WONG CHI KONG BENNY t/a SAI HING CONSTRUCTION & ENGINEERING CO v. TSANG KWONG KEUNG

DCCJ 1226/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1226 OF 2006

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DECISION

1.  The background of this action has to do with the Housing Department’s project of maintaining and refurbishing 3 housing estates in Hong Kong in 2003-2004.  Sing Fat Construction Company Limited was the main contractor engaged by the Department.  Sing Fat subcontracted the works to Sai Hing (the Plaintiff).  Sai Hing further subcontracted the works to Tsang (the Defendant).  The works were completed by the end of 2004.

2.  Sai Hing commenced the present action in March 2006, claiming the return of certain advance payments made to Tsang pursuant to their contract.  Sai Hing obtained default judgment on 25 April 2006.  Charging order followed, which was made absolute on 16 August 2006.  Tsang applied in January 2007 for setting aside the default judgment and the charging order.  He was granted legal aid afterwards.

3.  By his affirmations, Tsang challenged both the regularity of the judgment and the merits of Sai Hing’s claim.  At the hearing, Mr Iu for Tsang took no issue as to the service of proceedings and therefore the regularity of the judgment.  This was sensible, as I would have had no difficulty in dismissing the argument that the judgment was irregular.

PRINCIPLES

4.  The power to set aside a default judgment is discretionary.  Before a regular judgment may be set aside, the defendant must show that his defence has a real prospect of success.  It is his burden to satisfy the court that his case and the evidence he adduces in support carry some degree of conviction: see Hong Kong Civil Procedure 2008 at 13/9/14 (and the cases cited there).

THE DISPUTE

5.  It was about the advance payments or “預借糧款” made by Sai Hing to Tsang during the project period.  Tsang obtained the advance payments from time to time to settle his obligations to the suppliers and workers during the project period.  But the advance payments were supposedly subject to a contractual limit.  Further the advance would be subject to interest at 6% per annum above the prime rate.  Eventually, the amount of advance payments obtained by Tsang, Sai Hing says, exceeded the contractual limit.  Sai Hing is claiming back an amount of HK$247,471.16.

6.  According to the affirmations and the draft defence, Tsang raised the following issues in defence:

(1)	The contract is voidable.  The contract contained a lot of provisions which were neither verbally agreed nor contained in the draft.
(2)	Sai Hing’s pleaded cause of action is bound to fail.
(3)	After set off, Tsang could not be owing Sai Hing any money.
(4)	Sai Hing was in breach of the implied term of the contract in failing to use reasonable endeavour and to take reasonable steps to recover payment for the works completed from Sing Fat.

7.  At the hearing, Mr Iu did not argue paragraph (1) above.  For the purpose of this application, he was prepared to argue on the basis of the contract relied on by Sai Hing.

THE CONTRACT

8.  The contract was in Chinese.  The following terms are relevant:

(1)	Sai Hing would deduct 20% of each payment received as the administration fee payable by Tsang before the balance would be paid to Tsang (clause 4).
(2)	Tsang would supply all the information about completed works and Sai Hing would calculate and file claim for payment (clause 8).
(3)	Sai Hing would not be responsible for the result of the approval of final account by the Department (clause 9).

9.  The key term in issue is clause 13:

“	(a)	乙方首三個月不可以預借糧款，但柯打完成後可借柯打預算額的30%，而此借款甲方將按銀行年息借貸P+6%向乙方收取利息。
	(b)	若收到物業管理公司／房屋署中期糧單，甲方有權扣起乙方所借之糧款，然後發還乙方應得之糧款。”

10.  Clause 13(a) essentially provided that Tsang should not request advance payment within the first 3 months (presumably either after the contract had come into effect or the works had commenced).  Advance payment should not exceed the contractual limit of 30%.  But parties have dispute as to whether it should be 30% of the estimated value of the works ordered or the value of the works completed or the payment for the works completed.

11.  Clause 13(b) essentially provided that upon receipt of interim payment, Sai Hing would be entitled to deduct the amount of advance payments before paying the balance to Tsang.

