XCHRX WING LUNG BANK LTD. v. HO MAN IAM

1995 HCA No. 3116

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. These proceedings were commenced by the Plaintiff, Wing Lung Bank Ltd. ("the Bank"), on 1st April 1995. That was when its writ was issued. The Bank claims liquidated damages from the Defendant in the sum of $984,915.40 for breach of contract. No notice of intention to defend the action was given. Accordingly, on 3rd May 1995, judgment in default was entered for the Bank under Ord. 13 r. 1(1) for that sum with interest and fixed costs.

2. Over three years later - on 29th July 1998, to be precise - the Defendant applied for the judgment to be set aside. That application was heard on 14th December 1998. The master dismissed the application. The Defendant now appeals. He asks that the judgment in default be set aside on the grounds that it was irregularly obtained and that he has a meritorious defence to the Bank's claim. The ground on which the judgment is said to have been irregularly obtained is that the writ is said not to have been properly served on the Defendant.

Service of the writ

3. The Bank's solicitors purported to serve the writ on the Defendant by inserting a copy of it through the letter box of a flat in Whampoa Garden on 1st April 1995. That method of service is sanctioned by Ord. 10 r. 1(2)(b), provided that

(i) the writ was "for service on a defendant within the jurisdiction",

(ii) the flat was the Defendant's "usual or last known address", and

(iii) someone from the Bank or its solicitors were able to swear or affirm that in their opinion the writ would come to the knowledge of the Defendant within seven days.

The Defendant claims that none of these conditions were satisfied.

4. The Defendant lives in Macau. He has lived there since 1981. However, he comes to Hong Kong frequently, and information obtained from the Department of Immigration reveals his travel movements at the relevant time. They show that he arrived in Hong Kong from Macau on 24th March 1995, and left Hong Kong for Macau on 30th March 1995. He next came to Hong Kong on 5th April 1995, and left for Macau on 7th April 1995. He did not return to Hong Kong until 22nd May 1995.

5. In Barclays Bank of Swaziland Ltd. v. Hahn [1989] 1 WLR 506, the House of Lords held at p. 511B that the words "within the jurisdiction" in Ord. 10 r. 1(2) apply to the defendant, and not to the service of the writ. Accordingly, unless the defendant is within the jurisdiction at the time of service, the service is invalid. In the present case, the Defendant was not in Hong Kong on 1st April when the copy of the writ was inserted through the letter box. At first blush, therefore, the Defendant was not within the jurisdiction at the time of service.

6. However, Ord. 10 r. 1(3)(a) provides that where a writ is served by insertion through the letter box,

"the date of service shall, unless the contrary is shown, be deemed to be the seventh day ... after the date on which the copy was ... inserted through the letter box for the address in question."

The seventh day after 1st April was 8th April, and the Defendant was not in Hong Kong on that day either. At second blush, therefore, the Defendant was not within the jurisdiction at the time of deemed service. But that does not take into account the words "unless the contrary is shown", and in the Hahn case, it was held at p. 511F that the deemed date of service may be displaced by proof that the defendant acquired knowledge of the writ on some other date while he was within the jurisdiction. In fact, there is no sufficient evidence that the Defendant acquired such knowledge prior to the entry of the judgment in default, and Mr. Malcolm Merry for the Bank does not suggest otherwise. Indeed, Mr. Merry does not dispute that, for these reasons, the judgment was an irregular one, though he contends that the irregularity was subsequently waived.

7. It follows that the Defendant was not within the jurisdiction at the time of the service of the writ. Accordingly, the Defendant had not been served with the writ in accordance with the Rules, and the judgment which was entered against the Defendant was irregular. In these circumstances, I do not need to consider the Defendant's alternative arguments - namely, that the flat through whose letter box a copy of the writ was inserted was not the Defendant's usual or last known address, and that neither the Bank nor its solicitors could have been of the opinion that the writ would have come to the Defendant's knowledge by 8th April 1995.

The effect of non-service on the Defendant

8. Mr. Merry argues that the Bank's failure to serve the writ on the Defendant should not automatically result in the setting aside of the judgment against the Defendant. He contends that it is open to the court to refuse to set the judgment aside altogether, or at least to set it aside on terms.

9. The law in this area is in a state of flux - both in England and in Hong Kong. Until recently, it was thought in England that where a judgment had been obtained irregularly, a defendant was entitled to have it set aside as of right. That was subject only to the duty imposed by Ord. 2 r. 2(1) on a person who applies to set aside a judgment for irregularity to do so "within a reasonable time and before ... [he] has taken any fresh step after becoming aware of the irregularity". However, this thinking has been dramatically called into question in Faircharm Investments Ltd. v. Citibank International PLC (1998) The Times, 20th February. In that case, judgment was entered in default of defence when the hearing of a summons for summary judgment under Ord. 14 was pending, and time for service of the defence had not expired by reason of the operation of Ord. 18 r. 2(2). The Court of Appeal held that since summary judgment would have had to be entered against the Defendant because its defence to the Plaintiff's claim did not amount to a defence in law, it would be pointless to set the judgment aside. That view of the law has been heavily criticized: see the Supreme Court Practice 1999, Vol. 1, para. 13/9/8.

