VENCO ENGINEERING LTD v. TAI FONG ENGINEERING HONG KONG CO LTD

HCA2270/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2270 OF 2005

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J U D G M E N T

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1.  There are two summonses before me, first, a summons for summary judgment under Order 14 of the Rules of the High Court taken out by the plaintiff which I propose to take first; and, secondly, the defendant’s summons for security for costs. 

2.  It is important to understand the background to this case.  The starting point to all of this is a contract awarded by the Architectural Services Department of the Hong Kong Government to a company called Wing Hong Contractors Limited (“Wing Hong”) dated 29 March 2001 referred to as Contract TCK031.  This was a contract to do “alterations, additions, maintenance and repair of buildings and other properties for which Architectural Services Department (Property Services Branch) is responsible (designated contract area: Kwun Tong, Mongkok and Yau Ma Tei).”

3.  What then happened was that on 21 June 2001, Wing Hong subcontracted the entire contract to the defendant, for which it paid the defendant 96 per cent of what it would be paid by the Architectural Services Department.  This was done under what is a common practice in the building industry in Hong Kong, known as “shell borrowing.”  In the case of Atal Engineering Limited v Evergreen Engineering and Construction Company Limited [2004] HKEC 786, I had occasion to provide a full description of this practice.  Even if I say so myself it is useful to have regard to the first seven paragraphs of that judgment which provide a fairly comprehensive account of how the practice of “shell borrowing” operates and its implications for the various parties that are affected by it.

4.  The issue in this case is a stark one.  The plaintiff says that it was in turn subcontracted by the defendant to carry out the works that the defendant had been subcontracted to do by Wing Hong.  It is helpful to recite the relevant terms of the alleged agreement between the plaintiff and the defendant as pleaded in the statement of claim:

“	3.	At all material times:
		(a)	Wing Hong Contractors Limited (“Wing Hong”) was engaged by the Architectural Services Department of the Government of Hong Kong Special Administrative Region (“ASD”) as principal contractor for modification maintenance repair and renovation works under contract no.031/01A (the “Government Contract”).
		(b)	The defendant was a subcontractor of Wing Hong in respect of the Government Contract.
		(c)	The plaintiff was a subcontractor of the defendant in respect of the Government Contract.
	4.	By a verbal agreement made in early 2001 (the “Agreement”) between the plaintiff and the defendant, the plaintiff agreed to render modification maintenance repair or renovation works as so instructed by ASD under the Government Contract at various locations upon the requests of the defendant.  The arrangements of delegation of works by the defendant to the plaintiff under the Agreement were as follows:
		(a)	ASD would from time to time issue written works order site instructions (the “Works Orders”) to Wing Hong under the Government Contract.
		(b)	Each of the Works Orders contained, inter alia, the following information:
			I.	works order number;
			II.	the date of issue of the works order;
			III.	details or particulars of the requested construction works;
			IV.	estimated costs of the requested construction works (the “Estimated Costs”); and
			V.	location of the subject premises.
		(c)	ASD would sometimes amend the Works Orders in writing.
		(d)	From time to time, the defendant would be engaged by Wing Hong to carry out the works under some of the Works Orders.  If the defendant desired of engaging the plaintiff to carry out the works under part of those Works Orders (the “Delegated Orders”), the defendant would relay or forward the Delegated Orders to the plaintiff.  The plaintiff would then carry out the works under the Delegated Orders accordingly.
		(e)	If the Delegated Orders were amended by ASD, the defendant would relay or forward a copy of the amended Delegated Orders to the plaintiff accordingly.
	5.	The Agreement contained, inter alia, express and/or implied terms as follows:
		(a)	The plaintiff would charge the defendant 65 per cent of the Estimated Costs set out in each of the Delegated Orders.
		(b)	The defendant should pay the plaintiff for the works rendered by the plaintiff pursuant to the Delegated Orders upon payment by ASD to Wing Hong or the defendant for those completed works.
	6.	The particulars of all of the Delegated Orders are set out in the schedule annexed hereto.  The total amount of Estimated Costs of the Delegated Orders is $15,576,310.  Accordingly, the defendant should be liable to pay the plaintiff a total $10,124,601.50 for the Delegated Orders pursuant to the Agreement.”