CAUSE OF ACTION

12.  Now the claim is founded on clause 13(a).  It is pleaded that in breach of that clause, the advance payments to Tsang exceeded the 30% contractual limit.  Sai Hing is effectively claiming for the return of the allegedly overpaid advance payments.

13.  Clause 13(a) prohibited advance payments within the first 3 months.  Sai Hing would have been entitled under this provision to refuse to make advance payments requested by Tsang during these 3 months.  However, Sai Hing’s own case is that it did make such advance payments to Tsang in as early as the first month after the contract was signed.  Clause 13(a) imposed the contractual limit on the amount of the advance payment.  Wong of Sai Hing affirmed that he soon got to know the financial problem faced by Tsang which caused Tsang to repeatedly request Sai Hing to make advance payments.  These led to the amounts of advance payments listed under para.9 of Wong’s 1^st affirmation.

14.  The fact was that notwithstanding clause 13(a), Sai Hing did accede to Tsang’s requests for advance payments and the amounts did exceed the 30% contractual limit.  In the circumstances, Sai Hing is not entitled now to allege breach of these restrictions on the part of Tsang.  This is particularly true as Sai Hing would charge Tsang interest on the advance payments, whether the same exceeded the contractual limit or not.

15.  There is no dispute that the works were completed by the end of 2004.  But there are still payments to be approved by the Department.  When Sai Hing receives payment, it would be entitled to set off the amount payable to Tsang (under clause 4) by the amount of advance payments plus contractual interest still owed by Tsang.  This is exactly what clause 13(b) provided for.  However, the basis of Sai Hing’s present claim seems to be that Tsang is not entitled to keep any advance payments exceeding the contractual limit and therefore has to return the amount, though Sai Hing is yet to receive the balance of the payments for the works completed.  This is reflected by how Sai Hing calculates the amount claimed (para.12 of the 1^st affirmation of Wong of Sai Hing).

16.  For the purpose of this application, there is at least a real prospect of success in arguing whether Sai Hing is entitled to claim on the basis as pleaded.

17.  Of course, Sai Hing’s stance is that whatever view one takes about how the cause of action was framed, the outstanding payments to Tsang for the completed works would be less than the outstanding advance payments.  There will in any event be a net balance owed by Tsang.  However, it is exactly the final account between the parties which is in serious dispute.  Indeed Tsang raised the dispute even in his first affirmation when he was still acting in person.

THE FINAL ACCOUNT

18.  Tsang says that the total value of works completed was HK$3,233,084.04.  His 80% share (pursuant to clause 4 of the contract) would be HK$2,586,467.23.  He admits that the advance payments should be HK$478,041.60.  He says he is entitled to receive a net balance.

19.  Sai Hing says that the total value of works completed by Tsang was HK$1,601,714.36, of which there was an amount of HK$458,174.30 yet to be approved and paid by the Department as at the date of writ.  He says the advance payments amounted to HK$1,188,715.67.  After giving credit to the cost of the works completed payable to Tsang, the net amount owed by Tsang is HK$384,923.45.

20.  Tsang pointed out that (1) there was no explanation or evidence of how the alleged net amount of HK$384,923.45 came about; (2) the amounts stated in the documents adduced by Sai Hing in support of the total advance payments add up to just about half of the amount alleged; (3) the documentary evidence consists of duplication; and (4) some documents evidence payments by Sing Fat instead of Sai Hing.  I also note that according to the letter of demand dated 25 January 2006, Sai Hing’s case then was that the balance of payments for the works completed should be less than HK$500,000.  The advance payments amounted to HK$378,551.70.  Sai Hing demanded the return of HK$228,000.

21.  Mr Cheung for Sai Hing accepted imperfection in the pleading and documentary evidence in support.  But Sai Hing most recently had the former site agent of Sing Fat affirmed and verified its case, though by words only.  Sai Hing contends that Tsang’s case is on the contrary a bogus claim.  It pointed out that (1) the lists of completed works and their value put forward by Tsang are not supported by documentary evidence; (2) numerous items of works were allegedly completed even prior to the time when Wong of Sai Hing and Tsang first met; (3) numerous items of works recorded in the documentary evidence were unrelated to Sai Hing.

