LEADER CIVIL ENGINEERING CORPORATION LTD. v. WELL-PRO ENGINEERING LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1997, No. 264
(Civil)

-------------------

----------------------

J U D G M E N T

-----------------------

Liu, J.A. (delivery judgment of the court):

1. Leader Civil Engineering Corporation Limited (Leader) was a government contractor for the construction of storm water drains. Well-Pro Engineering Limited (Well-Pro) was the sub-contractor of the entire contract works of Leader. Leader was to take 3% of the contract price as management fee and staged payments up to $500,000, deductible (together with other allowable deductions) from interim payments made under the Government main contract. The interim payments under the Government main contract were to be released, from time to time, by Leader to Well-Pro upon their respective receipts.

2. In the latter part of 1996, Well-Pro allegedly omitted to carry out certain storm water drain works at Ning Po Street and Woosung Street in breach of the sub-contract. Well-Pro was in further alleged breach of the sub-contract by failing to maintain the works. In April 1997, Leader instituted the present action against Well-Pro claiming for, inter alia, repayment of over $9 million loans, damages of over $5.5 million for taking over and completing works allegedly omitted by Well-Pro, and loss and damage arising from Well-Pro's alleged failure to carry out maintenance in respect of the main contract works during the maintenance period from 29 October 1996 to 28 October 1997. In essence, Leader claimed against Well-Pro for loans and damages for breaches in two several parts of the sub-contract.

3. Leader served its statement of claim in mid June 1997. It was not until 5 July 1997 that Leader served on Well-Pro its Notice of Intention to enter judgment in default of defence. On 9 July 1997, Leader caused to be put in a draft default judgment for approval. On the following day, 10 July 1997, Well-Pro issued a summons for extension of time to file its defence. In fact, on that very day Leader's draft judgment was returned unapproved by the court. On the following day, 11 July 1997, Leader caused the draft judgment to be amended and re-submitted for approval. On 14 July 1997, the draft default judgment was approved by the court. On 15 July 1997, the default judgment was sealed and served on Well-Pro which took out a summons on the same day to set aside the default judgment so entered and for leave to file a defence within 21 days from the date of the Order prayed for.

4. Leader obtained judgment in default on the loans of over $9 million, for damages of over $5.5 million for Well-Pro's alleged omission to execute works at Ning Po Street and Woosung Street in breach of the sub-contract and for damages to be assessed for Well-Pro's alleged failure to carry out maintenance work during the maintenance period, again in breach of the sub-contract. Well-Pro's summons for setting aside the default judgment was returnable before Findlay, J. The judge only set aside a part of the judgment in default for the alleged loans of over $9 million, and the remainder was allowed to stay. Well-Pro now appeals.

5. The bone of contention is relatively uninvolved. First, it is complained that the claim of over $5.5 million was in excess of Leader's claim as advanced. Moreover, the judge is said to be wrong in assuming that there was no dispute over the alleged agreement between Leader and Well-Pro for the latter to pay all the incurred costs in Leader's take-over of the works allegedly omitted by Well-Pro. Secondly, the maintenance damages claim was submitted prematurely. Thirdly, the judge failed to give any or any sufficient weight to Well-Pro's summons for extension of time to serve its defence, which was issued before default judgment was entered. Miss Cheng for Well-Pro concedes that it was encumbent upon Well-Pro to establish a real prospect of success in its defence of each of these claims by, at least, "potentially credible affidavit evidence [which] demonstrates a real likelihood that [Well-Pro would] succeed on fact".

