WENDEN ENGINEERING SERVICE CO. LTD. v. LEE SHING YUE CONSTRUCTION CO. LTD.

HCCT90/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION LIST NO.90 OF 1999

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D E C I S I O N

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The application before the court

1. There is before the court an application by the defendant for a stay of execution pending an appeal from the judgment of Madam Recorder Gladys Li, SC dated 18 April 2002 whereby the defendant was adjudged liable to pay to the plaintiff $14,320,355 and interest, with any balance due to be assessed by a master, and costs.

2. The Notice of Appeal was filed on 24 May 2002 and set down on that day. No dates have as yet been fixed for the hearing of the appeal, although the defendant is confident that it can be heard within a matter of months.

The defendant's grounds in support of the summons

3. Ms Teresa Cheng, SC who appeared for the defendant both at trial and before me, submitted two grounds in support of the application for a stay pending appeal :

(1) The merits of the appeal were strong.

(2) If a stay were not granted, the appeal would be rendered nugatory as there was a likelihood or even certainty that the defendant would be financially ruined.

4. Before I deal with these issues, it is first convenient to set out the relevant principles regarding stays of execution pending appeal to the Court of Appeal.

Stay of execution pending appeal - the principles

5. I have on several occasions recently had to consider the relevant principles regarding stays of execution pending appeal. I hope I will be forgiven if I merely recite what I said in Star Play Development Limited v. Bess Fashion Management Company Limited, unreported, HCA No.4726 of 2001, 7 June 2002, at paras. 6-10 :

"Stay of execution : the applicable principles

6. Though in the court's discretion whether or not to grant a stay, it is important to bear in mind that the starting point is RSC Order 59, rule 13(1) :

' Except so far as the court below or the Court of Appeal or a single judge may otherwise direct-

(a) an appeal shall not operate as a stay of execution or of proceedings under the decision of the court below;

(b) no intermediate act or proceeding shall be invalidated by an appeal.'

7. In other words, unless the defendant can justify a stay of execution, one will not be ordered. The practice of the court is that justification can be demonstrated only if good reasons exist.

8. Good reason can exist in a variety of forms. It will be wrong to set out any exhaustive definition of what would constitute good reasons, but, commonly, reference is made to factors such as whether the absence (or existence) of a stay would render an appeal nugatory (thus bringing into focus the relative prejudice that may be caused to the appellant and to the respondent by a stay of execution), and the merits of the appeal.

9. In the context of these two factors, I would make the following observations :

(1) In determining the question whether or not an appeal would be rendered nugatory, the court must of course first have regard to the nature of the order that is the subject matter of the appeal. If the order appealed against is a money judgment, the court will require evidence as to why the levying of execution will result in the appeal being rendered nugatory, such as, for example, an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal. Sometimes, though, the nature of the order will by itself almost be determinative of the question. Where the relevant order is, for example, an injunction (and particularly so if it is a mandatory injunction), it may well be that, without a stay, an appeal would be rendered nugatory in the event of a successful appeal. Similarly where, as in the present case, the relevant order is one for the possession of premises, again it can readily be appreciated that without a stay of execution, more often than not, it is likely than an appeal would be rendered nugatory : see Ketchum International plc v. Group Public Relations Holdings Limited [1997] 1 WLR 4, at 10H.

(2) That said, whatever the nature of the order or judgment appealed from, the court will still require evidence as to why an appeal will be rendered nugatory in the event of a stay not being granted. The requisite quality of the evidence will, of course, depend on the nature of the order or judgment appealed against.

(3) I now deal with a common facet relied on in any argument relating to an appeal being rendered nugatory, namely that of financial ruin or serious financial consequences. Where, as in the present case, it is said that the levying of execution would result in financial ruin or serious financial consequences for the appellant, the court will require good evidence to support this contention, such as the production of accounts or other documents to justify the assertion. A bare assertion is unlikely to meet with much sympathy where more substantial evidence is available : see the observations of Mr Justice Litton, JA in World Trade Centre Group Limited v. Resourceful River Limited, unreported, 12 May 1993, Civil Appeal 70 of 1993, Court of Appeal, at 3-4.

