Press Summary (English) Press Summary (Chinese) FACV No 22 of 2012 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO 22 OF 2012 (CIVIL) (ON APPEAL FROM CACV NO 83 OF 2011) Between : Mr Justice Chan PJ, Acting CJ: 1. For the reasons given by Mr Justice Tang PJ in his judgment, I would allow the defendant’s appeal and restore the judgment of Mr Justice Au dismissing the plaintiff’s claim on the main contract and its claim for an indemnity. For the reasons given by Mr Justice Ribeiro PJ in his judgment, I would dismiss the defendant’s counterclaim and set aside Mr Justice Au’s decision in respect thereof. Mr Justice Ribeiro PJ: 2. I am in respectful agreement with Mr Justice Tang PJ’s judgment in favour of allowing the appeal and setting aside the Court of Appeal’s judgment on the main contractual claim and the claim for an indemnity. I would restore the judgment of Mr Justice Au to that extent. 3. In this judgment, I address Au J’s judgment in favour of the defendant on the counterclaim. For the reasons which follow, I have respectfully reached the conclusion that that judgment must be set aside. 4. I also wish to make certain observations about the lack of pleadings in this case. The counterclaim 5. Where a person is appointed agent and incurs expenses on behalf of his principal in the execution of his authority, one would expect him, in a commercial transaction, to be reimbursed for those expenses. One would not normally expect an agent to be out of pocket in respect of expenses incurred for his principal’s benefit. Where the agency is contractual, a right to reimbursement is generally implied.[1] The parties may of course provide expressly for how expenses and reimbursement are to be dealt with, stipulating, for instance, that they are to be absorbed by the agent as part of his contractual remuneration[2] or that they should be reimbursed from specified sources or according to a specified payment schedule. In construing such contractual provisions, the commercial context of an agent having incurred expenses on his principal’s behalf should be borne in mind. 6. In the present case, having rejected the plaintiff’s claim, Au J gave judgment for the defendant on its counterclaim in the sum of HK$3,151,824.00. That sum represented what the Judge found to be the amount by which the plaintiff had been overpaid under the Agreement dated 21 July 2000 (“the 21/7 Agreement”). 7. In pleading the counterclaim, the defendant alleged that it had paid to the plaintiff a total of HK$10,000,000.00 under the 21/7 Agreement; that since only 338,128 m3 of contaminated mud had been dumped pursuant to the first Dumping Permit, the plaintiff was entitled to payment of only HK$5,748,176.00; and that the plaintiff was therefore obliged to refund HK$4,251,824.00 to the defendant.[3] Au J therefore awarded a lesser sum than the amount claimed in the counterclaim. 8. Before examining the way in which Au J arrived at his award on the counterclaim, the relevant provisions of the 21/7 Agreement should be noted. The provisions relevant to the counterclaim 9. Under clause 1.1, the plaintiff was appointed: “To act on behalf of the [defendant], as Agent, in respect to all matters relating to the obtaining of Dumping Permits to dispose of contaminated mud and necessary permits for the [defendant’s] vessels to enter/operate, in China waters.” 10. The parties knew that securing the dumping permits would require fees to be paid to the State Oceanic Administration (in particular to its South China Sea Branch “SCSB”) and they made express provision for how such fees would be dealt with. Clauses 2.1, 2.3 and 2.9 made it clear that the plaintiff would make the actual fee payments to SCSB and provided for those payments to be included in the Dumping Fee of HK$17.00 per m3 of mud dumped. Clause 2.1 Dumping Fee : HK$17.00/m3 (Seventeen dollars) based on in-situ volume and inclusive of all expenses whatsoever incurred relating to the dumpling permit in mainland China. Clause 2.3 The Dumping Fee is inclusive of all costs and expenses whatsoever incurred in respect to obtaining the necessary approvals / permits and permissions in mainland China. Clause 2.9 The Agent shall be responsible for arranging the taking of samples of analysis by the State Oceanic Administration, the payment of all fees and expenses whatsoever incurred in respect to the obtaining of all necessary permits for the Contractor’s dumping operations and for liasing with all concerned parties including local people groups for the smooth progress of the Contractor’s operations. 11. Clause 2.6, which was significantly amended by the Addendum,[4] is important. As amended, it materially states as follows: Clause 2.6 Payment Schedule The first Dumping permit shall be for a quantity of 1,000,000 m3 of contaminated mud, equivalent to a Dumping Fee of HK$17,000,000.00 which shall be paid as follows : - a. First Payment, Within five (5) working days of the Contractor receiving the official Dumping Permit. The Contractor will deposit HK$8,000,000.00 (eight million dollars) directly to the Agents bank account, from this payment, HK$7,000,000.00 (seven million dollars) will be paid immediately to State Oceanic Administration Bureau, the remaining HK$1,000,000.00 (one million dollars) for the payment of Port charges at Zhuhai. b. Second Payment, Within one (1) working day of the Contractor receiving the official vessel license. The Contractor will deposit HK$2,000,000.00 (two million dollars) directly to the Agents bank account, this payment shall be for the procurement of the Performance Guarantee Bond, which shall be effective for the whole period of dumping operation, in the same amount. c. Third Payment, balance of HK$7,000,000.00 (Seven million dollars) will be paid upon the quantity of dumping having reached 60% (600,000m3) of the Permit total. Upon receipt of this payment the Agent shall immediately effect and secure a Performance Guarantee Bond in favour of the Contractor in the amount of HK$1,000,000.00 (one million dollars).[5] 12. Clause 2.4 stipulates that “the first Dumping Permit under clause 2.6 hereof ... shall be obtained within the week commencing 24 July 2000”. The Addendum did not change that provision. Au J’s findings 13. His Lordship found that it was common ground that the defendant had “only dumped 338,128 m3 at the SEZ site and that the defendant had “effectively paid the Plaintiff approximately HK$10,000,000.00 under the contract for various purposes”, stating in a footnote that out of that amount, HK$8,900,000.00 had been paid to the [plaintiff[6]] for obtaining the permits “as its entitlement under the contract”.[7] 14. The findings relevant to the operation of clause 2.6 are that: (a) On 31 July the defendant “paid the Plaintiff HK$8,000,000.00, out of which HK$7,000,000.00 was to be in turn paid to SCSB by the Plaintiff for the 1st Dumping Permit, and the remaining HK$1,000,000.00 to the Zhuhai port authority to obtain the necessary port clearance certificate to enable named vessels to carry the contaminated mud through the port into the Mainland waters to the ESZ Site.”[8] (b) “On 21 August 2000, pursuant to the 21/7 Agreement, the Defendant remitted to the Plaintiff's bank account HK$2,000,000.00 for the purpose of enabling the Plaintiff to secure a performance bond.”