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West Kowloon Cultural District Authority v AIG Insurance Hong Kong Limited  HKCFI 569, concerned a bond obtained by the contractor, Hsin Chong Construction Company Limited (Hsin Chong), from the Defendant, AIG Insurance Hong Kong Ltd (AIG), in favour of the Plaintiff, West Kowloon Cultural District Authority (West Kowloon), as required under a construction contract. The Court rejected AIG’s argument that demands upon the bond were invalid because they did not comply with the terms of the bond. It also rejected its argument that demands on the bond were made in bad faith.
By General Conditions of Contract for Building and Civil Engineering Works (Contract), West Kowloon engaged Hsin Chong as contractor for a project.
Clause 14(1) of the Contract required Hsin Chong to obtain and provide to West Kowloon a bond in its favour from a bank or other financial institution, valid until completion of the works. Hsin Chong procured AIG to issue to West Kowloon a Form of Contractor’s Bond for HK$297,198,000 (Bonded Sum).
Clause 2 of the Bond provided that “If, in [West Kowloon’s] opinion, [Hsin Chong] is or has been in default in respect of any if its obligations under the Contact, [AIG] shall upon demand made by [West Kowloon] in writing and without conditions or proof of the said default or amount demanded, pay the amount identified in the demand in respect of the damages, losses, charges, costs or expenses sustained by [West Kowloon] by reason of the default, up to the amount of the Bonded Sum” (emphasis added).
West Kowloon issued a formal notice to Hsin Chong under the Contract advising that it was terminating its employment under the Contract on the basis that a default had occurred because Hsin Chong had become insolvent. It also delivered a letter to AIG demanding payment of the Bonded Sum (1st Demand) followed by two chasers (2nd Demand and Final Demand), which AIG failed to comply with. The relevant part of the 1st Demand stated:
“We refer to the above bond issued to 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”.
Applications before the Court
West Kowloon applied for summary judgment against AIG on the basis that it had made a valid demand on the Bond. AIG applied to strike out the action on the ground that the demand letters relied upon by West Kowloon did not constitute valid demands upon the Bond as:
They did not identify the amount of damages, losses, charges, costs or expenses sustained by West Kowloon by reason of Hsin Chong’s alleged default; and
They purported to demand payment of the full Bond sum in respect of an unidentified amount of future or prospective damages etc, which were not within the terms of the Bond.
Type of Bond
The Court said that the first issue was to determine the true construction of the bond to ascertain whether it was a “single bond” (i.e. a simple demand bond payable on demand or upon whatever additional evidence the bond itself may specify, usually called a “demand bond”) or a “double or conditional bond” (i.e. consisting of two parts, first the obligation and secondly the condition, usually called a “default bond”).
The Court said that the wording of the Bond in this case pointed to it being a demand bond.
Issues before the Court
The issues before the Court were:
Whether the demands complied with the terms of the Bond when they did not identify the amount of damages sustained by reason of Hsin Chong’s default and referred to future damages, losses etc. AIG’s case was that the demands were non-compliant and therefore invalid (Formality Issue).
Whether the demands were made fraudulently in that West Kowloon could not have formed a bona fide opinion that Hsin Chong was insolvent and therefore in default, or that by reason of such default the Plaintiff had sustained damages, losses etc of or exceeding HK$297,198,000. AIG argued that the demands were fraudulent and should not be enforced (Fraud Issue).
The Court held that the 1st Demand complied with the requirements of Clause 2 of the Bond. It held:
The Court was not satisfied that West Kowloon’s Demands were made in bad faith. It held:
This judgment is a good reminder of the importance of the wording used in bonds and also in demands for calls upon them. It also confirms the Court’s approach that as long as the demand states in substance what is required in the bond and is understood by its recipient as such, the demand will be treated as valid. As the Court said, being hypercritical of the wording of a demand and an overzealous insistence of strict compliance will only serve to undermine the certainty and reliability of demand bonds and should be rigorously resisted.
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