(4) An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant faces financial ruin or the loss of all his property. Demonstrating that the failure to grant a stay would have a serious deleterious effect is enough : see Caine Tai Investment Company Limited v. Ayala International Finance Limited [1983] 1 HKC 163, a decision of the Court of Appeal which made reference to Wilson v. Church (No.2) [1879] 12 Ch. D. 454.

(5) How relevant then is the court's consideration of the merits or strength of the appeal? In my view, while it is impractical and even undesirable for the court in dealing with an application for a stay of execution, to go deeply into the merits and strengths of an appeal, it must however form a preliminary view of these aspects. This I believe to be an inevitable consequence of the starting point I have earlier mentioned in referring to Order 59, rule 13(1).

(6) The existence of merely an arguable appeal cannot by itself amount to sufficient reason to justify a stay. It can be put this way : the existence of an arguable appeal (that is, one with reasonable prospects of success) is the minimum requirement before a court would even consider granting a stay. In other words, however exceptional the circumstances may be otherwise justifying a stay of execution, if the court is not convinced that there exist arguable grounds of appeal, no stay will be granted.

(7) Conversely, however, the existence of a strong appeal or a strong likelihood that the appeal would succeed, will usually by itself enable a stay to be granted because this would constitute a good reason for a stay : see World Trade at 2; Winchester Cigarette Machinery Limited v. Payne (No.2), unreported, 15 December 1993, English Court of Appeal (a case referred to by the Court of Appeal in Fung Wai Kwong William v. The Insider Dealing Tribunal [2001] 1 HKC 44).

(8) In most cases, the court will not be dealing with the extreme situations I have referred to. Often, it will be faced with simply the existence of an arguable appeal. Here, it becomes necessary for the appellant to provide additional reasons as to why a stay is justified. The demonstration of an appeal being rendered nugatory is one example, albeit a common one. Here, where it is demonstrated that an appeal would be rendered nugatory if a stay was not granted, the court may require no more than the existence of an arguable appeal. Correspondingly, where it cannot be shown that an appeal would be rendered nugatory if a stay were not granted, the court will require, in the absence of any other factors, the appellant to demonstrate strong grounds of appeal or a strong likelihood of success. This I understand to be the sentiment found in authorities such as World Trade at 2 (in a passage cited with approval by the Court of Appeal in Fung Wai Kwong William at 48) and Mabul Properties Corporation v. Ahmed, unreported, 24 June 1987, English Court of Appeal.

(9) I have so far referred to the position of the appellant. It is important to stress that the court must not at any stage forget the position of the successful party. It is always relevant to consider the prejudice that would be caused to the successful party (the respondent in the appeal) in the event a stay is granted and if necessary, to impose conditions so as to minimise the prejudice caused to him. A fortiori, the court must consider any contention that the appeal would be rendered nugatory to him (in the event the appeal is dismissed) should a stay of execution be imposed.

10. Ultimately, the court embarks on a balancing exercise and uses its common sense, but bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success : see Winchester Cigarette Machinery, per Ralph Gibson LJ."

Merits of the appeal

6. In Star Play Development Limited, I said that the existence of a strong appeal or a strong likelihood that the appeal would succeed, will usually by itself be enough to justify the grant of a stay of execution. I said this by reference to the judgment of Litton JA in World Trade Centre Group v. Resourceful River Limited, unreported, 12 May 1993, Civil Appeal No. 70 of 1993, Court of Appeal. It is apparent from that case that the requisite strength of the appeal must be such that the court takes the view that "something has grievously gone wrong with the process of law in the court below".

7. In other words, if the party applying for a stay of execution can demonstrate that it is almost bound to succeed in the appeal, this by itself will almost invariably tilt the balance in favour of granting a stay.

8. On the other hand, if all that can be demonstrated is that the appeal is arguable or even that good arguments exist, something more needs to be shown by the appellant in order to obtain a stay of execution. This is a consequence of the starting point in all applications for a stay pending appeal, namely that, the successful party in the court below is not to be deprived of the fruits of his success. This approach is dictated by RHC, Order 59, rule 13(1).

9. In the present case, the defendant, a Group C Contractor, was the main contractor under a term contract numbered TCG 003 dated 31 March 1998 for the Mainland East area awarded by the Architectural Services Department. The plaintiff was the specialist electrical subcontractor of the defendant under the works in that contract.