[9] (c) “.... on 27 September 2000, the Defendant paid the Plaintiff a total sum of HK$900,000.00, out of which HK$500,000.00 was intended for payment for application for renewal of the port permits, and HK$400,000.00 was to be further paid over to Wing Yiu by the Plaintiff ...”[10] 15. Plainly, the amounts in (a) and (b) were paid pursuant to clause 2.6a and clause 2.6b as amended by the Addendum respectively. For present purposes, we can ignore the HK$2,000,000.00 payment since it was applied to provide a performance bond and stands on a different footing. 16. It is not entirely clear how the Judge arrived at his figure of HK$8,900,000.00, but it would appear likely that it consists of the HK$8,000,000.00 sum paid under clause 2.6a plus the HK$900,000.00 referred to above in paragraph (c). However that HK$900,000.00 amount appears to have been dealt with by Au J as a separate sum paid out over and above the HK$8,900,000.00 sum which he declined to award to the defendant.[11] It is unnecessary for present purposes to resolve the apparent inconsistency and I will proceed on the basis that the payment which is relevant to the counterclaim was made by the defendant to the plaintiff in the sum of HK$8,900,000.00. 17. The Judge arrived at his award without any discussion of the abovementioned contractual provisions and apparently simply accepted that an overpayment had been made.[12] It is unclear what, if any, submissions were made on the plaintiff’s behalf. How the counterclaim award was arrived at 18. What emerges from the above is that the Judge awarded the defendant the sum of HK$3,151,824.00 as an amount overpaid by the defendant on the following footing: (a) Since only 338,128 m3 of mud was dumped pursuant to the first Dumping Permit, the plaintiff was entitled to be paid HK$5,748,176.00 (338,128 m3 at the rate of HK$17.00 per m3). (b) Since, the plaintiff had already been paid Dumping Fees of HK$8,900,000.00, it had been paid more than the HK$5,748,176.00 it was entitled to. (c) So the plaintiff was liable under the counterclaim to refund the over-payment of HK$3,151,824.00. Construction of clause 2.6 19. Whether the counterclaim award is well-founded depends on the true construction of clause 2.6 and in particular, whether it was intended that sums paid in accordance with its terms should be refundable as found by the Judge. In other words, was the sum of HK$8,000,000.00 (or, on the Judge’s finding, HK$8,900,000.00) paid by the defendant to the plaintiff on 31 July 2000 and on-paid by the plaintiff to SCSB and the Zhuhai port authority refundable on the ground that a lesser entitlement to Dumping Fees had arisen when calculated according to the agreed unit price?[13] 20. It is only if on the true construction of clause 2.6, those monies are refundable that the defendant would be entitled to assert that it has overpaid the plaintiff. If, properly construed, those sums are not refundable once paid, no question of overpayment arises. 21. In my judgment for the reasons which follow, the sums are not refundable and the counterclaim should have been dismissed. 22. As we have seen, by clauses 2.1, 2.3 and 2.9, the agreement was that the fees that had to be incurred in obtaining the necessary permits would be included within the Dumping Fees payable to the plaintiff. Clause 2.6 is plainly intended to provide the mechanism for this to be implemented. The following features of clause 2.6 are important : (a) It provides for the payment of Dumping Fees to the plaintiff, it having been agreed that the payments made by the plaintiff to obtain the permits would be covered by such Dumping Fees. (b) The clause 2.6 mechanism does not require the plaintiff to pay the permit fees “up front” out of its own pocket and then seek reimbursement out of Dumping Fees. This is consistent with clause 2.9 which makes it clear that the plaintiff was responsible only for “arranging ... the payment of all fees and expenses whatsoever incurred in respect of the obtaining of all necessary permits for the Contractor’s dumping operations”. It recognizes that the permits are for the defendant’s operations and does not say that the plaintiff is to fund those payments. (c) Accordingly, under clause 2.6, the parties agreed that the defendant would provide the plaintiff with the funds necessary to pay those fees, and the plaintiff accepted the obligation “immediately” to make the onward payments to the Chinese authorities once it was put in funds. Both parties therefore agreed that the money was not being paid to the plaintiff for its own economic benefit but paid to it for immediate onward transmission in order to obtain the necessary permits on the defendant’s behalf. (d) One can see why this may have been commercially attractive to both sides. It meant that the plaintiff did not have to find “up front” finance for the payments nor to take the risk of non-reimbursement. The defendant was assured that there would not be any delays while the plaintiff sought to raise finance and was credited with the amounts provided as sums to count as Dumping Fees which it had contracted to pay. (e) Nothing in clause 2.6 or anywhere else in the 21/7 Agreement suggests that those payments are refundable. Clause 2.6 says, without qualification, that the scheduled payments “shall be paid as follows”, and then sets out a schedule with time-limits within which the payments had to be made. (f) It would be commercially very odd that the parties should have intended the payments to be refundable by the plaintiff where they had stipulated that the plaintiff was required immediately to pay away the whole of the sums received in order to secure the necessary permits for the defendant’s benefit. One would expect refunds only to be demanded from a person who received and had the right to keep the money. If the parties had intended that the payments should nevertheless be refundable in particular circumstances, one would surely have expected those circumstances to be spelt out in the contract. 23. The commercial incongruity of the suggestion of refundability is magnified when one recognizes that the plaintiff not only duly applied the funds as required, but that, on 26 July, five days after the 21/7 Agreement was signed, it successfully obtained the first Dumping Permit which was stated to be for the exclusive use of Hyundai.[14] Six days later, on 1 August 2000, it obtained the Zhuhai port authority clearance certificate.[15] The plaintiff therefore fully performed the first (and only relevant) phase of its contractual obligations within less than a fortnight after the 21/7 Agreement was signed. 24. The defendant took the benefit of the permits so obtained and started its SEZ dumping operations on 2 August, the day after the clearance certificate was provided.[16] It continued to operate pursuant to those permits until its activities were stopped by environmental protests and EPD’s refusal of a loading permit for October 2000 – matters which obviously had nothing to do with the plaintiff. The environmental appeal process then took the defendant to the end of May 2001 when the Dumping at Sea Appeal Board ruled against it, and it was not until early September 2001 – over a year after the plaintiff had completed performance of its obligations – that the defendant gave up on the idea of dumping at the SEZ site. That was no doubt a decision taken by the defendant on commercial grounds and, as the Judge found, not the result of the dumping contract having been frustrated. 