HOYDEN HOLDINGS LTD v. CMB WING LUNG INSURANCE CO LTD

DCCJ 1729/2021

[2022] HKDC 651

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1729 OF 2021

--------------------------

BETWEEN
	HOYDEN HOLDINGS LIMITED	Plaintiff
	and
	CMB WING LUNG INSURANCE COMPANY LIMITED	Defendant

--------------------------

Before:  His Honour Judge H. Au-Yeung (Paper Disposal)

Dates of Submissions:  4, 18 & 25 May 2022

Date of Decision:  30 June 2022

--------------------------

DECISION

--------------------------

THE APPLICATION

1.  By Decision dated 20 April 2022 (“the Decision”), this Court dismissed the plaintiff’s Order 14A application and its action herein. I also made a costs order nisi that the plaintiff shall bear the defendant’s costs of the action (including the costs of the Summons with all costs reserved), with certificate for counsel (“the Costs Order Nisi”).

2.  Pursuant to paragraph 44 of the Decision, the defendant applied to vary the Costs Order Nisi in that the defendant’s costs shall be taxed on an indemnity basis.

3.  I will adopt herein the nomenclature used in the Decision.

THE LEGAL PRINCIPLES

4.  The general rules as to when the court may order costs on an indemnity basis are trite.

5.  In Overseas Trust Bank Ltd v Coopers & Lybrand (a firm) and Others [1991] 1 HKLR 177, Godfrey J (as his Lordship then was) explained that:

“ […] In order to justify a taxation on the indemnity basis, the successful party has to show, either that the case is one of a type already recognised in the practice of the court as warranting a taxation on that basis (such as, for example, the contempt cases to which I have already referred) or that there is some feature in the case even more special or unusual than one which would justify a taxation on the common fund basis. A case in which the successful party has demonstrated that the proceedings were initiated or prosecuted by the unsuccessful party in a manner which constitutes that party’s proceedings an abuse of the process of the court might well be a candidate for an award of taxation of costs on an indemnity basis. A taxation of the successful party’s costs on an indemnity basis could properly be ordered, in my opinion, where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for taxation of the successful party’s costs on an indemnity basis.” (at 182G – 183C)

6.  In Choy Yee Chun (The representative of the estate of Chan Pui Yiu) v Bond Star Development Ltd [1997] HKLRD 1327, Stock J (as his Lordship then was), having referred to the Judgment quoted above, stated:

“It has since been held that, though there must still be shown special and unusual features, even the circumstances particularised by Godfrey J. are not to be taken as exhaustive of the conditions in which it might be appropriate to make such an award, and that the power to award taxation on an indemnity basis is not confined to cases which have been brought with an ulterior motive or for an improper purpose. (See Macmillan Inc. v. Bishopsgate Investment Trust Ltd., 10 December 1993 (unreported) cited in Sung Foo Kee Ltd. v. Pak Lik Co. [1996] 3 HKC 570).

In Sung Foo Kee Ltd a litigant had been repeatedly in contempt of court orders and the trial judge had found that the defendant had deployed defences which he termed “hocus pocus” and had used the legal process to prevent the plaintiff obtaining its just payment. The Court of Appeal said that it would have awarded costs on an indemnity basis. It remarked (at page 575) that the circumstances in which an indemnity award might properly be made were not restricted to circumstances such as those described by Godfrey J. in Overseas Trust Bank (supra). At p.575B - E of Sung Foo Kee Ltd. (supra), Godfrey J.A. said -

‘Here, as in England and Wales, the judge has a discretion, in a case which does fall outside the general rule, to direct the taxation of the receiving party’s costs on the basis which he considers to be appropriate to that case. This is not a discretion limited by indications in previous cases, such as, eg the observations of Godfrey J in Overseas Trust Bank Ltd v Coopers & Lybrand [1991] 1 HKLR 177 (in which he declined to order the successful party’s costs to be taxed on the indemnity basis), as to the sort of special or unusual feature (there does have to be some special or unusual feature) which could justify an award of indemnity costs. Although the examples given in the judgment of Godfrey J at 182J‑183C may be of assistance in other cases in which indemnity costs are claimed, his judgment does not purport to be and is not to be taken as determinative of the sort of case in which indemnity costs may be ordered.’

