PREMIER FASHION WEARS LTD. v. CHOW CHEUK MAN

H E A D N O T E

Test on setting-aside of default judgment: real prospect of defence on the merits being believed necessary - No such prospect here.

Wrong rule being cited in summons did not matter since no one prejudiced by error.

Garnishor, having equitable charge on garnished debt, has standing to resist setting-aside of judgment under which debt subsists - Has legal right as opposed to mere commercial interest.

Appeal against setting-aside allowed.

IN THE COURT OF APPEAL

1993, No.177
(Civil)

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J U D G M E N T

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Litton, J.A.:

1. I invite Mr Justice Bokhary to give the first judgment.

Bokhary, J.A.:

2. These appeals were heard together. The first appeal concerns an action in which Premier is the plaintiff. The second appeal concerns an action in which Broadway is the plaintiff. Chow is the defendant in both actions. Li is the third party in both sets of third party proceedings.

3. Premier claims under a contract for the supply to it by Chow of garments, alleging short-delivery. Broadway claims under three contracts for the supply to it by Chow of garments, alleging short-delivery under one contract and non-delivery under the other two.

4. In each instance, Chow third-partied Li as a non-delivering and short-delivering sub-contractor from whom he sought an indemnity.

5. In the actions, Premier and Broadway each obtained summary judgment against Chow.

6. In neither set of third party proceedings did Li give notice of intention to defend.

7. Following the obtaining of summary judgment against him in each action, Chow applied in each set of third party proceedings for an indemnity from Li.

8. Master Woolley entered judgment for the indemnities sought.

9. Li, who had not appeared before the Master, then appealed from the Master to a Judge in Chambers, seeking the setting aside of the indemnity judgments. Those appeals came before Deputy Judge Griffiths QC who, on November 2 last year, set aside the indemnity judgments.

10. Premier and Broadway now appeal to this Court against the Deputy Judge's Orders. They seek the restoration of the indemnity judgments.

11. In setting aside those judgments, the Deputy Judge concluded that they were irregular. He also concluded that even if those judgments were regular, they ought nevertheless to be set aside on the basis that Li, who contended that he was a mere intermediary rather than a sub-contractor, had disclosed a defence on the merits worthy of trial.

12. Before us, Premier and Broadway attack while Li defends those two conclusions of the Deputy Judge. Li also seeks to support the Deputy Judge's decision upon an additional ground advanced by way of a Respondent's Notice.

13. The indemnity judgments would only be irregular if the Court had no jurisdiction to enter them. And the Court would have lacked such jurisdiction only if it was obliged to confine itself to rule 5 of Order 16 and to ignore rule 7 of that Order. Unfortunately, instead of saying to the Deputy Judge that his clients relied on rule 7 rather than rule 5, counsel then arguing the matter for Premier and Broadway sought to fit their cases within rule 5 by arguing that summary judgments are judgments in default within the meaning of rule 5. That argument, not surprisingly, was rejected by the Deputy Judge. It is equally unsurprising that it has not been renewed before us.

14. In my judgment, the Master had jurisdiction under rule 7 to enter the indemnity judgments. The references in Premier and Broadway's summonses to rule 5 did not exclude them from recourse to the Court's jurisdiction since nobody was prejudiced by the errors in the summonses invoking rule 5. The Master had jurisdiction; and there was no circumstance forcing the case into the fictitious position that he did not have jurisdiction.

15. That brings us to the merits. In his judgment, the Deputy Judge said this:-

"If, on the other hand, a judgment is regularly obtained, then as the courts have made plain in a long line of authorities, it is the merits of any defence which is of primary importance, though of subsidiary importance are such matters as the reason why the default judgment occurred and the like."

16. Now, there is no doubt that the merits are always of particular importance since, first, no court would wish to re-open a matter without merit since that would only pointlessly postpone the inevitable and, secondly, no court likes to decide any matter other than in accordance with the merits if any are in real prospect because the court's objective is justice. But that does not mean to say that the courts do not attach importance to factors such as the other ones mentioned by the Deputy Judge. And it will be necessary to say a word in regard to those factors later on, after considering whether there is any merit in the defence which Li raises.

17. As to the merits, the Deputy Judge's judgment continues thus:-

"But, the Third Party avers in his affirmation that he was acting purely as an intermediary and I have to consider whether there is incontrovertible evidence, either documentary or in some other way, or whether that allegation is so inherently implausible that it cannot succeed."

18. Now, that approach is a far cry from the approach of Lord Atkin and the other members of the House of Lords in the well-known case of Evans v. Bartlam [1937] AC 473. One sees at page 480 that Lord Atkin made it clear that by an "affidavit of merits" from the defendant he meant "evidence that he has a prima facie defence". No defence is any good if it will not work in law even if based on fact. Likewise, no defence, whatever its effect in law if believed, is any good if it does not enjoy any real prospect of being believed.