25. Given that course of events, it appears bizarre to suggest that the clock should be wound back and that the monies paid at the inception of the dumping project should be refunded even though the purpose of the payments had been achieved and exhausted, and their benefits obtained by the defendant. The Court should certainly demand some very clear provisions in the contract to entitle the defendant to a refund in such circumstances. No such provisions exist and the argument on construction, in my view, strongly supports a conclusion in favour of non-refundability. 26. For the foregoing reasons, I conclude that on the true construction of the contract, the sums paid to the plaintiff and applied by it in making onward payments were not refundable. I would therefore set aside Au J’s decision on the counterclaim and order the counterclaim to be dismissed. The lack of pleadings 27. We have been faced with the extraordinary situation of a plaintiff being allowed at trial to run two alternative unpleaded cases without being required even to formulate a proposed amendment setting out what exactly those alternatives are.[17] We face the even more extraordinary situation of the plaintiff proceeding on appeal on the basis of the alternatives still not pleaded by way of amendment – and succeeding on one of those alternatives. The position remained the same with nothing formulated in writing even when the case came on for hearing in this, the Court of Final Appeal. This has given rise to confusion and a real likelihood of procedural unfairness. 28. No doubt Au J decided to allow the alternatives to be run with such informality because he thought there was nothing in them and gave them short shrift. However, he might have been alerted to the unacceptable shortcomings of that approach when he identified some of the problems faced by the plaintiff in seeking to run those cases. 29. For example, he noted that while seeking to run the first alternative case which involved the proposition that there was a contractual obligation to pay by reference to “the entire amount of contaminated mud that was dredged from the CT9 project” (subject to a “bad weather” exception): “... as there is no evidence at trial as to what was the entire quantity of mud dredged from the CT9 project (understandably so, since this issue does not arise from the pleadings and at trial), Ms Cheng says if the Plaintiff could succeed on this, there should be a further direction for assessment of damages.”[18] 30. The fact that the plaintiff was unprepared to argue an essential aspect of its unpleaded alternative indicates just how unacceptable it was to allow this purported alternative to be run. A party must raise all the issues he wishes to raise to be dealt with at the trial. Parties are not entitled to have issues recently thought up dealt with separately and piecemeal. The other party is entitled to know from a clear pleading what is the entire case he has to meet so that he can decide whether particulars should be sought; how he should plead in response; what discovery he is entitled to; what evidence he should adduce to meet it; and what points of law should be taken. Notions like “the entire quantity of the mud dredged from the CT9 project” might be studded with arguable questions as to how such quantity should be ascertained dependent on the evidence. If there was room for exceptions regarding bad weather or anything else, the scope and effect of such exceptions could no doubt throw up factual and legal questions. 31. Where a late attempt is made to introduce a new case, it is doubly important that the other side should have a clearly pleaded draft amendment so that proper consideration can be given as to whether objections should properly be made to such amendment and whether an adjournment should be sought. 32. Au J stated that counsel for the defendant had not “clearly identified any specific prejudice that would have [been] caused to the defendant if [the alternative cases] are so allowed to be run” or shown “what evidence the defendant would have adduced had these alternative cases ... been specifically pleaded...” With respect, without having seen even a draft amendment such inability is not surprising. Indeed, the inability to be specific as to those matters itself constitutes prejudice. 33. When the case came on appeal before this Court, argument was frequently bedevilled by confusion as to the nature of the alternative cases contended for. There were times when the plaintiff’s argument drifted uncertainly, oscillating between what the Court had endeavoured to understand the two alternatives to be. There were gaps in the evidence that would no doubt have been considered if the case had been properly constituted. The response of counsel for the plaintiff that such gaps could be approached on the basis that “the point was not disputed” could not be accepted: How could one expect the other side to dispute, or to come ready with evidence to refute, a point that has not been pleaded or even formulated in draft? 34. Pleadings are not mere formalities. They impose a necessary discipline and are fundamental to enabling every procedural facet of the adversarial system to operate fairly. Mr Justice Tang PJ: Introduction 35. The appellant[19] was the principal contractor for the civil engineering works associated with construction of container terminal 9 (“CT9”). The work required dredging at the Rambler Channel which involved the removal of a large quantity of contaminated mud. According to the appellant’s tender documents, the estimated quantity of contaminated mud to be dredged was 6,823,030 m3, of which all but 0.5 million m3was intended to be dumped in Mainland waters. Dumping at sea in Hong Kong waters required the payment of a levy of HK$55.4 per m3. Dumping in Mainland waters was considerably less expensive. As the Chief Judge said[20] in his judgment in the Court of Appeal: “4. … It was the intention and expectation both of the employer[21] and of the principal contractor[22] that the bulk of the contaminated mud to be dredged would be dumped in an approved site to be found in Chinese waters. Prices for the contract were based on such an assumption.” 36. Dumping in Mainland waters required dumping permits from the Mainland’s State Oceanic Administration (“SOA”). There were meetings with officials from the South China Sea branch of SOA (“SCSB”) to explore the possibility of applying for dumping permits. On SCSB’s suggestion the appellant decided to engage an agent with experience in applying for dumping permits. In July 2000, the appellant appointed the respondent[23] in writing as its agent to apply for dumping permits from SCSB to enable contaminated mud dredged in connection with CT9 to be dumped at a dumping ground known as South Erzhou (“SEZ”). The contract between the respondent and the appellant is contained in several documents which will be discussed in detail below. 37. In late July 2000, the respondent obtained a dumping permit (the first dumping permit) for the dumping of 1,000,000 m3 of contaminated mud at SEZ. The first dumping permit covered 1,000,000 m3, because of large dumping levy which was payable up front to SCSB, it was decided that dumping permits should be applied for in stages. 