DAH CHONG HONG (ENGINEERING) LTD. v. BOLDWIN CONSTRUCTION CO. LTD.

HCA1291/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1291 OF 2002

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REASONS FOR DECISION

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Background

1) Before I deal with the applications before the court, it is useful to set out the background.

2) The dispute between the parties involves the construction of a residential development at Tsing Yi Station, located at 132 Tsing King Road, Tsing Yi, New Territories ("the Development"). By a main contract dated 27 January 1998, the Defendant was engaged as main contractor by the developer, Shinta Limited ("the Employer").

3) By a subcontract in writing dated 25 May 1999 ("the Subcontract"), the Plaintiff was in turn engaged by the Defendant for the supply and installation of external and internal stone works. The Subcontract was in standard form.

4) There was contained in clause 22 of the Subcontract an arbitration agreement whereby any disputes or differences between the Plaintiff and the Defendant were to be referred to arbitration. As will later become apparent, there is no controversy over the effect of this clause.

5) Work having been carried out by the Plaintiff, debit notes were issued to the Defendant demanding payment. The Plaintiff alleges that there is a sum of $3,507,331.77 due under 10 debit notes dated variously between August 1999 and October 2001. By a letter dated 7 March 2002, the Defendant demanded that the Plaintiff make payment of this sum. A letter before action dated 28 March 2002 was sent to the Defendant by the Plaintiff's solicitors.

6) No payment having been made by the Defendant, on 6 April 2002, the Writ of Summons in the present action was issued and served. The Defendant's response was a letter dated 16 April 2002 in which it was suggested that, in view of the existence of a winding-up petition that had been presented against it (HCCW 340/2002), the present action should be stayed pending the hearing of the petition.

7) There was no response to this suggestion. The Defendant, however, failed to enter an Acknowledgement of Service and give notice of intention to defend. Neither did it seek to stay the action under section 181 of the Companies Ordinance.

8) On 30 April 2002, judgment in default of notice of intention to defend was entered pursuant to RHC Order 13, rule 1 ("the Default Judgment"). This judgment, however, was not served on the Defendant.

9) On 28 May 2002, Master Lung made three garnishee orders to show cause directed at The Hongkong and Shanghai Banking Corporation Limited ("HSBC"), Hang Seng Bank ("HSB") and Bank of China (Hong Kong) Limited ("BOC"). These orders were served on the Defendant.

10) On 18 June 2002, the Defendant issued a summons to set aside the Default Judgment and for an order that the present action be stayed pursuant to section 6 of the Arbitration Ordinance ("the Ordinance").

11) On 11 September 2002, Master S Kwang discharged the garnishee orders to show cause directed at HSB and BOC, but adjourned the order in relation to HSBC to the judge hearing the 18 June 2002 summons, in the meantime ordering HSBC to pay $3,648,758.07 into Court pending the determination of the summons. The costs of the hearing on 11 September 2002 in relation to all three garnishee orders to show cause were reserved also to the judge hearing this summons.

The present applications

12) The 18 June 2002 summons to set aside was amended by Order of Burrell J on 16 September 2002 and this was the summons before me on 4 October 2002. Together with the matters adjourned by Master S Kwang on 11 September 2002, the following matters accordingly fell to be determined :

(1) The application to set aside the Default Judgment.

(2) If the Default Judgment was set aside, the application for a stay of the present action for the disputes and differences between the parties to be referred to arbitration.

(3) The garnishee proceedings in relation to HSBC.

(4) Payment out of the said sum of $3,648,758.07 and interest.

(5) Costs.

13) After hearing submissions from Mr John Scott SC for the Plaintiff and Peter Clayton for the Defendant, I ordered as follows :

(1) The Default Judgment was to be set aside.

(2) The action be stayed, and the disputes and differences between the parties be referred to arbitration.

(3) The garnishee proceedings in relation to HSBC be set aside.

(4) The said sum of $3,648,758.07 (and any interest thereon) be paid out to the Defendant.

(5) The costs of and occasioned by the various garnishee proceedings and the summons dated 18 June 2002 (as amended) be to the Plaintiff, to be taxed if not agreed and paid forthwith.

14) I indicated to counsel that I would hand down the Reasons for my Decision at a later date.

The application to set aside the Default Judgment

15) RHC Order 13, rule 9 simply states :

"Without prejudice to rule 7(3) and (4), the Court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuant of this Order."

We are not concerned in the present case with the applicability of Order 13, rules 7(3) and (4).

16) The Default Judgment was a judgment regularly obtained. The original summons dated 18 June 2002 seemed to suggest that the Default Judgment may have been an irregular one, but it is clear from Mr Clayton's submissions that the Defendant now accepts it was a regular judgment.