The Court of Appeal endorsed the view of the English courts that :

‘The power to order taxation on an indemnity basis is not confined to cases which have been brought with an ulterior motive or for an improper purpose. Litigants who conduct their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who cause costs to be incurred irrationally or out of all proportion as to what is at stake, may also expect to be ordered to pay costs on an indemnity basis if they lose, and have part of their costs disallowed if they win. Nor are these necessarily the only situations where the jurisdiction may be exercised; the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be ‘appropriate’.’ (see Macmillan Inc. v. Bishopsgate Investment Trust Ltd. supra)

Further at p.576 -

‘… it is a pity that various courts have attempted to define in exactly what circumstances indemnity costs may be ordered.’ (see Munkenbeck & Marshall v. McAlpine (1995) 44 Con LR 30 per Hollis J, at page 33)

The Court of Appeal in Sung Foo Kee Ltd at page 576F added :

‘… Our rules do now expressly provide for the taxation of costs on an indemnity basis and when they consider it appropriate judges should not be slow to make orders for the receiving party’s costs to be taxed on that basis.’ ”

(at 1334G – 1335G)

7.  In Cheung Wei Man Vivien and Chan Kim Thiam v Centaline Property Agency Ltd & Others (HCA 286/2000, unreported, 15 December 2006), Lam J (as Lam PJ then was) had the following to say:

“It is also useful to remind ourselves what Simon Brown LJ said in Liam v MGN Ltd (No.2) [2002] 1 WLR 2810 at Paras.11 and 12 in considering whether the conduct of a losing party is so unreasonable so as to warrant an award of indemnity costs. In particular, at Para.12, His Lordship observed,

‘I for my part understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight.’ ”

8.  It has also been held that whilst the pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order: Wates Construction Limited v HGP Greentree Allchurch Evans Limited 105 CLR 47 at 55.

GROUNDS OF APPLICATION

9.  The defendant’s solicitors had drawn this Court’s attention to the correspondences exchanged between the parties (i) prior to the commencement of this action; and (ii) before the plaintiff took out the summons for the Order 14A application (“the Order 14A Summons”), and submitted that:

“(a) P, while having ample opportunity to clarify the true legal merits of the validity of the Surety Bond, did not bother to do so even though D had already explained the exact reasons why the Hong Kong Housing Society line of authorities should be distinguished – P said it was a waste of time and costs;

(b) P unreasonably commenced this action and took out the Order 14A Application regardless of the plain wordings of the Null and Void Clause of the Surety Bond, the merits of P’s claims and the costs implications even though the same had been specifically explained and drawn to P’s attention;

(c) P, while having the opportunity to narrow down the differences between the parties, took a high-handed approach and refused to provide D with the requested particulars and basis of the Order 14A Application before P actually took out the application;

(d) P’s arguments have all been rejected by this Court, including some that were fallacious or simply not agreeable, suggesting that P’s claims and the O.14A Application were meritless and should not have been pursued; and

(e) This Court vindicated D’s arguments including but not limited to the validity of the Surety Bond which D had explained to P from the outset before this action was commenced.”[1]

DISCUSSION

10.  The question is whether an order of indemnity costs should be made against the plaintiff on the basis that it should not have brought this action in the light of the explanation given by the defendant’s solicitors to the plaintiff’s solicitors by letter dated 19 January 2021 that the Hong Kong Housing Society line of authorities is distinguishable from the facts herein.

11.  In my view, the answer must be “No”.

12.  It is true that the plaintiff’s solicitors did refer to the Hong Kong Housing Society case in their letter dated 13 January 2021 in support of their argument that the Surety Bond was still valid despite the issuance of the Certificate for Practical Completion. It is also a fact that the defendant’s solicitors gave their view in rather strong terms on 19 January 2021 as to why the Hong Kong Housing Society case was distinguishable, and that that view was subsequently accepted by this Court in the Decision. However, I do not think that is adequate for the purpose of this application, because the inapplicability of Hong Kong Housing Society was not the end of the plaintiff’s case. The plaintiff did put forward other arguments in support of its interpretation of the Surety Bond in the Order 14A application.

13.  Although I had rejected all those arguments raised by the plaintiff, I do not think those arguments were “hopeless”. Neither do I think the plaintiff can be said to have been unreasonable to a high degree in commencing this action. The plaintiff was merely wrong in its interpretation of the Surety Bond.

14.  The defendant’s complaint about the plaintiff’s failure to give “particulars and basis of the Order 14A application” before the Order 14A Summons was taken out, in my view, cannot assist its application herein either, because I do not think it can be disputed that the Order 14A procedure had indeed been useful in bringing this action to the end quickly in a costs-saving way. Furthermore, given the main (if not the sole) issue herein is the interpretation of the Null and Void Clause in the Surety Bond, I do not accept the defendant’s argument that such an issue could have been narrowed down further if the plaintiff did provide the “particulars and basis” of the Order 14A application as requested. In any event, in the circumstances of the present case, I do not think the plaintiff was unreasonable to a high degree in failing to communicating with the defendant further before taking out the Order 14A Summons.