38. Apart from dumping permits from the SCSB, a marine dumping permit (in this case an export permit) from the Director of Environmental Protection (“EPD”) under the Dumping at Sea Ordinance Cap 466 was also required for dumping in Mainland waters. In determining whether to issue a permit EPD was required to have regard to, inter alia, the need to protect the marine environment (s10). Export permits were issued on a monthly basis and were obtained by the appellant for the months of August and September 2000[24] for dumping at SEZ, as a result of which approximately 338,128 m³ of contaminated mud was dumped there under the first dumping permit. At the time it was the practice of EPD to issue export permits on the strength of SCSB dumping permits. It appeared that the respondent and the appellant proceeded on the basis that provided dumping permits were granted by SCSB, an export permit would be issued by the EPD as a matter of course. However, as a result of protests by Greenpeace (which included activists repeatedly boarding the appellant’s dredging barges to stop them from dredging and loading the contaminated mud), EPD no longer regarded SCSB dumping permits as sufficient evidence to prove that dumping would not cause unacceptable impact on marine environment, but would require evidence that the requirements of s10 of the Dumping at Sea Ordinance have been satisfied. After September 2000, no export permit was granted to the appellant for dumping in SEZ, and thereafter no dredged mud from CT9 was dumped at SEZ. 39. As a result this action was brought by the respondent. These proceedings concern the proper interpretation of the contractual documents. The respondent claimed that its contract with the appellant was a fixed sum contract and claimed damages for breach of contract on the basis that the respondent was entitled to be paid HK$17 per m3 on a quantity of 6,410,770 m3. The quantity of 6,410,770 m3was called the “total dump volume” in the re-amended statement of claim and represented the alleged in-situ volume at CT9. The learned trial judge (Au J) described this as the “Alleged Agreed Quantity Term” and said the case was put on the basis that it was an express or implied term of the contract “that the appellant agreed to dump the Alleged Agreed Quantity of the contaminated mud at SEZ site”. The respondent also claimed an indemnity in respect of contractual obligations to third parties which it had entered into.[25] 40. The appellant’s case was that it was a measurement contract and that the respondent was entitled to be paid HK$17 per m3 on the 338,128 m3 actually dumped at SEZ, namely, HK$5,748,176. Since it was agreed that the appellant had paid the respondent HK$10 million[26], the appellant counterclaimed the return of HK$4,251,824, the difference between HK$10 million and HK$5,748,176, para 9 re-amended defence and counterclaim. The appellant also claimed repayment of a sum of HK$900,000 paid for the extension of the first dumping permit which it alleged was never secured. This claim failed and we are not concerned with it. 41. In other words, although the parties agreed that the appellant was entitled to be paid at a rate of $17 per m3, they disagreed on whether the contract on its proper construction was a measurement contract or a fixed sum contract. The respondent’s primary pleaded case was that the appellant agreed to pay HK$17 per m3 based upon the in-situ volume of the contaminated mud which was said to be 6,410,770 m3.[27] However the respondent was also allowed to run 2 unpleaded cases in the alternative, which were recorded in Au J’s judgment. The first was that under the agreement[28] the appellant had agreed to engage the respondent to secure the right to dump the entire quantity of mud dredged from CT9 project. Although no quantity of contaminated mud had been fixed, the quantity relating to the right to dump was ascertainable and referable to the entire amount of contaminated mud that was dredged from the CT9 project subject to the bad weather exception. But because there was no evidence at trial as to what was the entire quantity of mud dredged, counsel for the respondent asked for a direction for assessment of damages. 42. The second alternative was that the respondent’s contractual duty under the dumping contract was to secure the right to dump (i.e. the dumping permits) for the appellant and it was entitled to receive HK$17 per m3 on the volume of the right to dump that it had secured for the appellant (as opposed to the actual dumped volume) under the said permits. Given that the respondent has successfully obtained the first dumping permit, the respondent was entitled to receive HK$17 million. Since the appellant had only paid HK$8.9 million, the respondent should be entitled to claim for the difference of HK$8.1 million. Court of Appeal 43. Au J dismissed all the claims. On appeal, the Court of Appeal agreed that the primary pleaded case as well as the second alternative case should be dismissed, but held in favour of the respondent on its indemnity claim as well as its first alternative case.[29] 44. On the first alternative case, the Chief Judge said: “59. All this leads me to the ultimate question in terms of liability in this case : when the dumping fee payable by the Defendant to the Plaintiff is expressed in the unit rate of HK$17 per m3, does it refer to the quantity to be dumped in Chinese waters, or does it refer to the quantity to be dredged in Hong Kong (to be verified by the employer with the Defendant) less the quantity dumped elsewhere under the type of limited circumstances described above? 60. In my view, on a true construction of the contractual documents, bearing firmly in mind the commercial purpose and context of this case, the answer must be that it is a reference to both, in the sense that the two are, in fact, in the peculiar circumstances of the present case, interchangeable and have been used by the parties interchangeably. In other words, the Defendant is contractually obliged to dump the dredged mud at the South Erzhou site, subject to the limited exceptions described. That accords fully with the intention and expectation of the parties when they entered into this dumping contract.” 45. The commercial purpose or context was identified at para 29 to 34 of the judgment, namely, that, at all material times, the parties had proceeded in the hope and expectation that the entire quantity of contaminated mud would be dumped in Mainland waters and that it was not commercially viable for the appellant to do otherwise. That the parties were able to agree on the unit price of HK$17 per m3 “because they had proceeded on an estimate that the entire volume of the contaminated mud ... would be in the region of 6.8 m3”. That was regarded as “a very important background fact”. 46. I believe undue weight was put on the fact that the unit rate of HK$17 m3 was fixed with the estimated quantity of mud to be dredged in mind. Unit rates are common in measurement contracts. One would respect that normally they would be fixed with an estimated amount of work in mind. That is why, for the mutual protection of the parties, some contracts provide for variation of the unit rate in the event that the actual volume falls significantly short of or greatly exceeds the estimate. 