10. It is clear from the judgment that there were considerable discussions and negotiations in relation to the question of remuneration and reimbursement under the subcontract. The plaintiff's case was that everyone including the defendant recognised that at the discounted rates offered by the defendant to the plaintiff (some 55% discount on the Schedule of Rates under the main contract), the plaintiff would inevitably make a loss.

11. It was common ground that the plaintiff commenced its subcontract works before agreement was reached on remuneration.

12. Eventually, on 31 August 1998, the parties entered into an agreement ("the Agreement") in which was contained the following provisions relating to payment and reimbursement :

"(a) The Main Contractor shall pay the Sub-contractor all moneys received from the Principal for the Subcontract Works pursuant to the Main Contract.

(b) The parties acknowledge that the contract price of the Subcontract Works may be less than the actual cost of the Subcontract Works and that the Main Contractor shall compensate the Subcontractor for its loss in accordance with sub-clause (c) below.

(c) In the event that the total price of the Subcontract Works payable to the Subcontractor is less than the total cost of subcontract (as certified by the Main Contractor), the Main Contractor shall, in addition to paying the Subcontractor the certified contract price, pay to the Subcontractor only on a back to back basis within 7 days after receipt of the relevant amount from the Principal:-

(1) 5% of the total builder's works order value of the Main Contract certified by the Principal relating to the works order issued during the 1st Contractual Period; and

(2) 4% of the total builder's works order value of the Main Contract as certified by the Principal relating to the works order issued during the 2nd Contractual Period; and

(3) 3% of the total builder's works order value of the Main Contract issued by the Principal relating to the works order issued during the Remaining Period.

(d) The Main Contractor shall send copies of all payment certificates issued by the Principal from time to time as soon as practicable after the Main Contractor receives the same.

(e) All moneys payable to the Subcontractor by the Main Contractor under this Agreement shall, and shall only, be made on a 'back to back basis' by the Main Contractor in accordance with sub-clause (f) below.

(f) The Main Contractor shall inform the Subcontractor in writing (which may be in the form of payment certificates) on the 5th and 20th days of each calendar month during the continuance of this Agreement of the latest payments and disbursements certified by the Principal for the Subcontract Works and shall pay any amount payable to the Subcontractor within 7 days after receipt of the corresponding payments from the Principal."

13. The learned judge, in construing in particular Clauses 2(b) and (c), came to the view that in respect of the reimbursement element referred to in Clause 2(b), the defendant was obliged to pay the plaintiff on a back-to-back basis as set out in Clauses 2(c)(i) - (iii). This obligation, the learned judge held, was one that continued throughout the performance of the subcontract and the main contract. She said, at paragraph 46 of her Judgment :

"As I see it, the parties intended that the plaintiff should be paid the relevant percentage of the builder's works value as and when the defendant itself received payment from the ASD."

14. The learned judge rejected the plaintiff's contention that this reimbursement payment was payable only after the occurrence of the relevant event expressly set out in Clause 2(c), namely, the certification by the defendant that the total price of the subcontract works payable to the plaintiff was less than the total cost of the subcontract. This certification, the defendant contended, could only take place after final certification under the main contract. Much emphasis was laid on the word "total" throughout Clause 2(c).

15. Ms Cheng took me through the arguments in some detail (since I was not the trial judge) and in the course of an attractive submission, said that the learned judge had simply misconstrued the relevant clause. Clause 2(c), she said, was clear in its language and the learned judge's attempt to arrive at what she regarded as a just result, simply could not be justified on the express wording of Clause 2(c).

16. Extremely attractive though this submission is, I am ultimately persuaded by Mr Clive Grossman, SC (for the plaintiff) that the defendant has in the end not shown anything more than just an arguable appeal or that good arguments exist on appeal. I am of the view that it just cannot be said that the appeal is strong or that there exists a strong likelihood that the appeal will succeed.

17. Mr Grossman points out that the clause was badly drafted and that the obscurities in the language used in that clause suggested more than the initial view that one might take. On the defendant's construction, the clause was perfectly workable, he argued. If after final certification, it was discovered that the plaintiff had been overpaid, then there would be a clawback, a not uncommon feature of building contracts. There was also the fact that the learned judge obviously paid much attention to the factual matrix of the Agreement, made as I have said, after the plaintiff had already started performance of subcontract works.

