SEGA DESIGN & CONSULTANCY LTD v. LAM LUN KEE DECORATION CO.

HCA 131/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 131 OF 2005

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D E C I S I O N

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Application

1. This is an application for setting aside of default judgment by the Defendant against the Plaintiff.

Background

2. Profit Link International Limited (“Profit Link”) was the main contractor of the renovation works of the premises known as 23^rd to 28^th Floors, Hip Shing Hong Centre, No.55 Des Voeux Road Central (“the Premises”).  The renovation works were sub-contracted to the Defendant who further sub-contracted the same to the Plaintiff.  On 21 January 2005, the Plaintiff commenced the present proceedings against the Defendant for balance of outstanding payment in the sum of $1,438,865.

3. Although the Defendant did file their acknowledgment of service on 15 February 2005 indicating that they would contest the proceedings, no defence and counterclaim was filed and served within the time limit.  As such, default judgment was entered for the Plaintiff on 22 March 2005.  The Defendant took out the present application on 2 December 2005.  They conceded that it was a regular judgment and sought to invoke the discretion of this Court to set it aside.

4. The substantive argument was fixed to be heard by me on 2 May 2006.  Mr. P.K. Chan of Counsel acted for the Defendant while Mr. Bernard Yuen of Counsel represented the Plaintiff.  Upon consideration of all the evidence, authorities and submissions from the parties, I have come to the conclusion that the judgment is only to be set aside upon payment into Court of $580,000 by the Defendant.  My reasons appear as follows.

The Law

5. The applicable principles relating to setting aside of regular judgment can be found at pages 157 to 160 HKCP 2006 paragraphs 13/9/12 to 13/9/25.  In summary, the court’s power is discretionary and unconditional.  All relevant circumstances should be considered, including whether the defendant has shown “a real prospect of success”; why the default occurred; the defendant’s conduct after he had notice of the proceedings and the default judgment; prejudice caused to the Plaintiff or third party; and so forth.

The Defences: meritorious?

6. The Defence raised by Defendant may be summarized as that:

“ (a)  the costs of variation orders as claimed by the Plaintiff were grossly inflated and/or miscalculated;

  (b) the costs of variation orders ought to be discounted for the quality problems; and

  (c)  the Defendant should be entitled to set off against the Plaintiff’s claims herein so much of its costs for undertaking the remedial works.”

  (para. 6 of Mr. Chan’s skeleton)

7. In relation to these 3 lines of defences, I have the following observations:

(a) (i) The Plaintiff conceded that the sum of $60,000 design costs should not have been part of its claims herein.

(ii) It is not disputed that there were variation orders.  It is also not disputed that they were made directly by the main contractor with the Plaintiff.

(iii) According to the contract between the Plaintiff and the Defendant, the costs of variation orders are to be determined by further agreement of the parties.  The agreement dated 15 November2005 made reference to the subject quotation which stated that:

“現附上以上工程之單價明細表供參考之用，而其單價不能作此工程日後更改或後加的項目及數目之用。若有更改須另行商議價目。”

(iv) Upon the contemporaneous documents put before me, I do not consider that further agreement has been reached.  Factually, the Defendant simply relayed the costs of variation orders prepared by the Plaintiff to Profit Link for approval.  On 29 December 2003, the Plaintiff said that they amounted $1,791,708.00. Profit Link replied to the figure in November 2004.  It said that it worthed only $353,699.90.  Further, on 9 December 2004, during a labour dispute between the workers of the Plaintiff and the parties, Profit Link paid $580,000.00 to the workers in the following circumstances:

“ ……

雖然「添勝國際有限公司（‘添勝’）」與「世嘉」並無合約關係，但基於顧及世嘉及其外判的工人生計，「添勝」通融地同意付予「世嘉」HK$580,000.00（港幣伍拾捌萬元正）作為支付此裝修項目所有工人欠薪以及最終及全盤解決金額（Full and Final Payment），並將從「林倫記」剩餘工程款項扣回。