ORDER

15.  By reasons of the aforesaid, I dismiss the defendant’s application, and hereby order that the Costs Order Nisi be made absolute.

COSTS

16.  I make a costs order nisi that the defendant shall bear the plaintiff’s costs of this application, with certificate for counsel. My preliminary view is that the plaintiff’s engagement of counsel who argued the Order 14A application on its behalf is justified because the defendant’s arguments in support of the present variation of costs order nisi application are based on the merits of the Order 14A application.

17.  The above order nisi shall become absolute in the absence of application to vary within 14 days.

18.  The plaintiff’s costs shall be summarily assessed in lieu of taxation. Unless any application for variation of the aforesaid costs order nisi is made within time, the plaintiff shall lodge and serve its statement of costs within 7 days after the expiry of the said 14-day period. The defendant shall lodge and serve its statement of objection within 7 days thereafter. Summary assessment of the plaintiff’s costs will be conducted on paper (no matter whether any statement of objection is lodged by the defendant within time) thereafter.

19.  The costs assessed shall be payable by the defendant within 14 days after assessment.

( H. Au-Yeung ) District Judge

Mr Lau Ka Kin, instructed by Haldanes, for the plaintiff

Deacons, for the defendant

DCCJ 1729/2021

[2022] HKDC 336

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1729 OF 2021

--------------------------

BETWEEN
	HOYDEN HOLDINGS LIMITED	Plaintiff
	and
	CMB WING LUNG INSURANCE COMPANY LIMITED	Defendant

--------------------------

Coram:  His Honour Judge H. Au-Yeung (Paper Disposal)

Dates of Submissions:  11 & 24 January and 4 February 2022

Date of Decision:  20 April 2022

--------------------------

DECISION

--------------------------

THE APPLICATION

1.  By summons filed on 24 August 2021 (“the Summons”), the plaintiff applies pursuant to Order 14A of the Rules of the District Court (Cap.336H, Laws of Hong Kong) for:

(1)  the determination of the following question of construction in favour of the plaintiff, namely:

“Whether the Surety Bond executed by the defendant in favour of the plaintiff dated 1 February 2019 remains valid for receipt of claims notwithstanding the issuance of the Certificate of Practical Completion by LWK & Partners (HK) Limited on 23 December 2019”;

(2)  an order that the defendant’s counterclaim be struck out on the ground that it discloses no reasonable cause of action;

(3)  an order that the plaintiff be at liberty to enter judgment against the defendant for damages to be assessed and taxed costs of the action;

(4)  extension of time to file and serve Reply and Defence to Counterclaim.

2.  The defendant does not dispute that the question of construction is an appropriate one to be considered in the present application.

UNDISPUTED FACTS

3.  The following facts are either undisputed or indisputable.

4.  The plaintiff is a property developer, and was the employer of a construction project in Tuen Mun (“the Project”).

5.  Kin Shing (Leung’s) General Contractors Ltd was employed as the main contractor of the Project (“the Main Contractor”).

6.  The plaintiff engaged Osmar Far East Limited as a sub-contractor of the Project (“the Sub-Contractor”) by virtue of a Letter of Nomination dated 27 March 2017 (“the Sub-Contract”) for, among other things, the design, supply and installation of curtain walls, aluminium windows and doors.

7.  By virtue of a warranty dated 3 January 2019 (“the Warranty”), the Sub-Contractor warranted to the plaintiff, among other things, that it would “carry out complete and maintain the Sub-Contract Works” and that it would exercise reasonable skill and care in the design and selection of materials.

8.  The Sub-Contractor had also provided the plaintiff with a surety bond dated 1 February 2019 (“the Surety Bond”) which was executed by the defendant as the Surety. The sum of the Surety Bond was for the value of up to $2,993,000.

9.  On 8 November 2019, the Main Contractor served a Notice of Default on the Sub-Contractor.

10.  On 19 November 2019, the Main Contractor terminated the employment of the Sub-Contractor by virtue of a Notice of Determination.

11.  By virtue of a Statement of Voluntary Winding Up under Special Procedure in Case of Inability to Continue Business filed on 31 October 2019, a director of the Sub-Contractor certified in accordance with section 228A(1B) of the Companies (Winding Up and Miscellaneous Provisions Ordinance (Cap.32), among other things, that the directors thereof had passed a resolution that the company could not by reason of its liabilities continue its business and they considered that the company should be wound up.

12.  A liquidator of the Sub-Contractor was subsequently appointed on 22 November 2019.

13.  On 23 December 2019, the Certificate of Practical Completion was issued by LWK & Partners (HK) Limited, the Architect to the Main Contract (i.e. the contract between the plaintiff and the Main Contractor).

