WEST KOWLOON CULTURAL DISTRICT AUTHORITY v. AIG INSURANCE HONG KONG LTD

CACV 82/2020

[2022] HKCA 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 82 OF 2020

(ON APPEAL FROM HCA NO 2039 OF 2018)

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REASONS FOR JUDGMENT
and
DECISION ON COSTS

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Hon Au JA (giving the Reasons for Judgment and Decision on Costs of the Court):

A.  Introduction

1.  This is the defendant’s appeal against the summary judgment granted by Ng J (“the Judge”)  in favour of the plaintiff on 2 April 2020 (“the Judgment”).  By the Judgment, the Judge also dismissed the defendant’s summons dated 11 September 2018, which sought to, inter alia, strike out the plaintiff’s writ and statement of claim (“Defendant’s Summons”).

2.  By way of a Notice of Appeal dated 29 April 2020, the defendant advanced three grounds of appeal, which are categorized in its skeleton submissions as “the Demand Grounds” (Ground 1 and Ground 2 in the Notice of Appeal)  and the “Fraud Ground” (Ground 3 in the Notice of Appeal).  In light of the decision dated 18 September 2020 by this Court (Lam VP (as he then was)  and Yuen JA)  refusing the defendant leave to adduce new evidence for this appeal (“Leave Decision”), Mr Lam SC for the defendant indicated at the hearing that it would no longer pursue the Fraud Ground in this appeal.  This appeal therefore is only concerned with the Demand Grounds.

3.  The plaintiff also filed a Respondent’s Notice on 12 May 2020 seeking to affirm the Judgment on additional grounds.  It has also asked for an alternative order that, in the event that the appeal is allowed, the defendant be given leave to defend on the condition that the defendant is to pay the plaintiff the Bonded Sum (as defined below)  (with interest)  by way of interim payment.

4.  After the end of the hearing, we allowed the appeal and indicated that we would hand down our reasons for judgment and the decision on costs in due course.  This is what we do now.

B.  Background

5.  The material facts leading to this appeal were comprehensively summarized at [6] - [18] of the Judgment and [4] - [9] of the Leave Decision.  We only need to set out the following which are relevant to this appeal.

6.  By way of a General Conditions of Contract of Building and Civil Engineering Works dated 26 September 2015 (“the Contract”), the plaintiff engaged Hsin Chong Construction Company Limited (“the Contractor”)  as contractor for its project known as “M+ project”.  To secure the due performance of the Contractor, the defendant issued a bond No.H7478 (“the Bond”), up to the sum (“the Bonded Sum”)  of HK$297,198,000 on 8 October 2015 in favour of the plaintiff.

7.  Clause 2 of the Bond (“Clause 2”)  provides as follows:

“If, in the [Plaintiff’s] opinion, the Contractor is or has been in default in respect of any of his obligations under the Contract, the [Defendant] shall upon demand made by the [Plaintiff] 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 the [Plaintiff] by reason of the default, up to the amount of the Bonded Sum.” (emphasis added)

8.  On 17 August 2018, pursuant to clauses 73.1(a)  and 74.1 of the Contract, the plaintiff terminated the employment of the Contractor on the basis that it had been in breach of its obligations under the Contract.  On the same date, the plaintiff issued and delivered a demand letter to the defendant, asking for payment of the entire Bonded Sum under the Bond (“1^st Demand”).

9.  The relevant parts of the 1^st Demand stated as follows:

“We refer to the above bond issued by you in our favour, under which you are the Bondsman.

We hereby demand that you pay to us the full bonded sum of HK$297,198,000.

We are of the opinion that the Contractor is and has been in default in respect of various of its obligations under the Contract between the Contractor and us, and by reason of such defaults we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses.” (emphasis added)

10.  On 21 and 24 August 2018, the plaintiff delivered to the defendant two further chaser letters demanding the payment of the Bonded Sum.  The contents of the chasers are in substance the same as that of the 1^st Demand.  For the purpose of this judgment, references to the demand made by the 1^st Demand should be treated as also references to the demands made by the subsequent chasers.

11.  In response, the defendant had by way of correspondence sought various clarifications from the plaintiff, including the proof of the Contractor’s default and whether the demanded Bonded Sum represented the amount of damages or losses said to have already been suffered by the plaintiff.  The plaintiff did not provide the requested clarifications as it was of the view that it was unnecessary under Clause 2 for it to prove or particularize both the Contractor’s breach and the losses[1].  The defendant therefore had not paid the demanded sum.