47. As for the commercial viability of dumping in Hong Kong, given that the tender was based on dumping in Mainland waters and the substantial difference in cost,[30] I have no doubt the parties had contracted in the hope and expectation that dumping could take place in Mainland waters because export permit would be issued on the strength of a SOA permit. 48. I believe, the failure of the parties to foresee the risk of EPD refusing to issue an export permit lies at the heart of this case. The fact that neither party foresaw the risk does not mean that there was no risk. Nor, is the answer, to the question how they would deal with the risk, obvious. Upon the materialization of the risk, one must ask, whether the parties had allocated the risk and if so, how. 49. The answer may be provided by a proper construction of the contract. But, if the contract was silent, one has to consider whether a term could be implied. Ms Cheng SC, for the respondent, did not rely on an implied term. But, it may be a useful exercise to consider why the known background or the context of the contract in this case would not support an implied term. Frankly, one cannot say what answer might have been given to an officious bystander who posed the prescient question. The appellant might say since the substantial cost of dumping in Hong Kong would fall on us we would not agree to pay for dumping not carried out in Mainland waters. Or the parties might decide to share the cost of what they perceived to be a small risk. Or they might agree to limit their exposure at any time to, say, only 1,000,000 m3. The evidence showed that SEZ could accommodate 8,000,000 m³, and that once it was used for CT9 it could not be used for contaminated mud from anywhere else. So the respondent might say to the appellant, you must commit to dump all the mud from CT9 or there would be no contract. The appellant might agree or they might suggest a compromise. Indeed, the appellant might retort and say it is true that SEZ has a capacity of 8,000,000 m³, but apart from the contaminated mud from CT9 where would you find contaminated mud to fill your site by someone who would need your service? Moreover, there were other people in the same field of business as the respondent. So the appellant might go elsewhere. What is almost certain is that the parties would have addressed the perceived risk in their contract. I believe had the risk been foreseen the parties would have addressed the risk in a businesslike manner. 50. I went through this exercise to show that we are really concerned with an unexpected risk which has materialised. The fact that the parties had hoped and expected that all of the contaminated mud from CT9 would be dumped in Mainland waters would not necessarily provide an answer to whether the parties had allocated such risks in their contract and if so how. 51. I turn to consider how much the known background or context will help in the construction of the contractual documents. The documents forming the contract 52. Two Chinese documents dated 14 July 2000. The translation of the first reads: “ Agreement on the Dumping of Dredged mud Hyundai-CCECC Joint Venture is the General Contractor of Container Terminal 9 Development of Hong Kong, and Sinoearn International Ltd. is the Subcontractor of Hyundai-CCECC Joint Venture. After friendly discussions, both parties have reached an agreement on cooperating in dumping the dredged mud from Container Terminal 9 Development to seawater at South Erzhou, Dangan, Wanshan, Zhuhai, China. Both parties have agreed on the following: I. The price is HK$17.00/m3, [on] the total quantity [which] is subject to the final quantity confirmed by the Owner of Container Terminal 9 Development to Hyundai-CCECC Joint Venture. II. Terms of payment and other provisions will be decided through further discussions.” 53. The second document was in all material respect the same save that it provided : “… Furthermore, both parties have decided to jointly apply to the South China Sea Branch, State Oceanic Administration for the permit for dumping dredged mud. Relevant details of constructionwill be decided through furtherdiscussions.” 54. It should be noted the respondent was not appointed the appellant’s agent by either of the 14/7 agreement. The first agreement spoke of co-operation and the second provided for a joint application. The respondent was also called sub-contractor. 55. The respondent was appointed agent by an agreement in English dated 21 July[31], which is set out in full below: “ HYUNDAI ENGINEERING & CONSTRUCTIONCO LTD AN AGREEMENT made the 21stday of July 2000BETWEENHyundai Engineering & Construction Co., Ltd whose registered office is at Room 3206,32/F, TheCenter, 99 Queens Road Central, Hong Kong (hereinafter called ‘the Contractor’) of the one part and Sinoearn International Ltd whose registered office is at 19/F., Xiu HuaCommercial Building, 211-213 Jaffe Road, Wanchai, Hong Kong. (hereinafter called ‘the Agent’) of the other part. After consultation, the two parties set forth the following Articles of Agreement, to which both party's shall adhere. NOW IT IS HEREBY AGREED as follows: 1.0 GENERAL The duties and performances of the Agent shall include but not necessarily be limited to the following. 1.1 To act on behalf of the Contractor, as Agent, in respect to all matters relating to the obtaining ofDumping Permits to dispose of contaminated mud and necessary permits for the Contractor’s vessels to enter/operate, in China waters. 1.2 To liaise and coordinate with all concerned Parties in China for smooth progress of the Contractor's operations. 2.0 PARTICULAR 2.1 Dumping Fee: HK$ 17.00/m3 (Seventeen dollars) based on in-situvolumeand inclusive of all expenses whatsoever incurred relating to the dumping permit in mainland China. 2.2 Dumping Area: The contaminated mud materials shall be deposited in and around the dumping area South of Er Zhou, as stipulated in the Dumping Permit. 2.3 The Dumping Fee is inclusive of all costs and expenses whatsoever incurred in respect to obtaining the necessary approvals / permits and permissions in mainland China. 2.4 The first Dumping Permit under clause 2.6 hereof from the relevant Authority in China (State Oceanic Administration), for the dumping of contaminated mud shall be obtained within the week commencing 24 July, 2000. 2.5 Quantity – The total dumping quantities is estimated to be in the region of 3,000,000m3, under this agreement actual quantities will be those finally disposed of at the China dumping area through this Contract. 2.6 Payment Schedule The first Dumping Permit shall be for a quantity of 1,000,000m3 of contaminated mud, equivalent to a Dumping Fee of HK$17,000,000.00 which shall be paid as follows: - a. First Payment, Within four (4) working days of the Contractor receiving the first official Dumping Permit, the Contractor will deposit HK$5,000,000.00 (five million dollars) directly to the Agents bank account for the procurement of the Performance Guarantee Bond. b. Second Payment, of HK$ 5,000,000.00 (five million dollars) will be paid to the Agent, in the presence of representatives from State Oceanic Administration, within three (3) working days of the Contractor receiving the Performance Guarantee Bond. c. Third Payment, balance of HK$ 7,000,000.00 (Seven million dollars) will be paid upon the quantity of dumping having reached 60% (600,000m3) of the Permit total. Subsequent Permits d. Three (3) Instalments shall be paid in advance for each Dumping Quantities of 1,000,000 m3 under the subsequent Dumping Permit as follows; 2.7 The measurement for interim volume shall beon the basis of the current factor applied by the relevant China Authority but in no case shall this exceed 70% ofvolume of mud-water mixture calculated by actual loaded “Barge Volume”. 