PREMA BIRKDALE HORTICULTURE (MACAU) LTD v. VENETIAN ORIENT LTD AND ANOTHER

HCMP905/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Miscellaneous proceedings NO. 905 OF 2009

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DECISION

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1.  This is an urgent ex-parte application on notice which I entertained yesterday.  The application was made by Mr Andrew Sheppard, counsel for the plaintiff, and was opposed by Mr David Bateson of Messrs Mallesons Stephen Jaques for the 2^nd defendant.  Mr Galston appeared on a watching brief for the 1^st defendant who was absent.  I am satisfied that the plaintiff has demonstrated that there are triable issues between itself and the 1^st defendant and that the plaintiff has an arguable case against the 2^nd defendant for various reliefs for breach of a contract described as a Trade Contract which is governed by Macau Law and which stipulated that disputes arising thereunder were to be determined by Macanese arbitration proceedings.  Those disputes concerned the alleged failure of the 1^st defendant’s nominated construction manager to issue interim certificates in respect of work done by the plaintiff under the Trade Contract.  The amount in dispute exceeds MOP24 million.  The interim reliefs sought relate to an Advance Payment Bond (“the Bond”) issued by the 2^nd defendant in favour of the 1^st defendant to repay an advance payment made by the 1^st defendant to the plaintiff in respect of the plaintiff’s future performance under its Trade Contract with the 1^st defendant.  The amount of the Bond was to be reduced by the amount certified under the interim certificates.  Obviously, if no interim certificates are issued or interim certificates are wrongly withheld, that amount will not be reduced.  The dispute between the parties centred on the terms and nature of this Bond and I shall return to it later. 

2.  Upon making payment to the 1^st defendant under the Bond, the 2^nd defendant was entitled to claim payment of the sums paid out to the 1^st defendant from 3 directors of the plaintiff pursuant to a Deed of Guarantee and Indemnity that was governed by the law of New South Wales. 

3.  The 2^nd defendant has now made a demand under the Bond which the plaintiff asserts is wrongful because the advance payment made to the plaintiff has been absorbed, almost entirely, by the plaintiff’s performance of its Trade Contract to the 1^st defendant and in respect of which the plaintiff was entitled to interim certificates which have been wrongfully withheld.  It is not surprising that the 1^st defendant has made a demand at this point in time as the guarantee is due to expire at 17.00 hours on 29 May 2009.  This demand explains the urgency of the present application for the following reliefs :

(1)     Pending completion of the dispute resolution procedures contemplated in clause 19 of the Trade Contract between the plaintiff and the 1^st defendant, the 1^st defendant be enjoined from drawing upon in its own right or at all and/or receiving any payment from the 2^nd defendant under the guarantee dated 20 June 2008 provided by the 2^nd defendant to the 1^st defendant. 

(2)     To avoid the said guarantee between the 1^st defendant and the 2^nd defendant terminating by effluxion of time, that the 2^nd defendant do pay into the High Court of Hong Kong Special Administrative Region in these proceedings on or before 17.00 hours on Friday 29 May 2009 (Sunday 31 May 2009 being a non-banking day) into an interest-bearing account, the sum of MOP33,459,407.19, which money will remain in the said account until all the disputes between the plaintiff and the 1^st defendant have been determined in accordance with the provisions of and procedures contemplated by clause 19 of the Trade Contract to include, if necessary, the publication of any arbitration award in Macau and any lawful appeal therefrom and/or any arbitration award made in Macau, being registered in Hong Kong in accordance with the provisions of the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, 1958. 

(3)     The 2^nd defendant be enjoined from seeking reimbursement under the Deed of Guarantee and Indemnity between the 2^nd defendant and Mr James McGeogh, Ms Barbara McGeogh and Mr Darren Moseley pending the determination of those matters specified in paragraphs 1 to 3 hereof. 

4.  Prior to the amendments contained in the Civil Justice (Miscellaneous Amendments) Ordinance 2008, the rule established in the Siskina [1979] AC 210, followed in Hong Kong in Mercedes Benz A.G. v Leiduck [1996] 1 AC 284, would have prevented the plaintiff from making this application.  Prior to these amendments, the High Court in Hong Kong could not grant interim reliefs in support of substantive proceedings which had been or were to be commenced outside Hong Kong; in order to qualify for interim relief, an applicant had to satisfy the court that it had a good cause of action justiciable in Hong Kong. 

5.  Under the new section 21M of the High Court Ordinance, the Court of First Instance can now grant interim relief in relation to proceedings which have been or will be commenced outside Hong Kong (such as the intended proceedings between the plaintiff and the 1^st defendant in Macau), and which are capable of giving rise to a judgment which may be enforced in Hong Kong under any ordinance or at common law. 

6.  Likewise, under section 2GC(1a) of the Arbitration Ordinance, the court may grant an interim injunction or other interim relief in relation to arbitration proceedings that have been or are to be commenced in a place outside Hong Kong but only if the arbitration proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong under this ordinance or any other ordinance. 

