DENG MINGHUI t/a TIANYE INDUSTRIAL (HONG KONG) CO v. CHAU SHUK LING ELAINE

CACV 309/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 309 OF 2006

(ON APPEAL FROM HCA 749 OF 2005)

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J U D G M E N T

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Hon Cheung JA :

Setting aside default judgment

1. On 14 June 2005 the plaintiff obtained judgment against the defendant by reason of her default in acknowledging service of the writ of summons on her.  Pursuant to the judgment a charging order absolute was imposed on the defendant’s property situated at Flat J, 34^th Floor, Block 8, Aldrich Garden, No. 2, Oi Lai Street, Shau Kei Wan, Hong Kong (‘the property’). 

2. On 6 October 2005 the defendant issued a summons to set aside the judgment and to vacate the charging order absolute.

3. Master Queenie Au Yeung refused the application.  The defendant appealed to Deputy High Court Judge Saunders (as he then was).  The judge dismissed the appeal.  The defendant now appeals against this decision. 

Background

4. The writ was served on 28 April 2005 by the plaintiff by inserting it into a letterbox of the property.  The property was a vacant residential flat which was used by the defendant before she left for the United States of America on 28 September 2004. 

5. In May 2005 the defendant became aware of the proceedings when her son, who visited the property to check whether it was in good order, discovered the writ in the letterbox and forwarded it to the defendant in the United States. On 23 May 2005 the defendant’s solicitors wrote to the plaintiff’s solicitors stating that the defendant had been living in the United States of America since 2004, and that leave was required from the Court to serve proceedings on her.  It further stated that even “if the proceedings have sent to her by post, they have not been properly served”.  It asked the plaintiff’s solicitors for a complete set of the documents that had been served on the defendant. 

6. On 26 June 2005 the plaintiff’s solicitors filed an affirmation of service of the writ which obviously was intended to be for the purpose of obtaining judgment.  In this affirmation the process server described that the writ was served by inserting into the letterbox of the property.  The server stated that

‘in the opinion of the plaintiff, the said writ of summons so inserted in the letterbox for the address of the defendant will have come to her knowledge within seven days after the date of such insertion thereof.’

The address of the property was described as the last known address of the defendant. 

7. This affirmation did not disclose the letter of 23 May 2005 from the defendant’s solicitors.  On 14 June 2005 judgment was entered for the plaintiff.

8. On 6 October 2005 the defendant commenced the present application. 

Two matters

9. For the purpose of setting aside the judgment in default, one would have thought that the defendant could have relied on two matters which were unanswerable by the plaintiff.  First, that there was a material non-disclosure by the plaintiff in the terms of the letter of 23 May 2005 when he applied for judgment.  Second, that the writ was not properly served on the defendant because at the time of service she was outside the jurisdiction of Hong Kong.

Order 10, rule 1

10. The relevant rule is Order 10, rule 1 of the Rules of the High Court which provides that

‘	1.―	(1)	A writ must be served personally on each defendant by the plaintiff or his agent.
		(2)	A writ for service on a defendant within the jurisdiction may, instead of being served personally on him, be served―
			(a)	by sending a copy of the writ by registered post to the defendant at his usual or last known address, or
			(b)	if there is a letter box for that address, by inserting through the letter box a copy of the writ enclosed in a sealed envelope addressed to the defendant.
		(3)	Where a writ is served in accordance with paragraph (2)―
			(a)	the date of service shall, unless the contrary is shown, be deemed to be the seventh day (ignoring Order 3, rule 2(5)) after the date on which the copy was sent to, or as the case may be, inserted through the letter box for, the address in question;
			(b)	any affidavit proving due service of the writ must contain a statement to the effect that―
				(i)	in the opinion of the deponent (or, if the deponent is the plaintiff’s solicitor or an employee of that solicitor, in the opinion of the plaintiff) the copy of the writ, if sent to, or as the case may be, inserted through the letter box for, the address in question, will have come to the knowledge of the defendant within 7 days thereafter; and
				(ii)	in the case of service by post, the copy of the writ has not been returned to the plaintiff through the post undelivered to the addressee.’  (emphases added)