12.  In light of the non-compliance with the demands, on 29 August 2018, the plaintiff commenced the present action against the defendant seeking the payment of the Bonded Sum under the Bond.  By way of the Defendant’s Summons, the defendant sought to strike out the claim, or alternatively a determination of preliminary issues.

13.  On 14 September 2018, the plaintiff took out the summons (“the O14 Summons”)  seeking summary judgment against the defendant.

C.  The Judgment

14.  The Judge heard the Defendant’s Summons and the O14 Summons together.

15.  The defendant’s principal case under the Defendant’s Summons was that the demand for the Bonded Sum made in the 1^st Demand was invalid as it did not comply with the requirements under Clause 2.  This was so as (a)  the demand had failed to relate or identify the Bonded Sum with the damages said to have been sustained by reason of the Contractor’s default, and (b)  in any event, the demanded sum also covered and included future damages, losses, charges, costs or expenses which were not within the ambit of Clause 2.  For convenience, we will refer to these questions as the “Construction Issues”.

16.  The defendant further alternatively contended that the demands were made fraudulently as the plaintiff could have formed no bona fide opinion that the Contractor was in default of its obligations under the Contract between the two of them, or that by reason of such alleged default the plaintiff had sustained damages etc of or exceeding the Bonded Sum.  Again for convenience, we would refer to this issue as the “Fraud Issue”.

17.  On these bases, the defendant also opposed the summary judgment application.

18.  Under the Construction Issues, there was no dispute that to be valid, a demand made under the Bond must comply with the requirements as provided under Clause 2, and it was (a)  a matter of construction of Clause 2 as to what those requirements were, and (b)  a matter of construction of the 1^st Demand as to whether it complied with those requirements: see [20] - [25] of the Judgment.

19.  For the Construction Issues, the Judge concluded that on a proper construction, a demand would be in compliance with Clause 2 if[2]:

(1)  The demands were made by the plaintiff in writing (“the 1^st Requirement”).

(2)  In the plaintiff’s opinion, the Contractor was or had been in default in respect of any of its obligations under the Contract (“the 2^nd Requirement”).

(3)  The amount stated in the demand was in respect of the damages, losses, charges, costs or expenses sustained by the plaintiff by reason of the Contractor’s default (“the 3^rd Requirement”).

See [26] - [30] of the Judgment.

20.  The Judge found that the 1^st Demand complied with all three requirements.

21.  First, he held it was clear that the 1^st Demand complied with the 1^st Requirement, as it was in writing.  See [32] of the Judgment.

22.  Second, the 1^st Demand also complied with the 2^nd Requirement as the plaintiff did say in it that it was of the opinion that the Contractor was or had been in default in respect of various obligations under the Contract. In this respect, it was clear from Clause 2 that the plaintiff in making a demand was not required to prove the Contractor’s default or the amount demanded.  See [30] and [33] of the Judgment.

23.  As to the 3^rd Requirement, as mentioned above, counsel for the defendant[3] contended that it was not fulfilled since (a)  the demand had failed to relate or identify the Bonded Sum with the damages said to have been sustained by reason of the Contractor’s default, and (b)  in any event, the demanded sum also covered and included future damages, losses, charges, costs or expenses, as expressly stated at paragraph 3 of the 1^st Demand, which were not within the ambit of Clause 2.

24.  The Judge disagreed with the defendant.  He held at [37] - [40] of the Judgment that:

(1)  It was not a requirement under Clause 2 for the plaintiff to specify the particular breach / default by the Contractor, or to particularize the amount of damages, losses etc sustained;

(2)  If one read paragraphs 2 and 3 of 1^st Demand as a whole (as they should be), the plaintiff stated, expressly or at least in substance, that it claimed the full sum of the Bond due to the Contractor’s default and the damages and losses etc so suffered by the plaintiff were the full sum of the Bond, which was the only figure appearing in the 1^st Demand.

(3)  He also endorsed and applied IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 in that as long as the demand had stated in substance what was required in the bond and was understood by its recipient as such, the demand would be treated as a valid one.  Such proposition, the Judge held, was consistent with the importance of preserving the certainty and reliability of on demand bonds.  He remarked that being hypercritical of the wording of a demand and an overzealous insistence on strict compliance would undermine the rationale of an on demand bond and should be resisted.