7.  The present application is therefore a novel application before the court under this new provision and is made on the basis that, as Macau and Hong Kong are parties to the New York Convention, any arbitration award obtained in Macau by the plaintiff could be registered and enforced in Hong Kong. 

8.  However, a court exercising this newly founded jurisdiction must still abide by the general principles governing the grant of interim injunctions and other interim reliefs.  As Suffiad J said in UDL Kenworth Engineering Ltd v Airport Authority Hong Kong (HCA8431 of 1998, 19 June 1998) at para. 26 :

“In a normal case where an interlocutory injunction is applied for it has to be shown that there is a serious question to be tried, that damages would not be an adequate remedy, and that, on a balance of convenience, it would cause less harm to grant the injunction … However, these principles do not apply to ‘on demand’ bonds (which the Courts have equated with letters of credit) because the obligations under such bonds must be honoured unless it can be shown that the demand was fraudulent.  It would only be in exceptional cases that Courts would interfere to grant interlocutory injunctions in the case of irrevocable obligations under such ‘on demand’ bonds.” 

9.  That statement of principle echoes the classic statement of Lord Denning in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159 at 171A-C :

“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 clear fraud of which the bank has noticed.”

and by Kerr J in R.D. Harbottle (Mercantile) Ltd v National Westminster  Bank Ltd [1978] 1 QB 146 at 155 G-H and 156 A-B and C :

“It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks.  They are the life-blood of international commerce.  Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain.  Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration … The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take.  In this case the plaintiffs took the risk of the unconditional wording of the guarantees.  The machinery and commitments of banks are on a different level.  They must be allowed to be honoured, free from interference by the courts.  Otherwise, trust in international commerce could be irreparably damage ... Banks are not concerned with the rights or wrongs of the underlying disputes but only with the performance of the obligations which they themselves have confirmed.”

10.  Mr Sheppard for the plaintiff readily accepted that the court is unlikely to grant injunctive relief to restrain a third party bank from honouring its obligations under an “on demand” bond.  However, he submitted that the Bond in question, which was exhibited as Exhibit “JM-2A” in the 2^nd Affidavit of James Stuart Hamilton McGeoch and described as an Advance Payment Bond, was a guarantee and not a performance bond.  In support of this submission, he relied upon the case of The Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co. [1992] 2 Lloyd’s Law Reports 365 in which the Court of Appeal held that the advance payment bond, which it had to construe and which was in a quite archaic language, was not a performance guarantee but that its purpose was to ensure that in the event and to the extent that the builders, who had received an advance payment from the owners, did not return under the building contract the amount of the advance payment, both the builders and the issuer of the bond should be jointly and severally primarily liable to the owners for the balance. 

11.  I do not find any assistance from this particular decision since the terms of the Bond in the present case are substantially different from the terms of the advance payment bond considered by the Court of Appeal in the case under consideration. 

12.  Mr Sheppard also relied upon the House of Lords’ decision in he Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co. Ltd [1996] 1 AC 199.  In that case, the main contractors for the construction of a new leisure complex for a borough council entered into a subcontract for groundworks.  Under the terms of the subcontract, the subcontractor, jointly with the General Surety & Guarantee Co. Ltd, provided the bond for 10% of the value of the subcontract on condition that “if the subcontractor shall duly perform and observe” all the terms of the subcontract “or if on default by the subcontractor the surety shall satisfy and discharge the damages sustained by the main contractor thereby” up to the amount of the bond then the obligation would be null and void, but otherwise remained in full force.  It was held that, on its proper construction, the bond, without the second part of the condition, amounted to a guarantee and that the second part itself did not alter the effect of the remainder of the bond.  It was held further that in order to establish liability under the bond, proof of damage was required and mere assertion was insufficient. 

13.  However, Mr Bateson, for the 2^nd defendant, submitted that the Bond in question was in fact an “on demand” bond which was not conditional nor was it a default bond which required proof of default before payment.  He referred me to the Court of Appeal decision in Kono Insurance Ltd v Tins’ Industrial Co. Ltd [1987] 3 HKC 71 in which Hunter JA said at p. 74D-75B :

“The first issue here is the nature of this bond, and it is common ground between counsel that the outcome turns upon the true construction of the bond.  Bonds are conveniently categorized in 12 Halsbury’s Laws of England (4^th Ed) paras 1386 and 1387 into two different species.  The first is what the editors call a single bond, and they go on to say that those ‘had become rare’.  A single bond is a simple demand bond, which is payable on demand, or on production of whatever additional evidence the bond itself nay specify.  This may be no more than the mere ‘say-so’ or ipse dixit of the beneficiary under the bond.  They can be oppressive documents.  Perhaps the most notorious, or should I say infamous, bond was that given by Antonio, the ‘merchant of Venice’, to Shylock, which is in fact referred to in the footnote to para 1386.  Shakespeare got it right.  He wrote of ‘Your single bond’.  We all know what happened to that.  Perhaps that may account for the fact that they fell into disuse over the years.