10. In Hong Kong, the latest word on the topic from the Court of Appeal is Po Kwong Marble Factory Ltd. v. Wah Yee Decoration Co. Ltd. [1996] 4 HKC 157. The effect of the judgments in Po Kwong was summarised in Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Ltd. v. Yuet Wah (Hong Kong) Wah Fat Ltd. [1997] HKLRD 489 at p. 493B-D as follows:

"... there are passages in the judgment of Sears J. (p. 161B) and Bokhary J.A. (p. 162A-B) which suggest that the court has power, in an extreme case, to refuse to set aside a judgment even if it has been obtained irregularly. What there is no doubt about, however, is that in Po Kwong the court held, despite Nazareth V.-P.'s misgivings which he did not press to the point of dissent, and despite Godfrey J.A.'s powerful judgment in Fok Chung Hung v. Lo Yuk Shi [1995] 1 HKLR 420, that terms can be attached to the setting aside of a default judgment which had been irregularly obtained because the writ had not been properly served. That was because Ord. 13 r. 9 gives the court power to set aside such a judgment 'on such terms as it thinks just'. However, the court also decided that in determining the terms on which it would be just to set aside such a judgment, it would not be right to consider whether the defendant has a defence on the merits."

Likewise, the merits of the defendant's defence should not be considered, I would add, when the court is determining whether the defendant should be deprived of having the judgment set aside altogether.

11. I note that Waung J. in Desirable International Fashions Ltd. (in liquidation) v. Chiang Shi Chau [1997] 3 HKC 170 analysed the judgments in Po Kwong in a similar way. Indeed, he concluded at p. 178B-E that the effect of the various pronouncements of the Court of Appeal on the topic, in particular what was said in Po Kwong, was as follows:

"(i) the court should not go into the merits of the defence in considering the setting aside of irregular judgment, as otherwise the distinction between irregular and regular judgment disappears and the defendant of an irregular judgment will be in an invidious position of having to go fully into the merits of the defence and such a defendant would be worse off as result of no proper service having been effected on him;

(ii) if there was such fundamental defect in the service such as that mentioned by Godfrey J.A. in the Fok case, then the court can take such matter into account and normally would arrive at a result of setting aside without imposing any terms;

(iii) the conduct of both parties in relation to the proceedings could be taken into account in deciding whether the default judgment should be set aside and if so on what terms."

The Po Kwong case is, of course, binding on me, and accordingly - unlike the court in Faircharm - I must ignore the merits of the Defendant's defence when I consider, as I now do, the effect of the non-service of the writ on the Defendant. When this analysis was put to Mr. Merry in the course of argument, he accepted that this was the correct approach for me to adopt on the current state of the law, but he reserved the right to argue elsewhere that the law should be otherwise.

12. Leaving aside the merits of the Defendant's defence, two factors, broadly speaking, are said by Mr. Merry to justify either depriving the Defendant of having the judgment set aside altogether or imposing conditions on the setting aside of the judgment:

(i) The Defendant was partly responsible himself for the writ not reaching him. After all, the address in Whampoa Garden was the address which he had given to the Bank as an address for him, even though he had also given to the Bank an address in Macau. It is said that the Defendant had not responded to two letters sent to him on 13th and 24th March 1995 at his address in Macau, and that was why the Bank sought to serve the writ at the address in Whampoa Garden.

(ii) The Defendant had, on his own account, become aware that judgment had been entered against him on 26th September 1997. Six days earlier, he had been informed by the bank at which he had opened an account a month or so earlier that his account had been frozen. He had asked why, and he was told that he had been adjudicated bankrupt. He had not known that before then. It was on 26th September 1997 that he was told by the Official Receiver that the reason why he had been made bankrupt was because of his non-payment of the judgment which the Plaintiff had entered against him. Mr. Merry does not contend that there is any evidence which suggests that the Defendant became aware of the judgment earlier than that. However, instead of then applying for the judgment to be set aside, he issued separate proceedings against the Bank claiming damages for the loss he had sustained as a result of his new bank account being frozen. It was not until over ten months after discovering that judgment had been entered against him that he applied to have the judgment set aside.