25.  The Judge further held that the additional reference to the future damages and losses in paragraph 3 of the 1^st Demand, as heavily relied on by the defendant in support of its contentions, was at most redundant and mere surplusage that would not render the 1^st Demand invalid.  He explained his reasons at [42] as follows:

“42.  It is true that the 1^st Demand also referred to damages, losses etc that the Plaintiff would continue to suffer and sustain by reason of the Contractor’s default.  But the reference to future damages, losses etc does not vitiate or render nugatory that part of the 1^st Demand which did refer to damages, losses etc sustained by reason of the Contractor’s default which are admittedly within the ambit of the Bond.  Since Clause 2 does not require particularization or proof of the amount demanded as damages, losses etc sustained, the additional reference to future damages and losses is at most redundant and a surplusage and can be ignored.  It might be different if the 1^st Demand only referred to future damages and losses but omitted to mention damages, losses etc already sustained: cf AES-3C Maritza East 1 Eood v Credit Agricole [2011] EWHC 123 (TCC).  If that were the case, the Defendant’s argument that the 1^st Demand is thereby rendered defective would have more force.  But that is not the case here.”

26.  For the above reasons, the Judge concluded that the 1^st Demand complied with all the requirements of Clause 2, and was thus valid.

27.  The Judge then further rejected the defendant’s contentions made in support of the Fraud Issue for the detailed reasons given at [44] - [60] of the Judgment[4].

28.  Having decided against the defendant in relation to both the Construction Issues and the Fraud Issue, the Judge dismissed the Defendant’s Summons and granted summary judgment in favour of the plaintiff.

D.  This appeal

29.  As stated earlier, the defendant in this appeal only pursues the Demand Grounds, which are as follows:

(1)  The Judge erred in finding that the plaintiff’s failure to state that the amount demanded was in respect of losses, charges, costs or expenses sustained by reason of the Contractor’s default did not render the 1^st Demand invalid (“Ground 1”).

(2)  The Judge erred in finding that the 1^st Demand was valid even though it plainly included a claim for losses which the plaintiff had not yet sustained as at the date of the 1^st Demand (“Ground 2”).

30.  In relation to these, it is also important to note that in this appeal, the parties agree that:

(1)  The issues raised in this appeal under the Demand Grounds are matters of proper construction of Clause 2 and the 1^st Demand, which are questions of law for the court.

(2)  In this respect, authorities based on different bond documents and demands made in the context of the specific facts of each case are not of particular relevance to the question of construction relating specifically to Clause 2 and the 1^st Demand.

(3)  Properly construed, the requirements under Clause 2 are the three requirements as identified by the Judge and summarized at [19] above.

(4)  The 1^st Demand satisfied the 1^st and 2^nd Requirements.

(5)  The only real and substantive issue in this appeal is whether the 1^st Demand satisfied the 3^rd Requirement.

31.  Mr Lam SC (leading Mr Cheung)  has in gist advanced the following submissions to say why the 1^st Demand did not satisfy the 3^rd Requirement.

32.  First, he submits that paragraph 2 of the 1^st Demand only set out the demanded sum being the Bonded Sum, while paragraph 3 independently and separately set out and made reference to the default of the Contractor.  There is no reference or link between paragraphs 2 and 3 of the 1^st Demand.  In the premises, the 1^st Demand does not show that the demanded Bonded Sum was related to or was in respect of the Contractor’s default as required in the 3^rd Requirement.  It is therefore an invalid demand.

33.  We have no hesitation in rejecting this contention.

34.  There is no dispute that, as a matter of construction, the 1^st Demand (in particular paragraphs 2 and 3 thereof)  should be read and construed together objectively and in proper context.  Once so considered, it is surreal and unrealistic to read paragraphs 2 and 3 of the 1^st Demand in the manner as submitted by Mr Lam.  When reading the plain words of paragraphs 2 and 3 together and with common sense, the plaintiff was clearly stating in the 1^st Demand that it was demanding the Bonded Sum under the Bond as it related to the Contractor’s default under the Contract.