They were revived – I think to the surprise of English judges – in 1977, as a result of the practice of purchasers in the Middle East in effect seeking to obtain a built-in discount on the purchase price.  The first case to come before the court, came before Kerr J (as he then was) in 1977, RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146.  He described the document as ‘astonishing’ at p.150.  The matter was then further considered by the Court of Appeal in the next case in the same volume of the law reports, Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159.  There Lord Denning MR said that they were ‘virtually the same as a promissory note payable on demand’: p 170.

The effect of those decisions is that the court allied these performance bonds payable on demand with confirmed letters of credit.  They said that you have to look to the terms of the separate contract between the bankers, in the same way as you do in looking at confirmed letters of credit, and that for those reasons you were not concerned with the underlying contract.”

14.  Mr Bateson also referred me to the terms of the Bond in question and, in particular, to the following clauses thereof :

“2.     Guarantor’s obligations

(a)   The Owner has agreed to pay the Trade Contractor the sum of MOP33,459.407.19 (thirty three million four hundred fifty nine thousand four hundred and seven Macau patacas and nineteen cents) as an advance payment of sums due to the Trade Contractor under the Trade Contract (Advance Payment).

(b)   The Advance Payment must immediately be reimbursed to the Owner by the Guarantor :

(i)    when the Guarantor receives a written demand signed by an authorised officer of the Owner;

(ii)   for the sum demanded by the Owner up to the amount specified in clause 3(a).

(c)   The Guarantor waives any and all benefit of discussion and any rights it may have of first requiring the Owner to commence proceedings or enforce any other rights against the Trade Contractor.  Notwithstanding any other provisions in this Bond, the Guarantor’s liability is limited to the payment obligations contained in this Bond and does not extend to the performance of any other obligations or liabilities of the Trade Contractor under the Trade Contract.

…

4.       Liability of Guarantor

(a)   The liability of the Guarantor and the rights of the Owner in relation to this Bond are in addition to, and do not merge with or otherwise prejudice or affect and are not prejudiced or affected by, any other right, judgment, guarantee or security now or at any time held by the Owner in relation to the Trade Contract.

(d)   Payment under this Bond must be made by the Guarantor to the Owner, despite any notice by the Trade Contractor to the Guarantor not to pay the whole or any part of the sum :

(i)    free and clear of and without any deduction for or on account of any present or future taxes, levies, duties, charges, fees, set-off, counterclaims, deductions or withholdings of any nature; and

(ii)   to an account nominated by the Owner and in freely transferable funds which must be either Macau patacas or Hong Kong dollars.

(e)   Payments due under this Bond must be made notwithstanding any dispute between the Owner and the Trade Contractor and whether or not the Owner and the Trade Contractor are or might be under any liability one to the other.

…

9.       Governing law

This Bond will be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region (Hong Kong).  Each party irrevocably and unconditionally submits to the exclusive jurisdiction of the courts of Hong Kong subject to the rights of the parties to enforce a judgment obtained in the courts of Hong Kong in any other jurisdiction.”

15.  Having regard to the terms of the Bond in question, I am satisfied that it is a classic “on demand” bond which does not require any proof of breach on the part of the plaintiff before the 2^nd defendant has to make payment under it.  The Bond is in effect a promissory note payable on demand and on similar footing to a letter of credit.  Accordingly, on the basis of the authorities cited above and in the exercise of my discretion in the matter, I decline to grant the interim reliefs claimed by the plaintiff in the absence of knowledge on the part of the 2^nd defendant of clear fraud.  

16.  In this connection, Mr Sheppard very frankly conceded that his hands were tied and that the plaintiff could not assert that this was a case of fraud on the part of the 1^st defendant, but he did make an eloquent submission to the effect that the plaintiff had made demand for the full amount, less the sum of MOP8.5 million which was the subject of one cumulative interim certificate, and which, to the knowledge of the 1^st defendant, was an excessive demand.  Unfortunately, that is insufficient material upon which the court can act to grant the interim reliefs claimed.  The plaintiff must establish that the 2^nd defendant has knowledge of clear fraud on the part of the 1^st defendant and which the plaintiff was unable to do.  Although the 2^nd defendant knows that the parties are in dispute, it is specifically required under clause 4(e) of the Bond to make payment, notwithstanding any dispute between the 1^st defendant and the plaintiff.  In particular, the 2^nd defendant has no knowledge that the demand made by the plaintiff is excessive. 

17.  For these reasons, I am unable to grant the reliefs claimed by the plaintiff. 

18.  Accordingly, it is not necessary for me to further consider whether or not I should refuse to grant the reliefs sought on the ground that the fact that the court has no jurisdiction, apart from section 21M of the High Court Ordinance, in relation to the subject matter of the proceedings concerned makes it unjust or inconvenient for the court to grant the application (see section 24M(4) of the High Court Ordinance).  I also leave for future determination the question whether the new jurisdiction under section 21M of the High Court Ordinance can only be invoked for applications in relation to court, and not arbitration, proceedings or whether the jurisdiction thereunder is co-terminus with the jurisdiction under section 2GC of the Arbitration Ordinance. 

19.  I shall hear the parties on the question of costs.