14.  On 6 October 2020, the plaintiff, through its solicitors, demanded the defendant for payment pursuant to the Surety Bond.

15.  By a letter dated 11 January 2021, the defendant’s solicitors enquired with the plaintiff’s solicitors as to whether any Certificate of Practical Completion had been issued, and asked for a copy of the same “bearing the signed statement of the issuing party that he is the Architect to the Contract”.

16.  The plaintiff’s solicitors responded on 13 January 2021 and provided the defendant’s solicitors with the Main Contract Certificate of Practical Completion dated 23 December 2019.

17.  The plaintiff subsequently commenced this action and claimed against the defendant for $2,993,000 on the basis that the plaintiff had to pay the Main Contractor more than $8 million as the costs of the curtain wall remedial works.

THE CRUCIAL TERMS OF THE SURETY BOND

18.  As set out in paragraph 1 of this Decision, the question which this court has to consider in this application is whether the Surety Bond remained valid despite the issuance of the Certificate of Practical Completion by the Architect to the Main Contract.

19.  This hinges on the interpretation of the following provisions in the Surety Bond:

“NOW THE CONDITION of the above written Bond is such that if the Nominated Sub-Contractor shall duly perform and observe all the terms, provisions, conditions and stipulations of the Sub-Contract and the Warranty on the Nominated Sub-Contractor’s part to be performed and observed according to the true purport intent and meaning thereof or if on default by the Nominated Sub-Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby up to the amount of the above written Bond then this obligation shall be null and void but otherwise shall be and remain in full force and effect but no alterations in terms of the Sub-Contract or the Warranty or in the extent or nature of works to be executed and completed thereunder and no allowance of time by the Architect to the Contract under the Sub-Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Sub-Contract on the part of the Employer or the said Architect shall in any way release the Surety from any liability under the above written Bond.

This Bond shall remain valid for receipt of claims as aforesaid until the date of issue of the Certificate of Practical Completion by the Architect to the Contract (as evidenced to the Surety by presentation to him by the Nominated Sub-Contractor of a copy of the Certificate of Practical Completion bearing the signed statement of the issuing party that he is the Architect to the Contract) after which date the Bond shall become null and void and must be returned to the Surety for cancellation.”

(emphasis added)

20.  Mr Lau for the plaintiff described the second paragraph above as the “Null and Void Clause” in his written submissions and Mr Wong for the defendant had followed suit. I will therefore adopt that term in this Decision.

THE PLAINTIFF’S ARGUMENTS

21.  Mr Lau did not dispute that the “Certificate of Practical Completion” referred to in the Null and Void Clause indeed means the Certificate which was issued by the Architect to the Main Contractor[1]. However, he argued that the Null and Void Clause is still not engaged:

(1)  The Null and Void Clause must be considered in the context of the whole document. Since the Sub-Contractor had gone into liquidation before practical completion, it was not in a position to present any evidence of completion to the defendant pursuant to the Null and Void Clause;

(2)  If the Bond is construed as a whole, the “Certificate of Practical Completion” in the Null and Void Clause would only mean a certificate issued in respect of the works which the Sub-Contractor undertook to do, instead of “any” certificate;

(3)  The condition of the Bond is that “this obligation shall be null and void but otherwise shall be and remain in full force and effect”, subject only to two “ifs” as provided in the Bond: the “first if” is that “the [Sub-Contractor] shall duly perform and observe all the terms”. The “second if” is that “on default by the [Sub-Contractor] the Surety shall satisfy and discharge the damages sustained by the Employer”. Issue of certificate of practical completion per se is not one of the “ifs”. Put it in another way, in the event of default (under the “second if” situation), the Sub-Contractor’s default cannot be redressed or undone by any certificate;

(4)  The Null and Void Clause serves to identify the time limit for the return of the Bond for cancellation in the “first if” situation only, because in such a case (unlike in the “second if” situation where the Bond shall be in full force until the defendant pays), the Bond does not specify the duration of the Bond;

(5)  The Bond must be construed in the light of the commercial purpose of the transaction. If the defendant’s interpretation were right, it would have been able to escape liability for the very eventuality for which the Bond was put in place;

(6)  Therefore, the words “Certificate of Practical Completion” in the Null and Void Clause can only reasonably be read as referring to a certificate to which the Sub-Contractor would have been entitled or received had it completed the works which it undertook to do.