35.  Second, Mr Lam submits that given it was expressly stated at paragraph 3 of the 1^st Demand that, by reason of the Contractor’s defaults, the plaintiff “have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses” (emphasis added), it is obvious that it is the plaintiff’s own position that the demanded Bonded Sum related to damages which the plaintiff regarded as something it would continue to suffer by reason of the Contractor’ default.  The Bonded Sum thus included not only damages and losses the plaintiff had already suffered by the time of the demand (which are permitted under Clause 2)  but also future damages and losses (which are not within the ambit of Clause 2).

36.  We agree with Mr Lam.  In our view, the plain and express words of the 3^rd paragraph of the 1^st Demand objectively and reasonably inform the reader that the Bonded Sum as demanded related to damages and losses that had already been suffered by the plaintiff as well as ones that are yet to be suffered by reason of the Contractor’s default under the Contract.

37.  In this respect, it is important to note that Mr Maurellet SC (leading Mr Niehorster)  for the plaintiff has fairly and rightly accepted at the hearing that:

(1)  under Clause 2, the plaintiff can only validly demand payment for damages, and losses that they have already suffered and sustained at the time of demand, and

(2)  objectively, it is a permissible construction of paragraph 3 of the 1^st Demand that the demanded Bonded Sum included damages and losses which the plaintiff would continue to suffer after the time of the demand, ie, in the future.

38.  However, Mr Maurellet has submitted that the court should adopt the Judge’s construction and find that the Bonded Sum as demanded under the 1^st Demand related to only damages already suffered by the plaintiff at the time of demand, and that the words “will continue to suffer and sustain” in paragraph 3 are redundant and surplusage.  This is so as paragraphs 2 and 3 should be read in the following proper contexts:

(1)  The Contractor’s breach or default of the Contract is a one-off incident as they had already been removed as the contractor by the time of the demand.  A new replacement contractor had already been appointed.  As such, there would not be any further or future breaches or defaults by this Contractor covered by the Bond.

(2)  In the premises, by the time of the demand, all the actual damages and losses the plaintiff would have suffered by reason of the Contractor’s default had already been suffered and sustained.  All that was left was only a matter of detailed assessment and quantification.

(3)  Clause 2 on the other hand does not require particularization or proof of the amount demanded as damages, losses etc sustained.

39.  Once read in these contexts, says Mr Maurellet, it is clear that paragraphs 2 and 3 when considered together meant, as the Judge held at [42] of the Judgment, that the Bonded Sum as demanded reflected the plaintiff’s opinion that (a)  this was the amount of damages they already suffered at the time of the demand by reason of the Contractor’s default, (b)  the overall damages and losses the plaintiff would suffer as a whole must go beyond the Bonded Sum after final quantification, and hence the reference to the words “will continue to suffer and sustain”. These words are therefore, as held by the Judge, redundant and surplusage for the purpose of the demand.

40.  With respect to Mr Maurellet, we are unable to accept his submissions.

41.  First, the rather convoluted construction advanced by Mr Maurellet goes against the plain meaning of the words used in paragraph 3.  In this respect, as a matter of construction, the court normally expects the drafter to use words chosen to express a meaning and would not lightly find that he intended to add or use redundant and surplusage words.

42.  Second, as pointed out by Barma JA at the hearing, the operative words used in Clause 2 are “damages, losses, charges, costs or expenses”.  These are words or terms referring to actual or quantified amounts.  Hence, it is intended under Clause 2 that when the plaintiff makes a demand, it should be by reference to damages, losses etc which have already been suffered and quantified, but not unquantified sums arising from or by reason of the Contractor’s default.  This intention is underlined by the fact, as confirmed by Mr Maurellet and Mr Lam, that under the Bond, the plaintiff can make multiple and subsequent separate demands[5].

43.  Third, there is nothing before the court which would show and support the position that at the time of the 1^st Demand, there was an objective context or basis to say that the quantified damages were already well beyond the Bonded Sum.

44.  In the premises, we reject Mr Maurellet’s construction as the preferred construction since that would go against the plain and obvious meaning of the words used in paragraph 3 and also the nature of the demand intended to be made under Clause 2.

45.  For these reasons, with respect to the Judge, we find him to have erred in his construction and conclusion at [42] of the Judgment.  We accept Mr Lam’s submissions that, on a proper construction, the Bonded Sum as demanded under the 1^st Demand included future damages and losses which were outside the ambit of Clause 2.  Therefore, the 1^st Demand was not made in compliance with Clause 2 and was thus invalid.

