XCHRX KOREA SONBAK SHIPPING COMPANY v. CHARTER HARVEST SHIPPING LIMITED

1993 No. CL113

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

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H E A D N O T E

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Where a deponent of an affidavit used in interlocutory proceedings deposes that certain documents supplied to him are the source of his information or belief, Ord. 41 r. 5(2) of the Rules of the Supreme Court is complied with even if they are not exhibited to his affidavit, provided that, if he is required to produce the documents, he either does so, or provides an explanation for not doing so which the court regards as acceptable. The requirement to produce the documents need not be made by notice under Ord. 24 r. 10.

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J U D G M E N T

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1. This is an application by the Defendant to set aside a judgment entered on 26th October 1993 in default of defence. Since it raises an interesting question as to the true effect of Ord. 41 r. 5(2) of the Rules of the Supreme Court, I decided to reserve judgment. For that reason, I give leave for this judgment, though handed down in chambers, to be reported.

The Reason for the Default

2. The Defence was due to be served on 30th September, but the Plaintiff extended the Defendant's time for service to 7th October. The Defence was not served, and on 11th October Mayo J. gave the Plaintiff liberty to enter judgment against the Defendant unless the Defendant filed its Defence by 4.00 p.m. on 21st October.

3. On 19th October, after considering advice given to it by its solicitors, the Defendant instructed its solicitors to apply to the court for the Plaintiff's Amended Points of Claim to be struck out on the ground that it disclosed no reasonable cause of action against the Defendant. The obvious course which the Defendant's solicitors should then have taken was to file the Defence within the time stipulated by Mayo J., with either a letter to the Plaintiff's solicitors or an averment in the Defence itself to the effect that the Defence was being filed without prejudice to the Defendant's contention that the Amended Points of Claim disclosed no reasonable cause of action against the Defendant.

4. However, the strategy which the Defendant's solicitors chose to adopt was a high-risk one. Without applying to the court for a further extension of time, they filed a summons on 20th October seeking the striking out of the Amended Points of Claim. Not surprisingly, that summons could not be heard before 4.00 p.m. on 21st October. Indeed, on 20th October it was fixed for hearing on 26th October. Accordingly, when the Defendant's solicitors realised that the summons could not be heard before the time when the Defence had to be filed, they issued a summons on 21st October itself seeking a further extension of time. Mayo J. heard that summons at 3.00 p.m. on 21st October, and at 3.50 p.m. he dismissed it. The Defendant did not have time within the next 10 minutes to file its Defence, and the Plaintiff entered judgment in due course.

5. These reasons for the default on the part of the Defendant to file its Defence in time were characterised, in an affirmation made by Mr. Yip, a solicitor employed by the Defendant's solicitors, as being the "result of the Defendant's innocent but misplaced optimism in respect of the accommodation and indulgence that will be afforded by the Opponents and by the Court". I disagree. In my view, the default was the result of the Defendant's solicitors' belief that the mere issue of the summons to strike out the Amended Points of Claim would result in the court deciding to extend the time for filing the Defence until after the summons had been heard. That belief was wholly erroneous: Mayo J.'s decision of 21st October demonstrated that.

The Relevance of the Reason for the Default

6. The reason for the default is one of the matters which the court will take into account in deciding whether to exercise its discretion to set aside the judgment: Evans v. Bartlam [1937] AC 473 at p. 483. However, there is no rule that a reasonable explanation for the default is a necessary prerequisite to a successful application to set aside a default judgment: Fountain v. Bank of America National Trust and Savings Association [1990] 2 HKLR 158 at p. 170B. Moreover, the primary consideration is whether the Defendant has a defence which is not merely arguable but has a real prospect of success, though not necessarily a better than 50:50 chance of success: Evans v. Bartlam, op. cit., as explained in The Saudi Eagle [1986] 2 Lloyd's Rep. 221 at p. 223 and The Ruben Martinez Villena [1987] 2 Lloyd's Rep. 621 at p. 624. Although I do not regard the explanation for the default as reasonable, I propose to set aside the judgment - if necessary on terms - if the Defendant satisfies me that its defence has a real prospect of success.

The Nature of the Claim

7. The Plaintiff is the owner of a vessel. It chartered the vessel to the charterers. The Plaintiff claims that (a) demurrage was earned on the loading of the vessel, and that (b) the charterers were in breach of an implied term of the charterparty in failing to ensure that customs and port authority clearance at the port of loading would be granted promptly on the completion of loading. The Defendant was the charterers' agent. The Plaintiff claims that the Defendant guaranteed the due performance of the charterers' obligations under the charterparty.

The Defendant's Defences

(1) Guarantee

The Defendant denies that it guaranteed the due performance of the charterers' obligations under the charterparty. However, at the time when the charterparty was being negotiated, the Defendant sent a telex to the charterers' other agents in which it gave those agents authority to conclude a charterparty with a clause in it under which the Defendant guaranteed the full performance of the fixture. There is no evidence that that authority was ever revoked. Indeed, the references to such a guarantee in (a) a subsequent telex from those agents to the Plaintiff's agents and (b) the charterparty itself (although it was never signed) suggested that that authority was not revoked. The documents therefore strongly suggest that the Defendant agreed with the Plaintiff, in consideration of the Plaintiff agreeing to charter the vessel to the charterers, that the Defendant would guarantee the due performance of the charterers' obligations under the charterparty.

