Hong Kong court: form of demand all important for call on bond

In West Kowloon Cultural District Authority (WKCD) v AIG Insurance Hong Kong Limited, the Hong Kong Court of Appeal set aside the summary judgment that had been given in favour of WKCD at first instance.

In this case the invalid demand may not have been fatal for the employer as it seems that it had made new demands on the bond. However, if the bond had expired before such new demand was made, it would have been fatal and left the employer chasing the contractor who had following the termination gone into liquidation.

Resisting a bond call where the bond is on-demand is extremely difficult. Fraud is usually the only available ground on which to do so, and this is difficult to prove. However this judgment is a reminder that calling an on-demand bond is not only a serious step but must be done in strict compliance with the wording of the bond

Any sense of a recent judicial relaxed approach to demands that the “in substance” compliance test in IE Contractors Ltd v Lloyds Bank Plc and Rafidian Bank might suggest, have been put in sharp context by this case. The Court of Appeal stated that it was not necessary to even consider whether the “in substance” test or “strict compliance” test supported in Simic v New South Wales Land and Housing Corp should be applied to the demand. It would, however, appear that the court was in fact applying the strict compliance test in arriving at its decision.

The ruling

The case arose in conjunction with the construction of the M+ Museum, part of the huge West Kowloon Cultural District project in the Hong Kong Special Administrative Region (SAR). WKCD engaged Hsin Chong Construction Company Limited as the contractor in 2015 and the contract was terminated in August 2018 for alleged breaches of obligations by the contractor. WKCD moved quickly on the same day to make a call on the bond that had been provided as security for the contractor’s obligations.

There was no controversy about the nature of the bond. It was an “on-demand” bond in the sum of HK$297,198,000 capable of being called “upon demand made by the employer 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 employer by reason of the default, up to the bonded sum.”

The Court of Appeal agreed with the first instance judge as to the requirements of a valid call under the on-demand bond: the demand must be made by the employer in writing; the demand must state that, in the employer’s opinion, the contractor was or had been in default in respect of its obligations under the contract; and the amount stated in the demand was for the damages, losses, charges, costs or expenses suffered by the employer by reason of the contractor’s default.

The issue for the Court of Appeal was whether the bond satisfied the third requirement. That the first two requirements had been met was not in dispute.

WKCD requested AIG to pay the full amount of the bond of HK$297,198,000 on the grounds that, as stated in the bond, the contractor is and has been failing to perform its obligations under the contract, based on which the former has "suffered and sustained, and will continue to suffer and sustain, damages, losses, charges, costs and expenses".

The main attack on the form of the demand was that it purported to demand money in respect of damages that WKCD had not yet sustained.

It was accepted by WKCD that a demand under the bond could only be made for damages that had already been suffered. However, WKCD argued that the reference to future damages was “redundant and surplusage” and the reference in the demand to damages that had been suffered was sufficient.

The court rejected this argument based on the reasons that: the court would expect the drafter of a demand not to use redundant and surplusage words; the demand should be limited to damages that had already been suffered; and there was nothing before the court that would show that at the time of the demand there was reason to say that the quantified damages already suffered exceeded the amount of the bond requested.

Consequently, the demand was held to be invalid and the Court of Appeal allowed the appeal and set aside the summary judgment that had been given in favour of WKCD at first instance.