TAI CHAO CHENG v. CHEUNG CHUN

HCA770/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.770 OF 2003

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REASONS FOR DECISION

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1. By summons dated 2004 ("the Setting Aside Summons") the defendant applied :

(a) to set aside an interlocutory default judgment with damages to be assessed entered against him dated 10 June 2003 ("the Judgment"); and

(b) to strike out the plaintiff's claim or have it stayed until the final disposal of DCCJ 3176 of 2002 ("the District Court Action").

2. The unusual combination of relief sought by this summons arose from the complicated history of the underlying dispute between the parties and the procedural mishaps that have unfortunately been allowed to happen.

3. I heard the matter on 19 April 2004 and at the end of the hearing I ordered that :

(a) the Judgment be set aside and the defendant be granted leave to defend the action, with costs of and occasioned by the Setting Aside Summons to the plaintiff;

(b) the action be transferred to the District Court (where, it is hoped, it may be consolidated with the District Court Action and all the disputes between the parties resolved as early as possible) with costs of and occasioned by the defendant's summons dated 27 May 2003 ("the Transfer Summons") to the defendant; and

(c) any other costs not covered by the above costs orders be cost in the cause, to be taxed on the High Court scale.

4. I now give my reasons for making those orders.

The dispute between the parties and procedural history

5. It is necessary to refer in some detail to the rather convoluted history of the dispute and the events leading to the present application before me.

6. A convenient point to start is the District Court Action. That action was commenced on 24 May 2002 by the defendant in this action ("Cheung") against the plaintiff herein ("Tai"), under which Cheung sued Tai for the sum of HK$460,000 under a "promissory note" signed by Tai dated 1 June 1999 ("the Promissory Note"). The Promissory Note was in simple terms in Chinese stating that Tai had borrowed HK$460,000 from Cheung and promised to repay that sum by the following Chinese New Year (early February 2000).

7. According to Tai's pleaded case, the Promissory Note came about in the following way. It is alleged that in April 1999, Cheung invited Tai to purchase 30% of the equity of a factory in the PRC known as [博羅聯永印染廠] ("the Factory") said to be owned by Cheung. In early May 1999, the parties entered into an agreement whereby Cheung agreed to sell to Tai 30% of the equity in the Factory for HK$660,000 and for the operation of the Factory from 1 June 1999 ("the Cooperation Agreement").

8. Tai claims that he paid Cheung HK$200,000 on or about 1 June 1999 in cash and Cheung asked him to sign a document, prepared by Cheung, for the purpose of confirming Tai's promise to pay the balance of the purchase price, i.e. HK$460,000. Tai claims that he signed that document in reliance on his faith and trust in Cheung and on Cheung's representations and inducement as to the purpose and content of the document. That document he signed was of course the Promissory Note. He therefore claimed that he was not liable on the Promissory Note.

9. It is then contended by Tai that in breach of the Cooperation Agreement, Cheung had failed or refused to transfer to him any part of the 30% equity in the Factory. Hence it is said that there was no consideration for the Promissory Note.

10. It is further contended that Tai in fact paid Cheung another HK$200,000, making a total of HK$400,000. He counterclaimed, inter alia, for the repayment of HK$400,000. A point to note is that on Tai's own case, the two sums of HK$200,000 were paid on separate occasions to Cheung by him "in [Cheung's] office at 14th Floor, Block M, Lok Shun Factory Building, 6-28 Chai Wan Kok Street, Tsuen Wan".

11. In October 2002 Cheung ambitiously applied for summary judgment against Tai and, not surprisingly, was not successful. On 22 August 2003, Judge Ng gave Tai unconditional leave to defend with costs.

12. Thereafter Tai re-amended the defence to widen his case. It is now contended by Tai that in fact Cheung never had any equity in the Factory. It is alleged that the Factory was beneficially owned and operated by Cheung's company called Ever Allied Industries Ltd ("Ever Allied") hence he had no equity to sell to Tai. It is then pleaded by Tai, somewhat inconsistently with the claim that Cheung had no equity in the Factory, that Cheung had purportedly sold the entire equity in the Factory to other persons in February 2002. In any case, Tai claims that Cheung was no longer able to transfer the 30% equity to him.