46.  We therefore allowed the appeal on this basis.

47.  Given this basis, it is not necessary for us to deal with Mr Lam’s further submissions relating to whether the court should adopt a strict compliance[6] or in substance compliance[7] test or approach in an on-demand bond situation in determining whether the 1^st Demand had complied with Clause 2[8]. This is so as both Mr Lam and Mr Maurellet have fairly accepted that the question of whether there was in substance compliance by the 1^st Demand simply does not arise if this court concludes (as we have)  that, as a matter of construction, the Bonded Sum as demanded included future damages and losses etc.

E.  Disposition

48.  For the above reasons, we allowed the appeal at the hearing and set aside the Judgment.

49.  In the Notice of Appeal, the defendant has also asked for the O14 Summons to be dismissed and that the sum already paid by the defendant to the plaintiff to be repaid together with interest at judgment rate from the date of the defendant’s payment to the plaintiff. 

50.  Mr Lam at the end of the hearing also asked for the Defendant’s Summons to be allowed and that the action be struck out.  However, as pointed out by Yuen JA at the hearing, the defendant did not in its Notice of Appeal ask for these orders.  Mr Lam therefore asked for leave to amend the Notice of Appeal to include this relief, which was not opposed by Mr Maurellet as he accepted that this should follow if the appeal was allowed.  Mr Maurellet also confirmed at the hearing that the defendant would not pursue an alternative order that the defendant be given conditional leave to defend as sought in the Respondent’s Notice.

51.  In light of the above, we would therefore also grant leave to the defendant to so amend the Notice of Appeal[9] and further order that (a)  the O14 Summons be dismissed, (b)  the Defendant’s Summons be allowed and the writ and the statement of claim be struck out, and (c)  the sum already paid by the defendant to the plaintiff pursuant to the Judgment to be repaid together with interest at judgment rate from the date of the defendant’s payment to the plaintiff.

52.  As to costs, Mr Maurellet accepts that costs of the appeal should follow the event.  As to the costs below, he submits that, as reflected in the Judgment, up to 20 - 30% of the time had been spent at the hearing before the Judge on the Fraud Issue raised by the defendant, which the Judge had rejected and the defendant has abandoned on appeal.  In the premises, counsel says the defendant should not be entitled to all the costs before the Judge.

53.  We agree with Mr Maurellet. We therefore order that costs of this appeal (with certificate for two counsel)  and 80% of the costs below be to the defendant, to be taxed if not agreed.

Mr Douglas Lam SC and Mr Tommy Cheung, instructed by Tanner De Witt, for the appellant (defendant)

Mr Jose Maurellet SC and Mr James Niehorster, instructed by Bryan Cave Leighton Paisner LLP, for the respondent (plaintiff)

CACV 82/2020

[2020] HKCA 778

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 82 OF 2020

(ON APPEAL FROM HCA 2039/2018)

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DECISION

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The Court:

1.  This is an application made by the Defendant for leave to adduce new evidence in its appeal against a summary judgment granted by Ng J (“the Judge”) in favour of the Plaintiff on 2 April 2020 (“the Judgment”).  The summons to adduce new evidence was issued by the Defendant on 28 May 2020 (“the Summons”).  This application is opposed by the Plaintiff.

2.  Having considered the documents and submissions of the parties, we took the view that it is appropriate to determine the application on paper without an oral hearing.

3.  We now give our decision on the Summons.

Background

4.  The material facts in the present action have been set out in the Judgment at §§6 to 18.  In gist, the present action concerns the Plaintiff’s engagement of Hsin Chong Construction Company Limited (“the Contractor”) as contractor for a construction project known as “M+ project”.  To guarantee the due performance of the Contractor, the Defendant issued a Bond No. H7478 (“the Bond”) on 8 October 2015 in favour of the Plaintiff.  The Bond was for the sum of HK$297,198,000. 

5.  On 17 August 2018, the Plaintiff issued a demand for payment in the sum of HK$297,198,000 (“the Demand”) followed by two subsequent demands made on 21 and 24 August 2018 respectively, under the Bond.

6.  Clause 2 of the Bond provides:

“ If, in the [Plaintiff’s] opinion, the Contractor is or has been in default in respect of any of his obligations under the Contract, the [Defendant] shall upon demand made by the [Plaintiff] 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 the [Plaintiff] by reason of the default, up to the amount of the Bonded Sum.” (emphasis added)

7.  On 17 August 2018, the Plaintiff issued a formal notice to the Contractor to terminate its employment as contractor under the relevant contract on the basis that a default had occurred as the Contractor had become insolvent.   

