CLINTON ENGINEERING LTD v. B-TECH (HOLDINGS) LTD

HCA3608/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. OF 3608 OF 1998

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D E C I S I O N

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1. Originally, there were two summonses before the court, both from the plaintiff. First, there was an application to strike out a number of paragraphs in the defence. Secondly, by a separate summons filed two months earlier, the plaintiff was seeking a determination of preliminary issues. At the hearing Mr J. Harris, for the plaintiff, applied to withdraw the Order 33 summons and pursue only the striking out application.

2. Further, of the various paragraphs sought to be struck out of the defence only paragraphs 2, 3 and 9 remained contentious. Ms Po Wing Kay, for the defendant, consented to paragraphs 21, 22 and part of 23 being deleted.

3. Paragraphs 2, 3 and 9 of the defence are as follows :

"2. Save that the Plaintiff is a company incorporated under the laws of British Virgin Islands and was at all material times not licensed to carry out any contractor works in the design, supply and installation of mechanical and electrical building services in the People's Republic of China ('PRC'), no admission is made to Paragraph 1 of the Amended Statement of Claim.

3. The Defendant further avers that under relevant laws, rules, regulations and legislations in PRC, it was and is illegal for the Plaintiff to carry out the Works without a licence and that if it did, the Plaintiff was not entitled in PRC to recover any of the Contract Sum.

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9. In particular, the Defendant avers that the Employer did not owe any amount to the Plaintiff with respect to the Project and that all money required to be paid pursuant to the BS Contract had been duly paid by the Employer to the Plaintiff."

4. These three paragraphs give rise to a single issue for the purposes of this strike out application.

5. Firstly however, a brief resume of the background is necessary to place the issue in context.

Background

6. From 1994 onwards the plaintiff carried out mechanical and electrical works for a wholly owned subsidiary of the defendants (the employer) in China. In 1998 the employer commenced arbitration proceedings against the plaintiff in Foshan. An award of $12 million was made in the plaintiff's favour on its counterclaim in the arbitration. That award has now become enforceable in China.

7. These Hong Kong proceedings are based on a guarantee made by the defendant purportedly guaranteeing the employer's liabilities under the contract. (These liabilities having now been determined in arbitration.)

8. Also in 1998, the defendant applied to stay these Hong Kong proceedings pending the outcome of the arbitration. The stay application was heard and granted by Findlay J on 5 May 1998. The stay was lifted in September 2001 by Mr Recorder Liao SC. The award against the employer is a New York convention award and enforceable in Hong Kong. The plaintiff is suing the defendant on its guarantee and alleges that the guaranteed liabilities are those established by the award.

9. In their defence, the defendants, inter alia, plead that there is no liability to the plaintiff because the underlying building contract between the plaintiff and the employer was an illegal contract as the plaintiff did not have the necessary licence to carry out certain works.

10. However, the defendant in the 1998 stay application founded its case for a stay on the basis that the outcome of the arbitration would determine the amount that the employer owed the plaintiff for the purpose of determining liability under the guarantee. The issue of the illegality of the contract (denied by the plaintiff) was not raised either in the stay application or in the arbitration.

The issue

11. The issue which emerges from all this, and the sole issue in this application, is whether or not the defendant is estopped by the court's decision in the stay application from disputing that the arbitration award establishes the amount that the employer owes the plaintiff. If so, that amount, assuming the guarantee is valid, represents the amount owed by the defendant to the plaintiff.

12. Before a brief consideration of the law of issue estoppel is addressed the material part of the court's decision in 1998 should be noted. It is also important to note that the decision amounts to an acceptance by that court of the submission made to it by senior counsel on behalf of the employer.

13. Findlay J summarized the defendant's unequivocal submissions as follows :

"The Defendant's Case for a stay

The crucial argument in the defendant's case for a stay is the effect of the undertaking by the defendant. If it is the case that, assuming the undertaking to mean what it says, the defendant is bound to pay to the plaintiff what the arbitrator finds is due by the subsidiary to the plaintiff, and if the plaintiff can demand from the defendant no more than this, there is obviously a good case for a stay. If neither party, or only one party, is bound by the arbitrator's award, a stay would not be justified.