17) The principles to be applied in applications to set aside default judgments are well-known and are succinctly set out in Hong Kong Civil Procedure 2002 Vol.1 at 13/9/12-13/9/14. Among the matters that the applicant must show in applying to set aside (and often this is the most important, if not decisive, element in the exercise of the court's discretion) is the existence of a defence that has a real prospect of success or, as is sometimes put, a defence that carries some degree of conviction : see Hong Kong Civil Procedure Vol.1 at 13/9/14 referring to, among other cases, L&M Specialist Construction Limited v. Wo Hing Construction Company Limited [2000] 3 HKLRD 262 (Court of Appeal). As Mr Justice Ribeiro JA said in that case at 265J-266B :

"Where, as in the present case, the judgment was regularly entered, the court will consider the nature of and reasons for the default but it would focus primarily on whether [the] defence has sufficient merits."

18) Thus, this requirement to demonstrate a defence that has a real prospect of success (which I shall call "the Defence Requirement") is very much a dominant factor, although it has to be pointed out that it is not necessarily in every case decisive. The court must also weigh in the balance other factors such as the reasons for letting the default judgment occur, any delay in applying to set aside, and the intervention of third party interests : see the cases referred to in Hong Kong Civil Procedure 2002 Vol.1 at 13/9/13. In most cases, though, the Defence Requirement will be the most important, if not decisive, factor.

19) The present case, however, poses an unusual feature. It will be recalled that there is in existence an arbitration agreement between the parties dealing with the resolution of disputes and differences between them. In these circumstances, does the requirement of demonstrating the existence of a defence that has a real prospect of success, apply at all or at least not to its full rigour?

20) The arguments in favour of the proposition that the Defence Requirement is inapplicable in these circumstances can be summarised as follows :

(1) The rationale behind the Defence Requirement is that the court looks at the position it and the parties would be put in should the relevant default judgment be set aside. The court then has to determine whether or not in these circumstances, there is any real point in setting aside the judgment. If there is, then in the absence of any other factors that would be overwhelming (such as delay, etc.), justice will require the default judgment to be set aside. After all, as Mr Justice Riberiro JA said in L&M Specialist Construction Limited at 265J,

"The discretion is there 'to avoid the injustice which may be caused if judgment follows automatically on default.' "

If there is not, then the default judgment will not be set aside.

(2) In most actions, the position that the court and the parties find themselves in should the default judgment be set aside, is that the disputes or differences between the parties will have to be resolved at trial in court. Hence the need for the court itself to determine whether or not there exists a defence that has a real prospect of success or carries some degree of conviction (for it will be the forum for the trial). If this requirement (the Defence Requirement) is satisfied, it can then readily be seen that there is a real point in setting aside the default judgment. Conversely, if the Defence Requirement is not satisfied, then there would be little or no point in setting aside the default judgment in question.

(3) This rationale of looking at the position should the default judgment be set aside and therefore determining whether there is any real point in setting aside, can be found in various statements in numerous cases : see for example, The Saudi Eagle [1986] 2 Lloyd's Rep. 222, at 223(1) (English Court of Appeal); Premier Fashion Wears Limited v. Li Hing Chung [1994] 1 HKC 213 at 216 (Court of Appeal). All these statements are based largely on Evans v. Bartlam [1937] AC 473, where the same point is made by Lord Russell of Killowen at 482 and Lord Wright at 489. In the speech of Lord Wright in Evans v. Bartlam at 489, he also says this in relation to the matter before their Lordships, "He [the defendant in that case in relation to a betting indebtedness] clearly shows an issue which the court should try." (emphasis added)

(4) This quote from Evans v. Bartlam emphasises a point I have made earlier, that in most cases, the court is looking at the trial in court of the disputes or differences between the parties when considering whether or not to set aside a default judgment. It is quite different when an arbitration agreement is involved. Here, the position or scenario is that should the default judgment be set aside, the court will, as in the present case, often be faced with an application by the defendant for the action to be stayed so that the disputes or differences can be referred to arbitration.

(5) The role of the court when faced with a stay application (whether under section 6 of the Ordinance or Article 8 of UNCITRAL Model Law) is clear. It must refer the disputes or differences to arbitration unless one or more of the following is demonstrated :

(a) There is no arbitration agreement at all.

(b) The arbitration agreement is null and void, inoperative or incapable of being performed.

(c) There is in fact no dispute or difference to be referred to arbitration.

(d) The relevant dispute or difference is not one that is covered at all by the arbitration provisions in the arbitration agreement.

(6) The court's approach these days in dealing with applications for stay emphasise the twin icons of party autonomy and minimal court interference as far as arbitration agreements are concerned. In short, the parties are left to the tribunal that they have by contract chosen to determine the disputes or differences between them.

