SAMOVER CO LTD v. GRAND CHOICE CONSTRUCTION CO LTD

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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This Application

1. The plaintiff (Samover) is the developer of a large building project at Tai Po. The defendant (Grand Choice) was the main contractor. On 4 July 1996, Samover terminated the contract under clause 25. Samover is taking proceedings against Grand Choice claiming the sum of $24.3 million as liquidated damages. Grand Choice is defending the claim, and is counter-claiming for payment of about $100 million, various claims for damages and for an indemnity.

2. On 4 August 1997, Samover issued a summons seeking an order that Grand Choice give security in the sum of $19 million for Samover's costs in the action on Grand Choice's counterclaim. The order is sought under section 357 of the Companies Ordinance (Cap, 32) on the grounds that Grand Choice is a limited liability company, and there is reason to believe that it will be unable to pay Samover's costs if Samover is successful on the counterclaim.

3. This is the application before me.

Section 357

4. There is no doubt, as Mr Clayton accepts, that the matter falls squarely within the terms of section 357. Grand Choice is in liquidation, and Mr Clayton accepts that Grand Choice will be unable to pay the costs of a successful defence to the counterclaim. Indeed, Mr Clayton contends, if this application were to succeed, Grand Choice would be unable to proceed properly with its defence or counterclaim. During the hearing before me, the liquidator filed evidence in which he says that an order to provide security of anything over $1 million would stifle Grand Choice's claim and render it difficult to raise money to fight the claim by Samover.

The Statement of Claim

5. After identifying the parties and the contract, Samover recites some clauses of the conditions of the contract relating to completion of the work, the liability for liquidated damages for delay, and Samover's right to determine Grand Choice's employment. It is alleged that extended time for completion of the work was 22 December 1995, and that, by notice dated 4 July 1996. Samover terminated Grand Choice's employment under clause 25(1) of the contract or accepted its repudiation of the contract. Samover also alleges that the architect issued a certificate of non-completion and certified that the work ought reasonably have been completed by 22 December 1995, and that, by virtue of this certificate, Samover is entitled to liquidated damages from that date until 4 July 1996 at the rate of $120,000 per day, giving a total of $23.4 million.

6. The significance of Samover's reliance on clause 25 is that the effect of this clause is, counsel are agreed, that Grand Choice are not entitled to any payment until all outstanding work has been completed. When this has been done, the cost of completing the work is set off against what may be due to Grand Choice. On this basis, Samover's position on this is that, at the end of the day, Grand Choice will owe Samover about $103 million.

The Defence

7. In his written submission, Mr Kat said that the defence was "in fairly standard form". During Mr Clayton's argument, he said, sotto voce, that this concession was "a mistake". I do not think it was a mistake. It is the sort of defence one would expect to see in answer to the sort of claim advanced by Samover.

8. The defence denies that Samover was entitled to terminate the contract or that Grand Choice repudiated, and refers to its counterclaim. It goes on to plead a wrongful failure to allow justifiable extensions of time and that these extensions would nullify Samover's claim to liquidated damages. Grand Choice alleges hindrance in the work, and that time for completion was at large. Grand Choice says, if any sum is due to Samover, it is entitled to set off the amounts due under the counterclaim.

The Counterclaim

First Counterclaim

Paragraphs 16.17 and 17A

9. Here, Grand Choice seeks a declaration that it was entitled to extensions of time or that time for completion was at large.

10. The allegations are essentially the same as in Grand Choice's defence. Mr Kat accepts these allegations are directly related to the defence.

Paragraphs 18(a) to 18(b)

11. These paragraphs rely essentially on the same allegations as paragraphs 16, 17 and 17A and claim payment of the sum of about $32 million

12. Mr Kat accepts that the claims relating to extensions of time are directly related to the defence, but he seems also to argue that the claim for loss and expense of about $32 million have an "independent life". I do not understand this. This claim is based on the alleged failure to grant proper extensions of time.

Second Counterclaim

Paragraphs 19 to 19E

13. Under these paragraphs, Grand Choice claims under an account the sum of about $56.67 million and damages. This is based on clause 25 of the contract, or, if the termination was wrongful, as damages for breach. Although this aspect does not feature in Samover's claim at this stage, as I have said, Samover's position is that a proper account under clause 25 would show that Samover is entitled to about $103 million.

14. This claim would, to the extent of Samover's claim, provide a defence of set off. Even if there were no counterclaim, these allegations would need to be investigated in the trial of Samover's claim. And, of course, realistically, the whole claim would be investigated, not just to the extent of $23.4 million.

Third Counterclaim

Paragraphs 20 to 22

15. These paragraphs challenge Samover's termination of the contract. This raises, of course, the same issue as the defence.

Paragraph 23

16. This raises again the issue of wrongful termination. The claim is for about $306,000 and an indemnity. The basic issue is the same as that raised in the defence.

17. Mr Kat accepts that the monetary claim may be set off.

Fourth Counterclaim

Paragraph 24

18. Similar allegations are made here. The claim is for about $822.000 in respect of non-payment of certified sums and damages.

19. Mr Kat accepts that these may be subject to set off.

The Basis for the Application

20. Samover makes its application on the basis Grand Choice is to be treated as a plaintiff making a claim against Samover, and, because it will be unlikely to be able to pay Samover's costs if it is successful in defending the counterclaim, the justice of the matter requires that Samover provide security.