The undertaking, to paraphrase it, and to ignore the condition 'if [the subsidiary] were unable to meet its commitment', which has no relevance for present purposes, is to pay to the plaintiff what the subsidiary is obliged to pay under the contracts

Mr Dennis Chang, SC, on behalf of the defendant, argues that the defendant's undertaking is to pay what the arbitral award finds that the subsidiary was liable to pay because this is the subsidiary's obligation under the building contract. And the plaintiff can obtain from the defendant no more than this. Until that award is published, it cannot be known what the subsidiary is obliged to pay, and, therefore, it cannot be known what the defendant is obliged to pay." (emphasis added)

He went on to decide :

" In the case before me, the terms of the defendant's undertaking, which was negotiated with, and agreed to, by the plaintiff, is such that both parties to this action will be bound by the arbitrator's award as far as the defendant's liability to the plaintiff is concerned. The defendant's obligation is to pay to the plaintiff what the arbitrator finds is due by the subsidiary, and the plaintiff cannot impose on the defendant any greater obligation than that."

14. In spite of this the defendant now seeks to argue that the contract, upon which the arbitrator made an award which established the employer's liability, was an illegal contract. The defence, in effect, includes a claim that the award does not establish the guaranteed liability of the defendant. The plaintiff submits that the defendant should be estopped from advancing an argument which is inconsistent with the position they took in the stay application as it would be an abuse of process to permit them to do so.

Issue estoppel

15. The classic citation for the requirements as to when issue estoppel applies is that from the speech of Lord Brandon in The Senna (No.2) [1985] 1 WLR at page 499 :

"... in order to create an estoppel of that kind [issue] , three requirements have to be satisfied. The first is that the judgment in the earlier action relied on as creating an estoppel must be (a) of a court of competent jurisdiction, (b) final and conclusive and (c) on the merits. The second requirement is that the parties (or privies) in the earlier action relied on as creating an estoppel, and those in the later action in which the estoppel is raised as a bar, must be the same. The third requirement is that the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as that decided by the judgment in the earlier action."

16. In the present case the difficulty is not with the application of these general principles but with the fact that the estoppel being sought is in the course of interlocutory proceedings.

17. It is true that it is more difficult for a party to persuade a court to apply res judicata and issue estoppel in interlocutory proceedings. However there is no rule of law which forbids it. If the primary requirements are satisfied the court is permitted to take an overall view and exercise a discretion in the applicant's favour if it is satisfied that it is just and reasonable to do so. In the present case I find the underlying facts of the plaintiff's submissions to be compelling. The point is made, with some force, that five years ago the defendant argued successfully that an issue should be determined in a particular way. Now, their defence on the same issue is not merely inconsistent, it is, to all intents and purposes, the reverse.

18. In S.C.F Finance v. Masri [1987] 1 QB 1028 the same principle was considered, albeit on very different facts, when the estoppel sought was based, not on a judicial decision upholding counsel's submissions [as in the present case] but on an admission or concession underlying a consent order. Ralph Gibson L.J. said.

"... If a party puts forward a positive case, as the basis of asking the court to make the order which that party seeks, and then at trial declines to proceed and accepts that the claim must be dismissed, then that party must, in our view, save in exceptional circumstances, lose the right to raise again that case against the other party to those proceedings"

19. Having accepted that the principle of issue estoppel is applicable at this early stage of the proceedings I must finally go on to consider if it should actually be applied in this case. A high threshold has to be reached in strike out applications, particularly so when, if granted, a party will be denied an opportunity of running a particular defence.

20. In all the above circumstances my decision whether or not to exercise the court's discretion in the plaintiff's favour has not been easily made. However, ultimately one is faced with the reality that in order to obtain a stay in 1998 the defendant accepted the validity (and hence the legality) of the building contract. Now, by the Defence dated 16 April 2002, they say they owe the plaintiff nothing because of illegality. I consider it plain and obvious that they should not be permitted to advance such a defence. In the circumstances it is unsustainable and consequently an abuse of process. The mere fact that the plaintiff would be required to deal with an issue for the first time many years after the material events is, in itself, prejudicial.

21. Although not a factor in my decision, it is of considerable comfort to note that the defendant is not being denied its day in court as a result. What remains in the real crux of this case, namely the validity of the guarantee upon which the plaintiff sues. The effect of this judgment is to strike out (a) those parts of the defence which the defendant concedes should be deleted and (b) those parts of the defence which rely on the plea of an illegal contract. The core issue remains in tact.

22. Accordingly I grant the plaintiff's strike out application in respect of paragraphs 2, 3, 9, 21, 22 and 23 (in so far as it refers to paragraph 22 of the Statement of Claim) of the Defence with an order for costs of the strike out application to the plaintiff.

23. Further, I grant the plaintiff's application to withdraw its summons under Order 33 for the determination of a preliminary issue with costs to the defendant. However, in view of the similarity of issues between the two summonses the defendant's costs applicable to Order 33 summons shall be limited to a maximum of 15% of the total costs of and arising out of the hearing of both summonses.