APEX ENGINEERING & CONTRACTING LTD v. HONG KONG SWITCHGEAR LTD

HCA 1188/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1188 OF 2010

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BETWEEN

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J U D G M E N T

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Introduction

1.  By a notice of application in response to the plaintiff’s summons for case management, the defendant applied for an order against the plaintiff to provide security for the defendant’s costs, in the following terms:

“The Plaintiff company do within 28 days give security for the Defendant’s costs to the satisfaction of the Master on the ground that there is a reason to believe that the Plaintiff company will be unable to pay the costs of the Defendant if the Defendant is successful in its defence, and that in the meantime all further proceedings in respect of the claim and counterclaim be stayed; …”

2.  The defendant also sought an order for the costs of the application to be the defendant’s costs in any event.

3.  The matter was heard by Master Ho on 15 October 2012.  The Master dismissed the defendant’s application with costs to the plaintiff which by way of summary assessment came to $38,000, to be paid forthwith to the plaintiff.

4.  By a notice of appeal filed on 26 October 2012, the defendant appeals the Master’s order to a judge in chambers.  It seeks that the plaintiff be ordered to provide security for the defendant’s costs of the action by:

“(a) payment into court in the sum of HK$517,250 (to cover up to the trial) within the next 28 days; or

(b) alternatively, payment into court by the Defendant of the $181,115.60 sum due to the Plaintiff from them as the Plaintiff’s payment for security for the Defendant’s costs up to stage of the preparation of witness statements, or such other stage and sum as this Honourable Court deems fit,

and that pending the provision of such security both the Plaintiff’s Claim and the Defendant’s Counterclaim be stayed; …”

5.  This is the appeal before me.

The party’s pleaded case

6.  The plaintiff’s claim is against the defendant as the defendant’s sub‑contractor for civil works for the price of the works done under or incidental to the sub-contract.  Paragraph 7 of the statement of claim sets out the various sums, which for the purpose of this appeal can be summarised as follows:

Sub‑contract Works	$2,225,674.40
Additional/variation works	$439,650.00
Sub‑total:	$2,665,324.40
LESS payment received as of 9/10/2009	$967,035.60
Balance outstanding as of 9/10/2009	$1,698,288.80
ADD: administrative handling fee at 5% per month for 7 months (14/11/2009 – 13/6/2010)	$691,374.09
The plaintiff’s claim as of 13/6/2010:	$2,389,662.89

7.  I detect a miscalculation in the sum of $691,374.09.  If the administrative handling fee at 5% is based on the sum of $1,698,288.80, it should be $594,401.08 instead.

8.  Against the plaintiff’s claim, the defendant has filed a defence and counterclaim.  The major defence raised by the defendant is the plaintiff’s delay in the carrying out the sub‑contract works, although the defendant also complains of the plaintiff’s works being sub‑standard in quality and in safety.

9.  Paragraph 24 of the defence pleads that, according to the defendant’s own fax dated 18 May 2010, the following calculations had been accepted by the defendant who was prepared to pay $181,115.60 to the plaintiff:

(a)	Works done by the plaintiff	$1,559,620.00
		$112,000.00
		$147,112.00
		$232,909.60
		$66,690.00
	Total:	$2,118,331.60
(b)	Against the preceding sum total, the defendant claims that it is entitled to deduct the following items:
	Liquidated damages for delay imposed by the main contractor AHK on the defendant	$798,876.00
	Sub‑safety payments	79,000.00
	Interest at 3% of the defendant's loan to the plaintiff	8,723.40
	Payments to the plaintiff up-to-date	967,035.60
	Total:	$1,853,635.00

10.  On top of the sums in the preceding paragraph that are alleged to be deductible from the amount due to the plaintiff, the defendant also claims in paragraph 24 of the defence for setting off a sum of $83,581.00 being “Retention money for 12 months” at 5% of $1,671,620 (ie, the $1,559,620 + $112,000).  The defendant therefore pleads that the sum due to the plaintiff is $181,115.60, being:

	$2,118,331.60
-	$1,853,635.00
-	$83,581.00
	$181,115.60

11.  Apart from the part payments agreed by the parties, the largest sum sought to be deducted as set-off is $798,876.00.  This sum is reached by using $10,242 as the multiplicand, multiplied by 78 days.  The basis is pleaded in paragraph 21 of the defence, as follows:

“Under clause 15 of the said Tender Document, the Defendant was liable to pay AHK liquidated damages in respect of the delay in completing their works under the Main Agreement. Notwithstanding AHK’s entitlement to charge the Defendant a sum of HK$40,000 per day for each day of delay in liquidated damages pursuant to clause 15(3) of the said Tender Document, AHK charged the Defendant a reduced sum of HK$6,971 + 3,271 = HK$10,242 per day only; ...”