8. The Defendant offers no explanation whatever for its telex to the charterers' other agents. A mere denial of the existence of the guarantee without such an explanation would not be sufficient to avoid summary judgment on the issue: Murjani v. Bank of India [1990] 1 HKLR 586 at pp. 588I-589A. A fortiori, it is impossible for the Defendant to assert that it has a real prospect of success on the issue having regard to the absence of any evidence which it has chosen to file on the issue. I appreciate that the Plaintiff exhibited the Defendant's telex to an affidavit filed only two days before the hearing before me, but the Plaintiff's reliance on the telex has been known to the Defendant from the commencement of these proceedings because the telex was pleaded in para. 2 of the Amended Points of Claim.

(2) The defences available to the charterers

(i) The claim for demurrage. The Defendant relies on the defences available to the charterers. On the claim for demurrage, the Defendant denies that demurrage was earned. There are two strands to that defence. First. it is contended that since the charterparty permitted cargo to be loaded at two ports, the charterers were entitled to set off the time saved in one port against the time used in the other. If that argument is correct, it would reduce the demurrage due to the Plaintiff because the despatch payable to the charterers (since loading at one port took less than the time allowed) was half the rate of the demurrage payable to the Plaintiff (since loading at the other took more than the time allowed).

9. The Plaintiff contends that this argument is incorrect because of the administrative and accounting difficulties which it would create: the demurrage payable in respect of the time taken to load at one port would have to be recalculated if the time taken to load at the next port was less than the time allowed. The books simply could not be closed until after the loading at the next port had been completed, and the Defendant's argument is said to be inconsistent with the rule which Mr. Smith for the Plaintiff told me from the bar table exists that once a vessel is on demurrage, she remains on demurrage until the cargo is loaded. The Defendant's answer to that is that recalculation of the demurrage is unnecessary: only one calculation needs to be done, admittedly after the second loading. However, that is not an answer to the principle (if it exists) of "once on demurrage, always on demurrage" to which Mr. Smith referred.

10. I do not need to decide this issue because the Defendant's argument, if successful, only reduces the Plaintiff's claim for demurrage. It does not extinguish it. It is therefore necessary to look at the Defendant's second line of defence. That line of defence

(a) asserts that no demurrage was due at all because the notice of readiness was invalid when it was tendered and laytime therefore never commenced; and

(b) challenges the calculation of the demurrage if it is held that the notice of readiness was valid.

The point taken by Mr. Smith, however, is that the evidence relating to the facts necessary to support that line of defence is inadmissible because the evidence consists of Mr. Yip's affirmation, which is said not to comply with the provisions of Ord. 41 r. 5(2), which provides:

"An affidavit sworn for the purpose of being used in interlocutory proceedings may contain statements of information or belief with the sources and grounds thereof."

Those parts of an affidavit which contain statements of information or belief without identifying the source or grounds are inadmissible: Leung Kin Fook v. Eastern Worldwide Co. Ltd. (CA 184/90).

11. At first blush, Mr. Smith's point is a bad one. That is because the facts upon which the Defendant relies are set out in paras. 9-11 of the draft Points of Defence and Counterclaim. In relation to those paragraphs, Mr. Yip in his affirmation said that they "are derived from the information and documents supplied to the Defendant by the loadport agent and I verily believe the same to be true". Mr. Smith does not dispute that the loadport agent would have had personal knowledge of the facts pleaded, so on that score the requirement of identifying the source who could give direct admissible evidence on the topic (as required by Savings and Investment Bank Ltd. v. Gasco Investments (Netherlands) BV [1984] 1 WLR 271) was satisfied.

12. Mr. Smith's argument turned out to be a very refined one. Mr. Yip's source was not merely the information provided by the loadport agent, but also the documents supplied by him. Since those documents were not exhibited to Mr. Yip's affirmation, it is said that Ord. 41 r. 5(2) was not complied with.

13. Should Ord. 41 r. 5(2) be construed so as to require such documents as are the source of the deponent's information and belief to be exhibited? Mr. Smith's researches have revealed only one case which touches on the topic. In Deputy Commissioner of Taxation v. Ahern (No. 2) [1988] 2 Qd. R. 158, the Supreme Court of Queensland had to consider a provision similar in all material respects to Ord. 41 r. 5(2). Thomas J. at p. 163 said:

"The object of the disclosure is to provide some specified source which can, if necessary, be followed up by the adversary or the court. In a case such as the present a broad reference may suffice such as to a bundle of documents so long as they are somehow identified and can be produced if necessary, or there is a proper explanation for their absence."

I agree with that pragmatic approach. I hold that Ord. 41 r. 5(2) is complied with, even if the documents which are said to constitute the source of the deponent's information and belief are not exhibited to the affidavit, provided that, if required to produce the documents, the deponent either does so, or provides an explanation for not doing so which the court regards as acceptable. The requirement to produce the documents need not be made by notice under Ord. 24 r. 10. An informal notice will suffice.

