CHUNG CHI LEUNG t/a SHING CHEONG ELECTRICAL WORKS CO v. WAYTON ENGINEERING CO LTD

DCCJ 593/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 593 OF 2014

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DECISION

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1. This is the defendant’s application to set aside a default judgment (“the Judgment”) entered by the plaintiff against the defendant on 2 July 2014.

Background

2. On 18February 2014, the Writ of Summons, which was filed on 15 February 2014, was served on the defendant. Mr. Wun Ka Lok, a clerk to Messrs Lawrence Chung & Associates (“the Plaintiff’s Solicitors”), had filed an affirmation of service on the same day (i.e. 18 February 2014) proving due service of the Writ of Summons.

3. On 20 February 2014, Messrs Munros (“the Defendant’s Solicitors”) first wrote to the Plaintiff’s Solicitors to inquire about the date of service of the Writ of Summons. Following an exchange of correspondence, by letter dated 27 February 2014, the Defendant’s Solicitors pointed out that there are irregularities in these proceedings, and invited the Plaintiff’s Solicitors to withdraw the service of the Writ of Summons in order to save unnecessary costs.

4. On 27 February 2014, the Plaintiff’s Solicitors wrote to the Defendant’s Solicitors that:-

“Lastly it is unlikely for our client to withdraw the service of the Writ of Summons as our clerk has filed the affirmation of the service of the Writ on 18 February 2014. Should your client prepare to defend in which case is out of time, we have standing instructions to give reasonable extension of time to yours.” (Emphasis added)

5. In reply to the letter of the Plaintiff’s Solicitors, the Defendant’s Solicitor replied by letter dated 3 March 2014 and put on record that:-

(a)   defendant does not want to incur further unnecessary costs on further requesting plaintiff to explain the inconsistencies between his pre-action letter and the Statement of Claim;

(b)   defendant intends to contest these proceedings; and

(c)   defendant takes note that plaintiff agrees to extend the time for defendant to defend the claim, and plaintiff shall not take issue on any steps that defendant will take, including but not limited to the filing and service of the Acknowledgement of Service and/or Defence and Counterclaim, even if it is out of time.

6. During the prescribed time limit of 14 days (including the date of service) for the defendant to acknowledge the service of the Writ of Summons (“the Prescribed Time Limit”), the plaintiff did not receive the defendant’s notice of intention to defend these proceedings (i.e. on or before 3March 2014).

7. Without informing the defendant, on 17 March 2014, (i.e. 13 days after the Defendant’s Solicitors last open letter to the Plaintiff’s Solicitors), the plaintiff filed the 2^nd Affirmation of Service of Mr. Wun Ka Lok, and relied upon the same in the plaintiff’s application for a default judgment.

8. The contents of the 2^nd Affirmation of Service are exactly the same as those of the 1^st Affirmation of Service.  The “extension of time issue and defendant’s indication to defend” was not mentioned in the 2^nd Affirmation of Service.

9. The Judgment against the defendant was obtained on 24 July 2014.

10. From the Prescribed Time Limit and prior to the plaintiff’s entering of the Judgment (“the Waiting Period”), no notice to act was filed by any solicitors to represent the defendant in the present proceedings, no summons was taken out to make an application to extend the time to file the acknowledgment of service and no late acknowledgment of service had been filed into the court.

11. Both parties engaged settlement negotiations during the Waiting Period.

The grounds of setting aside

12. The grounds of setting aside the Judgment are:-

(a)   the Judgment is irregular by reason of the plaintiff’s material non-disclosure; and

(b)   In any event, the Judgment should be set aside because the defendant has a meritorious defence to the plaintiff’s claim.

The issues

13. The issue I was called upon to decide is whether the Judgment entered against the defendant was a regular one.

14. Was there an agreement that the Prescribed Time Limit for filing the acknowledgement of service and intention to defend had been extended for a reasonable time by both parties?  If the answer is yes, would this fact be material to the present proceeding?  And if so, would the non-disclosure by the plaintiff render the Judgment to be irregular?

15. If the Judgment is a regular one, whether the defendant has a meritorious defence with a real prospect of success which entitles Defendant to set aside the judgment entered against her in this case. 

Defendant’s case

16. The Defendant’s Solicitors relied on the following cases:-

(1)   It is well-established that material non-disclosure is a ground for setting aside a default judgment: Deng Minghui v Chau Shuk Ling [2007] 1 HKLRD 905 at 909 (§9) per Cheung JA; Upper Like Investments Ltd v Sino-Rank International Ltd, HCA 17637 of 1999 (19 November 2012) at §30 per Recorder A Ho, SC.

