REDLAND CONCRETE LTD. v. HING LEE CONSTRUCTION CO. LTD. AND ANOTHER

1998, No. A8140

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 8140 OF 1998

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REASONS FOR JUDGMENT

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Introduction

1. On 22 April, 1998, the Plaintiff herein issued High Court Action No. 6319 of 1998 ("the Earlier Action") against the two defendants herein. On 20 May, 1998, the Plaintiff issued this action against the same two defendants.

2. The contents of the Statement of Claim in the Earlier Action were the same in substance as the one in this action save that:-

3. In both actions, the Plaintiff's cause of action against the 1st Defendant ("D1") was based on an agreement evidenced by or contained in a Quotation No. 97-1422 dated 4 July, 1997. The cause of action against the 2nd Defendant ("D2") was based on a Deed of Guarantee dated 2 December, 1997("the Guarantee"). It was alleged that D1 was liable to the Plaintiff for the price of goods sold and delivered whereas D2 was liable for D1's debt under the Guarantee. Default Judgment has been entered against D1 in this action (the same appears to be the case in the Earlier Action). It seems that D1 is now in liquidation. Since the issues before me did not involve D1, I do not propose to deal with D1's position further here.

4. The legal representatives for the respective parties in both actions are the same. Prior to 20 May, 1998 (when the Writ herein was issued), D2's solicitors have been communicating with the Plaintiff's solicitors. In particular, on 12 May 1998, the Plaintiff's solicitors wrote to defence solicitors in effect giving a 48-hour notice pursuant to R.H.C. Ord. 19 r. 8A. The reply given by defence solicitors is set out below since this was a document relied upon by Mr. Shum (for the Plaintiff):-

5. It was not entirely clear (since no evidence was produced in this connection) but it was probable that time extension was given (either by consent or by court order(s)) for the filing and service of a defence. On 15 June, 1998, D2's solicitors filed a defence in the Earlier Action for D2. Unknown to D2's solicitors,

6. In his affirmation filed in support of the applications for setting aside the Default Judgment and the service of the statutory demand, D2 stated he and his family had moved from the address where the Plaintiff attempted to serve him by inserting into the letter box thereat in early March, 1998. He exhibited the document from the removal company to support this statement. Mr. Shum did not concede this to be true but did not submit further on this point. I consider he was correct in doing so because the Plaintiff has not adduced any evidence to rebut D2's statement. For the purpose of the hearing before me, I found that D2 had moved from the said address in early March, 1998.

7. D2 further stated he did not learn of the bankruptcy proceedings until December, 1998. Similarly, this was not contradicted by the Plaintiff's evidence. I also found that D2 only learnt of the bankruptcy proceedings (and therefore the Default Judgment) since that time.

8. D2 complained that it should have been apparent to the Plaintiff before the purported service of the Writ on him that he had already left the address in question. The Plaintiff responded by saying that D2 had still used that address in a lot of documents even after D2 had left there. I do not consider fruitful to engage in such kind of fault-finding exercise. The matter can be sufficiently dealt with on sound legal principles which will be set out below.

9. There is one matter which I must mention. The Plaintiff's solicitors have chosen, for reasons best known to themselves, not to notify D2's solicitors about this action. This is an unusual case where two actions were commenced based on exactly the same causes of action as well as the same agreements. D2 has through his solicitors indicated that the Earlier Action would be defended. In these circumstances, it must be obvious to any right-thinking solicitor that D2 and his solicitors would take the same position in relation to this action. Under such circumstances, there was no valid reason for not notifying D2's solicitors, or sending a copy of the Writ to them.

10. Mr. Shum did not enthusiastically defend this failure on part of his solicitors (I doubt if he would be able to). He merely said that there was no legal requirement to do so. While that may be true, common sense and fairness requires litigants (and more so their lawyers) to act with candour and openness. If they fail to, the courts should condemn such failure. I regard what the Plaintiff's solicitors had done here as very akin to sharp practice, if not sharp practice indeed.