14. The correctness of that approach is demonstrated by the facts of this case. The Defendant was not required by the Plaintiff to produce the documents to which Mr. Yip referred. It would be grossly unfair to deny the Defendant the right to rely on the information which those documents contain when the Plaintiff could have called for them, but either did not think of doing so or deliberately chose not to do so in order to keep open the point which Mr. Smith now takes. Accordingly, I rule that Ord. 41 r. 5(2) has been complied with in relation to Mr. Yip's verification of the facts to which paras. 9-11 of the draft Points of Defence and Counterclaim relate, and his verification of those facts is therefore admissible. Since Mr. Smith did not challenge the Defendant's assertion that those facts, if true, amounted to a defence to the claim for demurrage, the defence has a reasonable prospect of success.

(ii) Damages for breach of the implied term. Apart from denying the implied term relied upon by the Plaintiff, the Defendant contends that the charterers were not in breach of it: any delay in obtaining customs and port authority clearance at the relevant loading port was due to facts beyond the charterers' control. Those facts are set out in para. 15 of the draft Points of Defence and Counterclaim. In relation to those facts, Mr. Yip in his affirmation said that they were "provided to the Defendant by the loadport agent at Dalian, which are to my knowledge true". The phrase "to my knowledge" must be inaccurate: he cannot know the facts to be true if they came from someone else, and I therefore treat his verification as deriving from his belief that the facts are true. Again, Mr. Smith does not dispute that the loadport agent would have had personal knowledge of the facts pleaded.

15. Here, Mr. Smith's argument is an even more refined one. Even though documents are not said to be the source of Mr. Yip's information or belief, it is said that the relevant part of his affirmation is inadmissible because there must be documents in existence which evidence the facts pleaded, and they have not been exhibited. This argument, in my view, is quite untenable. The fact, if it be the case, that there are documents in existence which evidence the facts pleaded does not mean that those documents were the source of Mr. Yip's belief. In any event, the Defendant was not required by the Plaintiff to produce those documents which the Plaintiff claims must exist. I therefore rule that Ord. 41 r. 5(2) has been complied with in relation to Mr. Yip's verification of the facts to which para. 15 of the draft Points of Defence and Counterclaim relate, and his verification of those facts is therefore admissible. Since Mr. Smith did not challenge the Defendant's assertion that those facts, if true, amounted to a defence to the claim for damages for breach of the implied term, the defence has a reasonable prospect of success.

Conclusion

16. I have borne in mind the remarks of Kaplan J. in Tong Yi Sang v. Fung, Law and Ng (HCA 2721/93). Kaplan J. said that on an application to set aside a regular judgment,

"... I would expect a defendant to condescend to particulars of his Defence on the merits in his own words. To verify a draft Defence, drafted, no doubt, on the basis of instructions given by the defendant and expressed in the usual obscure wording of a pleading, may not be sufficient to discharge the onus placed on a defendant in a situation such as this. What is far more preferable (and I leave over the question whether it is strictly necessary) is an affidavit in narrative form explaining precisely what the proposed Defence will be so that the court can be assisted in forming a value judgment as to whether it can be satisfied that there is some degree of conviction and a real prospect of success in the proposed Defence."

In this case, the draft Points of Defence and Counterclaim set out clearly and concisely the facts upon which the Defendant wishes to rely, and I do not think that this is the sort of case in which the mere verification of the facts was inappropriate.

17. For these reasons, I set aside the judgment entered in favour of the Plaintiff on 26th October, and I extend the Defendant's time for filing and serving Points of Defence and Counterclaim until seven days after the handing down of this judgment. I appreciate that the judgment was entered because of the Defendant's failure to comply with an "unless" order, and I bear in mind that Sir Thomas Bingham MR in Costellow v. Somerset County Council [1993] 1 WLR 256 said at p. 264F that "special treatment" may be called for "where a default is repeated or persisted in after a peremptory order". But this was the first default of a peremptory order, which had itself been made unusually early in the proceedings, and I discern no relevant prejudice suffered by the Plaintiff. I do not intend, therefore, to impose terms on the Defendant as a condition of the setting aside of the judgment. However, the order nisi I make as to costs is that the Plaintiff's costs (a) of entering judgment and (b) of and occasioned by the Defendant's summons filed on 30th October 1993 be paid by the Defendant.

18. There is one final matter I must mention. This was yet another case in which the Practice Direction issued by the Chief Justice on 19th October 1989 relating to interlocutory applications was not complied with. I reminded the profession of the importance of compliance with it in Sanyo Electric Trading Co. Ltd. v. Leung Kwok-hing [1993] 1 HKLR 253 at p. 261. Kaplan J. has recently gone further in Tong Yi Sang v. Fung. Law and Ng, op. cit. Noting that the Practice Direction is still not being complied with, Kaplan J. held that in future, if the Practice Direction and that relating to affidavits are ignored, he will, save in the most exceptional circumstances, refuse to hear the application and adjourn it to a date to be fixed by which time he will expect the Practice Directions to have been complied with. I propose to adopt the same practice.