18. I need say no more (indeed I should not say any more at this stage) about the merits of the appeal. They will be for the Court of Appeal to consider in detail.

19. My conclusion on the merits of the defendant's appeal means that the defendant will have to demonstrate something more before a stay of execution can be granted. Here, the defendant argues that the appeal will be rendered nugatory if a stay were not granted on the ground that serious financial consequences would follow.

Appeal being rendered nugatory

20. The factual basis for this contention was contained in two affirmations of Mr Taylor Ho, the defendant's financial controller. In short, based on Mr Ho's affirmations, Ms Cheng made the following submissions in support of her contention that if a stay were not granted, the appeal would be rendered nugatory :

(1) The defendant is a substantial company with many projects at hand as well as in the pipeline. The projects it is at the moment handling are worth in excess of $650 million. For the future, the defendant expects to be awarded contracts later this year amounting to over $100 million.

(2) The defendant has in its and its subcontractors' employment over a hundred workers, and this number is expected to increase substantially when the new projects begin.

(3) However, the defendant is unable at present to satisfy the judgment debt of $14,320,353. It is said by Mr Ho that if the judgment debt were to be paid now, "the Defendant will be deprived of the cash required for running the business of the Defendant and be ruined." Later in his 1st affirmation, he softened this to, "On the other hand, if the stay is not granted and the Judgment Debt is paid now, the Defendant's business will definitely suffer seriously and it may most probably not even be able to pursue its appeal." (emphasis added)

(4) The defendant needs a continuous cashflow in order to operate, including satisfying the capital requirements set by the ASD and the Hong Kong Housing Authority. Accordingly, it did not want the monies it was receiving from building projects to be diverted to paying the judgment debt. In his 2nd affirmation, Mr Ho says, "As explained in my affirmation dated 14 May 2002, the Defendant needs continuous income to maintain its business operations. To deprive it of the income will cause great hardship to it, if not simply ruin it." (emphasis added)

(5) In order not to prejudice the plaintiff too much, the defendant has offered to undertake not to apply its cash or assets for any purpose other than continuing its operations and will not declare any dividends or increase remuneration for its management staff. It has also offered to pay 20% of its receipts from the main contract to the plaintiff.

(6) The shareholders of the defendant have indicated that they are unable to inject further funds to satisfy the judgment debt.

21. I am unable to accept this contention :

(1) It is first to be noted that there is some inconsistency in the way that the defendant has stated its alleged predicament . At its highest, it is put at financial ruin, but elsewhere this has been mollified to an assertion that it "may" most probably be unable to pursue an appeal and of "great hardship".

(2) Semantics aside, I am at a loss to understand how a company the size of the defendant and with the many lucrative projects it has or expects to get, cannot at this stage pay off the judgment debt of just over $14 million. Many documents have been exhibited, including audited and management accounts, but little or no detail has been provided to justify the basic contention of inability to pay. For example, no details are given of the defendant's day-to-day capital working requirements, such that the payment of $14 million would effectively shut the defendant down.

(3) Furthermore, for a company as large, lucrative and promising as the defendant alleges itself to be, no explanation has been forthcoming as to why the shareholders are unwilling to support it. No evidence of inability to borrow has been adduced either. These are in my view significant omissions. In the course of argument, I also asked Ms Cheng rhetorically : if the defendant's shareholders or bankers were not willing to support the defendant in these circumstances, why should the court?

(4) There is one last point. An examination of the defendant's audited accounts for the year ending 31 March 2001 shows that directors' remuneration increased from $1.45 million in 2000 to $4.57 million in 2001. This was maintained for 2002 where the defendant's management accounts for the year ending 31 March 2002 show directors' remuneration at $4.77 million. In my view, this is consistent with the defendant's contention that it is a company full of potential. In this circumstances, I am simply not convinced that the appeal will be rendered nugatory if a stay is not granted.

Order

22. For the above reasons, I dismiss the defendant's summons and make an order nisi that the defendant do pay to the plaintiff the costs of and occasioned by the said summons in any event, such costs to be taxed if not agreed. I will also certify the application fit for two counsel.