11. Mr. Shum also relied on the defence solicitors' said letter of 13 May, 1999 as leading his solicitors to believe the defence solicitors had no instruction to act for D2. I do not agree at all. All that that letter said was D1 was about to be wound up. When it was said therein "We have ... no specific instructions to deal with this matter", the words "this matter" must refer to the winding up of D1 and nothing else.

12. Against the background set out above, D2 applied to:-

13. At the end of the hearing on 17 June, 1999, the following orders were made:-

Brief reasons were given then and I indicated full reasons would be given later. These are the reasons.

Application to Set Aside Default Judgment

14. There were three issues between the parties relating to this part of the application:-

15. Points (a) and (b) will be considered under one heading and point (c) will be consider under a separate heading.

(1) Was the Default Judgment Regular?

16. Quite some time of the parties' submissions was spent on whether the Default Judgment was a "regular" one. In order to determine this question, it is useful to examine the relevant authorities first before applying them to the facts of this case.

17. Most of these authorities were related to service of originating process other than by way of personal service. Under the Hong Kong R.H.C. Ord. 10 r. 1(2), service can also be effected by registered post or by inserting through the letter box.

18. The first of these authorities was Honour Finance Co. Ltd. v. Chui Mei-mei [1989] 2 H.K.L.R. 146. There the writ was sent by post to the defendant's last known address but she had in fact left it earlier and was unaware of the writ. The Master set aside a default judgment there on the ground of "irregular service" and the appeal to the Judge was dismissed. On the plaintiff's appeal to the Court of Appeal, counsel for the defendant "elected to address no argument to the court or to seek to uphold the dismissal". The following passages appeared in the judgment of the Court of Appeal:-

19. The emphasis of the Court of Appeal in Honour Finance was apparently placed on the "delivery" of the originating process rather than "notice" of that.

20. In the English Court of Appeal decision of Forward v. West Sussex County Council [1995] 1 W.L.R. 1469, the holding in the headnote read:-

The reasons for such holding can be found in the following passages:-

After summarizing the parties' argument, the Court of Appeal continued:-

The Court of Appeal declared at the end of the judgment "that the writ has not been duly served on the fourth defendant" (at p. 1477F). Thus, the court agreed with the Defendant's argument therein that "The real test was one of notice not delivery".

21. The Forward decision has been applied in Hong Kong in:-

Further, there were two Hong Kong Court of Appeal decisions subsequent to the Honour Finance case which discussed when service was good and whether a default judgment should be set aside "as of right": Fok Chun Hung v. Lo Yuk Shi [1995] 2 H.K.C. 648 andPo Kwong Marble v. Wah Yee Decoration [1996] 4 H.K.C. 157.

22. The Desirable International case concerned a writ sent by registered post at a time when the defendant was not in Hong Kong. The writ was not returned to the plaintiff's solicitors who obtained default judgment and subsequently a garnishee order. Mr. Justice Waung held that the judgment was no doubt entered irregularly on two grounds: it was entered for too much and service of the writ was purportedly effected when the defendant was not in Hong Kong. As to the latter ground, the learned Judge observed that Ord. 10 r. 1(2)(a) required inter alia "a defendant within jurisdiction" at the time of service (relying on Barclays Bank v. Hahn [1989] 2 All E.R. 398). The decisions in Honour Finance and Fok Chung Hung were distinguished..

23. The most recent Hong Kong Court of Appeal referred to herein was the Chu Kam Lun case. There the Court of Appeal said:-

24. It appears since the decisions in Desirable International and Chu Kam Lun, the Hong Kong courts also shared the view expressed in the Forward case that whether service of an originating process was good should not be decided by "delivery" but by "notice". It also seems clear that the Court of Appeal in Chu Kam Lun also considered whether a judgment was regular depends on whether service was good.