2.8 The measurement of final volume shall be, based on the Bathymetric Survey data submitted by the Contractor to the Employer of the Project, calculated using the principle of Initial Survey less Final Survey less any other Survey quantities of contaminated mud dumped in other disposal areas. 2.9 The Agent shall be responsible for arranging the taking of samples for analysis by the State Oceanic Administration, thepayment of all fees and expenses whatsoever incurred in respect to the obtaining of all necessary permits for the Contractor’s dumping operations and for liasing with all concerned parties including local people groups for the smooth progress of the Contractor’s operations. 2.10 The Contractor shall allow two representatives of the Agent to be stationed in a container office, with electricity supply and telephone line, at the CT9 project site free of charge for the duration of the dumping operation for performance of the contract. 2.11 The Contractor undertakes to provide the Agent with details of vessels, information of dumping quantities and time schedules insofar as the same is required for the carrying out of the Contractor’s operations and shall assist the Agent and do such things or act as may be required by the China authority for the performance of this Agreement. 3.0 Performance Guarantee Bond - Pursuant to the period stated in Article 2.6a) above, the Agent shall provide to the Contractor, in wording to be agreed by the Contractor an irrevocable and unconditional Letter of Guarantee issued through a reputable bank in Hong Kong, for the sum of HK$ 5,000,000.00 (five million dollars). 4.0 Confidentiality - The matters in and surrounding this agreement shall be treated and remain as strictly private and confidential between the party’s. 5.0 The Agent shall not be regarded as committing a breach of this Agreement by reason of any change of law or policy of the Chinese Government.” 56. At trial, Au J held that the agreements of 14/7 were binding and enforceable and that they had not been superseded by the agreement of 21/7. The Court of Appeal said that the agreements of 14/7 had not been varied by the agreement of 21/7: “39. … There is no suggestion that the parties have by the 21/7 Agreement agreed to vary the terms already agreed in the 14/7 agreement. That is an important context to bear in mind when looking at the terms of the 21/7 Agreement, which must be construed together with that in 14/7 Agreement as a whole.” 57. I will adopt the same approach. 58. On what had been agreed in the 14/7 Agreement, the Chief Judge said: “35. … As for the first 14/7 Document, it sets out in clause 1 the all important unit rate of HK$17 per m3. But it does not stop there. Nor is it silent on the question of quantity. Clause 1 goes on to say that ‘the total quantity is subject to the final quantity confirmed by the Owner ...” 36. Pausing here, this clause makes sense and accords well with the important background facts that I have described. The parties have reached an agreement on the unit rate, expressed in terms of HK dollar per m3. The quantity is to be determined not by reference to the volume of mud to be dumped at the South Erzhou site as such, nor to the quantity of dredged mud to be transported by vessels and barges from Hong Kong to Chinese waters for dumping purposes. Rather, quantity is by reference to the amount of mud to be dredged, as to be verified by the owner of the CT9 project with the Defendant as principal contractor. Unless that amount, that is, the amount of mud to be dredged to be verified by the owner with the Defendant should bear a relationship to the amount of mud to be dumped at the site, for which purpose the dumping permission is to be obtained, and for which purpose the service of the Plaintiff is to be engaged and to be paid for, the reference does not make sense. 37. Taking one step further, unless it is the parties’ contractual intention that the mud to be dredged from the project (the quantity of which is to be verified by the owner) is to be dumped entirely at the site, the clause does not make commercial sense.” 59. I cannot read so much into clause 1[32]. I believe the reference to the final quantity being subject to confirmation by the owner, was concerned with measurement and not quantity. Since payment was at a rate of HK$17 per m3, it was natural to provide how it should be measured. We are concerned with the measurement of mud dredged from the seabed, and there are several possible stages during the dredging and dumping process that measurement could be made, for example: (a) in-situ before dredging (b) whilst in the barge (c) in-situ after dumping [33] 60. The 21/7 Agreement which supplied some of the details envisaged by clause 2 of the first 14/7 Agreement provides illumination. Clause 2.7 dealt with measurement for the purpose of interim payment. Clause 2.8 is important. It provided for the measurement of final volume[34], which: “ … shall be, based on the Bathymetric Survey data submitted by the [Appellant] to the Employer of the Project, calculated using the principle of Initial Survey less Final Survey less any other Survey quantities of contaminated mud dumped in other disposal areas.” There is no dispute that the “Initial Survey” and the “Final Survey” are carried out at the site of CT9 for submission to the “Employer of the Project”. 61. When clause 2.8 is read with clause 2.1, it is clear that the measurement for final payment under the 21/7 Agreement isbased on in-situ volume before dredging. I believe the provision in clause 1 that the total quantity is subject to the final quantity confirmed by the owner simply provided that the total quantity, whatever it might be, should be measured in the same way. So read, it makes good commercial sense. With respect, I am unable to agree with the interpretation put upon clause 1 by the Court of Appeal. 62. In essence, the effect of the judgment of the Court of Appeal is that the appellant was contractually bound to dump all contaminated mud subject to certain exceptions: Was there anything in any of the agreements which leads one to conclude that the appellant was contractually bound to dump all the contaminated mud from CT9 subject to the limited exceptions[35], such that the appellant would be liable to pay HK$17 per m3 on such volume whether or not they were actually dumped at SEZ. 63. I turn now to 21/7 Agreement with a view to ascertaining whether as a matter of construction when read alone or together with 14/7 Agreement the appellant had bound itself contractually to dump all the contaminated mud from CT9 at SEZ. 64. Clause 1.1 and 1.2 spelled out the duties of the agent. There was no corresponding statement of the obligations of the appellant to dump any amount of mud. As for clause 2.1, I am of the view that the reference to in-situ volume was also concerned with how volume should be measured and did not indicate that there was a contractual obligation to dump any particular amount of contaminated mud. 65. Clause 2.5 covered quantity “The total dumping quantities is estimated to be in the region of 3,000,000 m3, under this agreement actual quantities will be those finally disposed of at the China dumping area through this Contract.” There was no explanation acceptable to the judge from the respondent’s witnesses why the estimated quantity was stated to be in the region of 3,000,000 m3, instead of the known estimate for the total quantity of contaminated mud to be excavated. The learned trial judge regarded the fact that the estimate was given as 3,000,000 m3 to be inconsistent with the construction that the appellant had undertaken to dump all the contaminated mud from CT9 at SEZ. Likewise, that the actual quantity under the agreement should be “those finally disposed of at the China dumping area through this contract”. 