XCHRX CENTALINE PROPERTY AGENCY LTD. v. GRANDCO (HOLDINGS) LTD.

HCA20614/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.20614 OF 1998

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J U D G M E N T

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Introduction

1. This is an appeal against the order of the Master dismissing the defendant's application on for setting aside the default judgment.

2. The plaintiff is a company engaged in the business of estate agency. The defendant company, formed by Ng Yik Man and Fong Chun Kin, was involved in property investment. They had used different corporate vehicles to acquire and re-sell properties for profit since 1990. The present dispute relates to the property known as House No.34, 15th Street, Hong Lok Yuen, Tai Po ("The Subject Property"). The plaintiff sued for the payment of commission and default judgment was obtained against the defendant under Order 13, rule 9. Judgment was entered on 15 January 1999 and the defendant only took steps to set aside the judgment in December 2000. Having failed in the application before the master, the defendant appealed to this court.

The background

3. On 16 November 1996, the defendant entered into a Sale and Purchase Agreement ("The Agreement") with a Far East Button & Belt Manufacturing Factory Limited for the sale of the Subject Property. The purchase price was HK$21.6 million. The plaintiff had done the introduction work.

4. Clause 8 of the Agreement provided that the defendant was liable to pay HK$216,000 as commission to the plaintiff and that the payment should be effected not later than 29 November 1996. On 5 October 1997, the defendant signed another provisional agreement for the sale of the Subject Property to a Harbour Wealth Company. However, complication arose due to the existence of illegal structures and a reconstructed garden on the premises and the purchaser refused to complete. The dispute was taken to the Court of First Instance in HCA3388/1998 and was heard before Deputy Judge To. The learned judge found in favour of the purchaser and concluded that the latter was entitled to the return of the deposit. This judgment was delivered on 6 April 2000. In the meantime, the plaintiff had commenced the present action against the defendant for the said commission on 2 December 1998. On 30 August 2000, the plaintiff issued a statutory demand against the defendant followed by a petition filed on 27 September 2000.

The defendant's grounds

5. In the summons taken out by the defence which was heard before the Master, the grounds for the application were as follows :

"The Judgment entered herein on 15th January 1999 in default of notice of intention to defend be set aside firstly, for irregularity on the ground that the Plaintiff fraudulently and/or wrongly represented to the Defendant that in the event if Judgment in default was entered herein, the Plaintiff shall only enforce the Judgment on condition that the Defendant would win in the action HCA No.3388 of 1998; and alternatively if the Judgment was regular, on the ground that the Defendant has a meritorious defence;" (emphasis added)

6. Now counsel for the defendant had put forward, in the present appeal, five grounds in support of their case. They were :

"(a) meritorious defence;

(b) collateral contract/estoppel;

(c) the default judgment was obtained by fraud;

(d) breach of duty of care and/or fiduciary duty by the Plaintiff;

(e) general discretion of the court. "

(paragraph 15 of the defendant's skeleton submission)

7. The main factual allegations relied on by the defendant could be found under the heading of Defendant's case in the skeleton submission. They were :

"11. Since 1990, Ms Ng Yik and Mr Fong Chun Kin had engaged the Plaintiff as their agents in their landed property investment. It had always been the parties' agreed practice that Ng and Fong or their corporate vehicles would pay commission to P only if the property was re-sold at a profit. Even though it might be a term of the agreements that Ng or Fong or their corporate vehicles was to pay Plaintiff 1% of the purchase price, Ng, Fong or their corporate vehicles usually paid only 0.5% to 0.8% of the purchase price as Plaintiff's commission.

12. Prior to the signing of the S & P Agreement, Chau Man Hon and Tang Wing Chiu of the Plaintiff orally gave oral representation and/or assurance to the Defendant that :

a. the commission payable under the S & P Agreement should be paid if and only if Defendant could successfully re-sell the Property;

b. if the Property was re-sold at a loss, Defendant would not be liable to pay the commission to Plaintiff;

c. no illegal structure existed in the Property.

