E. BON BUILDING MATERIALS CO. LTD. v. WALLAND ENTERPRISES LTD.

HCA5232/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5232 OF 2001

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REASONS FOR DECISION

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INTRODUCTION

1. This action arose out of an agreement as evidenced by a quotation dated 12 September 2000 ("the Agreement") whereby the plaintiff engaged the defendant to produce three sets of bathtubs. Pursuant to the Agreement, the plaintiff had paid a total of HK$1,200,000 to the defendant. Complaining that the defendant had failed to discharge its contractual obligations under the Agreement, the plaintiff commenced the present proceedings on 5 December 2001, claiming for the said sum of HK$1,200,000 or alternatively for damages to be assessed. On 28 December 2001, default judgment was entered on the said sum of HK$1.2 million with interest. However, upon the defendant's application, the default judgment was set aside by the master on 5 July 2002. The defendant subsequently filed its defence and counterclaim on 11 July 2002.

2. Dissatisfied, the plaintiff appealed. The appeal came before me on 4 September 2002. After hearing the parties, I allowed the appeal, set aside the master's order, restored the default judgment and ordered costs against the defendant. These are my reasons.

TEST

3. It is common ground that the default judgment as a regular judgment. The defendant seeking to set it aside must show a defence with a real prospect of success in defending the plaintiff's claim. It is not enough simply to show a merely arguable defence. The burden is higher. He must satisfy the court that his case and the evidence that he adduces in support of it is potentially credible and carries some degree of conviction. Thus, the court must form a provisional view of the probable outcome of the action : see Premier Fashion Wears Ltd v. Li Hing Chung [1994] 1 HKC 213 at pp.219-220.

4. This test is well established. Mr Wong, counsel for the defendant, did not seek to dispute it. But he submitted that where the ultimate outcome would depend on whose evidence is believed and no provisional view of the probable outcome of the action can be formed without a trial, the appropriate test to determine whether the defendant has a real prospect of success is whether the defence could well be established : see Guangdong International Trust & Investment Corp. HK (Holdings) Ltd v. Yuet Wah (HK) Wah Fat Ltd [1997] 2 HKC 696.

5. As will be seen below, the defendant had been unable to satisfy me that it was entitled to set aside the default judgment on either of the tests. I first summarize the primary facts which are not in dispute.

PRIMARY FACTS

6. The quotation evidencing the Agreement read :

"...

Further to your goodself recent request, we (the defendant) are pleased to offer the mould details suitable for vacuum process sand casting for your kind perusal:-

(1) Left apron bath 1510 x 350 x 410;

(2) Right apron bath 1510 x 350 x 410; and

(3) Built in bath 1500 x 750.

The above 3 sets of mould cost a total of HK$500,000 with the following terms and conditions:-

(a) 100% deposit for the cost of the moulds and HK$700,000 as refundable security fund;

(b) All shape drawing to be approved;

(c) Plaster moulds to be delivered in one and half months after payment;

(d) Resin moulds, a complete set of sand boxes, and vacuum pipes connected to the air plugs to be delivered in three months after confirmation of the plaster moulds;

(e) The payment covers all the costs of test running to the satisfaction of E. Bon Building Materials Company Limited ('E. Bon');

(f) The ownership of the moulds is belonged to E. Bon and cannot be used to produce products for other customers without written consent of E. Bon;

(g) The security fund of HK$700,000 is refundable without interest to E. Bon upon expiry of a 'trial production period' of six months; and

(h) Should the moulds being made are not to the standard of specifications of E. Bon or not to the satisfaction of E. Bon, the whole deposit together with the security fund be refunded to E. Bon unconditionally.

The payment of HK$1,200,000 should be fully paid on or before 30 September 2000 in order to facilitate the completion of the above 3 sets of mould in the early of 2001.

Remarks:-

The above mentioned 3 sets of mould should keep in the foundry with storage free of charge. However, all expenses related to insurance, repair and maintenance will be charged to E. Bon on actual reimburse cost basis."