66. Clause 2.6 contained the payment schedule. 2.6(a), (b) and (c) covered the first dumping permit. Subsequent permits were covered under 2.6(d) and provided that they should be paid for in advance in accordance with the payment schedule under 2.6(d). 67. Clause 2.8 which provided for final measurement which should be as measured “less any other Survey quantities of contaminated mud dumped in other disposal areas”. 68. Au J was of the view that clause 2.8 was also inconsistent with a construction which required all the mud from CT9 to be dumped at SEZ. Nor did he agree with the submission that “dumping at other disposal areas” only referred to dumping elsewhere in the event of bad weather. The learned judge also noted that neither 14/7 Agreements nor 21/7 Agreement referred to a bad weather exception.[36] 69. The Court of Appeal was of a different view and said: “58. … the reference to other disposal areas in clause 2.8 can easily be construed as a reference to the pre-contract dump as well as these odd bad weather occasions. This interpretation does not do an unacceptable violence to the language of clause 2.8 and, more importantly, it does not flout the commercial sense of the transaction. Equally importantly, this reading of clause 2.8 brings it into complete harmony with clause 1 in the first 14/7 Document, and clauses 2.1, 2.5 and 2.6(c) and (d) of 21/7 Agreement.” 70. The Court of Appeal regarded the words “dumped in other disposal areas” opened to two interpretations. One interpretation, the literal one, supported the appellant case namely that it was not bound to dump all the contaminated mud in SEZ. The other interpretation which the Court of Appeal preferred was that these words referred only to the limited circumstances under which contaminated mud might be dumped elsewhere. The exceptions were pre-contract dumping and bad weather. Since there were two possible constructions they rejected that which they regarded as contrary to business common sense. 71. With respect, I question whether the parties would have seen fit to provide expressly for pre-contract dumping. I rather think it would not have occurred to ordinary business people that such dumping would be covered by a later contract. As for the bad weather exception, the Court of Appeal said: “57. … there was evidence to the effect that after the making of the 14/7 Agreement, the parties did discuss the odd occasion when bad weather in Hong Kong or in South China Sea would prevent dumping operation at the South Erzhou site in which event the dredged mud would have to be dumped in Hong Kong waters.” We have not seen the evidence. It is not suggested that this discussion was the genesis of the provision in clause 2.8. This is slender basis to support the Court of Appeal’s conclusion. 72. Indeed, I do not believe the Court of Appeal based their conclusion on their construction of clause 2.8. Rather, it was their decision that since a literal construction would have flouted the commercial common sense of the transaction, they were entitled not to give a literal construction to clause 2.8. So, ultimately, their conclusion depended on their view of commercial common sense. Issue of Law 73. I turn to the issue of law involved in this appeal ,for which leave to appeal was given, namely, what is the role to be played by considerations of business common sense in determining what the parties meant. In fact, there was no disagreement on the law or the correct approach. 74. On the question of interpretation of commercial contracts. The Chief Judge said and I respectfully agree: “24. … Contracts are not made in a vacuum. In construing a contract, it is important to bear in mind, amongst other things, the context or setting in which a contract was made, and the purpose for which it was made. The test is invariably objective. 25. In relation to a commercial contract, as has been pointed out by Lord Wilberforce in the well known case of Reardon Smith Line Ltd v Hansen Tangen [1976] 1 WLR 989, 995H to 996A, it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.” 75. The purpose of the contract was clear. It was so that contaminated mud from CT9 could be dumped in SEZ. That, however, must not be conflated with a common intention that, even if dumping in Mainland waters did not take place, the appellant would be fully liable for the consequence. They could contract on that basis, whether they have done so, is to be gathered from their contractual documents. 76. With respect, the Chief Judge also correctly pointed out that in determining the meaning of the language of a commercial contract, the law generally favours a commercially sensible construction[37], Lord Clarke said: “… If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”[38] 77. But it is essential not to lose sight of the fact that: “… the Court’s task is to determine ‘what a reasonable person would have understood the parties to have meant by using the language which they did.’”[39] And that “… If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other...”[40] 78. As well as Neuberger LJ’s important reminder that[41]: “21. … the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations. At least between them, they have control over the words they use and what they agree, and in that respect the words of the written contract are different from the surrounding circumstances or commercial common sense which the parties cannot control, at least to the same extent.” 79. It is true that, in many respects, the contract which the respondent had entered into was disadvantageous to them as events turned out. In my view, that is the consequence of the failure to foresee the risk of no export permit from Hong Kong. I believe, had they perceived the risk, the respondent most assuredly would have contracted differently. But, as I have tried to explain, how differently, would be a matter of negotiation between the appellant and the respondent. Commercial common sense, like commercial purpose must not be seen through the eyes of only one party.