13. During the period between the date of service of the Writ of Summons (8th December 1998) and the date of the default judgment (15th January 1999), Chau Man Hon and Tang Wing Chiu of Plaintiff assured the Defendant that the present action was instituted only a matter of formality by Plaintiff's Legal Department and it was not necessary for Defendant to defend the action. Chau Man Hon and Tang Wing Chiu further assured that the Plaintiff would not enforce any judgment obtained in the action against Defendant unless Defendant won the action HCA No.3388/98 against Harbour Wealth.

14. In reliance on the representation/assurance of the Plaintiff, the Defendant did not defend the action and judgment in default was entered against the Defendant."

In the draft defence and counterclaim, the defendant had pleaded similar allegations under paragraph 2B.

8. In short, counsel for the defendant had argued the following :

(1) There is a serious dispute of fact which affects whether the amount of commission was payable at all by the defendant as there was the promise that the commission was only payable when the property could be sold at a profit;

(2) The assertions put forward by the defendant are neither inherently improbable, given the positive market atmosphere before the economic crisis, nor contradicted by any extraneous evidence. The defendant's defence "could well be established" at trial;

(3) The defendant's assertions are supported by evidence such as the past dealings with the plaintiff. The transactions revealed that the defendant had paid a lower rate of commission or no commission at all, despite the existence of the contractual terms of 1% commission payable to the plaintiff. Oral evidence would therefore be admissible to prove that the document was not a complete record and there was a collateral contract and/or that the defendant could rely on the principal of estoppel;

(4) The plaintiff only issued the present proceedings to enforce payment of commission two years after the contractual due date and no satisfactory reasons were given;

(5) The plaintiff was the agent and therefore they owed a fiduciary duty to the defendant. And in the circumstances, the plaintiff also owed a duty of care to the defendant. The defendant was given the representation that there was no illegal structure on the premises. Such misrepresentation had caused the defendant to suffer loss;

(6) The judgment against the defendant was obtained by fraud. Before judgment was entered on 15th January 1999, Chau Man Hon and Tang Wing Chiu of the plaintiff had repeatedly assured Ms Ng Yik Man of the defendant that the present action was brought as a matter of formality by plaintiff's Legal Department and plaintiff would adhere to its previous assurance and would only enforce judgment in the event that defendant won the action HCA3388/98. The judgment was entered on 15th January 1999. It was only on 31st August 2000 did the plaintiff formally serve a Statutory Demand on defendant for enforcement after the judgment, judgment in HCA No.3388/98 had been delivered on 6th April 2000. That was more than one and a half years after the date of judgment. This shows that the plaintiff had waited for the outcome in HCA3388/98 before taking any further action. It is consistent with the defendant's case.

The Plaintiff's case

9. The plaintiff pointed out that the only issue regarding whether the judgment is regular is service. The judgment obtained would not be rendered irregular by virtue of the allegations that the plaintiff had "promised" not to enforce it. (Ho Kwok Wah v. Group Jewellery Arts Ltd & Ors [2000] 3 HKC 595).

10. The plaintiff contented that the test for setting aside a regular judgment, which is the situation in our case, is whether the applicant has by potentially credible affidavit evidence shown that he has a real prospect of success in the action. In this regard, the plaintiff relied on the authority of O Mark Polyethylene Products Factory Ltd v. Reap Star Ltd [2000] 2 HKC 330. It appeared that there is not much dispute between the plaintiff and the defendant on the test for setting aside the judgment. And I do not think there is any dispute that the defendant faced a higher threshold than an Order 14 application.

11. The plaintiff submitted that the defendant had failed to satisfy the test. The plaintiff reminded this court that the defendant had waited for almost two years before taking action and it was only after the plaintiff had instituted winding up proceedings. The plaintiff emphatically stated that the factual basis of the defence was nothing more than bare assertions. These allegations, especially that the commission was only payable if the defendant could re-sell at a profit, were ridiculous and "an affront to common sense and commercial reality". If these allegations were true, then the defendant should have taken proceedings to set aside the judgment sooner. It was simply unbelievable that the plaintiff, being an estate agent company, would make such an agreement with a particular client.

12. The plaintiff invited the court to look at some of the letters exchanged between the plaintiff and the defendant at the material time. In particular, the plaintiff mentioned that on 26 January 1999, a letter was sent to the defendant by the plaintiff's legal representative demanding payment. It was significant to note that the defendant's reply made no reference to the arrangement that the commission would only be payable upon profitable re-sale. This shows the incredulous nature of the defendant's account.