25. However, Mr. Shum argued that there is a difference between (a) service of process at a time when the defendant was outside jurisdiction and (b) service of process by the alternative modes which the defendant can show was ineffective to notify him of the process. In the former case, the defect was one of jurisdiction, that is, the defendant's absence prevents Ord. 10 r. 1(2) from being properly invoked. In the latter case, however, the service was good because, at the time when the plaintiff effected service, everything under Ord. 10 r. 1(2) has been complied with. What the defendant was able to show subsequently only rebuts the presumption of notice created by the alternative modes of service. I agree with Ms. Vee's submissions that Mr. Shum's argument was in effect reiterating what the plaintiff in the Forward case had argued: see Forward at p. 1475 (cited above). This was rejected by the court in the Forward case. I also rejected it.

26. Relying on the court's observations in the Fok Chun Hung case, Mr. Shum further argued that the Default Judgment entered herein was a regular one. In the Fok case, the writ was served by post which turned out to be unsuccessful. After default judgment was obtained, the posted writ was returned to the plaintiff's solicitors. It can only be inferred from these facts that the defendant did not have notice of the writ until later. Despite that, the plaintiff did not apply for setting aside the judgment (pursuant to Ord. 13 r. 7(3)) but proceeded to obtain a charging order. The passages relied on by Mr. Shum were:-

27. Mr. Shum submitted the Court of Appeal decided the default judgment in Fok Chun Hung was regular and this decision was binding on me. This is because the Plaintiff herein also had no reason to believe service of process was unsuccessful at the time of obtaining default judgment.

28. I should point out that the Forward case was not referred to by the court in the Fok Chun Hung case. The Fok case was heard in February, 1995 and the judgment in Forward was officially reported only in November, 1995. The difficulty which I faced, however, was that the reasoning in Fok Chun Hung did not appear to have been doubted or changed in the subsequent cases even though it has been referred to. Ms. Vee agreed that I am bound by the decision in Fok Chun Hung.

29. Applying the Forward case, I would have concluded that the Default Judgment was an irregular one. While I am bound by the Fok Chun Hung case, it was stated therein:-

30. In the factual circumstances of this case (set out above), I find that the Default Judgment falls within the type described by the court in Fok Chun Hung cited in the paragraph immediately above. For this reason, it was set aside unconditionally.

(2) Merits of the Defence

31. I have concluded at the hearing on 17 June, 1999 that it could be set aside without regard to the merits of D2's defence, following what was said in Fok Chung Hung at p. 653B-I and Po Kwong Marble at pp. 161A-C and 161I-62B, and taking into account the facts of this case, including the conduct of the Plaintiff's solicitors.

32. The question of whether the merits of the defence need to be considered when an irregular judgment (or, as in this case, one which is in substance irregular) is to be set aside was extensively explored in the Desirable International case. In the course of his judgment, Waung, J. said:-

He then traced the authorities starting from the Honour Finance case and observed that there was a somewhat confusing state of the law in Hong Kong regarding this area. He then referred to the Fok Chung Hung case and continued:-

33. The question was touched upon by the Court of Appeal in the more recent decision in Chu Kam Lun:-

34. It appears there are arguments supportive of the approach which the court appeared to have adopted in Faircharm: the time and expenses of the courts and litigants should not be wasted to allow hopeless defence to be put up or to persist. On the other hand, there are arguments supportive of the so-called "Absolute Right Principle": litigants should be encouraged by the law to be scrupulous and abide by the rules of practice and procedure. If the courts were to say that merits of the defence will invariably be examined, plaintiffs may be encouraged (in extreme cases) to employ foul play to obtain default judgments.

35. The court is exercising a discretion in deciding whether to set aside a default judgment (including an irregular one). I do not consider that either of the two approaches sufficiently meets the potentially indefinitely variable factual circumstances of each case, or that the courts should be bound to adopt either of these approaches. Litigants can usually expect the courts to set aside irregular judgments without going into the merits of the defence. However, this does not mean the courts cannot in exceptional cases consider other matters including the question of merits. I consider this approach to be consistent with what Waung J. meant when in Desirable International he referred to the "Limited Right Principle" and what Sears J. meant in Po Kwong Marble when he referred to the court's "residual discretion".