19. It is interesting that there is no attempt by Li to suggest by way of a Respondent's Notice that even if the test laid down by the Deputy Judge was too generous to him, he could nevertheless succeed by reference to the correct test. When one looks at all the circumstances-and they include how very simple was the role ascribed to himself by Li and how very much more involved in the transactions he was when one looks at the whole of the evidence-it seems to me plain that the defence has no real prospect of success because it has no real prospect of being believed. If it had, then it would not be for us to anticipate the result. But, equally, if it has not, then it cannot be taken any further.

20. So, I am therefore against Li on the merits.

And I return now to the other factors. The Deputy Judge never said what he made of them. But the plain fact of the matter is that there was very long delay here. And in the course of that delay, Premier and Broadway took steps and incurred costs on footing of the indemnity judgements. What is more, it appears probable that what little chance they ever had of execution against Chow disappeared during the period of delay. The opportunity which they lost was of some value. And it was lost as a result of delay on the part of Li who now seeks the indulgence of the court. By reference to those other factors, too, my decision is against him.

Can all of that set at naught on the basis of the point taken in the Respondent's Notice? That point is quite simple that neither Premier nor Broadway had locus standi to resist the setting-aside of the indemnity judgment. I disagree. A garnishor, having as he does an equitable charge on the garnished debt, has standing to resist the setting-aside of a judgment under which that debt subsists. He has a legal right as a opposed to a mere commercial interest. No other view would be consistent with the existence of that equitable charge. Nor, for that matter, would any other view be compatible with practicality: and the law is meant to be a practical code.

21. I would allow the appeals, set aside the Deputy Judge's Orders and restore the indemnity judgments entered by the Master.

Litton, J.A.:

22. What we have here is not an unusual situation. The plaintiffs have obtained judgments against Chow who is a man of straw. Chow has in turn obtained judgments against the third party for the identical sums. The third party seeks to set aside those third party judgments.

Locus standi

23. Do the plaintiffs havelocus standi before the Court? That is, do the plaintiffs as Chow's judgment creditors have the right to appear as parties in these proceedings and to put evidence before the Court in opposition to the third party's application to set aside the judgments obtained by Chow against them? This was an issue which the Deputy Judge left unresolved.

24. Let me first deal with a marginal point in the Deputy Judge's judgment, namely that the judgments of October 14, 1991, were obtained "nominally" by the defendant Chow but that the applications for judgment before the Master were "conducted by the plaintiffs". I am not sure what the Deputy Judge meant by that precisely. The fact is that the judgments were obtained upon the Master hearing the solicitors for the defendant Chow. They were the solicitors on the record as solicitors acting for Chow. Whether the proceedings were initiated at the behest of the plaintiffs or not is besides the point.

25. It seems to me that the question of locus standi is self-evident. The Garnishee Orders obtained by the plaintiffs were made absolute on May 26, 1992, long before the third party commenced the present proceedings. The Orders say in terms that the third party as the garnishee is required to pay to the plaintiffs the sum being so much of the debt from the third-party to Chow as is sufficient to satisfy the judgments obtained by the plaintiffs against Chow. The plaintiffs clearly have a legal interest in the judgments against the third party, for if those judgments were set aside, then the plaintiffs' right as garnishors in the present proceedings must go. The plaintiffs are not simply creditors of Chow with no prior involvement in these proceedings. They are the creditors who initiated the actions in which the third party was adjudged liable to pay. Assuming that the third party were to pay to the plaintiffs the sum of $285,343.18, the sum named in the Garnishee Order in Civil Appeal No. 177 of 1993, the plaintiffs' receipt of this sum would validly discharge both Chow and the third party. Plainly, in these circumstances, the plaintiffs have the right to intervene as parties to these proceedings, in other words, have locus standi.

Irregular judgment

26. As to whether the judgments ordered by Master Woolley were irregular, the question quite simply was whether the Master had jurisdiction to make the orders he did. A court has either jurisdiction under the law or it has no jurisdiction. This cannot depend on the way a party puts the matter to the Court for adjudication. It is conceded that Order 16 rule 7 of the Rules of the Supreme Court gave the Master jurisdiction to enter default judgment against the third party in the circumstances of this case. The error, or indeed ignorance, of the parties and their legal advisors cannot alter the result.

27. The Deputy Judge in his written judgment cited in full the provisions of Order 16 rule 5. He was right of course to conclude that rule 5 did not allow the Master to do what he did. But that was not the end of the matter. If the Deputy Judge had gone on and looked at rule 7, he would have seen that the Court's powers are very wide, for judgment may be entered "as the nature of the case may require". This was amply sufficient to allow the Master to enter default judgment against the third party, summary judgment under Order 14 procedures having previously been entered against Chow.