13. Further, the plaintiff argued that even assuming the staff of the plaintiff, Chau and Tang, had made some oral representations regarding the commission, there was no suggestion by the defendant as to the basis on which the plaintiff should be bound by such representations. They were merely front-line employees of the plaintiff. Ng and Fong were sophisticated businessmen. They could not have formed the view that the staff had the authority to make agreements beyond the written contractual terms. Therefore, even if the representations were made, it would be unreasonable for the defendant to rely on them. At most, the defendant could claim against the staff in their personal capacity.

14. The plaintiff also refuted, point by point, of the defendant's argument in the skeleton submission, in relation to the issues of collateral warranty/estoppel, fraud and breach of fiduciary duty. But the main criticism of the defendant's case remained to be the long delay before making any application to set aside the judgment.

Evaluation

15. I tend to agree with the plaintiff that in a case like the present one, contemporaneous records, such as letters or fax exchanged at the time, are useful. I consider that this letter prepared by the defendant in response to the plaintiff's demand is important. The date was 2 February 1999 and Ng Yik Man, the ex-director wrote the following :

「 來函收到，關於大埔康樂園15街 34號之佣金，首先澄清我們公司並沒有說不付佣金。

(一) 只是我們所需要付的與你們所要收取的銀碼不一樣，在多年以來我公司經你們公司所買入的樓都不須付全額，是在口頭承諾的，我們只是須付一半，即港幣拾萬捌仟圓(HK$108,000.00)。

(二) 當你公司的經紀推銷我們買入此物業時，你們的經紀說明會幫我們賣出，雖然似乎是賣出，但是由於你們的過失而令到我們公司損失慘重。好了，首先你們要弄清楚到底我們要付多少，然後我公司才安排怎樣付款。」 (There is a translation of it in the bundle)

16. In my view, the response indicated two important points : there was an absence of reference to the allegations of the arrangement between the defendant and the plaintiff regarding "no profitable re-sale, no commission payable". However, there was the reference to "your fault" and the defendant argued that it was referring to their oral agreement. Whether it also covered the issue of the illegal structure was not very clear from the affirmation of Ng Yik Man.

17. Further, counsel for the defendant had referred to the affirmation of Ng and pointed out a number of property transactions between the plaintiff and the defendant. The information demonstrated that despite the terms of the written agreement on the commission, there were indeed instances that commissions were paid at a reduced rate and in some cases, no commissions were paid by the defendant.

18. In this regard, the defendant submitted that there was a course of dealings showing that the contractual terms were not being followed. The plaintiff argued that the information only showed that in the past, the plaintiff had waived or reduced the commission. It was said that traders would do that kind of things to maintain good business relationships. These were nothing more than gratuitous discounts freely given.

19. The defendant's reference to the previous transactions appeared to be supported by the search records produced. I also noted that in the letter dated 24 February 1999, the plaintiff had written to the defendant stating that "we had never afforded 50% discount on the commission in respect of the property". The question here became a matter of credibility and whether there was indeed a course of dealing capable of varying the commission-payment term in the Agreement.

20. I am also concerned about the issue of misrepresentation regarding the lack of illegal structure on the premises. The plaintiff argued that given the sophistication of the directors of the defendant, it would be unusual that the defendant would, without inspection at all, committed to purchase a property for the amount of HK$21.6 million. The plaintiff submitted that whether the defendant knew that there were illegal structures existed in the subject property had no bearing to the issues in HCA3388/98, hence it would be misleading for defendant's counsel to refer to the judgment of Deputy Judge To, who found that the defendant (the plaintiff in that case) had not inspected the property. However, the issue of inspection would be an issue in the present case in light of the defence raised. Even disregarding the finding of Deputy Judge To, it was never suggested by Chau Man Hon and Tang Wing Chiu, in their almost identical affirmations, that the defendant had made inspection of the property before the purchase. They simply denied having made the representation.

21. If what plaintiff's counsel said was correct that it would be unusual for the defendant not to inspect when purchasing a house at such a price, then the question would be why was there no inspection and whether it was really because of the representations made by Chau and Tang. If there was a misrepresentation, and provided other conditions were satisfied, I believe the defendant would have a valid issue to raise in their defence.

