LIN LU LIN v. GREEN LIVING LTD AND ANOTHER

HCA 1845/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1845 OF 2004

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REASONS FOR JUDGMENT

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1.  By the Notice of Appeal dated 10 January 2005 the 2^nd defendant appealed against the order of Master Levy made on 28 December 2004 whereby she dismissed the 2^nd defendant’s summons to set aside the interlocutory judgment entered by the plaintiff against the 2^nd defendant.

2.  At the conclusion of the hearing of the appeal on 1^st February 2005 I dismissed the 2^nd defendant’s appeal with costs to the plaintiff.  I indicated at the time that I would give my reasons in writing later.  This I now do.

3.  The plaintiff’s claim against the 1^st defendant is for breach of an agreement to renovate House 25 at 26^th Street, Hong Lok Yuen, Tai Po in the New Territories (“the house”).  The 1^st defendant carries on the business of renovation and decoration works.  The 2^nd defendant is and was at all material time a director and the major shareholder of the 1^st defendant.

4.  The plaintiff’s case is that by an agreement in writing dated 6 September 2003 between the plaintiff and the 1^st defendant (‘the agreement”) the 1^st defendant agreed to do the renovations works for the house as described therein for the total price of $1,565,000.  It was agreed that the time for completion of the works would be 4 months namely, by 6 January 2004.

5.  On 7 April 2004 additional works were agreed to be carried out by the 1^st defendant for the further price of $241,995.

6.  Pursuant to the agreement the plaintiff made part payments for the renovation works totalling $1,200,000 from 18 September 2003 to 19 April 2004.  The plaintiff also made payments for the purchase of materials totalling $66,414.

7.  The 1^st defendant failed to complete the renovation works within 4 months from the date of the agreement or within a reasonable time from the date of the agreement.

8.  On 18 May 2004 the 2^nd defendant signed a Letter of Indemnity in favour of the plaintiff (“the Letter of Indemnity”) which provided as follows :

“

Our Company Green Living Limited was engaged in September 2003 to carry out the decoration work at the above premises and promised to finish the work before the end of February 2004, in the meantime (our Company) had received Hong Kong Dollars One Million Two Hundred Thousand Only as deposit.  However, due to the internal problem of our Company, only 30% of the decoration work had been carried out so far [about Hong Kong Dollars Six Hundred Thousand worth].  Now, I, Mr. Chu Kwok Hung Thomas hereby undertake to finish all the works before 30th June 2004.  If the works cannot be finished on the due date, I am willing to bear all responsibility.”

9.  Also on 18 May 2004 the 2^nd defendant signed a document acknowledging receipt of $150,000 from the plaintiff.  This provided as follows :

“	[The 2nd defendant] hereby acknowledges receipt of Hong Kong Dollars One Hundred and Fifty Thousand [HK$150,000.00] from [the plaintiff] on 18th May 2004 and shall finish the following works within 10 days :
	1.	to confirm the ordering of indoor furniture;
	2.	to finish the glass house work;
	3.	to finish the interior plaster work;
	4.	to finish the door frame and ceiling works.”

10.  It is common ground that the 1^st defendant did not complete the renovation works on or before 30 June 2004 the extended time for completion as set out in the Letter of Indemnity.

11.  By a letter dated 7 June 2004, the 2^nd defendant, representing the 1^st defendant, gave formal notice that the 1^st defendant was unable to complete the renovation works.  The letter provided as follows :

“	I, [the 2nd defendant] representing [the 1st defendant] hereby give formal notice to the owner of [the house], Ms. Lin Lu Lin on 5th June 2004 that our company are unable to finish the decoration work of [the house] and notify the owner to handle the remaining works herself.”

12.  The plaintiff’s claim against the 2^nd defendant is for damages for breach of the Letter of Indemnity.

13.  The Writ of Summons endorsed with the Statement of Claim was issued against both the 1^st and 2^nd defendants on 10 August 2004.

The Judgment

14.  As no notice of intention to defend was given by the 2^nd defendant the plaintiff entered interlocutory judgment against him on 9 September 2004 for damages to be assessed and costs to be taxed (“the judgment”).

15.  On 27 September 2004 the 1^st defendant filed and served its defence and counterclaim.

16.  On 28 September 2004 the 2^nd defendant’s solicitors filed a notice to act and a summons to set aside the judgment under Order 13, rule 9 RHC. 

17.  On 28 December 2004 Master Levy dismissed the 2^nd defendant’s summons with costs to the plaintiff. 

18.  At the hearing of the appeal, Mr. Lam, for the 2^nd defendant, accepted that the judgment entered against the 2^nd defendant was a regular judgment.  That being so, in order to set aside the regular judgment the 2^nd defendant must show that he has a defence on the merits with a real prospect of success.