36. In the circumstances of this case, I consider that the Plaintiff's solicitors' failure to notify D2's solicitors of this action to be a factor which tips the balance in D2's favour. Having so concluded, there is no need for me to deal with the question of merits of defence. However, if I needed to do so, I would have found that D2 has a good defence to the Plaintiff's claim relating to economic duress.

37. The law is not without difficulties regarding the test to be adopted in determining what defence is sufficient to justify setting aside a default judgment.

38. In Hong Kong this point seems to have been stated authoritatively in Premier Fashion Wears Ltd. v. Li Hing Chung [1994] 1 H.K.C. 213. The Court of Appeal said:-

39. In Day v. Royal automobile Club Motoring Services Ltd., The Times, 24 November, 1998, the English Court of Appeal said:-

40. A reason underlining the Court of Appeal's concern was that:-

This observation applies most aptly to cases where the outcome of the case depends on credibility and each side's affidavit is as credible standing on its own as the other side's. A literal application of the "real prospect of success" test would almost invariably lead to a refusal to set aside the judgment because in such a case, since the court cannot properly conclude whether to believe the plaintiff or defendant, the defendant cannot be said to have shown a defence with a real prospect of success.

41. It could be that there was no real difference between the test propounded in the Day case and that in Premier Fashion apart from semantics. The language used in the two cases however was sufficiently different for it to be arguable that the Hong Kong court intended a different test should be applicable. This is particularly so when the Hong Kong Court of Appeal stated in effect that the hurdle for the defendant is higher in a setting aside application than in a summary judgment application.

42. I am bound by the Hong Kong Court of Appeal decision. For present purposes, I will determine the merits of the defence assuming that a higher hurdle must be surmounted by D2. D2 stated on oath that he was under the economic duress of the Plaintiff when he signed the Guarantee. The Plaintiff tried to refute this by showing that the document had been sent to D2 for some time before he signed it. While it may be true that D2 had the document from about 27 November, 1997 to about 2 December, 1997, there is nothing inherently implausible that D2 was under duress during this period. The contemporaneous documents could not assist me to decide on credibility. Further, the Plaintiff's affirmation in opposition was made by a Mr. Chan Kin Ho who described himself as its Credit Controller. Although Mr. Chan asserted he was responsible for dealing with D2 (at paragraph 6 of his affirmation), he kept on stating that he was "informed by the Plaintiff and he believed" in nearly all the matters addressed by him therein in answer to the points raised in D2's affirmation. I found it rather unusual that Mr. Chan appeared to keep a distance between himself and these matters in his affirmation and considered this to be in D2's favour.

Application to Set Aside Service of Statutory Demand

43. Mr. Shum accepted that once I set aside the Default Judgment, it follows that the service of the statutory demand must also be set aside.

44. There is however one matter about the affirmation filed by the Plaintiff's solicitors to prove service of the statutory demand which I must mention. It is common ground that in this affirmation, the Plaintiff's solicitors did not inform the court that D2 was represented by a firm of solicitors in the Earlier Action and that the causes of action in the Earlier Action are exactly the same as those in this action.

45. Mr. Shum argued that there was no need for his solicitors to do so because the affirmation was sufficient if it contains all the ingredients expressly required under Rule 49 of the Bankruptcy Rules, Cap. 6. I do not agree. First, Rule 46(2) requires: "The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor's attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected". This rule expressly stipulates that the debtor's attention is of paramount importance. Further, I consider that the statutory demand should be served (because it was reasonable to do so) on D2's solicitors (who were actively defending the Earlier Action by that time) in order to satisfy the requirements of Rule 46(2).