8.  The Demand was in these terms:

“ We refer to the above bond issued by you in our favour, under which you are the Bondsman.

We hereby demand that you pay to us the full bonded sum of HK$297,198,000.

We are of the opinion that the Contractor is and has been in default in respect of various of its obligations under the Contract between the Contractor and us, and by reason of such defaults we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses.”

9.  The Defendant did not comply with the Demand and the Plaintiff commenced the action in HCA 2039/2018 on 29 August 2018.  By a summons of 11 September 2018, the Defendant sought to strike out the claim, or alternatively a determination of preliminary issues.  By a summons of 14 September 2018, the Plaintiff applied for summary judgment.   

10.  The two summonses came before the Judge on 10 April 2019.  By a judgment of 2 April 2020, the Judge granted summary judgment in favour of the Plaintiff and dismissed the Defendant’s summons. 

11.  The Defendant appealed against the Judgment by a Notice of Appeal filed on 6 May 2020.  In the Notice of Appeal, the Defendant relied on three grounds, namely:

(1)  The Judge erred in law in his reliance on (and consequent application of) IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496, which was inconsistent with §18 of Nishimatsu Construction Co Ltd v AHA Co unreported, HCA 10416/1999, 20 September 1999 (“Ground 1”);

(2)  The Judge erred in finding the Demand was valid even though it plainly included a claim for losses which the Defendant had not yet sustained as at the date of the Demand (“Ground 2”); and

(3)  The Judge erred in finding that the Demand was not made fraudulently (“Ground 3”).

The application to adduce new evidence on appeal

12.  In the Summons, the Defendant seeks leave to adduce two affidavits as new evidence in the appeal:

(1)  the affidavit of Ronald Michael Randall, the Senior Legal Counsel of the Plaintiff, dated 24 October 2019 and filed on 8 November 2019 under HCCW 239/2018 (“the HCCW Affidavit”); and

(2)  the 3^rd affidavit of Ronald Michael Randall dated 22 March 2019 (“the 3^rd Affidavit”).

 (collectively, “the Affidavits”)

13.  The Defendant intends to use the new evidence to support Grounds 2 & 3 in the appeal.  By reference to the Affidavits, the Defendant intends to demonstrate inter alia that:

(1)  As at the date of the Demand, the Plaintiff had not sustained certain loss and damage as alleged, and either knowingly included, or wrongly assumed that such alleged loss and damage would be incurred without undertaking any verification before inclusion of the same in the sum demanded;

(2)  The figures of the alleged loss and damage provided in the HCCW Affidavit and the 3^rd Affidavit are inconsistent with each other and/or contradictory; and

(3)  The Plaintiff included items that were not and could not be loss and damage it had sustained.

The approach on admission of new evidence

14.  Order 59 rule 10(2) of Rules of the High Court, Cap 4A provides as follows:

“ The Court of Appeal shall have power to receive further evidence on questions of fact, either by oral examination in court, by affidavit, or by deposition taken before an examiner, but no such further evidence (other than evidence as to matters which have occurred after the date of the trial or hearing) shall be admitted except on special grounds.”

15.  “Special grounds” require, in general, that the conditions in Ladd v Marshall [1954] 1 WLR 1489 at 1491 be satisfied.

16.  The three conditions in Ladd v Marshall [1954] 1 WLR 1489 at 1491 are as follows: (1) the evidence could not have been obtained with reasonable diligence for use at the hearing below; (2) the evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive; and (3) the evidence must be apparently credible, though it need not be incontrovertible.  All three conditions must be satisfied for new evidence to be admitted on appeal.

17.  Since the Judgment was granted in the context of an application for summary judgment, the following observations of Lord Bridge in Langdale v Danby [1982] 1 WLR 1123 at 1133B to F are relevant,

“ The classic statement of what amounts to ‘special grounds’ within the meaning of Ord. 59, r 10(2) comes from the judgment of Denning L.J. (as he then was) in Ladd v. Marshall [1954] 1 WLR 1489 …

In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification.  It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial.  The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue.  But I can see no injustice at all in requiring a defendant to use such diligence as is reasonable in the circumstances to put before the judge on the hearing of the summons, albeit in summary form, all the evidence he relies on in defence, whereas it would be a great injustice to the plaintiff to allow the defendant to introduce for the first time on appeal evidence which was readily available at the hearing of the summons but was not produced.”