5.  The plaintiff says that it has been paid $4,963,938.92 by the defendant pursuant to that agreement and that there is now outstanding $4,567,572.66 for which it has brought this action.

6.  The amended defence admits the subcontract between itself and Wing Hong but denies the existence of any subcontract between itself and the plaintiff.  The essence of its defence is in paragraph 6 which is in these terms:

“	6.	Save that subparagraphs (a) to (c) are admitted, paragraph 4 is denied.  It is averred that:
		(1)	It was a term of the subcontract between the defendant and Wing Hong that the defendant shall at all times represent and conduct itself as an agent of Wing Hong in relation to the subcontract and the Government Contract.
		(2)	Pursuant to the aforesaid, the defendant at all material times represented and conducted itself as an agent of Wing Hong, including in its dealings with the plaintiff.
		(3)	From time to time, the defendant would, on behalf of Wing Hong, instruct the plaintiff to carry out certain Works Orders.”

7.  I have described the issue as a stark one.  The plaintiff says that it has a contract with the defendant, pursuant to which the defendant has already paid nearly $5 million, mostly using its own cheques.  The defendant says that it was merely acting as agent for Wing Hong and that the plaintiff knew that to be the case.  The fact that it paid the plaintiff directly is a reflection of the shell borrowing arrangements.  The ASD paid Wing Hong who in turned paid the defendant and the defendant then paid the plaintiff on behalf of Wing Hong.  The defendant’s case is that the plaintiff should be looking to Wing Hong for the balance of what is due to it because its contract is with Wing Hong.

Order 14 Principles

8.  These are well-known and I take them shortly.  A defendant has to show that he has a real or bona fide defence; per Ackner LJ as he then in Banque de Paris v Costa de Naray [1984] 1 Lloyd’s Rep 21 at 23.

9.  The matter was analysed by Bokhary JA in Safe Rich Industries [1994] HKLY 183 in this way:

“	...that whether a defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

10. And by Godfrey JA in Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 at p.158:

“

The evidence must be reasonably capable of belief.  The question to ask is: is what the defendant says credible?  If so, he must have leave to defend.  If not, the plaintiff is entitled to summary judgment.  The issue is not whether the defendant’s assertions are to be believed.  It is whether those assertions are believable.”

The Defendant’s Assertions

11.   There is no doubt that the plaintiff’s case is very well documented in terms of the delegated orders, invoices submitted by the defendant and payments received from the defendant using the defendant’s cheques.  Plainly, this raises the need for a serious explanation by the defendant.  The defendant’s case is set out in the affirmation of Mr Chan Chin-yip, A71.  He is one of its directors.  Mr Chan’s first point is that under the contract between Wing Hong and the defendant, it was expressly provided that the defendant shall:

“	at all times conduct themselves on this project, including his employees and subcontractors, as agent of the company, i.e. Wing Hong and shall keep the existence of this contract confidential.”

He says that as a result, this is precisely what the defendant did and that it instructed the plaintiff to do this work in that capacity for Wing Hong.  He denies the alleged verbal agreement pleaded in paragraphs 4 and 5 of the statement of claim (supra) to the effect that the plaintiff would be paid for this work at the rate of 65 per cent of the gross fee paid by Wing Hong to the defendant.

12.  In order to give credence to the defendant’s claim that the plaintiff was in a direct contractual relationship with Wing Hong, Mr Chan has referred to 13 documents, being letters, memoranda and invoices to show that the plaintiff had a direct relationship with Wing Hong.

The Argument

13.  Mr Douglas Lam for the defendant submits that the current state of the evidence has thrown up three separate issues, all of which are of prime importance in deciding the outcome of the action.  First, who were the proper parties?  Secondly, what were the terms of the oral contract?  And thirdly, quantum.