13. Unusually, the Counterclaim was amended whereby the claim for the refund of the sums paid to Cheung was deleted (this was evidently done to avoid the duplicity of claims in this District Court Action and this action).

14. I need only to summarise Cheung's reply briefly. In so far as material for present purposes, it is Cheung's case that there was a prior agreement between himself on the one hand and Tai and his cousin a Mr Tai Fo Kok on the other for the purchase of 30% of Cheung's "right to run" the Factory. This "right to run" the Factory (which effectively meant the full control of the Factory, its materials and operations and to share in its profits and losses) was "through" Ever Allied and pursuant to a Subcontract Agreement dated 4 December 1991 between Ever Allied and the PRC owner of the Factory ("the Subcontract Agreement").

15. Cheung contends that Tai all along knew of the above arrangement when the Cooperation Agreement, which was to replace the prior agreement, was entered into. It is claimed that the Cooperation Agreement had been complied with on both sides in that Cheung had done everything required thereunder to make Tai a 30% owner, including the appointment of Tai as factory manager and his cousin as deputy factory manager, opening of bank accounts which required joint signatures of Tai, and the sharing of profits of the Factory pursuant to the agreed shareholding ratio. It is alleged that Tai had paid HK$200,000 in cash and paid the balance of HK$460,000 by signing the Promissory Note. It is therefore contended that Cheung had complied with his contractual obligations and caused the 30% equity to be vested in Tai.

16. Cheung further alleged that Tai was in breach of the Cooperation Agreement in the following ways :

(a) Not repaying him the HK$460,000;

(b) Withdrew from the Cooperation Agreement in about February 2002 thereby causing loss to Cheung; and

(c) Starting from August 2001 committed breaches of his duty as factory manager and collected sale proceeds of the Factory without accounting for them.

The current proceedings

17. Having recited broadly the disputes between the parties in the District Count Action, it is now necessary to explain how the current proceedings arose.

18. The writ in this action was issued on 28 February 2003, i.e. after Cheung took out summary judgment application in the District Court Action and before the application was heard. The claim, as indorsed on the writ, was for damages for breach of the Cooperation Agreement. In the Statement of Claim filed on 27 March 2003, the claim is simply pleaded on the basis that Cheung had failing to transfer the 30% equity in the Factory to Tai but had sold the entire equity to other persons, hence was in breach of contract.

19. Tai's solicitors, Messrs Benny Kong & Peter Tang ("BKPT"), who were also solicitors on record for him in the District Court Action, did not issue any letter before action to Cheung or to his solicitors on record in the District Court Action, Messrs M.F. Ko & Dennis Wong ("MFKDW") who are also Cheung's solicitors in this action. The writ stated the last known address of Cheung as "Block M & N, 14th Floor, Lok Shun Seaview Factory Building, 6-28 Chai Wan Kok Street, Tsuen Wan" i.e. the same address as Cheung's office pleaded by Tai in the District Court Action (the minor difference between the two addresses, i.e. the inclusion of "& N", is immaterial for present purposes).

20. The writ was served on Cheung at the last known address stated on the writ ("the Tsuen Wan Address"). There is an affirmation of service dated 29 March 2003, given by a clerk of the firm ("the Clerk"), deposing that he had visited the Tsuen Wan Address on 12 March 2003 and effected service of the writ by inserting through the letter at that address. Whether there has been proper service is hotly disputed and I will return to that issue later on.

21. Carrying on with the narrative, MFKDW acknowledged service of the writ on Cheung's behalf on 17 March 2003. No defence was filed by Cheung upon expiry of the time for doing so. Mr Dennis Wong of MFKDW said on affirmation that since the proceedings were considered to be an abuse of process, and liable to be struck out or stayed, no defence was filed. However, no application to set aside the writ or to strike out the claim or stay the action had been made. Be that as it may, Tai did not enter judgment in default of defence.