(2)   The facts of the present case(i.e. non-disclosure  of an extension of time agreement)  are very similar to those in Pointpiper Investment Ltd v The Sun’s Property Management Ltd, DCCJ 3512 of 2006 (22 December 2006). HH Judge Chow held in §§10 and 12 as follows:-

“10. When [the Plaintiff’s Solicitors] made the application for default judgment, on 15.8.2006 it did not inform the Court that on 8.8.2006 it had agreed that it made an offer to the [defendant] on that day. On 23.8.2006 the Court sought a confirmation from the Plaintiff as to whether the requisite notice to enter judgment had been duly served. The Plaintiff simply filed an affirmation of service in respect of the Notice on 6.9.2006, without disclosing to the Court that it had made the said offer, and that [the Plaintiff’s Solicitors] had agreed to take further instruction from the Plaintiff on the draft Consent Summons on 11.9.2006. The Court was obviously misled by the non-disclosure of these matters into thinking that the Defendant was made aware by the Notice that the Plaintiff would enter judgment in default of a defence and yet chose not to file a defence and allowed the default judgment to be entered.

…

12. By reason of the matters above-said, the Judgment is an irregular judgment, and I set it aside.” (Emphasis added)

The plaintiff‘s case

17. The material non-disclosures will render the Judgment irregular is not in dispute.

18. The plaintiff argues that the offer given by the plaintiff has never materialized because of the defendant’s inaction.  Therefore, for the purpose of obtaining the Judgment, this is not a material fact that needs to be disclosed.

19. Furthermore, the plaintiff argues that in the letter dated 27 February 2014 as aforementioned, the Plaintiff’s Solicitors only indicated that the plaintiff was prepared to consent to the defendant’s intended application for an extension.  However, the consensus would only be formed by the parties when the defendant made an application for a court order to extend the Prescribed Time Limit.

20. In order for the offer to materialize, it requires the defendant’s proactive step to apply to the court within a reasonable time.  In spite of this requirement, the defendant did not make any application for an order to extend the time for filing and serving a Notice of Intention to Defend  to defend the present proceedings.

21. A lapse of 4 months is certainly far beyond a reasonable period allowed by the plaintiff.  In the premises, the offer lapsed after a reasonable period and it is not material to the present case.

22. The defendant had ample time to file the Acknowledgment of Service, but she did not.  Thus, the plaintiff resorted to and was fully entitled to obtain the Judgment.

Discussion

23. I do not take the plaintiff’s view.

24. Looking at the facts given, it is clear from the Plaintiff’s Solicitors’ letter on 27 February 2014, which stated that the defendant had already been out of time to defend, was in fact wrong. The Writ of Summons would only expire 14 days after its service (Order 12, rule 5 (a), The Rules of District Court), namely, on 3 March 2014.

25. From the facts given, the plaintiff was very eager to obtain default judgment at the outset, otherwise, there is no reason the 1st affirmation was filed into court on the same day of the service. From 4 March 2014, the plaintiff was entitled to file an affirmation of service to obtain the default judgment.  However, the plaintiff only did it on 14 March 2014, i.e. 11 days later.  If there was never an agreement of extension of time, it was no reason why the plaintiff had to wait for another 11 days. The inference can be drawn that when the plaintiff received the Defendant’s Solicitors’ letter dated 3 March 2014, the consensus was reached. The plaintiff is bound by this agreement. I am not with the plaintiff’s view that consensus would only be formed by the parties when the defendant made an application for court order to extend the Prescribed Time Limit. Once the agreement of extension of time is reached, it is not necessary for the defendant to obtain the relevant court order.  Completion of formality is not a must in this case.

26. The plaintiff’s view that it requires the defendant’s proactive step to apply to the court within a reasonable time for the plaintiff’s offer to materialize is not accepted. There was no such condition imposed by the plaintiff’s letter dated 27 February 2014. The intention of both parties to extend the time is clear, this is why both parties still engaged negotiations during the Waiting Period. Of course, in order to safeguard the best interest of the defendant, I agree that the Defendant’s Solicitors should apply to the court under the relevant rules.

27. I agree that a lapse of 4 months (from 4 March 2014 to 24 July 2014) is certainly far beyond a reasonable period allowed by the plaintiff, but the fact is that the plaintiff applied for default judgment in 13 days, not 4 months.  The reason why the Judgment was not granted until July is simply because of the technical defect of Mr. Wun Ka Lok’s affirmation of service. Otherwise, the Judgment would be obtained against the defendant in April.

28. All Mr. Wun’s affirmation of service did not contain the information of extension of time agreement and defendant’s indication to defend.

29. In my view, the agreement of extension of time, if still in force, is material to the present proceeding as it has binding effect on both parties.  Now, I come to consider whether the agreement has lapsed when the application for Judgment was made.  From the letter of the Plaintiff’s Solicitors dated 27 February 2014, it stated that: “We have standing instructions to give reasonable extension of time to yours”. Applying a reasonable man test, 13 days is still within the meaning of reasonable extension of time.  In such circumstances, I find that when the plaintiff applied for default judgment, the agreement of extension of time is still valid.  This information is material to the present proceedings.