7. The manufacturing process of bathtubs involved several steps. Before a manufacturer engaged in the large scale production of a bathtub, he would require two moulds : one plaster mould and one resin mould. The purpose of making a plaster mould is to enable the manufacturer to study in detail the design of the bathtub. When he is satisfied with the design, the manufacturer would proceed to make a resin mould on the basis of the plaster mould. Only one resin mould would be used in the manufacturing process. Once the resin mould is completed, the manufacturer would test it by using it to produce sample bathtubs. A resin mould cannot be regarded as reasonably fit for its purpose unless the sample bathtubs produced therefrom are of satisfactory quality.

8. Pursuant to the Agreement, the plaintiff had paid the sum of HK$1,200,000 to the defendant.

9. Despite repeated requests including letters dated 2 May 2001 and 4 August 2001, the defendant had not physically delivered any of the bathtub moulds to the plaintiff. Indeed, according to the defendant's own evidence, it had only finished one set of bathtub (i.e. the right apron bath). The mould was at all material times kept at its premises and had not been delivered to the plaintiff. In essence, the defendant accepted that it had not completely performed its obligations under the Agreement.

DEFENCE

10. But denying liability, the defendant raises two principal grounds of defence :

(a) Its failure to perform its obligations under the Agreement was directly or substantially caused by the plaintiff's own breach or prevented by the plaintiff's own acts ("the Performance Defence").

(b) On a proper construction of the Agreement, the defendant was entitled to payment for extra works occasioned by the plaintiff's variation of the original dimensions ("the Extra Works Defence").

I will deal with them in turn.

THE PERFORMANCE DEFENCE

11. The defendant in essence relied on three matters in support of the Performance Defence, namely :

(a) the plaintiff had failed to provide with the defendant with the necessary specifications;

(b) the plaintiff had unreasonably withheld its approval of the resin mould of the right apron bath;

(c) the plaintiff had further unreasonably refused to take delivery of the resin mould.

None of these matters however bear scrutiny. I will explain why below.

(1) Failure to provide with the necessary specification

12. It was the defendant's case as disclosed in the first affirmation of its director, Mr Christopher Cheung Wai Keung dated 8 February 2002 that that the plaintiff did not provide any instructions or specifications to the defendant until December 2000 and that only oral instructions were given on that occasion. However, it is not disputed that design drawings were in fact sent to the defendant in early October 2000 and the defendant duly acknowledged receipt of such drawings by a letter dated 14 October 2000. Mr Cheung had not explained this apparent inconsistency.

13. In Mr Cheung's second affirmation dated 2 May 2002, it was stated that the design drawings provided by the plaintiff were "inadequate" for actual production purposes in that more detailed specifications were required. However, in his first affirmation, Mr Cheung stated that only verbal instructions and specifications were given by the plaintiff. Despite, his allegation, the defendant was able to complete a sample plaster mould on the basis of such verbal instructions. In fact, the sample specifications adduced by Mr Cheung clearly shows that the design and dimensions of a bathtub are so technical and detailed that oral instructions on those matters for the purpose of producing the actual mould are impossible. Mr Cheung's evidence in fact is consistent with the plaintiff's case. While the plaintiff gave the initial instructions or specifications, it was up to the defendant to come up with the technical details.

14. In Mr Cheung's first affirmation, he stated that between September 2000 and December 2000, the plaintiff never discussed any timing issues with the defendant. However, by a letter dated 23 October 2000, the plaintiff expressly requested the defendant to complete the plaster mould within one and a half month. Again, no explanation has been given in respect of this inconsistency.

15. It is also Mr Cheung's evidence in his first affirmation that the plaintiff orally requested the apron height to be increased from 410 mm to 430 mm. The documents, however, unmistakably confirm that the plaintiff never made any request for the increase of apron height. On the contrary, the plaintiff sought to explore the possibility of shortening the apron height to 395 mm. Once again, no explanation has been given in respect of this inconsistency.