22. Instead, on 23 April 2003, Tai's solicitors issued a summons for directions seeking usual orders for discovery. That matter came before Registrar C. Chan on 14 May 2003 who, quite rightly, thought that discovery was premature in the absence of a defence. After some discussion between the legal representatives of the two sides, Cheung's counsel asked the Registrar for an extension of time to file the defence. The Registrar gave 14 days, up to 28 May 2003.

23. In the meantime, MFKDW thought that the current action ought to have been raised in the District Court Action. However, instead of filing a defence or seeking any further extension of time or interim stay, they issued the Transfer Summons on 27 May 2003 seeking, inter alia, the stay of the present action pending the final disposal of the pending summary judgment application. It is now sought to be explained by Mr Dennis Wong of MFKDW that in his view the application itself was already for stay of the time for filing the defence and was made before the deadline of 28 May 2003. I regret to say that, with respect to Mr Wong, he was utterly wrong : see Schindler Lifts (Hong Kong) Ltd v. Ocean Joy Investments Ltd, unreported, HCCT 81of 2001, Ma J (as he then was) 11 January 2002 at paragraph 10.

24. On 29 May 2003, upon expiry of the time extended for service of the defence, BKPT applied ex parte to enter judgment in default. In the meantime, on 6 June 2003, the hearing of the Transfer Summons came before Master Lung. There is no dispute that at the hearing the representative from BKPT did not mention the pending application for default judgment. She submitted to the Master that if the Transfer Summons had to be substantively argued, the matter should be adjourned with leave to the parties to file evidence. The Master adjourned the hearing to a date to be fixed and gave directions. That matter has not yet been restored.

25. The default judgment was approved and sealed on 10 June 2003. It was served on MFKDM on 19 June 2003.

26. On 27 June 2003, the Clerk made a further affirmation of service purporting to correct an error in his earlier affirmation. He deposed that the writ was inserted through the letter box for the Tsuen Wan Address rather than the letter box at the address.

27. On 2 July 2003, the present application was taken out to set aside the Judgment and for the claim to be struck out for being vexatious and oppressive or otherwise an abuse of process.

Grounds of application

28. Cheung seeks to set aside the Judgment on a number of grounds. First, it is contended that the Judgment was a nullity because there was no proper service of the writ. Secondly, it is said that the Judgment was the outcome of a series of abuse of court process and being collusive and fraudulent, it should be set aside. Finally, if the Judgment was regular it should nevertheless be set aside. The summons further seeks to strike out the claim for abuse of process.

Was the Judgment regular?

29. Having considered the materials before me and the submissions advanced on behalf of the parties, it is in my judgment clear that the Judgment was regularly obtained. As correctly pointed out by Mr Bernard Man, appearing on behalf of Tai, the Judgment was entered pursuant to Order 19 rule 3, Rules of the High Court, in default of filing a defence. The simple undisputed fact was that Cheung did not file any defence despite the extension of time granted by Registrar C. Chan on 14 May 2003. Therefore Tai was entitled to enter judgment.

30. The argument over the irregularity of the service of the writ was in my view a red herring. The evidence filed on behalf of Cheung went into considerable length to explain that there was no letter box at the Tsuen Wan Address whereas the letter box for the Tsuen Wan Address was actually located quite far away from the lift to the Tsuen Wan Address. There is also evidence to suggest that the envelop containing the writ was hand delivered to the Tsuen Wan Address and left there with an employee rather than inserted through the letter box for the premises.

31. All these are entirely beside the point because there is no dispute that Cheung did come to knowledge of the writ on 13 March 2003, on which day he faxed a copy of it to MFKDW. The writ was therefore served on him on 13 March 2003 at the latest : see Barclays Bank of Swaziland Ltd v. Hahn [1989] 1 WLR 506 at 511-512.

32. I should also mention that even if the question of service of the writ were relevant, since MFKDW acknowledged service on behalf of Cheung, the onus was on Cheung to show that the writ was not properly served on him : see Order 10 rule 1(5), Rules of the High Court. Clearly Cheung was not able to show that.