12.  Unlike other items for set off as alleged by the defendant, one item has not been attached with a price tag, which is that the defendant needed to store one set of low voltage main switchboard in a warehouse and incurred extra transportation costs because of the plaintiff’s failure to build two transformer rooms in which the switchboard was to be installed without delay.

13.  The defendant raises this storage and extra transportation costs as well as the liquidated damages calculated at $40,000 per day as reduced by $798,876.00 (the actual liquidated damages that AHK had charged it) as a counterclaim against the plaintiff.  The liquidated damages claim comes to $2,321,124.00 being $3,120,000 (ie, $40,000 per day x 78 days) minus $798,876.

14.  The importance of this counterclaim will be apparent below.

The Law

15.  The defendant’s application for security for costs is based on section 357 of the Companies Ordinance, Cap 32 which reads:

“Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

16.  As usual, the White Book (Hong Kong Civil Procedure, 2012, Vol 1) is helpful on the various factors to be considered in this matter.  Regarding the plaintiff’s inability to pay the costs of the defendant if successful in his defence, p 514 of the White Book states that apart from a company in liquidation, which is prima facie evidence of its inability, the application for security must be supported by an affidavit which credibly and reasonably shows the inability of the company to pay the costs of the successful defendant.  The White Book continues:

“The Court may accept there is a prima facie case that the threshold under s.357 has been met as a result of the following factors: (1) the plaintiff is a shelf company with a nominal amount of paid‑up capital; (2) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (3) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (4) the plaintiff company, other than entering into the transaction as stated in sub‑para. (2) does not ordinarily carry on business…However, the proof of one or more of the factors set out above may not be sufficient…”

17.  The grounds of the belief relied upon by the defendant are set out in paragraph 3 of the first affirmation of Lim Willy which states:

“The grounds of my belief are that according to documents obtained from the Companies Registry, the Plaintiff company was only founded on 15 Oct 2008 with a present paid up capital of a mere HK$1 and just 1 director and shareholder. In the circumstances, I verily believe the Plaintiff company is a very small company tantamount to nothing more than a bare shell with no track record and meaningful assets to speak of, giving rise to a belief that it will be unable to pay the costs of the Defendant if the Defendant is successful in its defence. …”

18.  It is unnecessary to make a decision whether the plaintiff is unable to pay the costs of the defendant if the defence is successful.  I would rather examine other points of the relevant law and relevant facts for consideration of the merit of this appeal.

19.  Other useful passages that can be found in the White Book are set out below (p 508):

“… if a defendant admits so much of the claim as would be equal to the amount for which security would have been ordered, the court may refuse him security, for he can secure himself by paying the admitted amount into court…Further, where the defendant admits his liability, the plaintiff will not be ordered to give security…”

“… a plaintiff’s appeal against a judge’s order for security for costs was allowed where the defendant had made a substantial payment into court (with respect to the plaintiff’s claim) which was substantially more than the amount of security ordered by the judge. …”

“… the court should be slow to exercise its discretion to order security against a plaintiff where to do so would effectively be tantamount to providing security to the defendant for the prosecution of its counterclaim…”

20.  Certain useful passages can also be found in the judgment in Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213, where it is stated at p 221 as follows:

“(b) Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim. …

(e) It is pertinent to ask whether in the particular case the counterclaim is a cross‑action or operates as a defence, that is to say merely operates as a defence. …

(f) In determining the question in (e), the most important factor to consider is whether ‘the claim by the plaintiffs and the cross‑claim by the defendants – raise essentially the same issues and are going to be fully litigated anyway so far one can tell’. (BJ Crabtree (Insulation) Ltd v GPT Communications Systems, per Bingham LJ at p.54.)”

21.  The rationale behind the need to order security seems clear to me: it would be unjust and unfair to the defendant who comes to court to defend the plaintiff’s claim and incurs costs in doing so to face the situation where he has won the case or been fully vindicated in his defence but finds the costs order (that follows the event) in his favour unable to be satisfied because of the inability of the plaintiff to pay.

22.  Where the defendant seeks security for costs, the fact that it raises a counterclaim may, as a rule, be a bar to his application.  The court will not help such a defendant, for otherwise he would be assisted in the pursuit of his counterclaim.  While he is forced to get involved in litigation in defending the plaintiff’s claim, there is no compulsion for him to bring the counterclaim.  Where, however, his counterclaim is but a set-off, which is a properly recognized defence to the claim, the unwillingness of the court to assist him in his offensive should not apply because he is simply defending and not taking the offensive.  He should not in such a case be discouraged in properly defending himself.