22.  Tsang gave his explanation in his affirmation in reply.  But Mr Iu for Tsang submitted that even after taking out all those items challenged by Sai Hing, the value of the works completed remains substantially more than the advance payments, whether as alleged by Sai Hing or, of course, Tsang.  To counter, Mr Cheung for Sai Hing submitted that once tainted by those items of alleged fabrication, Tsang’s case ought to be ruled out completely.  However, I take that was an argument without prejudice to Sai Hing’s own case that HK$1.6 million worth of works had been completed by Tsang.

23.  Indeed Tsang argues that even accepting Sai Hing’s case, there remains a net balance payable by Sai Hing to him and therefore Tsang could not be owing to Sai Hing any amount.  For instance, 80% of the HK$1.6 million (as alleged by Sai Hing) is HK$1.28 million.  Giving credit to the advance payments of HK$1.18 million (again as alleged by Sai Hing), Tsang should still not owe Sai Hing.

24.  No doubt the burden is on Tsang to satisfy the court that he has a meritorious defence.  While bare assertion is not enough, the particulars of the items of works completed such as their respective dates, housing estates and reference numbers suggest that there may well be documentary basis for Tsang’s list.  In any event, a defendant is perfectly entitled to show a meritorious defence also by scrutinising the plaintiff’s case and its evidence in support.  The issue is not merely whether judgment was entered for too much but whether Tsang is liable for a net balance at all.  Seeking to form a provisional view of the likely outcome of the dispute on the final account is, in the circumstances of this case, not straightforward.  Tsang’s case may well be established at trial: see Hong Kong Civil Procedure 2008 at 13/9/14 (and the Hong Kong cases referred to therein, citing Allen v Taylor [1992] 1 PIQR 255, 259).

BREACH OF IMPLIED TERM

25.  The proposition is that Sai Hing should have used its best endeavours to recover the payment for the works completed; otherwise Sai Hing is personally liable to pay Tsang.  The basis for implying such a term was not clearly explained during the hearing.  Nor was authority submitted in support of the implication of such term in the circumstances of this case.

26.  On the one hand, clause 4 of the contract provided that payment would be made within 60 days after Tsang had submitted the claim for payment each month.  On the other hand, the same clause implied that payment would depend on approval and actual payment by the Government, somewhat like a back-to-back arrangement.  Since there is no dispute that the works were completed by the end of 2004, 3 years have elapsed by now while some payment for the works remains admittedly outstanding.

27.    The question of whether the proposed term should be implied to the contract containing these express terms was not really argued during the hearing.  But in view of what I have already indicated above, I do not need to say more on this proposed ground of defence for the purpose of this application.

CONCLUSION AND COSTS

28.  I am satisfied that the application should be allowed.  After consideration, I am not inclined to imposing condition in the circumstances of this case.  The concern about delay and inaction on the part of Tsang prior to this application could be addressed by way of appropriate costs order and directions for the further conduct of this case.

29.  I repeat my observation regarding Tsang’s explanation of the default.  I do not agree with Mr Iu for Tsang and I think the costs of and occasioned by the application should be borne by Tsang in the circumstances.

ORDER

30.  I make the following order:

(1)	Judgment dated 25 April 2006 and the charging order absolute dated 16 August 2006 be set aside;
(2)	Leave to Tsang to file and serve the Defence within 14 days from today;
(3)	Leave to Sai Hing to file and serve the Reply, if any, within 21 days thereafter;
(4)	Costs of and occasioned by this application, including any costs reserved, be to Sai Hing in any event; such costs be taxed, if not agreed, with certificate for counsel;
(5)	Costs of and occasioned by the application for default judgment and the charging order be in the cause of the action;
(6)	Tsang’s own costs be taxed in accordance with legal aid regulations;
(7)	the above costs order be made absolute in the absence of appointment to argue costs in 14 days.