(7) In this context, "disputes" or "differences" exist unless there has been a clear and unequivocal admission of both liability and quantum. In other words, even an unanswerable claim will not mean that a dispute or difference does not exist unless there is a clear and unequivocal admission of liability and quantum. See, among many other cases : Tai Hing Cotton Mill Limited v. Glencore Grain Rotterdam BV [1996] 1 HKC 363, Guangdong Agriculture Company Limited v. Conagra International (Far East) Limited [1993] 1 HKLR 113, Louis Dreyfus Trading Company Limited v. Bonarich International (Group) Limited [1997] 3 HKC 597 and F&D Buildings Services Engineering Company Limited v. Chevalier (E&M Contracting) Company Limited [2001] 3 HKC 403.

(8) The above points highlight what I believe to be a fundamental difference in approach when the court is dealing with an application to set aside a default judgment in circumstances where there exists an arbitration agreement between the parties and it is the intention of one of them to apply to stay the court proceedings should the relevant default judgment be set aside. Essentially, there are three major differences in this context :

(a) The position that the court and the parties find themselves in should the default judgment be set aside is not the trial of the action by the court, but the application by one of the parties for a stay. It must therefore be to that application that the court's immediate attention is directed.

(b) The court's role in the stay application is limited in that the court can only look at those aspects set out in sub-paragraph (5) above.

(c) In particular, in considering the merits of the dispute between the parties, the court effectively does not do so and its role is restricted to finding out whether there is a clear and unequivocal admission of liability and quantum. The only proper forum for the resolution of the disputes or differences between the parties is the chosen one (viz. the arbitral tribunal).

21) In my judgment, the arguments set out in the previous paragraph are compelling and lead to the conclusion that the Defence Requirement (as defined above) has no initial part to play in an application to set aside where an arbitration agreement is in existence and it is the stated intention of one of the parties that a stay of the action would be sought once the default judgment is set aside. I use the word "initial" because the approach of the court in such circumstances can be summarised as follows :

(1) The court must of course reach a view on the stay application. Usually of course, as in the present case, such an application will be made at the same time as the application to set aside default judgment. Where the court will or is likely to grant the stay, the court does not consider the merits of the defence at all. In other words, the Defence Requirement need not be satisfied.

(2) Where, however the court takes the view that the stay application will or is likely to fail, the Defence Requirement will then have to be satisfied by the defendant since the court will then be projecting itself to the trial of the action by it should the default judgment be set aside.

(3) The matters referred to in sub-paragraphs (1) and (2) above do not of course signal the end of the court's enquiry in considering the application to set aside. The court will also have to consider those other factors I have referred to in paragraph 18 above.

22) I have not ignored Mr Scott's submissions (in relation to the Defence Requirement) that even though there may exist an arbitration agreement, this would not make a default judgment obtained in court proceedings brought by a plaintiff, an irregular one and therefore a defaulting defendant will still be required to set aside a regular judgment of the court. This is of course correct as far as it goes, but it does not follow that the court can ignore the existence of the arbitration agreement in the exercise of its discretion when it is the stated intention of the defendant to apply for a stay should the default judgment be set aside. In other words, the regularity of the default judgment does not assist in the exercise of the court's discretion in deciding whether or not to set aside. It seems to me in the application of Lord Wright's oft quoted words in Evans v. Bartlam at 489 that : "... if merits are shown the Court will not prima facie desire to let a judgment pass on which there has been no a proper adjudication", one has to bear in mind that the proper forum for the adjudication in this context is the arbitral tribunal and the court is largely prohibited from pre-empting the function of this chosen arbitral tribunal.

23) In the present case, Mr Scott accepts that should the Default Judgment be set aside, the Plaintiff would not be able to resist the stay application. In these circumstances, it seems to me irresistible that the Default Judgment should be set aside. There are no other factors which are relevant in relation to this. The court should not go into the merits of the defence raised by the Defendant in the present case, for that is the function of the arbitral tribunal chosen by the parties. The court should no more ask itself the question, "Is there any point going to arbitration?" (from a merits point of view) in an application to set aside anymore than it should in an application for a stay under section 6 of the Ordinance or Article 8 of the Model Law. True, as Mr Scott says, the disputes or differences will still have to be resolved and the arbitral tribunal is merely an alternative forum to hear the disputes or differences, but in my view, it is crucial to appreciate the limited role of the courts here.

24) The above is sufficient to dispose of the application to set aside and it would be wrong as a matter of principle for the court to consider the merits of the defence.

25) However, in case the approach identified above is in error and the Defence Requirement must first be satisfied, I should perhaps just say a few words about this.