Order 13 rule 9

28. As regards the merits of the case, Order 13 rule 9 of the Rules of the Supreme Court imposes no artificial fetter on the Court in considering whether a default judgment should be set aside or not. The Deputy Judge seems to have considered that once the possibility of the third party having a defence to the third party claim is raised, the onus is then on the party seeking to uphold the judgment to provide "incontrovertible evidence" against the potential defence of the third party. This is plainly a wrong approach and robs Order 13 rule 9 of its flexibility. All the relevant circumstances must be considered including the third party's conduct after the proceedings were served upon him. Obviously, if upon the material before the Court, the third party appears to have a strong defence to the claim that would be a powerful reason for setting aside the default judgment on the basis that in all the circumstances of the case it is just to do so.

29. My Lord, Mr Justice Bokhary has examined the circumstances. I agree with his conclusions and with the result; and I, too, would allow the appeal and restore the judgments of Master Woolley.

Godfrey, J.A.:

30. I agree; but out of deference to the judge below, from whom we are differing, I propose briefly to state my own reasons for doing so.

31. The first, and to my mind the most important, question on this appeal concerns the proper approach of the court to an application under O.13, r.9. This gives the court power, on such terms as it thinks fit, to set aside or vary any judgment entered in default of notice of intention to defend (it is given similar powers in relation to other default judgments). The court has a wide discretion under O.13, r.9, but the authorities do offer guidelines as to the considerations which the court should take into account when exercising its discretion. In relation to a regular judgment, the authorities show that the first consideration is whether the defendant can show a defence on the merits. But what does this mean?

32. Of the modern cases, I would single out Alpine Bulk Transport Co. Inc. v. Saudi Eagle Shipping Co. Inc. [1986]2 Lloyds L.R.221. This, I believe, shows that for the purposes of O.13, r.9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under O.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.

33. In the present case, the defence of the Third Party is that there was no contract of any sort at all between himself and the defendant. That, if made out, would obviously afford the Third Party a good defence to the Third Party proceedings. But in my judgment that is not enough. The court still has to form a provisional view of the probable outcome of the action. Has the Third Party satisfied the court that there is a real likelihood of his succeeding on the facts? I have to say that I am not so satisfied. I cannot, therefore, conclude that the defendant's defence has a real prospect of success. The judge seems to have thought that, if the defendant can show he has an arguable defence, a default judgment against him ought to be set aside unless there is incontrovertible evidence before the court to negate it. With all respect to him, that approach is not a correct approach.

34. That is sufficient to dispose of this appeal, but I will say something briefly about the two points taken by the Third Party (1) as to the provisions of O.16, rr.5 and 7 and (2) as to the locus standi of the plaintiff (to whom I shall refer as "the garnishor") to oppose the Third Party's application.

35. As to point (1), O.16, r.5 (under which the defendant applied for judgment) did not apply. But O.16, r.7 did apply. There is nothing in the point made by the Third Party as to the irregularity of the judgment. The true principle is that, in asking for an order from the court, a party is not bound to state under which rule or order he proposes to move. It frequently happens that parties move under a particular rule and then, when they find it is a wrong one, turn to another and an order is made : see In re Baker's Estate, Hetherington v. Longrigg (1878)10 Ch.D.162, at pp165-166. It is true that in the present case the court seems to have made an order under O.16, r.7 without knowing it (rather as Monsieur Jourdain spoke prose). But that seems to me to made no difference.

36. As to point (2), I confess I do not follow the Third Party's argument. It is plain that an assignee of a judgment debt has locus standi to appear on proceedings by the defendant to have the judgment debt set aside: see, for example, Harley v. Samson (1914)30 TLR 450. It is true that a garnishor is not an assignee of the judgment debt; but it is equally true that the garnishee order gives him an equitable charge over it : see Galbraith v. Grimshaw & Baxter [1910]1 KB 339, per Farwell L.J. at p.343. That, it seems to me, is a sufficient interest to justify his being heard upon the matter in question. It is a legal interest. The Third Party's suggestion that the garnishor's interest is a merely commercial interest seems to me entirely misconceived.

37. It is for these reasons that I, too, would allow this appeal.

Litton, J.A.:

38. Having heard counsel, the orders we make are as follows:-

(1) that these appeals are allowed;

(2) the orders of Master Woolley dated October 14, 1991, and February 26, 1993, be restored;

(3) the costs of these appeals and of and incidental to the third party summonses to set aside the judgments dated November 27, 1992, be to the plaintiffs.