18.  This approach is applicable in Hong Kong: Fortis Insurance Co v Lam Hau Wah Inneo, unreported,CACV 86/2010, 28 October 2010; Johnson Electric International Ltd v Bel Global Resources [2014] 5 HKC 504.  We shall discuss below whether each of the conditions of Ladd v Marshall has been satisfied in respect of the Affidavits. 

Condition (3) of Ladd v Marshall

19.  Condition (3), that is, the new evidence must be apparently credible, is not challenged by the Plaintiff as the deponent of the Affidavits Mr Randall is the Plaintiff’s legal counsel.

Condition (1) of Ladd v Marshall 

20.  Condition (1) requires that the new evidence could not have been obtained with reasonable diligence for use at the hearing below.  The degree of reasonable diligence which the court expects a defendant to have exercised when resisting a summary judgment application must be assessed against the overall circumstances of the case.  The court will take into account all relevant factors, such as the time available to the defendant to gather the evidence, the nature of the evidence, the difficulty encountered in obtaining the evidence, and the effort that the defendant had used in gathering the evidence (see Bank of New York Mellon v Sun Jiangrong [2016] 1 HKC 137 at §25)

21.  The 3^rd Affidavit was made available to the Defendant nearly 3 weeks before the hearing below.  At the time, it was the Plaintiff who wished to adduce it as evidence, but the Defendant objected to this by reference not only to delay, but also by reference to its contents.  Therefore, it cannot be said that the Defendant was not aware of its contents before the hearing below.  However, as the HCCW Affidavit was filed after the hearing below, the Defendant now says that because of alleged inconsistencies in the sums claimed in the two Affidavits, the 3^rd Affidavit has taken on a new significance and should be allowed to be used on appeal.  With respect, this seems to be an artificial argument, for the Defendant’s defence to the Demand is founded on the type of sums claimed by the Plaintiff (ex gratia payments, and forecast costs and expenses), not the difference in the quanta under these heads in the two Affidavits.  Accordingly, there is no real ground for allowing the 3^rd Affidavit to be adduced on appeal.   

Condition(2) of Ladd v Marshall   

22.  Be that as it may, in our judgment, the crucial consideration in the present application is in respect of the arguments concerning Condition (2), that is, the new evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive.

23.  We shall first discuss whether the Affidavits would probably have influenced that part of the Judgment which gave rise to Ground 2 i.e. the Judge erred in finding the Demand was valid even though it plainly included a claim for losses which the Defendant had not yet sustained at the date of the Demand. 

24.  This ground is founded on the express wording of the Demand: “… we have suffered and sustained and will continue to suffer and sustain damages, losses, charges, costs and expenses” (emphasis added).  In other words, the Defendant’s argument in Ground 2 is that the Demand is, on its face, non-compliant.   

25.  In discussing this “formality” argument, the Judge held at §42:

“ It is true that the 1^st Demand also referred to damages, losses etc that the Plaintiff would continue to suffer and sustain by reason of the Contractor’s default. But the reference to future damages, losses etc does not vitiate or render nugatory that part of the 1^st Demand which did refer to the damages, losses etc sustained by reason of the Contractor’s default which are admittedly within the ambit of the Bond. Since Clause 2 does not require particularization or proof of the amount demanded as damages, losses etc sustained, the additional reference to future damages and losses is at most redundant and a surplusage and can be ignored………”

26.  Whether the Judge was correct in so holding can be debated at the hearing of the appeal.  However, it is clear that the issue whether the Demand was, on its face, non-compliant is a “formality” argument which stands or falls as a stand-alone issue.  The Affidavits would not add anything to the determination of that issue.  Therefore, as the new evidence would not have had any influence on that part of the Judgment which gave rise to Ground 2, Condition (2) of Ladd v Marshall is not satisfied.    

27.  We shall now discuss whether the Affidavits would probably have influenced that part of the Judgment which gave rise to Ground 3 i.e. the Judge erred in finding that the Demand was not made fraudulently.