23.  In the case where there is a counterclaim which is over and above a proper defence, insofar as the defendant drops the offensive portion of it over and above his defence to the claim, the rule of barring security for costs should not properly apply.  But if the defendant only agrees to his counterclaim that exceeds his defence to be stayed in case the plaintiff’s claim is stayed by reason of the latter’s failure to comply with the order for security for costs, which means that the conditionally stayed counterclaim can or will be revived upon the plaintiff’s compliance with the order and the defendant in such an event is allowed to pursue his counterclaim against the plaintiff, it will offend the rule that the court will not order security in favour of an attacking defendant.  The situation would be very different if the defendant agrees to drop his counterclaim altogether and only maintains his set-off as a defence.  In such a case, the rule of protecting a defendant from an impecunious plaintiff in defending the claim instead of assisting the defendant to recoup costs for pursuing his own claim (by way of a counterclaim or an independent claim separate from the action he faces) will not be traversed.

The law as applied to the facts in the present case

24.  In the facts as pleaded in the pleadings that I cite above, it can be noted that the defendant does not dispute that the works done by the plaintiff under the sub‑contract or otherwise amounted to $2,118,331.60.  The parties agree that the defendant had made part payments of $967,035.60 to the plaintiff.  When the part payments are taken into account, the amount that the defendant admits to be due to the plaintiff comes to $1,151,296. The defendant has raised various amounts for setting off, namely, $798,876, $79,000, and $8,723.40.  These sums total $886,599.40.  The defendant’s entitlement to these set-offs is denied by the plaintiff and would have to be proved by the defendant.  If the defendant were to fail to prove its entitlement, the plaintiff would be entitled to judgment on the said amount of $1,151,296 without further ado, purely based on the admissions of the defendant.  It can be seen, therefore, that the plaintiff has a strong claim, and that a major purpose of the trial would be to examine the veracity and correctness of the set‑offs as raised by the defendant, rather than to examine the quality of the plaintiff’s claim.

25.  Regarding the effect brought about by the counterclaim, the point was first mentioned before the Master, whose decision as reduced in writing records:

“The other argument of Mr Lim [for the defendant] is that the counterclaim raised by the defendant is not a bar to the defendant to seek for security for costs against the plaintiff. However, in the present case, Mr Lim submits that the court should order the plaintiff to pay security for costs because the defendant is prepared, as per the Ai Zhong case, to give up its counterclaim in the sense that if the plaintiff fails to pay the security for costs, the defendant is prepared to have a stay of the defendant’s counterclaim as well.”

26.  This suggested dealing with the counterclaim did not receive any favour from the Master, not indeed does it receive any favourable reading from me.  The reason is, as far as I am concerned, the counterclaim as properly understood is only waived if the plaintiff fails to provide the security for costs as ordered by the court.  If the plaintiff complies with the security order, the counterclaim is still extant and has full force against the plaintiff.  That is what is objectionable.  The defendant has, after the hearing before the Master, on 9 November 2012, obtained leave from the Master to amend the defence and counterclaim.  The major effect of the amendments to the pleading is to add a new paragraph 26.1 to the defence, which reads:

“Further or alternatively, if (which is not admitted), the Defendant is held liable on the Plaintiff’s claim or any part thereof, the Defendant will seek to set off so much if (sic) its Counterclaim in extinction or diminution of the Plaintiff’s claim therein.”

27.  To the counterclaim, the amendment adds a paragraph 30.1, as follows:

“If upon trial the court is minded to enter judgment on the Counterclaim for a sum greater than the sum which the court may award to the Plaintiff on its claim, with a view to cap their Counterclaim to the Plaintiff’s claim the Defendant shall waive the excess of the sum which the court may award to them on their Counterclaim over the sum which the court may award to the Plaintiff on its claim, and shall accordingly pray to the court to confine the judgment sum on their Counterclaim to the same amount which the court may award to the Plaintiff on its claim, so as to enable the Counterclaim to just fully off-set the claim.”

28.  The purport of this paragraph 30.1 differs from the order sought in the notice of appeal cited in paragraph 4 of this judgment above.  Further, apart from the fact that the proposed paragraph 30.1 is prolix and cumbersome, the defendant’s wish if it is true to waive its counterclaim can be achieved simply by deleting the counterclaim in its entirety.  This can be done if the defendant truly believes in its argument that its counterclaim amounts to a true set‑off, being closely connected to and arising out of the subject matter of the plaintiff’s claim.  Mr Lim, for the defendant, insists on maintaining the counterclaim, albeit in its amended form, for the purpose of ensuring that no order for costs can be obtained by the plaintiff against the defendant for its dropping the counterclaim.