22.  Mr Lau relied heavily on two authorities: Hong Kong Housing Society v China Insurance Company Limited (HCCT 104/1999, unreported, 23 March 2000) and De Vere Hotels Ltd v. Aegon Insurance Company (UK)Ltd [1997] EWHC Technology 354, and submitted that an argument similar to that raised herein by the defendant had been rejected in those cases. That being so, it was contended that this court should also interpret the Null and Void Clause in the same way. My attention has also been drawn to a number of authorities such as British Suger Plc v NEI Power Projects Limited [1997] EWCA Civ 2438 which held that once a phrase has been authoritatively construed by a court in a similar context to that which exists in the case in point, a reasonable businessman must more naturally be taken to be having the intention that the phrase should bear the same meaning, and it would take very clear words to allow a court to construe the phrase differently.

THE DEFENDANT’S ARGUMENTS

23.  Mr Wong’s argument made on behalf of the defendant may be summarised as follows:

(1)  The plaintiff’s argument on “commercial purpose” had overlooked the express contractual “long-stop” date stipulated in the Null and Void Clause, namely, that the Surety Bond would only remain valid “until the date of the issue of the Certificate of Practical Completion”;

(2)  The facts in the case of Hong Kong Housing Society (supra) are distinguishable because the certificate of practical completion therein was issued under another contract rather than the contract approved by the insurance company that issued the surety bond;

(3)  The facts in the case of De Vere Hotels Ltd (supra) were also similar to those in Hong Kong Housing Society;

(4)  The court should be slow to reject the natural meaning of the Surety Bond, which refers to the Certificate of Practical Completion issued by the Main Contractor. It is erroneous for the plaintiff to suggest that the Sub-Contractor was contractually entitled to receive a certificate of practical completion;

(5)  There is no justification for the court to approach commercial purpose only from the plaintiff’s perspective. The court should also bear in mind that the Null and Void Clause provides contractual certainty to the temporal aspect of the defendant’s liability;

(6)  The fact that the Certificate of Practical Completion was not presented to the defendant by the Sub-Contractor is neither here nor there.

DISCUSSION

24.  I would consider the two authorities which have been heavily relied on by the plaintiff first. It had been submitted by Mr Lau that this court should follow these precedents when construing a very similar term in the Null and Void Clause of the Surety Bond in the present case.

25.  In Hong Kong Housing Society (supra), the Housing Society contracted with Hing Lee in 1996 whereby Hing Lee became the main contractor in a housing development. The contract required Hing Lee to provide a surety bond to the Housing Society. The defendant insurance company (“China Insurance”) provided the bond, which contained similar terms as in the Surety Bond in the present case.

26.  The Housing Society subsequently terminated Hing Lee’s employment under the contract in March 1998, and entered into another contract with Yiu Wing in September 1998 to complete the works. Despite the change of main contractor, the architect remained the same. The architect issued a “certificate of practical completion” to Yiu Wing on 21 June 1999 certifying completion on 23 March 1999.

27.  Counsel for China Insurance submitted that the “architect to the contract” between the Housing Society and Hing Lee was Simon Kwan & Associates. They issued a practical completion certificate in June 1999 because they continued to be the architect under the new regime with Yiu Wing. Under such situation, the Bond had, according to the submission of China Insurance, come to an end pursuant to the null and void clause therein.

28.  Burrell J did not accept this argument. His Lordship held that:

“There is no dispute that the certificate in June 1999 was issued to the new contractor, Yiu Wing. It can only have related to a certification of the works completed by them and can only have been given by the architect in its capacity as the architect to the later contract which had nothing to do with Hing Lee.”[2]

29.  Given Mr Lau’s acceptance that the “Certificate of Practical Completion” in the Null and Void Clause herein means a certificate issued by the Architect to the Main Contractor”[3], I accept Mr Wong’s argument that there was no “wrong” or “inapplicable” certificate as such in the present case, as in Hong Kong Housing Society. The Certificate of Practical Completion referred to in the Surety Bond herein, and the Certificate of Practical Completion which was in fact issued, was the same certificate, issued under the same Main Contract. This authority can therefore be distinguished.

30.  In De Vere Hotels Ltd (supra), De Vere employed Pentagon to construct a hotel. The contract between them, executed in February 1993, required Pentagon to provide a bond, which it did, with Aegon as the surety. Pentagon’s employment was subsequently terminated as administrative receivers were appointed to the company. In May 1994, De Vere entered into a new building contract with Amec to finish the uncompleted works. In September 1994, a certificate was issued to Amec, which stated that the date of practical completion of the works which Amex were employed to do was 9 September 1994. This certificate identified the contract under which it was issued as being dated 4 May 1994, which was the date on which the completion contract was made with Amec.

31.  De Vere demanded the liquidator of Pentagon (which had gone into liquidation) for the amount of the expenses incurred by them caused by the determination of the contract. As Pentagon was not able to pay, De Vere turned to Aegon for payment of the amount of the bond.