6. As to the over $5.5 million claim for allegedly omitted works, counsel submits that it was a claim in excess of Leader's own calculations by over $1.1 million which, though already incurred, Leader had yet to pay. Further, in Leader's letter before action, only just some $4.2 million was demanded and not over $5.5 million. Neither of these two contentions would have the effect of eroding Leader's entitlement to claim against Well-Pro for over $5.5 million. It is not unusual for the sum demanded in a letter before action to be less than the amount claimed in the subsequent suit, and unpaid liability incurred is no bar to a claim. Leader asserts that in fact, Well-Pro expressly agreed to pay all the expenditure incurred by Leader for taking over the allegedly omitted works of Well-Pro. The agreement is said to be evidenced by a letter dated 20 September 1996 from Leader to Well-Pro, confirming the mutual verbal agreement between them in terms of "contracharges" to Well-Pro's account with Leader. By a letter in reply dated 28 October 1996, Well-Pro sought to put a gloss over such costs incurred in Leader's takeover, viz. the value of works so taken over by Leader was only "to be deducted from payments to which Well-Pro would otherwise be entitled under the sub-contract and apart from such deduction neither party would have any claim for compensation against each other in connection with the works taken over by Leader as above referred to". By a letter in rejoinder dated 31 October 1996 to Well-Pro, Leader immediately refuted, inter alia, the newly raised payment term. In particular, Leader placed it on record that: "all costs incurred (including those of the site supervision and office management) in carrying out works at Woosung Street and Ning Po Street on your behalf [would] be contracharged to your account." The matter rested there. No issue was taken before the judge on Well-Pro's letter regarding its understanding of "contracharged". Only a mere passing reference was made to Leader's letter of 20 September 1996 in counsel's reply, and it was made only in the limited context that a different figure was claimed in the said letter. If the matter had been fully canvassed before the judge, he would not likely have concluded that Well-Pro did not dispute Leader's alleged oral agreement for all incurred costs to be met by, i.e. contracharged to, Well-Pro. In an affirmation of Chan Wang Choy filed on 8 December 1997, two days before the hearing before Findlay, J. he did state in his paragraph 17 the following:

"As to the letter of 20th September 1996, I crave [sic] letter to the ensuing letters dated 28th October 1996 and 31st October 1996 exhibited in 'ZW(2)-7'. It can be seen from these letters that there was never any agreement to allow the plaintiff to contra-charge freely. The plaintiff had intended and did unilaterally take out part of the defendant's works at Woosung Street and Ning Po Street and executed the same. As such, the defendant is not liable to such costs." (Emphasis supplied).

The reference made to "to contra-charge freely" is far from being unobscure, but it would appear that "contra-charging" in the context was at least understood by Well-Pro to be an immediate liability unconnected with Government main contract. However, Leader did, in the follow-up correspondence, categorically reassert its intention to seek reimbursement of all the costs incurred in the takeover of works allegedly omitted by Well-Pro. According to Leader, that was precisely what it meant by: "all costs incurred (including sub-contractor costs) will be contracharged to your account". In its said letter in reply, Well-Pro did seek to claim to have agreed to such costs "to be deducted from payments to which Well-Pro would otherwise be entitled under the sub-contract". Well-Pro did not pursue this matter, either in further correspondence or in its submissions made to Findlay, J. who could not be fairly criticised, in the circumstances, for taking the view that the alleged Well-Pro's oral agreement to be responsible for the take-over expenses was not in dispute. Before the judge, it did not seem to be so disputed. But Well-Pro did dispute it, at least at one time and in a single letter.

7. Before us, Miss Cheng, counsel for Well-Pro submits that the meaning of "contracharged" was well understood between the parties: it meant items "contracharged" to Well-Pro's account kept by Leader for later settlement by way of deductions from Government's interim payments to be released from time to time to Well-Pro under the sub-contract. But Well-Pro understood the word "contracharge" to have been used by Leader as a "free" undercharge, i.e. independent of the Government main contract. Strictly speaking, Well-Pro did dispute its alleged responsibility for such incurred costs. But if Well-Pro is correct, it would be difficult to appreciate why, according to Well-Pro, Leader should find it necessary to reiterate the original payment terms under the sub-contract, particularly at a time when Well-Pro was claimed to be in breach.

8. The over $5.5 million claim against Well-Pro was founded on two bases in the alleged breach. First, after the breach, it was allegedly agreed between Leader and Well-Pro for Well-Pro to bear all the incurred costs of the works taken over by Leader in the so-called "contracharge" agreement. Further, Leader simply sued Well-Pro for damages for breach in terms of the costs so incurred. The quantum of over $5.5 million was not in issue. Even if, on the evidence before him, the judge had been wrong in concluding that the allegedly agreed "contracharge" liability was not disputed, it would still have been open to the judge to find that Well-Pro had not established any real prospect of success in its defence to Leader's claim for damages for breach of contract.

