XCHRX CITILIGHT ENGINEERING CO. LTD. v. LI KI CHAU AND OTHERS and WAI SHUN CONSTRUCTION CO. LTD. (Third Party)

HCA14155/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14155 OF 1998

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J U D G M E N T

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The appeal

1. This is an appeal by the Third Party against the decision of the Master granting summary judgment to the Defendants for a declaration that "the Third Party is liable to indemnify the Defendants in respect of any sum which the Defendants may be held liable to or reasonably paid to the Plaintiff in respect of the Plaintiff's claim" together with costs.

Facts

The Sales Agreement

2. The Defendants were the partners of a firm called Wai Shun Construction Company. They were building contractors. On 30th September 1994, the Defendants and the Third Party entered into an agreement ("the Sales Agreement") in which the Defendants sold their business to the Third Party. Clause 7 of the Sales Agreement provides that the purchaser (Third Party) shall perform and discharge the outstanding obligations and liabilities of the vendors (Defendants) under contracts that had been entered into by the Defendants with contractors prior to 30th September 1994.

3. Among these contracts was a subcontract dated 1st May 1992 ("the subcontract") in which the Defendants subcontracted part of a maintenance work to the Plaintiff. On 19th September 1997, the Plaintiff commenced High Court Action No.9904/97 claiming against the Defendants for costs of work done under the subcontract up to July 1997.

The Indemnity

4. By an Indemnity dated 24th October 1997 ("the Indemnity") given by the Third Party to the Defendants, it is stated that -

"PURSUANT TO the sales and purchase agreement dated 30th September 1994 between you (i.e. the Defendant) and us (i.e. the Third Party) (the "Agreement ")

AND IN CONSIDERATION OF your forbearing to take third party proceedings against us in respect of the subsisting and future legal actions ("the Legal Actions") taken or to be taken against you by the sub-contractors, including Yau Sin Construction Company and Citilight Engineering Limited (i.e. the Plaintiff), under the Contracts (as defined in the Agreement), the benefits of which were transferred by you to us under the Agreement.

A. WE, WAI SHUN CONSTRUCTION COMPANY LIMITED hereby confirm, undertake and agree to:-

(1) indemnify you against all losses which you may suffer as a result of the Legal Actions; and

(2) be responsible for all your legal costs properly incurred in defending, counterclaiming, compromising or otherwise dealing with the Legal Actions, as the case may be, provided that:-

(a) in the event of any Legal Action arising, you undertake to give or procure that notice thereof is given, as soon as reasonably practicable, to us and, as regards any Legal Action, you shall in your best effects take such action to assist us to cause the Legal Action to be withdrawn, or to dispute, resist, appeal against, compromise or defend the Legal Action and any determination in respect thereof as reasonably directed by us; and

(b) without our prior approval, you shall make no settlement of any Legal Action nor agree any matter in the course of disputing any Legal Action likely to affect the liabilities thereof."

The Settlement Agreement

5. By a Settlement Agreement dated 30th March 1998 ("the Settlement Agreement") made between the Third Party and the Defendants ("Party A") on the one hand and the Plaintiff ("Party B") on the other, it is agreed that -

"1. Party A shall offer to Party B the sum of HK$2,500,000.00 for the settlement of H.C. Action No.A9904 of 1997, but Party A does not admit any liability to Party B. Party A will pay this amount to Party B in five (5) monthly instalments, of HK$500,000.00 for each of the instalments."

Clause 4 of the Settlement Agreement provides that -

"This Agreement shall constitute the only and final settlement of the matter under H.C. Action No.A9904 of 1997, and that all other previous discussions, meetings and correspondence shall become null and void."

The Plaintiff's claim

6. The Third Party paid one instalment of $500,000 and had not made any payment thereafter. The present action was commenced by the Plaintiff against the Defendants on 22nd August 1998 in which the Plaintiff claimed against the Defendants the sums of $2 million under the Settlement Agreement and $4,371,873.63 which is the difference between the amount of $6,371,873.63 due to the Plaintiff under the subcontract less $2 million unpaid under the Settlement Agreement.

The Defence

7. In their defence to the Plaintiff's claim, the Defendants disputed the amount claimed by the Plaintiff. They further stated that by entering into the Settlement Agreement, the parties agreed that the Third Party should be solely responsible to pay the Plaintiff the $2.5 million by five equal monthly instalments, and that the Plaintiff should not lodge any claim against the Defendants under the subcontract.

Order 16 rule 4(3)

8. Under Order 16, rule 4(3), the Court may, if the liability of the third party is established, order judgment to be entered against the third party in favour of the defendant. The liability of the third party may be established by a clear admission made by him or his agent or by an affidavit of the defendant or other person on the lines of an affidavit in support of a summons under Order 14 to which no sufficient answer to show cause is made by the third party, see Gloucestershire B. Co v. Phillipps (1884) 12 QBD 533 : para.16/4/10 Supreme Court Practice 1999.

Liability of the Third Party not established

9. The Defendant is only entitled to final judgment against the Third Party by reason of the terms of the agreements that they had reached and by the terms of the Indemnity. As far as the Sales Agreement is concerned, the agreement by the Third Party to perform and discharge the outstanding obligations and liabilities of the Defendants under the subcontract would not by itself entitle the Defendants to be indemnified by the Third Party of the Plaintiff's claim. The Plaintiff's claim is based not only on the alleged debts due under the subcontract, but also the outstanding sum under the Settlement Agreement. It is certainly arguable at this stage of the proceedings that the Settlement Agreement constitutes a fresh agreement between the parties and the terms of Clause 7 are not wide enough to cover the liability of the Third Party under the Settlement Agreement.

10. Under the Indemnity, the Third Party no doubt has agreed to indemnify the Defendants against loss that they may suffer as a result of the legal actions brought by, among others, the Plaintiff. However, the indemnity is subject to conditions. One of the conditions is that the Defendants must provide assistance to the Third Party to dispute the legal action as directed by the Third Party. Another condition is that any settlement of the legal action by the Defendant must be subject to the prior approval of the Third Party. However, the judgment now recovered by the Defendants against the Third Party would effectively preclude the Third Party from exercising such rights under the terms of the Indemnity. This is not envisaged under the terms of the Indemnity.

11. In view of the nature of the Plaintiff's claim which is not confined simply to the Settlement Agreement but to previous contractual disputes, even if the terms of the Settlement Agreement is still binding on the Third Party, a judgment would effectively preclude it from challenging the Plaintiff's claims in respect of the contractual disputes.

12. The Third Party and the Defendants had made no admission of their liability to the Plaintiff under the Settlement Agreement.

Appeal allowed

13. In my view, this is not a proper case for summary judgment against the Third Party. The judgment is accordingly set aside and the appeal is allowed. Having reached this decision, it is not necessary for me to express a view on the defence raised by the Third Party on misrepresentation and that its liability under the Settlement Agreement is confined only to $500,000.

Directions

14. I shall instead give directions for the Third Party proceedings in accordance with paragraphs 2(a) to (h) of the Defendants' summons of 23rd December 1998.

Costs

15. The costs of the hearing before the Master shall be costs in the cause and the Third Party is entitled to the costs of the appeal. The costs orders are, of course, in the nature of nisi orders.