Abuse of process

33. It was then contended on behalf of Cheung that the history of matter revealed that Tai and his solicitors deliberately ambushed Cheung and were guilty of abusing the Court's process. The following matters were principally relied on :

(a) The issue of the writ in this Court as opposed to the addition of the claim by way of counterclaim in the District Court Action and without prior notice to Cheung's solicitors;

(b) Using the Tsuen Wan Address as the last known address of Cheung when Tai and BKPT knew that it was not his usual address which was an office in Tsim Sha Tsui;

(c) The Clerk allegedly lied as to the manner of service of the writ; and

(d) The failure to inform Master Lung and Cheung's legal representatives of the application for default judgment at the hearing on 6 June 2004.

34. I shall deal with each of these contentions briefly.

(a) While it is correct that the writ was issued while litigation concerning the same or substantially the same subject matter was in progress in the District Court, at that time (February 2003) the jurisdictional limit of the District Court was HK$600,000. The writ seeks damages to be assessed and there is evidence placed before me that the value of the 30% equity in the Factory was worth around HK$810,000. In any case, it is far from clear that the value of Tai's claim, if established, must be less than HK$600,000. The increase of the jurisdictional limit of the District Court to HK$1 million did not take effect until 1 December 2003. Hence the writ was correctly issued in the High Court. Nor can I discern any duty (professional courtesy apart) on the part of Tai's solicitors to ask Cheung's solicitors whether they had instructions to accept service.

(b) Despite the evidence now placed before me by Cheung and on his behalf that his usual address was in Tsim Sha Tsui rather than the Tsuen Wan Address and that Tai knew it (which is disputed), Cheung himself used the Tsuen Wan Address as his address in his affirmations filed in the District Court for the summary judgment proceedings. That was the address stated in the latest affirmation he filed on 16 January 2003 in those proceedings shortly before the writ was issued. Another affirmation of his, dated 13 March 2003 i.e. after the writ was issued, also used that address.

(c) The allegation that the Clerk, in filing his 2nd affirmation of service to correct his previous affirmation, was lying was not made out. I am not prepared to hold, on the basis of conflicting affidavit evidence alone, that the Clerk deliberately lied as part of an attempt to ambush Cheung or mislead the Court. Since Cheung acknowledged service through MFKDW, I do not see why he should tell a lie in the first place. If there were any intent to ambush Cheung, I would have thought that the Clerk would not have taken the trouble to go to the 14th floor to deliver the envelop containing the writ to Cheung as alleged by Cheung's employee.

(d) I consider that there is no obligation on the part of Tai's solicitors to mention the pending application for default judgment to Master Lung. There can be no question of an attempt to hide it from the Master : the relevant papers would be on the court file before the Master. Nor do I think a solicitor should be under any obligation to reveal matters which may alert his opponent and thus serve to prejudice his own client's interest, unless not to do so may conflict with the solicitor's duty to the Court.

35. I therefore reject the contention that there was any abuse of the Court's process or any dishonest or even dishonourable conduct on the part of Tai or BKPT. It is a very serious allegation to make but in my judgment Cheung did not even come close to substantiating it.

36. For these reasons, I have come to the firm conclusion that the Judgment was regular.

Application under Order 12 rule 8, Rules of the High Court?

37. Before I turn to consider whether to set aside the Judgment, I must deal with an unusual application by Cheung to treat the application as an application under Order 12 rule 8, Rules of the High Court as well. The present summons was not taken out pursuant to Order 12 rule 8 and the time for making such an application has long expired. I am not persuade why I should extend the time for Cheung to make the application, bearing in mind that he has invoked the Court's jurisdiction by applying to transfer this action to the District Court. In any event, for the reasons stated above I cannot see any logical basis to challenge the service of the writ. I therefore rejected that application.

Whether Judgment should be set aside

38. The Judgment being regular, Cheung must demonstrate a defence with a real prospect of success in order that the Judgment might be set aside. Mr Kenneth C.L. Chan, who appeared on behalf of Cheung, did not dispute that burden but submitted that the burden has been discharged.