The defendant must be within the jurisdiction

11. The plaintiff was invoking Order 10, rule 1(2)(b) as the mode of service.  The requirement is that the defendant must be within the jurisdiction at the time of the service of the writ.  This is clear from the wording of rule 1(2).  Lord Brightman in Barclays Bank of Swaziland Ltd. v. Hahn [1989] 1 WLR 506 put the matter beyond doubt by stating that in order to invoke Order 10, rule 2(a), a defendant must be within the jurisdiction at the time when the writ is served.  As the defendant was not in Hong Kong at the time of the service of the writ it was not served on her. 

Concession by counsel

12. If the matter had rested there, in my view, the judge would no doubt have found for the defendant.  But, as recorded in the judgment, counsel then acting for the defendant (who was not Mr. Kenneth Lam, who appeared in this appeal) initially advanced the case that the writ should have been served on the defendant outside the jurisdiction by leave of court, only to abandon this jurisdictional challenge and, it now appears, to accept that the service as purportedly effected was good service.

13. Mr. Lam now takes the point that this concession was wrongly made by counsel.  He seeks leave to amend the notice of appeal to deal with this point, as to withdraw this concession.

14. I have no doubt whatsoever that the concession was wrongly made.  Counsel obviously missed the important decision of Lord Brightman in Hahn.  What probably had caused the concession to be made was the case of Penrose Industries Limited v. Tam Yan Lung (HCA 5738/2000) which was dealt with by the judge immediately following the statement that counsel had abandoned the challenge on jurisdiction.  In that case service was also effected by inserting the writ into the letterbox at the address of the defendant pursuant to Order 10, rule 1(2)(b).  The defendant was not in Hong Kong at the time of the service.  Yeung J (as he then was) held that

‘In my view irrespective of where the defendant was at the time of the service, if he had actually acquired knowledge of the proceedings he should not be allowed to complain about the service not being regular and effective.  In this respect, the judgment in the case of Chu Han Lun and Yap Lisa Susanto [1999] 3 HKC 378 is relevant.’

15. This Court (Nazareth VP and Leong JA (as he then was)) in Chu Han Lun actually held that the defendant must be within the jurisdiction for an Order 10, rule (1)(2)(b) service to be effective.  The case of Hahn was cited.  While the Court also dealt with the effect of notice by the defendant of the proceedings, this does not detract from the basic ruling on jurisdiction.  In my view, and I say this most respectfully, under the existing state of authorities, Penrose was incorrect.

16. Apart from this, and in any event, I cannot see why counsel should have made the concession at all.  The application was to set aside a default judgment.  The effect of bad service is to render the judgment irregular in nature, and under the existing law as stated by this Court (Nazareth VP, Bokhary JA (as he then was) and Sears J) in Po Kwong Marble Factory Ltd. v. Wah Yee Decoration Co. Ltd [1996] 4 HKC 157, the defendant is entitled to set it aside as of right.  Why, one wonders, should counsel have chosen not to rely on the straightforward route, but instead to assume a higher burden by accepting that there was proper service and thus that the judgment was regular, and then try to convince the judge that the defendant has a defence which has a reasonable prospect of success : see the requirement as laid down in Saudi Eagle Inc. [1986] 2 Lloyd’s Rep. 221?  The whole approach below makes no sense, save perhaps for a misapprehension of the law.  Certainly there is no indication by the defendant that she preferred to litigate in the Hong Kong courts; all the objective indicia are to the contrary.

17. Furthermore the concession as made was not a concession on factual issues, the withdrawal of which may somehow prejudice the plaintiff.  The evidence is by way of affidavits which were used before us and below.  In this situation, there is no question of prejudice to the plaintiff which cannot be compensated by costs.

18. In the circumstances, I am minded to hold that the concession was wrongly made, and that the defendant is entitled to argue as to the validity of the purported service.  It is clear that the writ was improperly served on the defendant because she was not in Hong Kong at that time.  As a result the judgment was irregular and should be set aside as of right.  This means the charging order absolute must also be discharged.