22. In the context of the inspection of the property, the plaintiff mentioned that the directors of the defendant were sophisticated in business, and hence they would not, in effect, do things to their own detriment. I suppose the same could be said about the plaintiff, which is a leading property agent in Hong Kong. In light of all these, there is a troubling question as to why, despite the protest that the plaintiff had been at fault, the defendant chose not to defend the action. On the other hand, the plaintiff had indeed waited for quite some time before they took action to enforce. If they were waiting for the outcome of the case of HCA3388/1998, the allegations by the defendant about the promise made by the staff did not seem to be totally far fetched.

The ground of irregularity

23. I would agree with the plaintiff's submission that the issue here is service. There was no dispute about this aspect and in fact the defendant was fully aware of the writ. The defence simply stated that they were induced not to defend. In the premises, I found no irregularity in the judgment.

The merits of the defence

24. The defendant could only rely on the ground of meritorious defence to support their application. Regarding the strength of the defence case that is required to set aside a regular judgment, counsel for the plaintiff had referred me to the decision of the Court of Appeal in Premier Fashion Wears Ltd & Anr v. Chow Cheuk Man & Anr [1994] 1 HKLR 377 at page 383. Godfrey JA (as he then was) had given the following judgment :

"Of the modern cases, I would single out Alpine Bulk Transport Co. Inc. v Saudi Eagle Shipping Co. Inc. [1986] 2 Lloyd's Rep 221. This, I believe, shows that for the purposes of O.13, r 9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under O.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success."

25. However, where the outcome of the action very much depend on whose version is likely to be accepted, it could be difficult to form a provisional view of the probable outcome of the action. In these circumstances, the appropriate question to ask would be whether the defence "could well be established" at trial and if the defendant's version could well be believed at trial, it follows that the defence has a "real prospect of success". (See O Mark Polyethylene Product Fty Ltd v. Reap Star Ltd. [2000] 2 HKC 330 at 335 and 337)

26. In the present case, both sides have filed affirmations in support of their respective cases. Based on the affirmations and the information contained therein, I have to say that the defendant had demonstrated that there was much more going on between the parties in their relationship, and behind the simple Agreement based on which the plaintiff had made their claim. The situation could well be as what the defendant had alleged, despite a strong submission to the contrary by the plaintiff's counsel. I take the view that there is some prospect of success and there is some degree of conviction in the case put forward by the defendant as a whole, particularly on the issue of the amount of the commission payable and whether there was any misrepresentation, although the final decision would really depend on a proper evaluation of the testimonies at the trial.

27. Even if I could not, at this stage, sensibly form a provisional view of the probable outcome of the trial, by applying the test in O Mark Polyethylene Products, I came to the conclusion that, the defence could well be established at trial and that the matters raised by the defendant are sufficiently substantial to merit a trial. In the circumstances, it would be appropriate to set aside the default judgment.

28. I am aware of the issue of delay on the part of the defendant. Of course, the application to set aside should be made promptly and within a reasonable time. Here the defendant had offered some explanation as to why they allowed judgment to be entered and that formed part of the matrix of facts now alleged by the defendant as to what had happened between the parties. There was no third party interest in the present case and the plaintiff had not demonstrated any prejudice on their part if the judgment were to be set aside. Considering all the circumstances, I found I should exercise my discretion to set aside the judgment and not to deny the defendant the opportunity to have the merits of his case be adjudicated upon by the court. Furthermore, I do not think it appropriate to impose any condition on setting aside the default judgment.

The Orders

29. I shall, therefore, allow the appeal and order that :

(a) The order of the Master be set aside;

(b) The judgment entered on 15 January 1999 in default of notice of intention to defend be set aside;

(c) The defendant be at liberty to defend this action and to file and serve its defence, or defence and counterclaim, herein within 7 days from the date of this judgment;

(d) The plaintiff be at liberty to file a reply, if any, within 14 days thereafter;

(e) Order nisi for costs of this appeal and the hearing before the Master be to the defendant, the amount to be taxed if no agreed. The nisi order to be made absolute 14 days from the handing down of this judgment;

(f) Liberty to apply on matters arising from this order, if any, within 14 days from the handing down of this judgment.