13. I do not think that either of these considerations should deprive the Defendant of having the judgment set aside. As for whether he was partly responsible for the writ not reaching him, I note that he claims that he telephoned the Bank after receiving each of the letters sent to him. If that is right (and I have no way of deciding whether it is or not in the absence of the deponents of the affirmations attending for cross-examination), there must have been some other reason for the Bank deciding to serve the writ at the address in Whampoa Garden. If documents from the Bank were not going to be seen by him if they were sent to the address in Whampoa Garden, he can, I recognise, be criticized for giving to the Bank the address in Whampoa Garden as his correspondence address. On the other hand, there is always a risk in a plaintiff choosing something other than personal service for the service of a writ, and that was the risk which the Bank took in this case.

14. As for the Defendant's delay in applying for the judgment to be set aside, the Defendant's evidence is that he immediately instructed solicitors in Hong Kong to act for him. As a result, on 29th September 1997, only three days after discovering that judgment had been entered against him, he had a conference with counsel. It was on counsel's advice that the new proceedings were issued against the Bank. Counsel did not advise that he should apply to set aside the judgment which had been entered against him. It was only much later on that his solicitors advised him to instruct more experienced counsel. Accordingly, on 3rd April 1998, he attended a conference with Mr. Jason Pow who has represented him today. Mr. Pow advised the Defendant that an application to set aside the judgment should have been made. It is true that almost four months then elapsed before the application to set aside the judgment was filed. That was because (a) Mr. Pow advised that various documents be obtained from the Department of Immigration and the Land Registry, and (b) Mr. Pow's professional commitments from the middle of May until the end of July prevented him from preparing the Defendant's draft affirmation earlier.

15. In weighing up these considerations, I have taken into account the fact that the lapse of time of more than three years between the entering of the judgment and the application to set it aside has not seriously prejudiced the Bank. The affirmations which have been filed on the merits show that the Bank's witnesses purport to have retained a clear recollection of the events which gave rise to the proceedings, and the crucial telephone conversations on which the Defendant's liability to the Bank primarily depends were recorded on tape. In addition, it is possible to protect the Bank against any difficulty which may have arisen in the meantime about enforcing any judgment it subsequently obtains because the amount standing to the Defendant's credit in his frozen account as at 27th August 1998 was about $2,716,000.00. In summary, therefore, the conclusion which I have reached, subject to the argument relating to waiver which Mr. Merry has advanced, is that the judgment should be set aside, provided that a mechanism can be found to give the Bank the comfort of knowing that it will be able to execute any judgment it obtains against the Defendant's assets.

Waiver

16. Ord. 2 r. 2(1) provides:

"An application to set aside for irregularity any ... judgment ... shall not be allowed unless it is made within a reasonable time and before the party applying has taken any fresh step after becoming aware of the irregularity."

Mr. Merry contends that the application to set aside the judgment was not made within a reasonable time, and in any event it was made after the Defendant had issued the separate proceedings against the Bank, which he contends constituted a "fresh step" for the purposes of Ord. 2 r. 2(1). In my view, the words "after becoming aware of the irregularity" in Ord. 2 r. 2(1) relate, not merely to the words "before the party applying has taken any fresh step", but also to the words "within a reasonable time". How could the mere lapse of time amount to a waiver of your rights if during that time you were not aware that you had any rights to waive?

17. In those circumstances, the critical question is: when did the Defendant become aware that the judgment which had been entered against him was irregular? It is necessary to distinguish between knowledge of the facts which give rise to the irregularity of the judgment, and knowledge that, on those facts, the judgment may be irregular. That distinction was recognised in Mercedes-Benz A.G. v. Leiduck [1994] 3 HKC 216 at p. 232H.

18. The evidence is that it was only when the Defendant was advised by Mr. Pow on 3rd April 1998 that he knew for the first time that his presence or absence in Hong Kong on or about 1st April 1995 was relevant to the issue whether the writ had been properly served upon him, and therefore whether the judgment was irregular. Since his current passport had only been issued in March 1997, he would only have known precisely when he had been in Hong Kong during the relevant period once he had received his travel movements from the Department of Immigration at the end of April 1998. That was well after he had taken what is contended to be the fresh step, i.e. the issue of the separate proceedings against the Bank. And although there was undoubtedly some delay between (a) the date on which the Defendant discovered the exact dates of his movements in and out of Hong Kong during the relevant period and (b) the date on which the application to set aside the judgment was filed, I must look at the reasons for that delay and the culpability, if any, of the Defendant. The whole of that delay was caused by Mr. Pow's professional commitments, and no blame can be attached to the Defendant. In all the circumstances, I cannot say that the application to set aside the judgment was not made within a reasonable time of the Defendant becoming aware of the facts, i.e. the exact dates of his movements in and out of Hong Kong during the relevant period, which constituted the irregularity.

Conclusion

19. For all these reasons, this appeal must be allowed, the order of the master must be set aside, and I shall hear from the parties how to get for the Bank the comfort of knowing that it will be able to execute any judgment it obtains against the Defendant's assets.