[42] Seen from the eyes of the appellant, the conclusion that not only would they have to bear the higher costs of dumping in Hong Kong water, they also have to pay in full for dumping not carried out in Mainland waters, made little commercial common sense. In this case, I do not think commercial common sense provided an answer. With respect, there is no support in the language of the contractual documents for the Court of Appeal’s conclusion, language over which, as Lord Neuburger reminded us, they had control. There is no relevant commercial common sense which would enable the court to override the language used. It was a measurement contract. Counterclaim 80. I have had the advantage of reading Mr Justice Ribeiro PJ’s judgment in draft. I agree with in views on the counterclaim as well as his comments on the lack of pleadings. Indemnity 81. The Court of Appeal reversed the learned trial judge on the respondent’s claim for indemnity. The back-to-back contracts, in respect of which an indemnity was claimed, were predicated on the respondent’s contract being a fixed sum contract. Since it is my view that the contract was a measurement contract, such back-to-back contracts were not entered into in the execution of the respondent’s duty as the appellant’s agent. Ms Cheng did not contend otherwise. Disposition 82. For the above reasons, I would allow the appeal and restore the judgment of Au J, save that the counterclaim is dismissed. Mr Justice Mortimer NPJ: 83. For the reasons given by Mr Justice Tang PJ I would allow the defendant’s appeal and restore Au J’s judgment dismissing the plaintiff’s claim on the main contract and its claims for indemnity. However, for the reasons given by Mr Justice Ribeiro PJ I would dismiss the defendant’s counterclaim. 84. I also agree with Mr Justice Ribeiro PJ’s observations concerning the lack of pleadings on the alternative cases which the judge allowed to be argued. Claims must be made and answered in pleadings or injustice may be the result. Sir Thomas Gault NPJ: 85. For the reasons given by Mr Justice Tang PJ, I agree that the appeal should be allowed and the judgment of Au J restored on the main contractual claim and on the claim for an indemnity. On the counterclaim, I respectfully agree with the judgment of Mr Justice Ribeiro PJ I have read in draft. Mr Justice Chan, Acting CJ: 86. The Court unanimously allows the appeal to the extent that (i) the judgment of Au J dismissing the plaintiff’s claim on the main contract and on its claim for an indemnity be restored, but (ii) his decision giving judgment to the defendant on its counterclaim be set aside. Mr Charles Manzoni SC and Ms Elizabeth Cheung, instructed by Jones Day, for the appellant Ms Teresa Cheng SC and Mr Adrian Lai, instructed by C Y Tsang & Co,for the respondent [1] Bowstead & Reynolds on Agency, 19th ed, 7-056 to 7-058. [2] Ibid, 7-060. [3] Re-Amended Defence §9 and Counterclaim §16. [4] Which Au J unfortunately thought was not relevant: Judgment §42. [5] This payment was obviously never reached. This sub-clause requires no further mention. [6] Erroneously referred to as “the defendant” in the footnote. [7] Judgment §4. [8] Judgment §48(2). [9] Judgment §51. [10] Judgment §60. [11] Judgment §153. [12] Judgment §154. [13] Or, if the HK$8,900,000.00 comprises HK$8,000,000.00 paid under clause 26.a and the HK$900,000.00 paid to the plaintiff on 27 September 2000 and on-paid by the plaintiff to port authorities, and to Wing Yiu, whether those payments are refundable. [14] Au J §46. [15] Au J §49. [16] Au J §50. [17] Au J §§110-126. [18] Judgment §112. [19] A Joint Venture between Hyundai Engineering & Construction Co Ltd (Hyundai) and China Civil Engineering Construction Corporation (CCECC). [20] With the concurrence of Cheung and Yuen JJA [21] The consortium which owned CT9. [22] The appellant. [23] Sinoearn International Ltd, chosen from a short list. [24] Dumping commenced on 2 August 2000. Each permit was for 500,000 m3. [25] They were called back-to-back contracts and described in Au J para 45. [26] Of which HK$8 million was paid on 31.7.2000, HK$7 million of which was paid to SCSB for the first dumping permit, and HK$1 million paid to Zhuhai port authority for port clearance certificate to enable barges to bring the mud to SEZ. The respondent also gave the appellant credit for the $10 million received. [27] Paras 6 &16 of the re-amended statement of claim. [28] The same agreement on which the primary pleaded case was based. The essential contractual documents are discussed below. It seems the only difference between the primary pleaded case and the first alternative case, is that, the former alleged an exact quantity of 6,410,770 m3, whereas in the latter the quantity was “ascertainable and referable to the entire amount … dredged”. The re-amended statement of claim did not mention the bad weather exception so it may be that the bad weather exception was also a difference. [29] The Court of Appeal held that the respondent was entitled to the dumping fee in respect of the first dumping permit, namely, $17 million and regarded the fact that the appellant had not utilized it in full irrelevant. They awarded the respondent HK$8.1 million being the unpaid balance. No award was made in respect of subsequent dumping permits never applied for because of absence of evidence to enable an assessment of damages to be made. The court refused to permit separate assessment of damages. [30] The cost savings was HK$246m and according to Mr Manzoni that was approximately 6% of the main contract sum. [31] There were two addenda with which we are not concerned. [32] Para 52 above. [33] Mr Manzoni SC for the appellant explained: “There would be a significant variation in the measurement of the volume of mud at each of the three stages. This is because of the fact that when the mud is in-situ (i.e., lying on the seabed), it is under immense pressure, both from the hydrostatic pressure of the water and the surcharge from the overlying mud. As the mud is dredged and brought to the surface, it swells significantly due to a drop in the surrounding pressure. The volume of the contaminated mud in the barge will therefore be significantly greater than its in-situ volume before dredging. After it is dumped, the mud is once again brought under pressure and will undergo contraction, the extent of which will depend on the depth at which it is dumped.” [34] Mr Manzoni explained and I agree that it makes commercial sense to adopt a different method of measurement for the purpose of interim payment to avoid the costs and inconvenience of a precise measurement which is required for measurement of final volume. [35] Namely, pre-contract dumping and dumping due to bad weather. Para 60, Court of Appeal. [36] The learned judge did not refer to pre-contract dumping. It appears from the judgment of Au J that the argument about the bad weather exception was raised at paras 95-99 of Ms Cheng’s final submissions. [37] In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, per Lord Steyn at page 771. [38] In Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 at para 21. [39] Ribeiro PJ in Champion Concorde Ltd v Lau Koon Foo (2011) 14 HKCFAR 534. [40] Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd and others (1999) 2HKCFAR 279. [41] 		Skanska Rashleigh Weatherfoid Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732. [42] Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] 1QB 818 at 870G where May LJ said: “It is nonetheless important, in attributing a purpose to a commercial transaction, to be sure that it is the purpose of both parties and not just one. If the purpose of the transaction is seen through the eyes of one party only an unbalanced view of the transaction may result. Many contracts represent a compromise between what one party wishes to obtain and the other is willing to give.”