30. In Mattel Inc v Tonka Corp [1991] 2 HKC 411 (considered in Hartanto Hady v Radnaabazar Bazar HCA 89/2008) at 430D, Deputy High Court Judge Andrew Li QC (as he then was) stated that the duty of full and frank disclosure on ex-parte applications is the most important principle.  The court’s power to discharge an application, when the principle is not observed, is salutary and necessary for the court’s protection.

31. Applying the aforesaid legal principle, I do find that the information of defendant’s indication to defend the case and the extension of time agreement should be disclosed to the court while the application for Judgment was made, failing which will amount to material non disclosures and render the Judgment irregular.

32. By the above-said reasons, I find the Judgment an irregular judgment, therefore I set it aside.

Meritorious defence

33. Even if the Judgment is a regular judgment, it must be set aside as the defendant has a meritorious defence to the plaintiff’s claim.

34. To establish a meritorious defence, the defendant must show “a real prospect of success”, instead of a mere “arguable” defence.  In general, the defendant must adduce evidence which carries some degree of credibility and conviction, which allows the court to form a provisional view as to the probable outcome of the action: Premier Fashion Wears Ltd v Chow Cheuk Man [1994] 1 HKLR 377 §32-33.

35. However, when it comes to the question of whose evidence is credible but no provisional view can be formed without a trial, the appropriate test is whether the defence “could well be established” at trial: O Mark Polythylene Products Fty Ltd v Reap Star Ltd [2000] 3 HKLRD 144 §10.

36. The defendant now alleges that her defence is as follows:-

(1)   The quotation could not form the basis of the oral contract (i.e. the works) and the total price was assessed at HK$335,500.00.

(2)   Quotations were not yet agreed.

(3)   The quantum is disputed.  There is a HK$2,000.00 difference in the total amount of interim payments and the outstanding sum, if the defendant is liable, should not exceed $38,500.

(4)   There is an alleged contractual obligation from the plaintiff to carry out the maintenance work.  No sum was due to the plaintiff as at the date of Writ of Summons. The claim is premature.

37. Oral contract:-

(1)   The plaintiff’s pleaded case is based on an alleged oral agreement made between the parties in December 2012 and January 2013.

(2)   However, in the plaintiff’s own pre-action letter dated 21 January 2014, the plaintiff did not make any reference to any alleged oral agreement between the parties.  He only claimed that (a) the defendant “without any comment or reply to the 3^rd Quotation informed [the plaintiff] to commence the works at the premises”, and (b) “the defendant made no comment or rejection to the 4^th Quotation and informed [the plaintiff] to continue to carry out the total works”.

(3)   Therefore, even in the plaintiff’s own case as stated in the pre-action letter, there was no oral agreement between the parties in respect of her quotations.

38. Quotations:-

Since 30 June 2012, the plaintiff has sent various quotations to the defendant for the performance of the Knowles Building Project.  It is the defendant’s case that all of the plaintiff’s quotations were not acceptable because the quoted prices were too high.  In respect of the plaintiff’s last quotation dated 9 December 2012, the defendant expressly marked thereon that the quotation is “待議” (subject to negotiation) and returned the same to the plaintiff on 12 December 2012.  In other words, in the defendant’s case, no agreement was reached between the parties as to the plaintiff’s quotation of $478,750 in December 2012 as alleged or at all.

39. Interim payment and quantum:-

(1)   Plaintiff admitted he has received interim payments of $268,000 from defendant, but on defendant’s case, it in fact paid a total sum of $270,000 as interim payments to plaintiff.

(2)   Without admitting liability, it is the defendant’s case that the plaintiff’s claim against the defendant (if any) should not exceed $38,500 for the following reasons:-

(i)   the works done by the plaintiff has been assessed at $335,500 [Trial Bundle B, p79];

(ii)   The defendant has paid interim payments to the plaintiff in the total sum of $270,000;

(iii)  As a result of the plaintiff’s defective work, the defendant has incurred a total sum of $27,085 for losses arising out the same which the defendant is entitled to set off against the plaintiff;

(iv)   In light of above, the plaintiff’s claim should not exceed $38,500 (viz. $335,500 - $270,000 - $27,085), which is far less than the Judgment sum of $230,000.

40. Maintenance work:-

(1)   In accordance with the trade practice in the construction industry and the parties’ previous course of dealings, the plaintiff and the defendant have been working on a “back-to-back” basis, namely, that the exact quantity of work to be carried out by the plaintiff (as a sub-contractor of the defendant) could only be ascertained until the final completion and expiry of the maintenance period of a project.