32.  The court was asked to consider a number of issues, including: “Is a document dated 13 September 1994 a certificate or statement of practical completion for the purposes of the proviso to the bond sued on in the action?”

33.  His Honour Judge Esyr Lewis QC held that:

“27. Clause 27.2 of the building contract conditions of course

provided for circumstances in which the employment of Pentagon under the contract would automatically be determined and Clause 27.4.2 allowed De Vere to employ Amec ‘to carry out and complete the design and construction of the Works’. Any contract entered into with a new contractor under the provisions of the (sic) this clause would necessarily be distinct from the contract which underlay the obligation assumed by Aegon under the bond. It would not cover, and the contract with Amec did not cover, the works to be constructed by Pentagon under the building contract, but only part of them. Moreover some of the works included in the building contract were, I accept, excluded from the certificate or statement of practical completion issued to Amec on 13 September 1994, as appears from Amec’s proposals which formed part of the building contract. That certificate was issued under the contract between De Vere stated in the certificate to have been made on 4 May 1994.

28. I accept Mr. Mann’s [the plaintiff’s counsel] submission that there was nothing in the building contract or the bond which required De Vere to issue a document under the completion contract in the style of that provided for in Clause 16.5 of the building contract conditions or indeed to issue any kind of practical completion certificate or statement. I agree with his submission that it was thus purely fortuitous that De Vere chose to make the completion contract with Amec which contained the same provision for the issue to Amec of a statement of practical completion as in the building contract. In my view, it does not make good sense that Aegon’s prima facie obligation under the bond, ‘on default’ by Pentagon, to ‘satisfy and discharge the damages sustained by the Employer’ was to be discharged, irrespective of the time limitation for taking proceedings contained in the bond proviso, on the pure chance that a completion contract would contain a similar provision for the issuing of a statement of practical completion as in the building contract and when no such statement had to be issued to Pentagon under that contract following the determination of their employment. I do not consider that this is what was envisaged or intended by the provisions in the bond which, in my judgement, relate entirely to the building contract contemplated when the bond was executed.

29. For these reasons I do not consider that there is any ambiguity in the words ‘a Statement of Practical Completion of the works’. In my view they can only reasonably be read as referring to the statement of practical to which Pentagon would have been entitled had they completed the works which they undertook to do and reject the submission that they should be read as referring to ‘any’ certificate of practical completion.”

(emphasis added)

34.  It can be seen that in De Vere Hotels Ltd, again, the certificate of practical completion was issued under another contract, after the original contract was terminated. The facts in the present case are plainly different.

35.  That being the case, I do not agree with Mr Lau that the court should simply follow the aforesaid authorities, irrespective of the differences of the facts as identified.

36.  In these circumstances, this court has to consider the effect of the Null and Void Clause in the Surety Bond in the present case, starting from square one. It has to start from the basic principles on the construction of contracts.

37.  In Achieve Goal Holdings Limited v Zhong Xin Ore-Material Holding Company Limited[2020] HKCA 51, Kwan VP referred to the general principles on construction of contracts as follows:

“16. The general principles have been set out by the Judge at Section E1 of the Judgment. The ones that are particularly relevant for present purpose may be stated as follows:

(1) The construction of a contract is an attempt to discover what a reasonable person would have understood the parties to have meant. This is done by identifying the meaning of the relevant words, (a) in light of the natural and ordinary meaning of those words, the overall purpose of the contract, any other provisions of the contract, the facts known or assumed by the parties at the time at the time the contract was made, and common sense, but (b) ignoring subjective evidence of any party’s intentions. (Marley v Rawlings [2015] AC 129 at §19, per Lord Neuberger of Abbotsbury, PSC)

(2) The background knowledge which would reasonably have been available to both parties in the situation in which they were at the time of the contract includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H to 913A, per Lord Hoffmann; Arnold v Britton [2015] AC 1619 at §21, per Lord Neuberger of Abbotsbury, PSC)

(3) Reliance placed on commercial sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. Except in a very unusual case, the parties have control over the language they use in a contract and must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision. A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. (Arnold v Britton at §§17 and 20, per Lord Neuberger of Abbotsbury, PSC)

(4) Interpretation is a unitary exercise. Where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But in striking a balance between the indications given by the language and the implications of the competing constructions, the court must consider the quality of drafting of the clause (the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention), and it must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest. (Wood v Capita Insurance Services Ltd [2017] AC 1173 at §11, per Lord Hodge JSC; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 at §16, per Mance LJ)

(5) Where the disputed provision is open to two possible interpretations, the unitary exercise involves an iterative process, by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated. Once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. (Wood v CapitaInsurance Services Ltd at §12, per Lord Hodge JSC; InreSigma Finance Corpn [2010] 1 All ER 571 at §12, per Lord Mance JSC)