The Basis for Opposition to the Application

21. Grand Choice opposes the application, in the first place, on the basis that Grand Choice is mounting a defence against Samover's claim, and its counterclaim would involve only investigation of essentially the same issues as would be involved in a trial of the issues raised in Samover's claim and Grand Choice's defence.

22. In addition, Mr Clayton argues that, in any event, the justice of the matter is against granting security because Grand Choice's financial difficulties are caused by Samover's failure to pay what is due, the application is being used oppressively to stifle Grand Choice's genuine claim, and, in fact, would stifle the defence as well as the claim.

23. I take no account of the merits of the claim or counterclaim. On what is before me, it is impossible to make any sensible judgment about who is wrong and who is right in the various allegations made. On this basis, although I am inclined to entertain suspicions in this direction, I cannot conclude, as matter of probability, that Samover caused Grand Choice's financial difficulties, nor can I find that Samover is using the application oppressively. Whether or not an order to provide security in any appreciable amount would, in fact, stifle Grand Choice's defence and counterclaim is not an over-riding consideration where otherwise it would be just to order security. The statute must contemplate that this might happen.

24. Accordingly, as I see it, the matter falls to be decided on whether or not Grand Choice's claim "clearly crossed the boundary which divides an aggressive defence from an independent counterclaim" - per Bingham, LJ at 318 in Hutchison Telephone (UK) Ltd. V Ultimate Response Ltd [1993] BCLC 307.

The Approach Where Security for Costs is Sought on a Counterclaim

25. Mr Kat has relied upon a number of authorities on the question of the correct approach when considering an application for security for costs against a counter-claiming defendant. I believe they are consistent, and it is sufficient to quote the words of Beldam, LJ in L/M International Construction Inc & Another v The Circle Ltd Partnership 37 ConI R 72, at 82 -

Application of this Approach

26. Both counsel, correctly I believe, urge me to look at the substance of this matter rather than appearances.

27. The substance of the matter is that there is a dispute between the parties as to whether or not Grand Choice performed its obligations under the contract. That dispute emerges initially from Samover's claim. It terminated the contract, and it commenced proceedings against Grand Choice on the basis that Grand Choice did not perform its contractual obligations. It says that Grand Choice owes it money as a result of this failure. Grand Choice has responded by saying that it did perform its obligations, and, far from owing money to Samover, Samover owes money to it.

28. Mr Kat says that Samover's claim is restricted to one for liquidated damages, but it is unrealistic to suppose that this will remain the position once Samover has finalised an account under clause 25.

29. The evidence from Mr Chung Ting Ting, on behalf of Samover, is that his "best assessment of the direct loss and/or damages suffered by [Samover] as a result of the determination" of the contract is $103,682,656. Mr Chung says "while this is my best assessment for now, variations to figures or inclusion of new heads of claims may be necessary in the future. Even leaving aside the liquidated damages claimed by [Samover], I verily believe that [Grand Choice] will in fact be indebted to [Samover] in a substantial figure in the order of [$103,682,656]".

30. In the face of Grand Choice's allegation that, under the same process as that undertaken by Mr Chung,, Samover will owe Grand Choice about $56.67 million, it would be to ignore the substance of the matter to suppose that Samover will not fight for judgment for the sum of about $103 million it says is due to it.

31. On that basis, every issue raised by Grand Choice on liability is mirrored by an issue that would arise in a trial of Samover's case. Even on quantum, the issues raised by Grand Choice would, of necessity, be investigated in the trial of Samover's claim to enable a decision to made on what amount, if any, is due to Samover.

32. One of the allegations by Grand Choice is that, if there were "any temporary lapses by the defendant in provision of adequate management or sufficient labour, or in the execution of the Works", these were caused by ''massive cashflow deprivations which the plaintiff occasioned".

33. Mr Kat says that trying this issue will "take enormous time" and more than half the expert evidence, which, it is said by Samover, will cost $9 million, will be devoted to it. That may or not be so, but the point is that these costs would be costs in the trial of Samover's allegation that the contract was justifiably terminated.

34. Mr Kat points to statements made on behalf of Grand Choice suggesting that it was the real plaintiff in the action. To my mind, all this implies is that those representing Grand Choice's interests regarded it as the wronged party. These statements cannot be decisive on the question of whether Grand Choice's claims "in substance and in extent, are separate and distinct from claims merely used as a shield".

35. I must conclude that, taking a realistic view of the matter, including what I regard as the reasonable assumption that Samover will claim what it says is due to it under the account taken under clause 25 of the contract, the issues that will arise under Grand Choice's counterclaim do no more than mirror essentially the issues that will arise in the battle over Samover's claim and the defence to it. I cannot see that there will be any significant amount of extra costs incurred by trying the counterclaim at the same time as the claim; an investigation of the same matters will be required.

36. In the result, in all the circumstances, I believe that the overall fairness and justice of the matter does not require that I should exercise my discretion to order security to be provided by Grand Choice.

37. Samover's summons is dismissed.

The Draft Bill of Costs

38. In any event, I regard the claim for $19 million as security as quite extraordinary. The draft bill covers every conceivable expense in the action on the claim and the counterclaim except the writ. It also covers the whole trial. Samover estimates that the trial will last twelve weeks. At this stage of the matter, there cannot be any reasonably accurate estimation of the length of the trial. Even if I were inclined to think that security should be provided, this would be only up to the stage of setting down for trial, and I would have considered that security in the sum of no more than $2 million would have been reasonable.

Costs

39. The matter of costs has not been argued, but there is no reason obvious to me why costs should not follow the event. I make an order nisi that Samover pay the costs of Grand Choice.