Housing Authority v Bank of Baroda [2011] FJHC 447; Civil Action 348.2010 (17 August 2011)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

Civil Action No. 348 of 2010

BETWEEN:

HOUSING AUTHORITY a statutory body established by the Housing Authority (Cap. 267) having its registered office at Suva in the Republic of Fiji Islands.
PLAINTIFF

AND:

BANK OF BARODA a body corporate duly incorporated in India, having its Head Office at Mandvi, Baroda, India and duly registered in Fiji under Part X of the Companies Act and having its Head Office at 86-88 Marks Street, Suva, Fiji.
DEFENDANT

BEFORE: MASTER DEEPTHI AMARATUNGA
COUNSELS: Mr V Maharaj of MC LAWYERS for Respondent Applicant
Ms Devan S. of NEEL SHIVAM LAWYERS for Applicant Defendant
Mr Vulaono A. of SIWATIBAU & SLOAN for Proposed Third Party

Date of Hearing: 8th August, 2011
Date of Ruling: 17th August, 2011

RULING

1. INTRODUCTION
   

1. This is the summons seeking leave to issue third party notice in terms of Order 16 rule 1 of High Court Rules of 1988. The action is filed by the Plaintiff against the Bank of Baroda, who were the parties to a performance bond. The proposed third party is the contractor who was engaged to perform certain constructions for which the said performance bond was obtained. The Defendant sought third party notice against the said contractor. Plaintiff as well as the proposed third party objected to the said summons. Plaintiff state that their action is based on the performance bond and the proposed third party was not a party to their claim. The issue is whether in terms of Order 16 rule 1 the proposed third party can be added to the action before the court.
   

2. LAW AND ANALYSIS
   

2. Order 16 rule 1 of the High Court Rules of 1988 states as follows:
   

"1(1) Where in any action a defendant who has given notice of intention to defend:

1. Claims against a person not already a party to the action any contribution or indemnity; or
   
2. Claims against such a person any relief or remedy relating to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff; or
   

100. Requires that any question or issue relating to or connected with the original subject-matter or the action should be determined not only as between the plaintiff and the defendant but also as between either or both of them and a person not already a party to the action;
     

Then, subject to paragraph (2), the defendant may issue a notice in Form No 9 in Appendix [1], (in this Order referred to as a third party notice), containing a statement of the nature of the claim made against him and, as the case may be, either of the nature and grounds of the claim made by him or of the question or issue required to be determined.

(2). A defendant to an action may not issue a third party notice without the leave of the Court unless the action was begun by writ and he issues the notice before serving his defence on the plaintiff.

(3) Where a third party notice is served on the person against whom it is issued, he shall as from the time of service be a party to the action (in this Order referred to as a this party) with the same rights in respect of his defence against any claim made against him in the notice and otherwise as if he had been duly sued in the ordinary way by the defendant by whom the notice is issued."

3. The affidavit in support of this application seeking third party notice states as follows:

1. In the 17 of February 2009, the Bank executed a Performance Bond by way of a deed in favour of the Plaintiff securing the performance of a building contract by Bulileka Hire Services Limited (Proposed third party);
   
2. The Performance Bond related to a residential housing building project at Wainibuku, which was to be built by Bulileka Hire as the building contractors under the said project for the Plaintiff;
   

100. The Plaintiff on 30 December 2009, filed the current proceedings by way of Writ of Summons in respect of the said Performance Bond claiming that the bank is liable to pay a sum of $670,119.30 to the Plaintiff in respect of damages that the Plaintiff has allegedly suffered as a result of Bulileka Hire not performing its obligation under the building contract and for alleged breaches of the said building contract;
     

4. The Bank has denied liability on the basis that the Performance Bond given by the Bank in favour of the Plaintiff has expired and no demand for payment pursuant to the bond was made or a request for extension of bond was received by the Plaintiff during the currency of the Performance Bond i.e. on or before May 9, 2010.
   

4. The said affidavit in support further stated that the Plaintiff's remedy now lies against Bulileka Hire for damages and loss it has suffered as a result of alleged contractual breach by Bulileka Hire and also stated the Bank is entitled to a claim for indemnity from Bulileka Hire in respect of the Plaintiff's claim.
   
5. In the affidavit of opposition filed by the proposed third party, it had stated that it had already filed a Writ against the plaintiff in respect of the building agreement, and had provided substantial security over the said performance bond to the Defendant worth over $1.5 million.
   
6. The said performance bond is attached to the affidavit in support of this application and the value of the bond is only $670,119.30 and the condition of the discharge of the bond are:
   
   1. The Contractor duly carries out and fulfills all the obligations imposes on the Contractor by the Contract Documents prior to the commencement of the Period of Defects Liability referred to in the Contract Document; or
      
   2. The Contractor satisfies and discharges the damages sustained by the Principal in respect of all defaults by the Contractor up to the commencement of the Period of Defects Liability or the termination of the Contract; or
      
   100. The Sureties satisfy and discharge up to the amount of the bond the damages sustained by the Principal in respect fall defaults by the Contractor up to the commencement of the Period of Defects Liability of the termination of the contract; or
        
   4. A Practical Completion certificate has been issued in respect of the Contract Works in accordance with clause 10.4 of the General Conditions of Contract.
      