(6) In construing a contract, all parts of it must be given effect where possible, and no part of it should be treated as inoperative or surplus. Whilst the presumption against surplusage is unlikely to be useful in interpreting a standard form contract, it is a relevant consideration in a bespoke contract drafted by the parties to meet the exigencies of a particular and significant commercial arrangement. (Secretary of State for Defence v Turner Estate Solutions Ltd [2015] EWHC 1150 (TCC) at §62, per Coulson J)

38.  Mr Lau has specifically reminded this court that one should construe the Surety Bond as a whole and should not focus too narrowly on a critical phrase. He referred to Lord Collins SCJ’s Judgment in the case of Re Sigma Finance Corp (in administrative receivership) [2010] 1 All ER 571 in which his Lordship said: “An over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose”[4]. However, I think it is also important to note the context in which his Lordship made the above comment, and for that purpose, it is necessary to quote what was said more fully as follows:

“[…] In complex documents of the kind in issue there are bound to be ambiguities, infelicities and inconsistencies. An over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose. […]” (at 589d)

39.  Bearing the above in mind, and having considered the arguments made by counsel carefully, I have come to the conclusion that the Null and Void Clause should be interpreted in the way as suggested by the defendant for the following reasons:

(1)  There is no ambiguity in that the “Certificate for Practical Completion” referred to in the Null and Void Clause is the certificate issued by the Architect to the Main Contractor in the Project, and that was indeed issued. The plain effect of the Null and Void Clause is that once the said certificate was issued, that would be the cut-off time for the Employer to lodge any claim pursuant to the Surety Bond;

(2)  It is trite that agreements such as Surety Bond must be strictly construed;

(3)  Although the court should bear in mind the commercial purpose of the Surety Bond when interpreting its terms, the court at the same time should not undervalue the importance of the language of the Null and Void Clause. Hence, Mr Lau’s argument that the words “Certificate for Practical Completion” in the Null and Void Clause can only reasonably be read as referring to a certificate to which the Sub-Contractor would have been entitled or received had it completed the works which it undertook to do is rejected. The words “Certificate for Practical Completion” in the Null and Void Clause were simply not qualified as such. To accept this interpretation would involve reading words into the Surety Bond which were not there in the first place. Furthermore, as aforesaid, Mr Lau accepted that the “Certificate of Practical Completion” in the Null and Void Clause herein means a certificate issued by the Architect to the Main Contractor. The court’s attention has not been drawn to any contractual provision in the Sub-Contract which provided that the Sub-Contractor would have been entitled to receive any certificate;

(4)  Mr Lau has directed the court’s attention to two “ifs” and submitted that the Surety Bond shall be and remain in full force and effect, subject to those two “ifs” (see the first paragraph of the part of the Surety Bond quoted in paragraph 19 above). In his own words:

“These are the two only scenarios which would render the [Surety] Bond ‘null and void’ ”[5].

In my view, this is interpreting the terms of the Surety Bond too narrowly. If the Surety Bond is looked at as a whole, there is in fact a third “if” which would render the Surety Bond null and void, that is, “if no claim is received before the date of issue of the Certificate of Practical Completion”, as provided in the Null and Void Clause. With greatest respect to the plaintiff, it was paying lip service when it argued that the court should consider the entirety of the Surety Bond;

(5)  If, as contended by the plaintiff, the Null and Void Clause only serves to identify the time limit for the return of the bond for cancellation under the first scenario, namely, when the Sub-Contractor had duly performed and observed all the terms, there is no reason why the Null and Void Clause would have been drafted in the way it was, without any express reference to the first “if”. If the court interprets the clause in such a way, it would in effect be re-writing the Surety Bond under the purported rationale of giving effect to the commercial purpose of the Surety Bond. I do not agree that this is appropriate. If the plaintiff’s proposed interpretation is correct, there is no need to have a separate null and void clause as such;

(6)  Mr Lau also placed reliance on the words in the bracket in the Null and Void Clause “as evidenced to the Surety by presentation to him by the Nominated Sub-Contractor of a copy of the Certificate of Practical Completion bearing the signed statement of the issuing party that he is the Architect to the Contract”. He described these words as a “proviso” and it seems that he was arguing that if the certificate would be unrelated to the work supposed to be completed by the Sub-Contractor, it would not count. With respect, I do not agree with such an interpretation, because this in effect is again putting more words into the Surety Bond which were not there;