Question of notice

19. It should be noted that Mr. Man, counsel for the plaintiff, accepted the authority of Hahn and Po Kwong Marble Factory Ltd.  In his written submission, he had argued that although at the time of the service the defendant was not in Hong Kong, nonetheless she had had notice of the writ in May 2005 when her son had forwarded it to her, and relying on the case of Forward v. West Sussex County Council [1995] 1 WLR 1469, he argued that the writ in fact was properly served on the defendant. 

20. In Forward the writ was sent to the 4^th defendant by post to his last known address as known to the plaintiff.  The defendant in fact had moved from that address and left the neighbourhood.  No acknowledgement of service was entered by him.  But the writ was not returned, and was delivered to plaintiff’s solicitors. Sir Thomas Bingham M. R. at page 1475 held that

‘It was a cardinal rule of procedure that a party should not in ordinary circumstances be answerable for a claim of which he had had no notice.  If he could show that the proceedings, although sent to and delivered to the last of his addresses known to the plaintiff, had not in fact come to his notice then good service had not been effected.  The real test was one of notice not delivery.’

21. As the defendant did not have notice of the writ the court held that the writ was not duly served on him. 

22. I do not read this judgment as qualifying the view held by Lord Brightman in Hahn.  Forward was not a case concerning a defendant who was not in the jurisdiction at the time of the service of the writ.  It certainly did not decide that if the writ was not properly served in the first place, but that if it subsequently came to the notice of the defendant, the service would then become proper service.  Mr. Man did not repeat this argument at this appeal.

Submission to jurisdiction

23.  Mr. Man argued that by not pursuing the jurisdictional challenge, and by making the concession which had occurred, that the defendant had submitted to jurisdiction, and thus that the issue as to improper service no longer was available to her as a point to be invoked on her behalf.

24. For my part, I do not accept this argument.  It is circuitous, and is based entirely on the concession by counsel.  Once the concession is removed, the argument on submission to jurisdiction goes as well.

Conditions

25. Mr. Man further argued that conditions should be imposed as the price for setting aside the judgment.  Leave was sought to amend the respondent’s notice to include this argument.  In Po Kwong Marble Factory Ltd. the Court had imposed conditions by ordering the defendant to pay money into court when it set aside an irregular judgment.  Bokhary JA held that,

‘Another thing I might have done was to underline the nature of the statutory jurisdiction.  ‘Ex debitio justitiae’ or as of right means without going into the actual merits of the defence.  It does not mean shutting one’s eyes to the circumstances surrounding the question of service and why things went wrong in that regard.  The court’s statutory jurisdiction is unfettered.’  (emphasis added)

26. The important part of this judgment, in my view, is contained in the words ‘the circumstances surrounding the question of service and why things went wrong in that regard’.  One must bear in mind the particular circumstances in which this observation was made by the Court.  In that case the problem of service was due mainly to the defendant disguising its registered office, which had confused the process server.  The defendant’s counsel also had conceded that conditions should be imposed in that case. 

27. In this case, there was nothing suspicious as far as the defendant is concerned regarding the question of service.  The short and ineluctable point is that she was improperly served by the plaintiff. 

28. Apart from the time taken in applying to set aside the judgment, there really is no other conduct on the part of the defendant which may justify the imposition of conditions.  Nor did Mr. Man rely on delay.  In my view this is right, because in August 2005 when the defendant’s solicitors wrote to the plaintiff’s solicitors asking once again for documents, the latter did not even bother to reveal that judgment had already been entered against the defendant. 

29. Mr. Man also argued that conditions should be imposed because the nature of the defendant’s case, namely, that she had taken away the plaintiff’s money, and had left the jurisdiction.  The difficulties with this approach is that this will require the Court to evaluate the merits of the respective parties’ case, which on the authority of Po Kwong Marble Factory Ltd. the Court does not need to undertake upon setting aside an irregular judgment.

