Hong Kong Court confirmed the contractor’s bond to be valid

2 September 2020 | by LexisNexis Hong Kong

Hong Kong Court confirmed the contractor’s bond to be valid

Facts

In West Kowloon Cultural District Authority v AIG Insurance Hong Kong Ltd [2020] HKCU 658, West Kowloon Cultural District Authority (“West Kowloon”) engaged Hsin Chong Construction Company Limited (“Hsin Chong”) as contractor for a construction project (“M+”) under the General Conditions of Contract for Building and Civil Engineering Works (“Contract”) on 26 September 2015.

The Contract included the following clauses:

• Clause 14(1) of the Contract required Hsin Chong to obtain and provide to West Kowloon a bond in its favour from a bank or other financial institution, valid until completion of the works. So, Hsin Chong sought AIG to provide to West Kowloon a bond (“Bond”) in the sum of HK$297,198,000 (“Bonded Sum”). The Bond explicitly provided that AIG was irrevocably and unconditionally obliged to pay West Kowloon the Bonded Sum.
• Clause 2 of the Bond stated that “If, in [West Kowloon’s] opinion, [Hsin Chong] is or has been in default in respect of any if its obligations under the Contact, [AIG] shall upon demand made by [West Kowloon] 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 [West Kowloon] by reason of the default, up to the amount of the Bonded Sum.”
• Clause 3(b) of the Bond explicitly mentioned that AIG should remain fully liable from its obligations, which should not be affected or discharged in any way. Further, AIG waived notice of inter alia the termination of the Contract or the employment of [Hsin Chong] under the Contract.

Hsin Chong later became insolvent, and West Kowloon issued a formal notice to Hsin Chong to terminate its employment under the Contract. West Kowloon also sent a letter to AIG requesting the full payment of the Bonded Sum (“1^st Demand”) along with two chasers (“2^nd Demand” and “Final Demand”).

West Kowloon applied for summary judgment against AIG based on that it had made a valid demand on the Bond. AIG applied to strike out the action because the demand letters from West Kowloon did not constitute valid demands regarding the Bond.

The two issues for the Court to determine were:

1. Formality Issue – Whether the demands complied with the terms of the Bond when they did not identify the amount of damages sustained by reason of Hsin Chong’s default and they referred to future damages, losses etc. AIG’s case was that the demands were non-compliant and hence invalid.
2. Fraud Issue – Whether the demands were made fraudulently, in which West Kowloon could not have formed a bona fide opinion that Hsin Chong was in default, or because of such default West Kowloon had sustained damages, losses etc of or exceeding the Bonded Sum. AIG contended that the demands were fraudulent and should not be enforced.

Judgment

Firstly, the court had to determine the type or the true construction of the bond in this case (e.g. it could be a single demand bond or a double/conditional bond). It discovered that it was a single demand bond, which was payable on demand or upon whatever extra evidence the bond itself may specify.

Formality Issue

The court held that the demands, were pursuant to the requirements of Clause 2 because its wording was clear, and the demand was in the correct form. Therefore, AIG had to make an immediate payment for the below reasons:

1. By following the decision in Nishimatsu Construction Co Ltd v AHA Co, it was made clear that the proof of Hsin Chong’s default or amount demanded was unnecessary and the only requirements under Clause 2 were:
   1. the demand by West Kowloon must be in writing;
   2. in West Kowloon’s opinion, Hsin Chong was or had been in default with regards to its obligations; and
   3. the sum written in the demand was in connection with the damages, losses, charges, costs or expenses sustained by West Kowloon because of Hsin Chong’s default.

These 3 requirements were met in the 1^st Demand and so there was a valid demand on the Bond.

2. Specifying a particular breach/default by Hsin Chong or particularizing the amount of damages, losses and etc. sustained by West Kowloon was not required in Clause 2.
3. The 1^st Demand had to be read completely rather than in parts. One would clearly understand West Kowloon’s clear message demanding for the full Bonded Sum because of Hsin Chong’s default, which had caused West Kowloon to suffer and sustain the damages and losses etc. to the Bonded Sum. The demand would therefore be treated as valid if it stated in substance what was needed in the Bond, and it was understood by its recipient.
4. The reference to future damages did not vitiate or render ineffective that part of the 1^st Demand in terms of damages, losses etc. sustained by reason of Hsin Chong’s default which were admittedly within the ambit of the Bond. So, the additional reference to future damages and losses was redundant and could be ignored.

Fraud Issue

The court disagreed that West Kowloon’s demands were made in bad faith.

Following Solo Industries UK Ltd v Canara Bank and Enka Insaat Ve Sanayi A.S. v Banca Popolare Dell’Alto Adige SPA, there were special considerations for summary judgment application based on a performance bond and “particular cogent evidence” was needed for AIG to establish the fraud exception in striking out the application. It was held that the evidence of fraud relied upon by AIG was not cogent evidence but little more than a mere assertion.

Further, West Kowloon may genuinely believe that it had suffered damages, losses etc. within the meaning of the Bond, permitting it to demand for the Bonded Sum before there was an accurate and detailed calculation of the amount. If not, the explicit wording of Clause 2 would be unmeaning.

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