9. Well-Pro is not in a position to allege that any of the over $5.5 million for the take-over works has been settled by Government under the main contract. Well-Pro also relies on the interim payment certificate between 13 August 1996 and 12 September 1996 for $351,989.37, which had been presented quite some time ago for payment under the main contract. The relevant works were completed on 28 October 1996. Counsel for Well-Pro invites us to infer that Leader must have been paid by Government $351,989.37. Mr Clayton for Leader repeats its stance that upon receipt from Government of payment for the works taken over by Leader, the same less proper deductions would be released to Well-Pro. Miss Cheng can really take the interim certificate no further. The judge could not have so inferred. Miss Cheng for Well-Pro submits that Leader's claim of over $5.5 million exceeds the proper claim of Leader's by at least $351,989.37. Counsel's contention cannot be sustained. The judge is right in refusing to set aside the default judgment against Well-Pro in the sum of over $5.5 million by way of damages for breach in the omitted works taken over by Leader from Well-Pro under the sub-contract.

10. The alleged breach was part of the case of Leader as pleaded. It was confirmed on Leader's evidence. There was a mere denial in the defence and counterclaim. Save for paragraph 17 of Mr Chan's said affirmation, no evidence was adduced from the defendant with respect to the alleged breach. Even paragraph 17 is obscure. We are told that no submission was made before the judge on the alleged breach. In the letter of 20 September 1996 from Leader to Well-Pro and countersigned by Mr Chan for Well-Pro, Well-Pro did not deal with the question of breach. For the lack of evidence, the judge was right in concluding that there was no real prospect of success in the defence to the breaches allegedly committed by Well-Pro, or that Leader had put in an excessive claim, or that Leader was not entitled to claim in damages as alleged.

11. Leader was responsible for maintenance for the period from 29 October 1996 to 28 October 1997 under the Government main contract. In the sub-contract, Well-Pro was to assume all the obligations of Leader under the Government main contract. Clearly, Well-Pro failed in setting up any defence with a real prospect of success to the maintenance claim in liability. The default judgment was sealed on 15 July 1997 and the end of the maintenance period was 28 October 1997. It is submitted that Leader's claim for damages, for the alleged failure of Well-Pro to maintain in the maintenance period was prematurely made. Well-Pro has never intimated that it did maintain or would or would continue to maintain for the rest of the pleaded maintenance period. The claim for damages to be assessed for the alleged failure by Well-Pro to maintain during the maintenance period from 29 October 1996 to 28 October 1997 was met with no defence or a defence of any real prospect of success. The judge was also right in refusing to set aside the default judgment for damages to be so assessed.

12. Nothing was said on the defendant's counterclaim before us.

13. Well-Pro's summons for setting aside was successful only in the part with regard to the over $9 million alleged loans. As to the remainder of the summons, Well-Pro failed, and costs should follow the event. For the successful part of the summons, the usual order is that the applicant for setting aside a default judgment should bear the costs of the application. Evidently, Leader had knowledge of Well-Pro's summons to extend time to file a defence. It was issued and served after Leader had applied for judgment to be entered in default. Pursuant to O. 19 r. 8A(1)(a) RHC, Leader served Well-Pro a Notice of Intention to enter default judgment as early as 5 July 1997. It was not until 9 July 1997, four days later, that solicitors for Leader submitted a draft judgment in default for approval. The draft was returned unapproved, the next day, 10 July 1997. It was amended and resubmitted for approval on 11 July 1997 and default judgment was not finally approved by the court until 14 July 1997. Default judgment was sealed on 15 July 1997. High-handedness is not suggested. There was no obligation for Leader to inform the court of Well-Pro's summons for extension of time to file its defence. Well-Pro's summons for extension of time must have been kept with the draft default judgment in the same file for the approval by the court. Moreover, Well-Pro could have taken steps in making an urgent application to the court for a stay or its time summons to be immediately heard. Procedurally or professionally Leader was not to blame. Well-Pro itself had not been diligent. On costs the judge was wrong, in principle, in taking into consideration Leader's knowledge of Well-Pro's summons for extension of time. The judge's exercise of discretion in costs cannot, therefore, stand. Leave has been granted to Leader to appeal against the judge's costs order. Leader now cross appeals on costs. We allow it and set aside the judge's costs order. In the exercise of our discretion, we can find no justification for departing from the usual order for costs.

We dismiss the appeal with an order nisi for costs to Leader. We allow the cross appeal and order that costs before the judge be costs against Well-Pro in favour of Leader. We grant also an order nisi for costs to Leader in the cross appeal.