14.  A difficulty which Mr Frederick Chan for the plaintiff needs to face up to is that, most unusually, in a very substantial building contract, his clients are suing on an oral agreement.  The only really certain term put forward is the payment at 65 per cent.  Whilst an oral agreement may well be proved by looking at all the surrounding circumstances and the subsequent conduct of the parties pursuant to that contract, the evidence in support of it must be, I would have thought, of a most compelling kind and I am sorry to say that at present this evidence does not measure up to that standard.  Mr Frederick Chan has been able to point to a number of payments received which are calculable on the basis of 65 per cent.  Nevertheless, the majority of the payments do not appear to be based on that percentage.  This is one of those cases which can only be resolved following a conventional trial when the various documents and the whole of the circumstances will have to be examined with the relevant witnesses.  At this stage, although many aspects of the plaintiff’s case are persuasive, it is an equivocal case.  The assertions of Mr Chan Chin-yip are, in my judgment, believable which is sufficient to enable the defendant to have unconditional leave to defend this action.

Costs

15.  As to costs on this summons, Mr Lam has submitted that where the plaintiff has had a sight of the defence, it should not have troubled the defendant with this application.  So I should give the defendant its costs in any event.  Mr Frederick Chan accepted that this would be consequence of the defendant getting unconditional leave.

16.  Nevertheless, it strikes me, now that I have had the opportunity to look at the evidence again in preparing this judgment, that Mr Chan’s concession is overly generous.  I do, after all, have a wide discretion on costs.  Given the weight of the documentation, although I found this to be equivocal and requiring a trial for a proper appreciation of it, it strikes me that the plaintiff was entitled to have a go, as it were.  I have not dismissed its summons outright.  This is not a case of an Order 14 that should never have been brought.  I propose to order defendant’s costs in the cause.  If they win the action, they will get these costs.  If judgment is entered against them after trial, they will not at least have to pay the plaintiff’s costs of this summons.

Security for Costs

17.  This matter has been taken shortly.  The application is under section 357 of the Companies Ordinance.  The plaintiff accepts that it will be unable to pay the defendant’s costs if the defendant is successful in its defence.  Mr Chan is contesting this on the basis that if I do order security, this will have the effect of stifling the plaintiff’s perfectly good claim.  Whilst I am not able to go into a detailed analysis of the relative strengths of the parties’ cases, it seems to me that the plaintiff has a perfectly arguable case.  The White Book at 23/3/14 sets out the court’s approach on an application such as this:

“	In considering whether to exercise its discretion under section 357 to order security for costs in a case where there may be a risk of stifling a genuine claim, the court has to perform a balancing exercise by weighing the injustice to the plaintiff if prevented from pursuing a proper claim against the injustice to the defendant if no security is ordered and, on the plaintiff’s claim failing, being unable to recover the costs incurred in defending its claim.
	Factors to be taken into account:
	(1)	whether the plaintiff company is using its impecuniosity to put pressure on the defendant;
	(2)	the plaintiff’s prospects of success (without going into the merits in detail: Porzelack KG v Porzelack UK Limited [1987] 1 WLR 420);
	(3)	whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside its own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available (this includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers.  If these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out: Hin Fai Limited v Longrace Development Limited & Another, unreported, HCA 1788 of 2003, July 18, 2003 [2003] HKEC 1367); and
	(4)	lateness of the application; whether this factor weighs against the plaintiff or defendant depends upon whether blame for the delay rests with the plaintiff or defendant.”

18.  As to (1), there is no evidence that the plaintiff is using its impecuniosity to put pressure on the defendant and indeed none is suggested.

(2)     As to (2), the plaintiff has a perfectly good case although somewhat short of Order 14 quality.  (3), it seems to me, is the real issue here and I will leave it to last.  As to (4), there is no delay in this matter of the sort contemplated.

19.  As to (3), whilst the company (the plaintiff) has no worthwhile assets, it strikes me that its backers in the sense of directors and shareholders have not made out much of a case save for bare assertions that they do not “have the means or intention to inject further capital into the plaintiff” (A96-6).  One would expect more than just that bare assertion.  A statement of their means would be required.  In such circumstances, it seems to me in carrying out the balancing exercise that I am required to undertake, I propose to make a limited order against the plaintiff on the basis that whilst the directors and shareholders say that they cannot pay, they have failed to demonstrate this.  I direct that security should be given in the sum of $175,000 which is a relatively modest amount.  Until this amount is paid in, the proceedings will be stayed.  The defendant will have its costs of this summons in any event.