and Fujita after the meeting which claimed liquidated damages. Fujita did not respond to these letters. The point is made that had the assurance been given they would have responded to that effect. I do not regard this as a compelling point. Dorfit merely sent the demands, out of a sense of completeness, to both of the Joint Venture partners. Fujita simply re-directed its copy to B+B who it believed, since the meeting, was the only party who would be liable for liquidated damages.

Reliance

31. Finally I consider the evidence relevant to the issue of whether Fujita relied on and acted on the assurance. It is not necessary to prove that the assurance was the only thing that Fujita relied on when deciding to complete the works. It is sufficient that it was a very significant matter which weighed heavily in the balance when making the decision. The cost of completing the works was plainly going to be a costly exercise. As it turned out the eventual costs approached $18 million. Prior to the meeting it is true that Fujita had done some preparatory work on site in connection with the completion works rather than the remedial works. However the evidence as to how much work had been done in advance ranged from $150,000 to $500,000. Whatever the exact amount was it was sufficiently small to write off had Fujita not been given the assurance they were seeking, namely that their costs were not going to be $7 million higher because of liquidated damages.

32. It is true that Fujita's Board of Directors in Tokyo had given their approval for Fujita to complete the works on 3 February, two weeks before the meeting. However, I accept the submission that this would not have been a blanket approval but rather it was an approval in principle, subject to satisfactory and sensible terms being agreed. "L.D equals zero" was such a term.

33. For all the above reasons the plaintiff's case fails and I decide the issue of liability on the Joint Venture guarantee in the defendant's favour. I make the usual order nisi that costs follow the event.