7. The Plaintiff's claim against the Defendant is based on the Performance Bond issued by the Defendant in favour of the Plaintiff to the effect that the Defendant Bank will pay to the Plaintiff the $670,119.30 in the event the contractor (the proposed third party) fails to fulfill its obligations under the said building contract between the Plaintiff and the proposed third party, and it will discharge only under the circumstances that is stipulated in the Bond itself.
   
8. The Halsbury's Law of England (4th Edition) Vol 3(1) at p 213 (para 256) describe the Performance Bond as follows:
   

"By issuing a performance bond or performance guarantee as bank assumes obligation to a buyer or other beneficiary analogous to those assumed by a confirming bank to the seller under a documentary credit. A bank which give a performance guarantee must honour that guarantee according to its terms; it is not concerned in the least with the relation between the supplier and the customer; nor with the question whether the supplier has performed his default or not; and subject to the fraud exception, the bank must pay according to the guarantee on demand. If so, stipulated, without proof or conditions. A performance bond is virtually a promissory note payable on demand and certainly has much more of the characteristics of a promissory not than of a guarantee. The bank is simply concerned to see whether the event has happened upon which its obligation to pay arises.

Where a performance bond is payable on demand upon the occurrence of a specified event, the beneficiary's demand must state that the event has occurred."

9. In the case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 Lord Denning MR held:
   

"A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was clearly stated in Malas (trading as Hamzeh Malas & Sons) v British Imex Industries Ltd[1]. Jenkins LJ .giving the judgment of this court, said:

'..it seems to be plain that the opening of a confirmed letter of credit constitutes bargain between the banker and the vendor of the goods, which imposes on the banker an absolute obligation to pay, irrespective of any dispute which there may be between the parties on the question whether the goods are up to contract or not . An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of the character, and in my judgment, it would be wrong for this curt in the present case to interfere with that established practice.'

10. To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. The most illuminating case is of Sztejn v J Henry Schroder Banking Corp which was heard in the New York Supreme Court in 1941. After citing many cases Shientag J said this:
    

'It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade.'

11. He said that in that particular case it was different because –
    

'... on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller'

12. That case shows that there is the exception to the strict rule; the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstance when there is no right to payment
    
13. The above decision is clear as to the law relating to letters of credit in the international trade. The creation of such instruments were done in order to ease the complicated issues in a dispute relating to commerce and to guarantee the payment, without waiting for the resolution of the dispute between the parties as to contract terms and their compliance. So, the strict compliance is needed, without resorting to auxiliary issues and the whole purpose of the creation of such instrument is the smooth functioning of commerce and the due payment of money without a delay. The only exception in such a situation is the 'fraud'.
    
14. In the said case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 it was held that legal principles relating to letters of credit is applicable to performance bonds and had equated for a promissory note Lord Denning at p 983 said:
    

"So, as one takes instance after instance, these performance guarantees are virtually promissory notes payable on demand. "

" ..... The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice." (emphasis is added)

15. In this case the Plaintiff is seeking to implement the performance bond against the Defendant bank and there is no allegation of fraud in this case and the exception does not apply and the proposed third party should not be brought to this action, as there is no cause of action against the proposed third party in the writ of summons filed by the Plaintiff. The claim is against the Defendant bank on the performance bond and even in the bank's defence there is no claim against the proposed third party, but states that the said bond was expired at the time the demand was made. In such as situation there will not be a need for third party in terms of Order 16 rule 1 of High Court Rules of 1988.
    
16. Lord Denning in the said judgment further stated that '...This possibility is so real that the English supplier, if he is wise, will take it into account when quoting his price for the contract.' That was a case where performance bond was executed in relation to goods supplied to Libyan government agency. So, when a performance bond is executed it is the obligation of the bank to pay, in terms of the bond, upon the happening of the event that is described in the bond, unless there is a fraud that was brought to the notice of the Bank. The bank has to take adequate measures as to security, cash or otherwise, or obtain a suitable indemnity against such payments, before entering in to such performance bonds. In this case the proposed third party alleges that more than adequate security has been provided to the Bank on the said performance bond. These facts have not been denied by the Defendant.
    

100. CONCLUSION

17. The Defendant did not indicate under which category in Order 16 rule 1 that the proposed third party should be issued notices. It is clear that the plaintiff's claim is based on the performance bond and the defence alleged in the statement of defence is that demand was not made within the valid time period of the said performance bond. So, it is clear that in terms of Order 16 rule 1 the proposed third party notice could not be issued and legally the issue relating to performance bond, in the absence of allegation of fraud, has to be decided only between the two parties to the said performance bond. The summons for the issue of third party notice is struck out and considering that the established legal principles are against the request of the Defendant and considering the delay and expenses; a cost of $500 each against the Defendant is awarded to the Plaintiff, and for the proposed third party, assessed summarily.
    

The Court orders as follows:

1. The summons for third party notice is struck off;
   
2. The Defendant is ordered to pay cost of $500 each to Plaintiff and the proposed third party.
   

Dated at Suva this 17th day of August, 2011.

Mr D. Amaratunga
Acting Master of the High Court
Suva

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^[1] [1958] 1 All ER 262 at 263, [1958] 2 QB 127 at 129