3.        ……

6.    此付款手續辦好以後，「世嘉」可自行繼續向大判「林倫記」追討其餘欠款（如確有）。但再與「添勝及集團其他成員」無關，而「添勝及集團其他成員」也不能再牽涉在內。”

(v) Putting myself into the position of the trial judge, the costs of variation orders are to be determined on the basis of “quantum merit” in the circumstances.  It can only be determined upon hearing of all evidence from the parties as to the reasonableness of such costs.  For the time being, the sum of $580,000 should be a figure that might be relied upon because it was something agreed by Profit Link as aforesaid.

(b) (i) The Defendant said that the works of the Plaintiff were defective.  The Plaintiff replied that it had taken steps to rectify the same.  In this respect, the Plaintiff is able to produce some contemporaneous documents to support its case, including a time chart dated 3 February 2004 showing details of remedial works being carried out and the letter of  7 February 2004:

“關於本司於30th January, 2004發出的信件檔案號碼HSHC/LLK/L-1225/SF就BDM發出的Defect List項目，特此通知貴司有關進度：—

有關23，25及26樓的執Defect項目，本司已於16-Feb-2004完成所有執Defect項目。如貴司對已完成的執Defect項目有意見請於此信件的發出日期起計三日內通知本司。”

(ii) On the contrary, as a matter of documentation, the Defendant cannot produce any reply to the above letter.  By way of affidavit evidence, the Plaintiff attempted only to dispute the same by reference to the complaints made by Profit Link.

(iii) I do not think I have to resolve such dispute at the present juncture.  It suffices to say that I am not optimistic about the Defendant’s case on this point.  Further, when Profit Link paid the said $580,000, probably, defects (if any) or costs of rectifying the same, should be one of the factors having been taken into account.

(c) The Defendant told this Court that they had incurred costs of $415,000.00 of rectifying the defective work of the Plaintiff.  The Plaintiff disputed the same.  For the time being, I agree with the Plaintiff.  The burden of showing “a real prospect of success” lies on the Defendant.  However, they have chosen only to show some very rough calculations.  This Court is left with no particulars of when, where, what and how these remedial works were carried out.

Other factors?

8. I also notice the followings:

(a) Mr. Lam of the Defendant told this Court that he was taking care of her mother, who having been hospitalized for in January and February 2005, and as such missed the deadline for filing the Defence.  I accepted that.

(b) Nonetheless, upon knowing the default judgment, he apparently did not take steps to rectify the same for some 9 months.  Further, he only kept negotiating with Profit Link about the matter, but regrettably failed to achieve anything.

(c) As far as the Plaintiff is concerned, there is no evidence adduced before this Court showing that either it or some other third party might be prejudiced if I would set aside the subject default judgment.

(d) 5 demand letters were issued by the Plaintiff to the Defendant from April 2004 to December 2004, but the Defendant did not make any formal reply or at all.

Conclusion

9. To sum up the position, in order to determine the real liability of the Defendant to the Plaintiff, a trial of all available evidence is necessary in order to determine the true costs of variation orders, defects of the work of the Defendant, if any, and so forth.  Upon the evidence before this Court so far, the sum of $580,000 appears to have been acceptable to the Plaintiff and Profit Link. Contemporaneous documentation is no good for the Defendant’s case.  There is further delay on the part of the Defendant in bringing up the present setting aside application.  To ensure the proper future conduct on their part, I am of the view that payment into court of $580,000.00 is appropriate in the circumstances.  I further allow the Defendant to do so within 21 days from today.

Costs

10. I do not have the benefit of having argument from both Counsel on the question of costs.  However, there appear no reason why costs should follow the event.  I therefore make an order nisi that, costs of the application, including costs reserved on 9 December 2005, together with Certificate for Counsel on the hearing on 2 May 2005 before me, be borne by the Defendant to the Plaintiff, to be taxed if not agreed, on party-and-party basis.