SEGA DESIGN & CONSULTANCY LTD v. LAM LUN KEE DECORATION CO (A FIRM)

HCA131/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 131 OF 2005

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J U D G M E N T

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1. This is an appeal from the decision of the master given on 2 May 2006 (the reasons for the decision was handed down on 27 May 2006) whereby the master granted leave to the defendant to set aside the default judgment entered against the defendant on condition the defendant pay into court the sum of $580,000.  Appeal has now been brought before this court to set aside that decision of the master and for an order to allow the defendant to defend its action without condition. 

2. This matter has come about in this way.  The plaintiff is suing the defendant for a sum of $1 million odd in relation to a sub-contract entered into between the plaintiff and the defendant.  The sub-contact was entered into as a result of the defendant entering into what I will call a main contract with Profit Link International Limited (“Profit Link”) in relation to certain works to be done at the Hip Shing Hong Centre, 23^rd to 28^th floors.  What had happened was although the contractual work agreed under the main contract and sub-contract had been done and had been paid for, there were disputes as to what is loosely called variation work, that is to say additional work not covered by the contract or the sub-contract, which had been requested by what I will call the employer Profit Link.  The variation orders were directly placed by Profit Link with the plaintiff, the sub-contractor, that is Sega Design & Consultancy Limited (“Sega”).  It is not in dispute that such variation work claim was made by the plaintiff against the defendant which is the subject matter of the action and the defendant in turn has made its claim against Profit Link but which has not yet come before the court, so to speak. 

3. The amount of the claim made by the plaintiff against the defendant for variation order work was in fact grossly exaggerated, according to both the defendant as well as Profit Link.  A settlement agreement was reached however between the plaintiff as the sub-contractor with the employer Profit Link by Profit Link agreeing to pay directly to the plaintiff the sum of $580,000 and that is, of course, for the variation order work that was alleged to have been done. 

4. The matter was somewhat complicated by the suggestion both by the employer Profit Link as well as by the defendant that the quality of the work done by the plaintiff under the contract and the sub-contract were defective, rendering remedial work to be done which of course had to be taken into account.  So that is a complication. 

5. Before me today there appeared Mr Yiu Man Kam, for the plaintiff, of the firm of Messrs Chak & Associates.  Mr Yiu informed me that there is an application by the solicitors pending before the master next month for leave to cease to act, as the solicitors have been unable to obtain instructions for some time.  So Mr Yiu, although he was present today, did not take any active part during the hearing and I heard basically submissions from Mr Frederick Chan, counsel for the defendant, as well as having studied his long and elaborate skeleton argument. 

6. In my view the case can be decided fairly easily on the following basis.  There are really two points, one is whether I should grant leave to appeal out of time, the other being whether there has been shown arguable merits of defence. 

7. So far as the first point is concerned, there is no doubt in my mind that the time had been incurred by the defendant in seeking legal aid and, eventually after a protracted process, the defendant has been given legal aid to enable it to bring this hearing before me.  So it is clear to me that there are good reasons for the delay and I therefore grant leave to bring this appeal out of time. 

8. So far as the merits is concerned, it seems to me that having regard to the Decision dated 27 May 2006, although I found Master Wong’s decision to be very helpful, at the end of the day I have come to a different conclusion.  It seems to me that since it is not in dispute that the subject of the claim by the plaintiff against the defendant is all based on the variation orders that therefore this is not a claim or at least is arguable that this is not claim which is brought under the sub-contract.  The Statement of Claim has made it very clear that it is a claim brought under the sub-contract, and it seems to me therefore that it is at the least arguable and I suspect it is more than arguable, that in fact and in law it is not a claim brought under the sub-contract because the contractual claim has been satisfied, and it is the non-contractual claim, that is to say the variation order claim which is being brought.  The reason why the claim now brought is non-contractual is the sub-contract itself says — anything that is to be varied, added, so on and so forth, have to be agreed by the parties.  There was no new agreement and therefore the claim is outside the sub-contract.  It seems to me that it is the first ground on which I can come to the view that there is more than arguable merit in the defence. 

9. The second way of looking at the defence is that the variation orders were given by Profit Link directly to the plaintiff and not by the defendant to the plaintiff.  Therefore work was done by the plaintiff in relation to the variation orders work at the request of Profit Link and the plaintiff should look to any quantum meruit claim to the person who gave that instruction and who received the benefit of such variation orders work.  Therefore there is an arguable case, at the least, that on these facts (which are not in dispute) the defendant should not be liable to the plaintiff for that variation orders given by Profit Link directly to the plaintiff.

10. The third basis that the court should set aside the default judgment is that the quantum of the variation work was agreed by the plaintiff and Profit Link at $580,000 under the settlement.  The master quite rightly said, that figure could be said to be the proper reasonable basis of the value of such variation work.  If that is the case, then really the plaintiff’s claim against the defendant for the variation work, quantified at a sum of $580,000 as being reasonable, has been satisfied because the plaintiff has received the whole of the $580,000 from Profit Link and the defendant therefore should not be liable for any other additional sum for such work or at least it is arguable that the defendant should not be liable for any additional sum.  So that would be another basis to consider that there is a bona fide defence. 

11. The fourth way to look at this matter is to have regard to the curious way (if I may so put it) the condition of $580,000 was imposed by the master.  If the master considered that bona fide defence has been shown, then it is really curious that the condition of $580,000 was imposed.  I think in fairness to the master I should read paragraph 9 at page 476 of the bundle (at page 7 of the Decision itself) where he says this :

“	… To ensure the proper future conduct on their part, I am of the view that payment into court of $580,000.00 is appropriate in the circumstances. …”

I do not know whether the $580,000 was considered as a security for costs or on some other basis or how that figure of $580,000 arrived at.  It seems to me that if bona fide defence have been shown earlier by the three grounds referred to earlier then there is really no basis to order security for costs.  The sum of $580,000 is really a figure out of the air and I do not know how it was arrived at, or how it has been assessed as to insure proper future conduct of the trial by the defendant.  In my view, either bona fide defence has been shown and therefore unconditional leave to defend should be given and default judgment be set aside without condition, or bona fide defence has not been shown.  For me it is a curious way of imposing the $580,000 term into a condition of allowing the setting aside of the default judgment.  It seems to me that this is wrong and I myself, having looked at the material and having regard to the three previous reasons that I have outlined earlier of why default judgment should be set aside because bona fide defence has been shown, I would not impose $580,000 term on the order to set aside the default judgment. 

12. Lastly I have also the benefit of additional evidence in the form of the 3^rd affirmation of Lam Kwok Wah, which goes into great detail as to the financial position of the defendant.  It is quite clear that, as set out in paragraph 17 of the skeleton argument of Mr Chan, the defendant has many outstanding liabilities, and that it cannot turn to anyone for help, the business has ceased on 31 March 2005 and the defendant is on legal aid.  There is no way the defendant can raise the $580,000 and that to impose such a condition in fact would amount to stifling its defence.  It seems to me that having regarded to these additional new material that there is the fifth reason for allowing the defendant to come in to set aside the default judgment without condition. 

13. In the circumstances I therefore order that the appeal be allowed, the defendant be given leave to defend the action without condition and that the costs of today’s appeal be to the defendant.  So far as the costs of the application before the master is concern, that stands.  I also order that the defendant’s own costs be taxed in accordance with Legal Aid Regulations.