28.  In gist, the Defendant contended that some loss and damage alleged by the Plaintiff, such as ex gratia payments to sub-contractors and forecast costs and expenses, were not loss and damage “sustained” by the Plaintiff at the time of the Demand, and that the figures for loss and damage alleged by the Plaintiff in the 3^rd Affidavit and the HCCW Affidavit are inconsistent and/or contradictory. 

29.  Counsel for the Defendant submitted that the Affidavits provided a “basis to suggest that [the Plaintiff] included the alleged loss and damage not sustained as at the date of the [Demand] with actual and/or blind-eye knowledge” (§19, the Appellant/Defendant’s Written Submissions in Support).  That apparently is the highest that counsel can put it.

30.  With respect, even if one were to examine the Affidavits against this assertion, when such an exercise is undertaken against the indisputable factual background of the case, there is nothing which remotely provides a proper basis for inferring fraudulent conduct on the part of the Plaintiff such as to absolve the Defendant from its obligation under the Bond.

31.  As held by the Judge (and we do not find any submission on the part of Mr Wong SC to suggest otherwise), the Bond is in the nature of an on demand bond.

32.  Performance bonds payable on demand are good security in the commercial world because the bondsmen’s liability to pay does not depend upon the determination of disputes in the underlying transaction.  It is sometimes said that such bonds, like letters of credit, are treated as cash.  Sir John Donaldson MR in Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 WLR 393 said:

“ The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank's customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met.”

See also United CityMerchants (Investments) Ltd v Royal Bank ofCanada [1983] 1 AC 168 and Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800.

33.  There are authorities suggesting that a more stringent standard governs the advancement of the fraud exception in a claim based on a performance bond.  In Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31 at [59], Lord Clark held in the context of an interlocutory injunction restraining a bank from making payment, 

“ In summary, the Board concludes that it must be clearly established at the interlocutory stage that the only realistic inference is (a) that the beneficiary could not honestly have believed in the validity of its demands under the letter of credit and (b) that the bank was aware of the fraud.”

34.  Whilst the context of the present case is different and the second limb is obviously not relevant as the allegation of fraud is advanced by the issuer of the Bond in the present case, the first limb is relevant, at least in showing that a more stringent standard should be applied to give recognition to the commercial efficacy of such an instrument. The test was taken from the judgment of Ackner LJ in United Trading Corp SA v Allied ArabBankLtd [1985] 2 Lloyds' Rep 554 at 561, which was subsequently applied by Mance LJ in Solo Industries UK Ltd v Canara Bank [2001] 1 WLR 1800 in the context of a summary judgment application against the bank on a performance bond. 

35.  In Hong Kong, Deputy High Court Judge Lok (as he then was) referred to the relevant English cases in Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd [2012] 5 HKLRD 620 at [20] to [21].  At [21], the learned judge said,

“ … the [English cases] show that there are special considerations for a summary judgment application based on a performance bond, and that the Court should always scrutinise the defendant’s allegation to see whether there is sufficient evidence to support the allegation of fraud. I agree with Mr Pao that such approach should be no different from cases of dishonoured cheques or promissory notes where the defendants are seeking to rely on fraud as a defence.”

36.  It is for the Defendant to show clearly that the Affidavits reveal that the Plaintiff could not have honestly believed that it was making a valid demand.  The fact that ex gratia payments were made to sub - contractors is neither here nor there, as the Bond included not only damages, but also losses and expenses.  As for forecast costs and expenses, the Defendant has not shown that the Plaintiff could not honestly have believed at the time of the Demand that its accrued liabilities did not at least match the Bond sum.   

37.  In any event, Mr Randall has in his 4^th Affidavit explained that what the Defendant alleged were discrepancies/inconsistencies in the figures of loss and damages were mainly due to computations based on different dates, and the difference between liquidated damages and general damages.[1]

38.  We are not satisfied that the Affidavits provide the Defendant with a proper basis to contend that the only realistic inference is that the Plaintiff could not honestly have believed that it was making a valid demand.    

39.  Accordingly, we are not satisfied that the Affidavits would have an important influence on Ground 3 either, and Condition 2 of Ladd v Marshall is not satisfied. 

Conclusion and costs

40.  For the above reasons, we decline to admit the Affidavits as new evidence in the appeal and the Summons is dismissed. 

41.  There is no reason to depart from the rule that costs should follow the event.  We order the Defendant to pay the Plaintiff’s costs of this application.  After considering the Plaintiff’s statement of costs, we summarily fix such costs at $350,000.