26) If it had been necessary, I would also have found that the Defence Requirement has been satisfied by the Defendant in the present case :

(1) I have already identified the Plaintiff's claim as that for the outstanding balance due (of $3,507,331.77) for work done under the Subcontract.

(2) It is the Defendant's case, however, that contra charges well in excess of that sum are due from the Plaintiff in relation to various breaches committed by it. There is an amount of $10,521,152.58 claimed for damage caused by water, among other claims. The contemporaneous documents exhibited in the voluminous affidavit evidence before me demonstrate the existence of complaints made against the Plaintiff, counter allegations and denials. There are witnesses to the above and obviously their testimony will have to be tested.

(3) Mr Scott does not really deny the existence of a defence that has a real prospect of success but submits as his main point that the quantum of $10,521,152.58 cannot and has not been justified. It is, he says, merely a bare assertion and that is not good enough.

(4) In my view, the Defendant has pointed to sufficient material to indicate a defence that has a real prospect of success or one that carries some degree of conviction, both in relation to liability as well as quantum. In terms of liability, there are numerous contemporaneous documents (correspondence, site reports, etc.) and potential witnesses. For quantum, Mr Clayton points to not only the affidavit evidence, but also to the contemporaneous correspondence. In particular, there is a letter dated 26 April 2000 in which details were given by the Defendant to the Plaintiff of the fact that the Employer had to engage subcontractors (who are named) to make good defects caused by various other subcontractors including the Plaintiff. The amount attributable to the Plaintiff at that stage was $7,658,143.00. In the various interim certificates, substantial deductions were made by the Employer from amounts otherwise due to the Defendant by reason of their having had to engage subcontractors to rectify defective works.

(5) Mr Scott complains of the absence of further documents to demonstrate that subcontractors were indeed engaged to rectify defective work and the value of such work. He also complains of the lack of survey or other expert reports.

(6) However, I am of the view that the Defendant has reached the requisite standard needed in the Defence Requirement. There is sufficient material before the court at this stage to reach that view.

The stay application

27) As I have said, Mr Scott accepted that should the Default Judgment be set aside, the Plaintiff could not resist the application for a stay. This was, with respect, entirely correct and I am grateful for his candour. It follows that the action should be stayed and the disputes and differences between the parties referred to arbitration.

The garnishee proceedings concerning HSBC

28) It is accepted and it follows from the above that these proceedings should be discharged and set aside, once the Default Judgment is set aside.

Payment out of $3,648,758.07 and interest

29) Mr Scott submitted that in view of the way the Defendant has conducted itself, this money should remain in court. He points to three instances where one of the deponents in the defendant's affidavit evidence, has been wrong in his assertions. He categorises these errors as being lies and a deliberate attempt to mislead.

30) In L&M Specialist Construction Limited, Mr Justice Ribeiro JA dealt generally with the question of the imposition of terms in the setting aside of default judgments : see 268H-269J. The learned Justice of Appeal said that it must be rare that payment into court is made a condition for setting aside. One example given was if the defence is shadowy (although these days a shadowy defence would probably not enable a defendant to satisfy the Defence Requirement). Reference was also made (at 269) to the words of the English Court of Appeal in City Construction Contracts (London) Limited v. Adam (unreported), The Times, 4 January 1998, where it was said that the imposition of conditions was "not to punish the defendant but to encourage the proper future conduct of the litigation and to provide a measure of security for the plaintiff".

31) In the present case, I do not believe that the three instances where mistakes had clearly been made in the affidavit evidence, were deliberate attempts to mislead. Further, even if they were, they were not by themselves serious enough to merit the imposition of what would in a fact be a payment into court of security for the claim. As Mr Justice Ribeiro JA also noted in L&M Specialist Construction Company Limited at 268I, in most cases in practice, the power to impose terms would relate to costs. I would venture to add that in most cases, a suitable order for costs will often be the only appropriate term to be imposed on a defendant.

Costs

32) Although Mr Clayton argued that the entering of the Default Judgment was neither party's fault and therefore the costs order should reflect this, he did not (rightly) press this. In my view, the Default Judgment was regular and the Defendant had no reason to suppose that the Plaintiff would not pursue the action to its logical conclusion and take all appropriate steps. There was, after all, no response to the letter dated 16 April 2002 (referred to in paragraph 6 above).

33) It was therefore hardly surprising that the Plaintiff obtained the Default Judgment and took steps to levy execution. In my view, the fault (if that is the right term) for the Default Judgment being entered, lay with the Defendant.

34) In these circumstances, as the Defendant is seeking an indulgence from the court, the normal order should follow and this is reflected in the cost order I have made.