(2)   The exact amount to be paid by the defendant to the plaintiff could also only be ascertained after the expiry of the maintenance period.

(3)   In about June 2012, the defendant obtained a sub-contract for the installation of electrical air-conditioning and ventilation work for the Knowles Building of the University of Hong Kong (“Knowles Building Project”). Pursuant to the sub-contract, the defendant (and in turn, its sub-contractor) shall, amongst others:-

(i) Carry out the monthly maintenance for the entire system during the Defects Liability Period: Clause 1.2 (q) [Trial Bundle B, p87]; and

(ii) Arrive on site within 2 hours upon the receipt of an emergency call during the Defects Liability Period: Clause 1.2 (x).

(iii) The “Defects Liability Period” is defined as 12 months from the date of Practical Completion of the Works.

(4)   However, it is pertinent to note that the Practical Completion Certificate [Trial Bundle B, p208-209] only certified the completion of work done between the contract period from 16 July 2012 to 12 December 2012, whereas in the plaintiff’s own case, he completed the works on a much later date, viz 19 January 2013. Therefore, the Practical Completion Certificate does not assist the plaintiff’s case much.

(5)   Furthermore, the plaintiff’s claim in this regard ignores the undisputed fact that he was responsible for carrying out maintenance works for the entire system during the Defects Liability Period, i.e. from 10 May 2013 to 9 May 2014. Thus, the plaintiff’s works in the Knowles Building Project could not be regarded as completed at any time during the Defects Liability Period. It follows that no sum was due to the plaintiff as at the date of the Writ of Summons, viz 15 February 2014.  The plaintiff’s claim against the defendant herein is plainly premature.

41. In relation to the alleged defence, the plaintiff replied that:-

(1)   The plaintiff’s case is clearly stated in paragraph 6 of the Statement of Claim that “the Total Works were completed in or about 19 January 2013.  On or about 20 February 2013, the Total Works have been examined by the University of Hong Kong with some minor defects which have been remedied by the plaintiff and accepted by the University of Hong Kong and the plaintiff in or about March 2013.”

(2)   Firstly, the outstanding sums under the works should be due and payable upon the acceptance of the Total Works by the University of Hong Kong. In BWP (Architectural) Ltd v Beaver Building Systems Ltd(1988) 42 BLR 86, it was held that a subcontractor was even entitled to interim payment for the total value of work properly executed notwithstanding allegations that the work had not been properly performed.  If, in such cases, the adequacy of the work performed is disputed, an appropriate deduction or set-off may be made.

(3)   ApplyingBWP (Architectural) Ltd, if the Total Works were not done properly, the defendant still could not refuse payment altogether since the work was in fact done, but rather, the defendant could deduct the amount to be paid at most. Therefore, despite the initial minor defects of the plaintiff’s work, the defendant should still make payment to the plaintiff (even if at a discount).

(4)   In light of the said minor defects, the plaintiff willingly withheld receipt of the whole payment until the same were remedied and accepted by the University of Hong Kong. Upon the completion of the works, the plaintiff was certainly entitled to the whole payment for the Total Works.

(5)   Alternatively, according to the defendant’s evidence, it is alleged in paragraph 34 of the defendant’s affirmation that a Practical Completion Certificate was issued on or about 10 May 2013. Giving the defendant the benefit of the doubt that a certificate must be issued to approve the plaintiff’s work before the plaintiff was entitled to payment, the defendants case still cannot stand.

(6)   According to Hotham v East India Co(1787) 99 ER 1295, to decide whether the issuance of a certificate to approve a contractor’s work is in the nature of an agreement will be determined by ascertaining the parties’ intentions.  And if the court is satisfied that this was the arrangement between the plaintiff and the defendant, then the plaintiff would be entitled to payment of the Total Works upon the issuance of the Certificate.

42. After considering the parties’ respective submissions, I have come to the conclusion that the defendant does have a meritorious defence with a real prospect of success in this case.

43. There is no dispute that the plaintiff did provide service to the defendant for the works done. The main issue in this case is not the liability to pay, it is the quantum the defendant is liable to pay. The issue of premature action is a minor point only in this case.

44.  From the relevant documents produced by the defendant, the defendant can show “a real prospect of success”, instead of a mere “arguable” defence.  The relevant documents carry some degree of credibility and conviction, they show that quotations had not been agreed before the Works started, the works was assessed at HK$335,500 and there was a 12-month Defects Liability Period. All these will definitely have an effect on the quantum issue. Furthermore, the accuracy of the interim payments is also in dispute.

Decision

45. For the reasons above-said, I set aside the Judgment.

46. I make an order nisi, to be made absolute in 14 days, that the plaintiff do pay costs of this application to the defendant, with certificate for counsel, to be taxed if not agreed.