Hong Kong Construction Litigation

The following information is quoted or paraphrased from Vivian Ramsay, Construction Law Handbook, (2002) Thomas Telford at p.22:

"Whether the escrow or the trust approach is taken, problems can arise because the parties have failed to define with sufficient clarity the purpose for which the account has been set up. This is especially so where the arrangement is only agreed right at the end of the contract negotiations. In Bouygues SA and Herve Pomerleau International v Shanghai Links Executive Community Ltd [1998] 2 HKLRD 479, the employer was a [Chinese] company formed in P.R. China."

The Chinese company, Shanghai Pudong New Area Links Executive Community Ltd, was wholly owned by Shanghai Links Executive Community Ltd (Shanghai Links) and formed for the sole purpose of a billion dollar property development in East Shanghai. Shanghai Links was owned by Sealand Housing Corporation (60%) and a group of investors lead by Bankers Trust Company. The author goes on to say:

The Contractor did not want to prejudice its prospects of winning the contract by raising the question of security for payment at tender stage.

The employer had agreed with all bidders that it would pay a deposit on construction work of more than $11 million. Bouygues and Pomerleau (the Contractor) won the bid and were paid a cash deposit of more than $11 million, but contrary to the tender documents would not start work until a letter was agreed that Shanghai Links would put the balance of the $33.25 million in a segregated account in Hong Kong for payment of completed construction works. The construction contract stipulated that the work was to be certified as complete at the end of each month by an Independent Project Engineer, Associated Engineering of Canada. All construction was contracted to be completed by December of 1997.

A form of 'comfort letter' was agreed by Stikeman Elliotts Solicitors of Canada, who acted for Shanghai Links. However, Stikeman Elliott did not realize that Bouygues and Pomerleau would attempt to assert a Quistclose Trust after being terminated by Associated Engineering for having completed less than 10% of the construction contract in March of 1998, approximately 3 months after the agreed completion date.

The project tender stipulated that Bouygues and Pomerleau post a 'demand bond' to guarantee their performance. Bouygues and Pomerleau’s major sub-contractor, Siemens AG, acknowledged that it had completed 0% of its portion of the works on the day Associated Engineering terminated the Bouygues and Pomerleau contract in March 1998, again 3 months after the contracted completion date. Siemens paid out on its demand bond, acknowledging in writing that it had no choice in the circumstances.

AIG, who provided Bouygues and Pomerleau their demand bond, argued that the wording that had been stipulated in the Shanghai Links Executive Community construction tender documents had been changed with the tacit consent of Stikeman Elliott Solicitors, and was therefore no longer a demand bond, but instead a default bond which would only be paid if it could be proved in Court, after all appeals had been exhausted, that Bouygues and Pomerleau had failed to perform their contract.

It is worth noting that Laventhol Horwath were engaged as an independent expert to ascertain the extent of the damages caused by Bouygues and Pomerleau. Laventhol Horwath determined the direct costs of the Bouygues and Pomerleau contract failure was approximately $US16 million. They also determined that the indirect damages caused by the Bouygues and Pomerleau breach of contract was another $US29 million, for damages totalling $US45million. The report noted that under the FIDIC contract, damages would likely be punitive because of the "grossly negligent" nature of the Bouygues and Pomerleau contract failure. They reported that this should result in damages payable to Shanghai Links being multiplied by 4 for total damages of approximately $180 million, plus legal costs.

The conclusion reached by Laventhol Horwath was supported by a legal opinion written by the Hong Kong offices of the leading Australian law firm, Mallesons Stephens and Jacques. This was also the view of the Independent Project Engineer, Associated Engineering, and can be confirmed by writing to either Peter De Groot, or Kerri Rudd at Associated Engineering.

Vivian Ramsay (supra.) goes on to say that the Hong Kong High Court and the Hong Kong Court of Appeal, determined that the,

"letters were contractually binding but the obligation undertaken by the parent and the investors was limited to ensuring payment from the account of sums due for performing [contracted] work…"

In other words, because the contractor had failed to perform the contracted work, in breach of the contract, the Quistclose Trust which Bouygues and Pomerleau had attempted to create by perfidy, would not be enforceable for future payment of works that could no longer be performed because the contractor had been fired for breaching the construction contract and negligently performing its contractual obligations.

What is alluded to but is not made clear in the Vivian Ramsay textbook is that Bouygues and Pomerleau got an injunction over the money that was needed to complete the project; therefore Shanghai Links’ reserved cash was not available to complete the project until late summer of 1998. This required that money to complete the project be borrowed from the Chinese Joint Venture, Shanghai Huaxia Trip International Country Club Ltd; from suppliers in China and Canada; and from Sealand Housing Corporation (owned by B Hansen). This is a fact that is not well known, but which had a significant impact on the final cost and the relationship with the Chinese Joint Venture partner, Huaxia Tourism Development Corporation, a statutory corporation controlled by the Shanghai Pudong New Area Special Economic Zone Government.

It was also not known that Bouygues and Pomerleau collected on [arguably fraudulently] a ‘demand bond’ that they purchased from Government of Canada’s Export Development Corporation (EDC) which paid out whether Bouygues and Pomerleau successfully completed the work or not. Engineers from Associated Engineering travelled to Ottawa Canada to argue that the Canadian government should not reward Bouygues (a non-Canadian company) and Pomerleau (a Quebec company) for breaching their Shanghai Links construction contract. EDC indicated that their hands were tied insofar as they signed wording in a bond which required EDC pay out whether the contract was completed or not. In the end, Bouygues and Pomerleau made more money by breaching the contract than if they had done the work. If it had been disclosed that the General Contractor would make more money by breaching the contract than by completing the contract, the contract would never have been executed. It is arguable that this crosses the line to misleading and deceptive conduct.

It is arguable that all problems on the Shanghai Links project were caused by the Bouygues and Pomerleau contract failure.