39. As expected, Mr Man contended that Cheung has not shown a defence on the merits to justify setting aside the Judgment. He submitted that all that the Judgment decided was that there was a breach of the Cooperation Agreement, with damages to be assessed. Since there was plainly no transfer of any equity in the Factory to his client, Cheung must have been in breach of the agreement, hence there was no defence to that claim.

40. I was not persuaded that the case was as clear-cut as suggested by Mr Man. While there was admittedly no physical transfer of any shares, there was no express provision in the Cooperation Agreement requiring such transfer. What was required to be done (other than the payment of the sum of HK$660,000 by Tai) was an audit of the assets of the Factory on 31 May 1999, the day before the cooperation was to commence, and thereafter the sharing of profits and losses in the ratio specified in the agreement. There was ample evidence placed before me that all those were done from 1 June 1999 onwards.

41. Further, bearing in mind the prior agreement and the (disputed) knowledge of Tai that the Factory was run by Ever Allied under the Subcontract Agreement, it was clearly strongly arguable on behalf of Cheung that the Cooperation Agreement did not envisage any physical transfer of shares. There was therefore substance in Cheung's case that he had performed the Cooperation Agreement.

42. Moreover, there was considerable documentary evidence placed before me to support the contention that it was Tai who walked out from the cooperation. In particular there was a letter dated 4 June 2002 written by Tai to Cheung in which he appeared to have acknowledged that he withdrew from the business with Cheung's consent. Cheung has also produced documents to support his claim that Tai had been in breach of his duties.

43. In my judgment, these are clearly matters for trial. I was therefore satisfied that the Judgment should be set aside and Cheung be given leave to defend this action.

Transfer to the District Court

44. As I recorded earlier, the adjourned hearing of the Transfer Summons has not been restored. However, I see no reason why all the parties' disputes should not be ventilated in one set of proceedings. Now that the jurisdictional limit of the District Court has increased, there should be no impediment to this case being transferred to the District Court.

45. When I raised this matter with counsel at the beginning of the hearing, both counsel sensibly agreed that I could order the transfer of this case to the District Court. Indeed, Mr Man sensibly conceded that he had no ground to oppose the transfer.

46. Accordingly, in the exercise of my case management power, I ordered that this action be transferred to the District Court. I was, of course, not able to make an order for the consolidation of this action, once transferred, with the District Court Action. However, I hope the parties will do whatever may be necessary to bring about the early resolution of this unhappy litigation to its proper conclusion.

Costs

47. Having heard argument from counsel, I ordered that Cheung should bear the costs of and occasioned by the application to set aside. The Judgment was regularly obtained, and frankly, was allowed to be entered because of the clear error on the part of MFKDW. Mr Man submitted that in such a case the usual order was that the applicant should bear the costs of the application. He cited the Court of Appeal's judgment in Leader Civil Engineering Corporation Ltd v. Well-Pro Engineering Ltd, unreported Civil Appeal No. 264 of 1997, 12 March 1998 in support of that proposition.

48. Mr Chan, on the other hand, reminded me that there were two sets of costs involved : the costs of and occasioned by the application itself and the costs of the contested hearing. While he accepted that the former set of costs should be to be to the other side, the costs of the hearing should be in favour of the successful party : see Lessy SARL v. Pacific Star Development Ltd [1996] 2 HKC 326.

49. I fully recognised the distinction between the two sets of costs but in my view it was not unreasonable for Tai to resist the application. A main part of Cheung's case before me was that the Judgment was irregular and was obtained by underhand behaviour. Those contentions were unfounded and firmly rejected by me. While Mr Chan succeeded in persuading me on the merits of Cheung's defence, the resistance on Tai's part was far from unreasonable. Accordingly, in the exercise of my discretion I awarded the costs of the entire application including the hearing to Tai.

50. In relation to the costs of the Transfer Summons, I think it was right that the matter should be heard by the same court already seised of the dispute between the parties. I therefore considered that Cheung should have the costs of that application.

51. In so far as there might be any costs not covered by the above orders, I ordered that these costs be in the cause of the action, to be taxed on the High Court scale.

52. Finally, I thank counsel for their assistance.