30. In any event, in respect of the plaintiff’s claim of $4,340,551, the defendant has only admitted that she had retained $1,436,320, and this amount was subject to a counterclaim on her part as to commission owing.  Her case on commission was, of course, based on an oral agreement, but this was likewise for the plaintiff’s case.  Moreover, without expressing a final view on the matter, I have to observe that on its face the plaintiff’s case is extraordinary.  Instead of requiring his customers, who had bought from his company, to pay the purchase price into the bank account of his company, he apparently had asked the defendant, an employee whose wage was about $7,500 per month, to receive these payments into her personal account, and then to transfer the money to the plaintiff’s personal account.  The defendant said that for the month of September 2004, her account showed that she had paid over $7,000,000 to the plaintiff.  On its face this is by no means an everyday commercial transaction.  Whether or not the case is tainted with illegality, as is alleged by the defendant, is of course a matter to be tried, but the background of the plaintiff’s claim leaves me with a deep sense of unease.  With this background, in my view this is simply not an appropriate case in which the Court should exercise any residual discretion and to impose conditions on the defendant.

Conclusion

31. I would allow the appeal, and set aside the judgment and the consequential charging order absolute.  The parties are allowed to amend their Notice of Appeal and Respondent’s Notice respectively.

Costs

32. I will make the following provisional costs orders :

1)	The plaintiff is to bear his own costs of signing the judgment and applying for the charging order absolute.
2)	The plaintiff is to pay the defendant,
	i)	the costs of and occasioned by the setting aside of the judgment and charging order absolute (other than the costs of hearing before the judge, which in the circumstances pertaining should be costs to the plaintiff) and
	ii)	Costs of this appeal.
3)	There will be no order as to costs of the amendment of the Notice of Appeal and Respondent’s Notice.

Hon Stone J :

33. I have had the advantage of reading in draft the judgment of Cheung JA.

34. I agree that for the reasons he gives that this appeal should succeed, and that the judgment in default entered on 14 June 2005, together with the consequential charging order absolute, should be set aside.  I further agree with the terms of the costs’ order nisi proposed by Cheung JA.

35. In deference to the interesting argument on this appeal, however, I would add a few words of my own.

36. I do not wish to be critical, but for my part I find it difficult to understand how this default judgment was entered in the first place by the solicitors for the plaintiff on the back of an affirmation which pointedly omitted to disclose the fact that it had become clear (vide the letter of 23 May 2005 from the defendant’s solicitors) that not only had the defendant not been in Hong Kong at the date of such purported service, but that she no longer was resident in Hong Kong; accordingly, on the face of it, in order to effect proper service in such circumstances this could not be a normal case of service by post pursuant to the provisions of Order 10, rule 1.

37. Moreover, it seems to me that the case of Penrose Industries, op cit., does not assist Mr Man – who seeks to uphold the validity of the purported service, and hence the validity of the consequential default judgment – because, with respect to the views of the learned judge who decided Penrose, it is difficult to see why the subjective knowledge of a plaintiff as to the last known address within the jurisdiction of the defendant intended to be served should suffice, which is what appears to be suggested in that case (vide page 5 of the unreported judgment).

38. If this interpretation be correct, as I believe it to be, I agree with the view of Cheung JA that Penrose was not correctly decided in light of the principles laid down by Lord Brightman in Hahn, op. cit.

39. It follows from this, therefore, that the default judgment which is now sought to be set aside by the defendant must be categorized as irregular, with the consequence that, subject always to the residual discretion of the court, it should be set aside ex debito justitiae.

40. However, this leaves Mr Man with one further string to his bow. 

41. It is this.  He says that, even if his other arguments based on Penrose are rejected (as they now have been), in any event this should no longer be considered to be an irregular judgment because, on the particular facts of this case, the defendant has submitted to the jurisdiction of the court, and accordingly that in the circumstances it is no longer open to her to seek to argue that the default judgment which has been entered against her is an irregular judgment.

42. Mr Man maintains that such submission to the jurisdiction had occurred because counsel acting for the defendant had conceded in argument during the hearing before the learned judge below that the judgment the subject of the application to set aside in fact was a regular judgment – which concession, of course, had had the effect of focusing the mind of the court below on the question of the merits of the defence case as revealed on the affidavit evidence.

