In the recent case of Hoyden Holdings Ltd v CMB Wing Lung Insurance Company Ltd, DCCJ 1729/2021, the court had to determine a question of construction in relation to a Surety Bond. Deacons acted for the Defendant, the Surety. The Court found in the Defendant’s favour, holding that the Surety Bond had become null and void, by reason of the issuance of the Certificate of Practical Completion by the Architect of the Main Contractor.
According to the Decision of the Court, the dispute arose from a construction project in relation to which the Employer had engaged a Sub-Contractor, for among other things, the design, supply and installation of curtain walls.
By virtue of a Warranty the Sub-Contractor warranted to the Employer that it would “carry out complete and maintain the Sub-Contract Works” and would exercise reasonable skill and care in the design and selection of materials. The Sub-Contractor also provided the Employer with a Surety Bond (for the value up to HK$2,993,000), which was executed by the Defendant as the Surety.
The Main Contractor served a Notice of Default on the Sub-Contractor and terminated the Sub-Contractor’s employment, by virtue of a Notice of Determination. The Sub-contractor subsequently went into voluntary liquidation.
The Certificate of Practical Completion was issued by the Architect to the Main Contract (i.e. the contract between the Employer and Main Contractor). The Employer, through its solicitors, demanded payment from the Defendant pursuant to the Surety Bond.
The Employer subsequently commenced this action and claimed against the Defendant for $2,993,000, on the basis that the Employer had to pay the Main Contractor more than $8 million as the costs of curtain wall remedial works.
The Surety Bond
The question before court was whether the Surety Bond remained valid, despite the issuance of the Certificate of Practical Completion by the Architect to the Main Contract, which hinged 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.”
In Court, thesecond paragraph of the Surety Bond was referred to as the “Null and Void Clause”.
The court said that in considering the effect of the Null and Void Clause in the Surety Bond it had to start from the basic principles on the construction of contracts. It decided that the Null and Void Clause should be interpreted in the way suggested by the Defendant and held that:
- There was no ambiguity. The “Certificate for Practical Completion” referred to in the Null and Void Clause was 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 was that once the Certificate was issued, that would be the cut-off time for the Employer to lodge any claim pursuant to the Surety Bond.
- Agreements such as Surety Bonds must be strictly construed.
- Although the court should bear in mind the commercial purpose of the Surety Bond when interpreting its terms, at the same time, it should not undervalue the importance of the language of the Null and Void Clause. Hence, the Plaintiff’s argument that the words “Certificate for Practical Completion” in the Null and Void Clause could 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, was rejected.
- The words “Certificate for Practical Completion” in the Null and Void Clause were simply not qualified as such. To accept the Plaintiff’s interpretation, would involve reading words into the Surety Bond which were not there in the first place. Furthermore, the “Certificate of Practical Completion” in the Null and Void Clause meant a Certificate issued by the Architect to the Main Contractor. The court’s attention had 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.
- While the Court accepted that the “Certificate of Practical Completion” was 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.
- The Court should not “bend backwards” so as to assist the Plaintiff in achieving its purpose of requiring the Surety to pay, but should adopt a “balanced view” and give effect to the contractual bargain which the parties had struck.
For further information, please contact:
KK Cheung, Partner, Deacons