29.  Moreover, the counterclaim is based on two matters, namely, first, the loss and damage allegedly suffered by the defendant as a result of the plaintiff’s failing to timely complete the building of the two transformer rooms under the sub-contract.  The loss that was allegedly caused to the defendant arose out of its need to hire storage for one set of main switchboard that was supposed to be installed in the transformer rooms.  The delay of the plaintiff as alleged had caused the defendant to store the switchboard and then re-transport it back for installation when the transformer rooms were ready, thus incurring storage and extra transportation charges (see paragraph 12(1) of the defence).  However, no sum is mentioned in the pleading or even its proposed amended form, indicating that no actual charges had been incurred. 

30.  The second head of the defendant’s counterclaim is based on the liquidated damages provided for in the main contract between it and AHK (the main contractor).  It is alleged in paragraph 21 of the defence that the stipulated liquidated damages were $40,000 per day.  AHK instead charged the defendant a sum of $10,242 per day for such damages, the total of which for 78 days ($798,876) is pleaded in the defence as a set off against the plaintiff’s claim.  However, in the counterclaim, the defendant raises the stipulated liquidated damages of $40,000 for the alleged 78 days of delay against the plaintiff, and gives credit to the plaintiff for the damages for delay based on the $10,242 a day as pleaded in the defence, resulting in a difference of over $2.3 million claimed against the plaintiff.  The basis for this claim is that the defendant is entitled to the liquidated damages as stipulated in the main contract although in fact the loss that it had suffered from the plaintiff’s delay that was apparently accepted by AHK was less than $800,000.  Regardless of whether or not the defendant had paid this $800,000 to AHK, the basis for it to claim a higher sum from the plaintiff is very questionable: it is seeking from the plaintiff enrichment by a contractual term allegedly providing for liquidated damages, as opposed to penalty, and not recovery of actual loss for the plaintiff’s breach of contract.

31.  It is ironic that on the one hand the counterclaim as raised by the defendant is nothing but weak and yet on the other hand the defendant seems reluctant to give it up even for the purpose of lending support to its application for security for costs.  Moreover, one does not know what position the defendant will take if it fails in this appeal.  Whatever the true reason or cause may be for making and keeping the counterclaim, the unsatisfactory nature of this aspect of the case is one of the reasons why I am not persuaded that I should exercise my discretion in ordering security in favour of the defendant.

Admitted sums and the amount of the costs sought to be secured

32.  Apart from the sum of $181,115.60 admitted by the defendant as due to the plaintiff, the defendant also admits that it has retained a sum of $83,581 as retention money for a period of 12 months.  Whether the counting should start from 18 May 2010 (the date of the fax) or from 28 September 2010 (the date of the defence), the period of 12 months has long expired.  Therefore the amounts admitted by the defendant that are due to the plaintiff without any need for further argument would be $264,696.60.  However, Mr Lim draws my attention to the correspondence between the parties’ solicitors where it was alleged that the plaintiff was not entitled to have this retention money because it failed to comply with a contractual term to provide some documentation to the defendant.  Yet, this matter has never been pleaded, not even in the recent amendment of 9 November 2012.  I am not persuaded that I should simply accept this explanation.  The fact that it has not yet been included in the pleading tells against its strength if not its validity.  This sum is important when one bears in mind the appropriate size of costs that ought to be secured if the defendant is held entitled to be properly and justly protected.

33.  According to the breakdown of the estimated costs, the costs that had allegedly been incurred came to slightly over $84,000 which included attendance by a consultant solicitor admitted in 1994, drafting of pleadings, summons and affirmation, as well as review of the plaintiff’s pleading and summons and of documents obtained from all parties.  The second part of the skeleton bill is for costs to be incurred that include attendance with client, with counsel and with the plaintiff’s solicitors, attending interlocutory hearing and attending the trial which is estimated to be for three days, for the drafting of pleadings, witness statements, list of documents, summons, affirmation, questionnaires etc, and review of the plaintiff’s pleadings, summons, witness statements, list of documents, questionnaires.  This second part requires almost a total of 80 hours of work of the consultant solicitor.  Counsel’s fee including that for the estimated three-day hearing amounts to $150,000.  I must say that the estimated work of the consultant solicitor is repetitive and looks highly inflated.  I am told by Mr Lim that this skeleton bill of costs does not include any costs for the counterclaim or for its prosecution.  This accentuates the problem rather than diminishes it.  I consider that a proper amount of costs to be secured, if the defendant were justly entitled to such an order, would be around the sum admittedly held by the defendant in favour of the plaintiff, namely, $270,000.  It would not seem proper or appropriate in the circumstances for me to exercise my discretion to order security for costs.

Conclusion

34.  By reason of the matters I set out above, this is a case where the application for security for costs against the plaintiff should be dismissed.  The appeal sought by the defendant therefore fails and I make an order nisi that the defendant pay the costs of this appeal to the plaintiff forthwith, to be taxed on a party and party basis, if not agreed.