The Defences

19.  Mr. Lam submitted that the 2^nd defendant had 4 defences :

(1)	Absence of consideration for the Letter of Indemnity;
(2)	The condition under which the Letter of Indemnity was given no longer existed as there were additional terms which were agreed;
(3)	Before signing the letter dated 7 June 2004, the plaintiff told the 2nd defendant that if the contract was terminated there would be no further claim by the other party; the plaintiff is therefore estopped from claiming against the 2nd defendant;
(4)	As the liability of the 2nd defendant is the liability of a guarantor, it is undesirable to enter judgment against the 2nd defendant before the question of the liability of the 1st defendant is determined.

I shall deal with each of these alleged defences in turn.

Defence (1)

20.  There is no dispute that $150,000 was paid by the plaintiff on 18 May 2004 the date when the Letter of Indemnity was signed by the 2^nd defendant.  The Letter of Indemnity made it plain that the 2^nd defendant was personally undertaking to finish all the works before 30 June 2004 and if the works could not be finished on the due date then he was willing to bear all responsibilities.  As clearly stated in the Letter of Indemnity, the 2^nd defendant accepted that only 30% of the renovation works had been carried out by that date. 

21.  I would observe that there is also the evidence of the surveyor’s report dated 19 July 2004 prepared by Oriental Loss Adjusters Limited which shows that as of 17 June 2004, the date of the survey, the value of the renovation works actually carried out at the house was only $424,150. 

22.  It seems to me that there was consideration for the Letter of Indemnity.  It is not disputed that a further $150,000 was paid by the plaintiff on 18 May 2004.  The fact that there was an extension of time granted until 30 June 2004 and that a further payment in the sum of $150,000 was made by the plaintiff provided ample consideration for the Letter of Indemnity. 

23.  Mr. Lam made the point that in the Letter of Indemnity there is no mention of any consideration there.  I am unable to accept that it is necessary to specify in the document itself what the consideration was.  What matters is whether or not there was consideration for the Letter of Indemnity.  There was clearly consideration for the Letter of Indemnity.  This defence is not a meritorious defence with a real prospect of success.

Defence (2)

24.  Mr. Lam submitted that the defendants agreed to complete the renovation works by 30 June 2004 on condition that there would be no further additional items of works to be carried out.  He submitted that in fact there were additional works which were agreed to be carried out.  That being so, the condition on which the Letter of Indemnity was given no longer existed and the plaintiff could not sue on the same.

25.  As Mr. Vaughn, for the plaintiff, rightly submitted, the Letter of Indemnity does not set out the alleged condition.  Be that as it may, it is disputed by the plaintiff. 

26.  The allegation made by the 2^nd defendant is set out at para. 8 of his 1^st affirmation as follows :

“	In any event, I confirm that on about 25th May 2004, the Plaintiff further requested for further items and the 1st Defendant agreed to the further items but the time and price would have to be adjusted.  The Plaintiff agreed and the 1st Defendant then made the order on the tiles.”

27.  I would also observe that para. 12 of the 1^st defendant’s defence and counterclaim pleads :

“	Later on about 25th May 2004, the Plaintiff requested for a number of additional items/works in particular the following items/works :
	1.	laying of tiles on the walls of all 3 rooms in the basement of the [house];
	2.	certain modification of the external wall of the [house].”

28.  There is no merit in the submission by Mr. Lam that the plaintiff has not disputed this allegation.  Para. 12 of the 1^st defendant’s defence and counterclaim has clearly been denied by the plaintiff in her reply and defence to counterclaim and the matter is clearly in dispute. 

29.  However, the assertion that a number of additional items were agreed is vague and largely unparticularised.  The only particulars given are those as set out at para. 12 of the 1^st defendant’s defence and counterclaim namely, laying of tiles on the walls of all 3 rooms in the house and certain modification of the external wall of the house.  The alleged modificationof the external wall of the house remains wholly unparticularised.  These are bare assertions of the 2^nd defendant with no documentary evidence in support.  The assertion at para. 8 of the 2^nd defendant’s first affirmation that tiles were ordered is not supported by any documentary evidence.  This is a bare assertion unsupported by any documentary evidence.   

30.  In any event, it seems to me that what is significant is the 2^nd defendant’s assertion at para. 8 of his first affirmation that “the time and price would have to be adjusted”.  He does not assert that this was ever agreed.  That being so, it seems to me that on his assertions this remained merely an agreement to agree as there was no agreement reached on the material terms as to price and time for completion of the works.  Mr. Lam submitted that the agreement was varied but this is untenable as there was no certainty on the material terms of price and time for completion.  The alleged variation is vague and uncertain.  The assertions do not support any enforceable variation of the agreed extended time for completion which was 30 June 2004. 

31.  In my view, this defence raised is also unmeritorious with no real prospect of success.

Defence (3)

32.  Mr. Lam submitted that it was orally agreed between the plaintiff and the defendants that after termination of the agreement the parties would have no further claims against each other and the plaintiff is therefore estopped from claiming against the 2^nd defendant. 