43. It strikes me that the existence of this concession by counsel figures large in the present analysis.   For Mr Man says that the effect of this stance inevitably must be that any such concession –  “in face of the solemnity of the court” was how he put it – must have had the effect of, or be regarded as, a submission to the jurisdiction, thus rendering otiose purported argument on the primary question of the jurisdiction properly having been invoked by the purported service of proceedings in this case.

44. This has given me pause for reflection; indeed, I confess that at the outset of this case I considered the issue of this concession by counsel – the fact of which now has been confirmed – to be central to this appeal, given that if Mr Man is right in his contention any issue as to the irregularity of this judgment is removed, and the court thus is thrown back upon the usual principles which have developed relating to the setting aside of regular default judgments: see, for example, Saudi Eagle, op. cit.

45. The problem, however, is that I do not think that Mr Man in fact is right in the circumstances of this case.

46. Putting to one side the fact that it is as plain as a pikestaff that this concession was incorrectly made as a matter of legal principle – and almost certainly was made absent instructions so to do, given that it was made in the context of a rehearing application, by way of Master’s appeal, to set aside a default judgment – I question whether a concession in such circumstances properly may be classified as a true submission to the jurisdiction.

47. This is difficult territory, and it is prudent to decide solely on a case by case basis whether a particular set of facts does, or does not, amount to a submission to the jurisdiction. 

48. However, I do not consider, on the present facts before the court, that such an obviously erroneous concession achieves the result for which Mr Man persuasively now contends.

49. It is settled law that in order to establish that a defendant has, by his conduct in the proceedings, submitted or waived his objection to the jurisdiction it must be shown that he has taken some step which is only necessary or only useful if the objection has been waived or never been entertained at all: see Dicey, Morris & Collins, Conflict of Laws, (14^th ed., 2006) at para 11-134 et seq.

50. The learned authors of this work provide examples of cases in which submission to the jurisdiction has been inferred, and conclude (at para 11-135) that “the clear trend of the modern authorities is that the defendant will not be regarded as having submitted by making an application in the proceedings, provided that he has specifically reserved his objection to the jurisdiction.”

51. Clearly, this is an area in which each case depends upon its own factual matrix, but I find it hard to convince myself that an error in submission by counsel, within the context of an application disputing the jurisdiction, fairly can be construed as amounting to a submission to the jurisdiction the very subject of such challenge.

52. If this be correct, then there is in this instance no ‘submission to the jurisdiction’ properly so-called, and it is open to the court to regard the default judgment thus obtained as irregular.

53. It follows, therefore, that subject to any conduct on the part of the defendant applicant which might be considered as in some way reprehensible, and which may serve to persuade the court to decline to exercise its discretion to set aside such judgment, that such irregular judgment should not be permitted to stand.

54. Returning to the instant facts, there is nothing here, for example, analogous to the conduct of the defendant in Po Kwong Marble Factory Ltd, op. cit., wherein the registered office of the company to be served was “virtually disguised”, and which led the court in that case to decide, in the exercise of its residual discretion even in the instance of an irregularly obtained judgment, to impose terms upon the setting aside of such judgment.

55. Nor is there any question of undue delay in the present case; indeed, Mr Man had made it clear that in the circumstances he is not in a position pray in aid delay.

56. At the end of the day, therefore, and absent any such vitiating factors, this court is in the situation wherein, in the words of Hunter J in Honour Finance Co. Ltd v. Chui Mei Mei [1989] 2 HKLR 146, the present defendant has “a confident expectation” that the irregular default judgment entered against her would be set aside, and I can perceive no basis for the imposition of any condition as to payment into court, which represented Mr Man’s alternative contention should this default judgment be set aside.

57. Accordingly, I concur that this appeal must be allowed, subject always to a costs’ order that recognizes and makes adequate provision for the circumstances of the argument below, namely, the misplaced concession on the part of the then counsel for the defendant which caused the learned judge below to frame his judgment in the manner that he did, with emphasis upon the perceived merits of the case.