(7)  Mr Lau further submitted that since the Sub-Contractor had gone into liquidation before practical completion, it was not in a position to present any evidence of completion to the defendant. In my view, whether the Sub-Contractor had presented the defendant with a certificate is neither here nor there. The said words in bracket only provided a means by which it could be proved that the certificate had been issued. If the presentation by the Sub-Contractor of the certificate had such level of importance, I wonder why the cut-off date would not be the date of such presentation of evidence. Mr Lau is attempting to elevate the status of the words in the bracket into a condition precedent, which is clearly not what those words meant. Furthermore, if the plaintiff is right, then that means the Surety would have been able to “escape from liability” so long as the Sub-Contractor could present the Surety with a copy of the Certificate of Practical Completion, no matter where the Surety got it from and whether the Sub-Contractor had completed the works satisfactorily. The intended purpose of the plaintiff could still not be achieved. That demonstrates the fallacy of the plaintiff’s theory;

(8)  By relying on the said words in the bracket, Mr Lau also argued that “not any certificate will suffice”[6]. With respect, the defendant is not relying on “any certificate” but the very certificate which the parties anticipated that the Architect would issue to the Main Contractor. Although it is true, and this court fully appreciates, that the certificate was eventually issued after the Sub-Contractor’s employment had been terminated, there is nothing in the Surety Bond which stipulates that the Null and Void Clause would not come into effect in such circumstances;

(9)  The plaintiff emphasized time and again that it would be most surprising if the defendant can escape liability under the Surety Bond when the Sub-Contractor had gone into liquidation and failed to complete the work. I agree that if the defendant’s interpretation of the Null and Void Clause is accepted, the plaintiff would not be able to achieve its purpose of requiring the Surety to pay pursuant to the Surety Bond in the present case. However, it should be borne in mind that the court should not “bend backwards” so as to assist the plaintiff in achieving such a purpose. As pointed out by Mr Wong, the court should also look at the matter from the defendant’s perspective. The court should adopt a “balanced view”, and give effect to the contractual bargain which the parties had struck;

(10)  Mr Lau further argued that the defendant’s construction of the Null and Void Clause is unworkable, on the basis that “it would inevitably take time to remedy the default”[7]. However, as he recognized in paragraph 18 of his reply submissions (when he commented on the defendant’s argument that the availability of a copy of the certificate would depend on the cooperation of the main contractor, the architect or the employer and that it makes no sense that the defendant should be confined to merely a passive role in ascertaining the validity of the Surety Bond and therefore its liability):

“This is the mechanism agreed under the Bond. Whether this agreed mechanism now ‘makes sense’ from the defendant’s perspective is not to the point: Achieve Goal §16(3).”

The same logic should be applicable to the plaintiff’s argument on “workability” of the Null and Void Clause.

40.  I will therefore answer the question of construction referred to in paragraph 1 of the Summons negatively: the Surety Bond executed by the defendant in favour of the plaintiff dated 1 February 2019 has become null and void by reason of the issuance of the Certificate of Practical Completion by LWK & Partners (HK) Limited on 23 December 2019.

41.  Mr Wong for the defendant suggested that the court should, upon answering the question of construction in favour of the defendant, make a consequential order that the plaintiff’s claim and the action should be dismissed with costs. Mr Lau did not query the appropriateness of this consequential order in his reply submissions.

ORDER

42.  By reasons of the aforesaid, I make an order that the plaintiff’s action be dismissed.

COSTS

43.  I make a costs order nisi that the plaintiff shall bear the defendant’s costs of the action (including the costs of the Summons with all costs reserved), with certificate for counsel.

44.  If any party wishes to vary the costs order nisi:

(1)  Such a party shall lodge and serve written submissions within 14 days hereof;

(2)  The other party shall lodge and serve written submissions within 14 days thereafter;

(3)  The applying party shall lodge and serve written submissions in reply within 7 days thereafter;

(4)  The application shall then be disposed of on papers.

45.  The above order nisi shall become absolute in the absence of application to vary within the first 14-day period mentioned above.

46.  The defendant’s costs of the action (including the costs of the Summons) shall be summarily assessed in lieu of taxation. Unless any application for variation of the aforesaid costs order nisi is made within time, the defendant shall lodge and serve its statement of costs within 7 days after the expiry of the first 14-day period mentioned above. The plaintiff shall lodge and serve its statement of objection within 7 days thereafter. Summary assessment of the defendant’s costs will be conducted on paper (no matter whether any statement of objection is lodged by the plaintiff within time) thereafter.

47.  The costs assessed shall be payable by the plaintiff within 14 days after assessment.

( H. Au-Yeung ) District Judge

Mr Lau Ka Kin, instructed by Haldanes, for the plaintiff

Mr Jonathan Wong, instructed by Deacons, for the defendant