33.  Mr. Vaughn rightly submitted that this plea of estoppel has not been pleaded in the 1^st defendant’s defence and counterclaim or in the draft defence of the 2^nd defendant. 

34.  The 2^nd defendant states in paras. 11 to 13 of his first affirmation as follows :

“	On the 7th June 2004, the Plaintiff asked me to come to the premises to negotiate and I went there with my colleague Mr. Chung at about 3 p.m.
	When we arrived there, I saw that the Plaintiff, her husband and an unknown male who appeared to be scaring (sic).  The Plaintiff and her husband told me that we (Green Living) had to terminate the works and to take away all the tools and belongings in a fierce and hostile manner.
	They further told me that the agreement would then be so terminated and each party would have no further claims against each other and they asked me to sign on a pre-typed document to confirm the same and on the understanding that each party would have no further claim against the other and in view of the deteriorated relationship, although I did not totally agree to the contents of the document by them, I signed on it to accept their proposal/offer of terminating all the agreements between the parties.”

35.  Although Mr. Lam no longer relied on the allegation that the 2^nd defendant had been forced to sign the letter of 7 June 2004 terminating the agreement, the 2^nd defendant said that he signed it on the understanding that each party would have no further claim against the other.  There is no mention at all of this important term in the letter and no reason is advanced as to its omission.  It is inconceivable that such an important term would be left out of the letter if indeed this had been agreed.

36.  Be that as it may, this assertion is, in my view, unbelievable.  The 2^nd defendant has himself acknowledged in the letter of 7 June 2004 that only 30% of the renovation works were completed as of 7 June 2004.  The surveyor’s report shows that as of 17 June 2004 renovation works only to the value of $424,150 were completed.  By that date the plaintiff had paid the sum of $1,416,414 ($1,200,000 + $66,414 + $150,000) to the 1^st defendant.  It is inconceivable that the plaintiff would agree not to make any claim under the agreement or the Letter of Indemnity on the termination of the agreement on 7 June 2004.  In my view this defence raised is also unmeritorious and has no real prospect of success. 

Defence (4)

37.  Mr. Lam submitted that as a guarantor, the 2^nd defendant’s liability depends on the liability of the 1^st defendant and before the liability of the 1^st defendant is established it cannot be said that the 2^nddefendant is liable.  He submitted that if the judgment is not set aside and if it should be found that the 1^st defendant was not in breach of the agreement then there would be two conflicting judgments in the same action. 

38.  I would observe that this defence was not originally raised by the 2^nd defendant but was only raised in written submissions to the Master after she had asked for assistance from Counsel. 

39.  I am unable to accept Mr. Lam’s submissions.

40.  Mr. Vaughan rightly submitted that there is nothing to prevent a creditor from pursuing an action against the guarantor alone without even suing the principal debtor.  The creditor can if he wishes bring an action against the guarantor alone.

41.  It is important to bear in mind that in respect of an application to set aside a default judgment there is no determination of issues but simply an exercise of discretion whether to set aside a judgment entered by default.  In Mullen v Conoco Ltd [1997] 3 WLR 1032 Hobhouse LJ said at page 1044 :

“	However, in my judgment, what occurs on an application under R.S.C., Ord. 13, r. 9 is not a determination of issues but merely an exercise of a discretion and the decision whether or not to grant a discretionary procedural remedy.  It is not of the same character as Order 14 proceedings.  A successful application for summary judgment under Order 14 has to establish and confirm the plaintiff’s cause of action and the absence of any defence to that claim. Therefore, Order 14 does require, before judgment can be entered, a determination of the merits of the case and the existence of causes of action if the application for summary judgment is to be successful.
	In contrast if the application for summary judgment is refused, no issue is decided at that stage.  Similarly, in respect of an application under R.S.C., Ord. 13, r. 9 there is no determination of issues.  There is simply an exercise of discretion and, therefore, it is not a decision which gives rise to res judicata properly as so called.  It may determine certain matters.  It will have to determine whether or not the judgment was a regular judgment.  In that respect, it can give rise to a res judicata.  In respect of the exercise of discretion, it does not do so.”

42.  Thus it is clear that there is no determination of issues in respect of an application to set aside under O.13, r. 9.  That being so, there is no question of there being two inconsistent judgments if the 1^st defendant should succeed at trial. 

43.  I would also observe that the judgment entered against the 2^nd defendant is an interlocutory judgment for damages to be assessed.  The question of damages is at large and the plaintiff will still have to prove damages at the hearing of the assessment.  The fact that there is the judgment entered against the 2^nd defendant does not prevent the 2^nd defendant from disputing and challenging all items of damages.

44.  This defence raised is also unmeritorious and does not have a real prospect of success.

Conclusion

45.  In my judgment, the Master rightly dismissed the 2^nd defendant’s application to set aside the judgment.  As the 2^nd defendant failed to establish a defence with a real prospect of success, I dismissed the appeal with costs to the plaintiff.