46. Further, Rule 49(5) states "If [the statutory demand was not served personally on or acknowledged in writing by the debtor], the affidavit [proving service] must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand, and must [give the various required particulars set out therein] ... ". Rule 49(6) is important and it states "The steps of which particulars are given for the purposes of paragraph 5(a) must be such as would have sufficed to justify an order for substituted service of a petition". Lastly, Rule 49(9) states "The court may decline to file the petition if not satisfied that the creditor has discharged the obligation imposed on him by rule 46(2)".

47. Mr. Shum further argued that the court was performing an administrative act under Rule 49 and could not refuse the affirmation provided it contains all the ingredients expressly required thereunder. Again I do not agree. The provisions in Rules 49(6) and 49(9) show that the court has a discretion in this matter (which must be exercised judicially). In this connection, The Supreme Court Practice 1999, Vol. 1, para. 65/4/2 stated that the court is exercising a wide discretion in deciding whether to direct substituted service (which is relevant to Rule 49(6)). Further, one only has to examine The Supreme Court Practice 1999, Vol. 1, para. 65/4/9 to see the usual steps required by the courts before such an order can be obtained.

48. Quite apart from the statutory provisions, general principles show that a party must act with candour and openness, that is, make full and frank disclosure, whenever an ex parte application (or an application having that character) is made. I regret to say that the Plaintiff's solicitors have fallen far short of that duty to make full and frank disclosure. I would have set aside the service of the statutory demand for this reason alone if necessary.

Petition for D2's Bankruptcy

49. Mr. Shum also accepted that once the Default Judgment and service of the statutory demand are set aside, the Petition must be dismissed.

Costs of the Application to Set Aside Default Judgment

50. After hearing parties' submissions on costs of the setting aside application, I ordered that:-

51. In the course of his submissions, Mr. Shum asked me to follow the costs order made in Fok Chun Hung. The Court of Appeal was critical of the plaintiff solicitors' conduct in that case but ordered the defendant's costs of the application and the charging order and costs of the appeal to be costs in the cause. As stated above, the Fok Chun Hung case was decided without reference to the Forward case. If it were decided now, it is quite probable the Court of Appeal might have made some different costs orders. However, it seems that although the Court of Appeal did not find the default judgment to be "irregular" in term, that judgment was very much regarded as "irregular" in substance. Nevertheless, defendant's costs were still ordered to be in the cause. While I did not consider that I am bound by such costs order, it seems important that some consistent approach ought to be maintained. For this reason, I considered it appropriate to order the costs of the summons prior to and including the date of filing and service of D2's affirmation in support to be in the cause. However, as regards those costs after that date, I found that there was no reason to depart from the usual rule that costs should follow the event.

52. Having reviewed the Fok Chun Hung case again after the hearing, the actual costs order made therein was "the defendant's costs be in the cause" and not simply "cost be in the cause". I understand that the formal order has not been drawn up or perfected yet. The court retains a general power to reconsider and amend judgments and orders before that happens: The Supreme Court Practice 1999, para. 20/11/9 (principle (6)) and 42/1/27. The order relating to costs of the setting aside application up to and including 29 January, 1999 should be D2's costs in the cause instead.

53. Mr. Shum also argued that costs should be in the cause because it was reasonable for the Plaintiff to have opposed the setting aside application. The usual costs order regarding costs of the action is that costs should follow the event. Mr. Shum submitted this rule should not be applied to costs of interlocutory applications. It is equally possible to argue that costs of an action should depend on whether it is reasonable for the proceedings to be carried on or defended (as the case may be). The policy reason behind the usual rule that costs should follow the event appears to be that it is simple, easy to understand and promotes certainty. I do not see any reason (whether legal or as a matter of policy) to depart from this rule in relation to costs of interlocutory applications.

Costs Relating to the Bankruptcy Proceedings

54. Mr. Shum did not raise any objection to these costs (including the costs of the statutory demand) being awarded to D2 and those costs should be so awarded.