16. Mr Cheung sought to rely in his first affirmation the Manual for Design, Casting and Porcelain Enameling Cast Iron ("the Manual") to support the defendant' allegation that the increase in apron height caused technical problem in the enameling process in the production of the resin mould. However, the Manual says nothing about dimensions or change thereof would have any effect on the enameling process at all.

17. Mr Westbrook, SC, for the plaintiff submitted that the defendant's allegations are in the circumstances untrue, that insofar as apron bathtubs (be that left or right) are concerned, the plaintiff unquestionably did provide the defendant with the necessary specifications. As far as the built-in bathtub is concerned, it is the plaintiff's case that the plaintiff orally instructed the defendant to adopt the design of a model of "To To". This tallies with the defendant's evidence that the plaintiff instructed the defendant to base the design of the moulds on a "Toto" model.

18. I agree. The defendant's allegations are contradicted by contemporaneous documents and are full of unexplained inconsistencies.

(2) Withholding approval

19. The defendant alleges that the plaintiff has withheld its approval of the resin mould; and that the reason is that the plaintiff is unreasonably dissatisfied with the defendant's production costs. It is apparently not in dispute that the resin mould had never been delivered or otherwise made available to the plaintiff for the plaintiff's inspection and that the plaintiff is, therefore, not even in a position to approve the resin mould. There is no evidence suggesting that the resin moulds were ever made available to the plaintiff for the plaintiff's inspection. In any event, it is common ground that the plaintiff would not be in a position to approve the resin mould unless it is provided with sample bathtub. The first allegation that the plaintiff had unreasonably withheld approval of the resin mould is clearly devoid of any merit. On the second allegation, Mr Westbrook complained that the defendant had not provided any particulars, like production quotation, to the plaintiff. The plaintiff was not even in a position to dissatisfy with the defendant's proposal. I agree.

(3) Refused to take delivery

20. In support of this contention, the defendant seeks to rely on clause (f) and the "remarks" which provide that the moulds should keep in foundry with storage free of charge and all expenses related to insurance, repair and maintenance would be charged to the plaintiff. However, as rightly pointed out by Mr Westbrook, nothing in the Agreement had provided that delivery was completed by keeping the moulds in the defendant's premises. As the plaintiff was the lawful owner of the mould, it was certainly entitled to demand the defendant to make physical delivery of the same. Counsel further submitted that on a proper construction, the remarks were only incorporated in the Agreement to cater for the contingency where the moulds are kept by the defendant for production purposes. Such a construction is supported by the fact that those provisions are set out under the description "remarks" instead of "terms and conditions". The contingency contemplated in the Agreement did not occur since the plaintiff has expressly demanded physical delivery of the moulds. In my view, Mr Westbrook's submission is supported by Clause (a) and (g) of the Agreement. They are indicative of the parties' contemplation that the plaintiff might ask the defendant to produce the bathtubs. But the parties had not entered into an agreement, whether by virtue of the Agreement or otherwise, that the plaintiff would engage the defendant to produce the bathtubs. I agree that the contingency as contemplated by the parties did not happen and the plaintiff was clearly entitled to physical delivery of the moulds.

21. I turn to the Extra Works Defence

THE EXTRA WORKS DEFENCE

22. The defendant put forward two basis to ground the Extra Works Defence : (1) an express oral agreement and (2) quantum meruit. On (1), as rightly observed by Mr Westbrook, the defendant had failed to condescend on particulars. In the circumstances, I will not attach any weight to such allegation : see Hong Kong Civil Procedure 2002, para.13/9/21 at p.143. On (2), the claim cannot possibly succeed as it is based on the plaintiff's alleged request to increase the apron height to 430 mm, which is contradicted by contemporaneous documentation. Mr Westbrook further submitted as an alternative that a claim on a quantum meruit cannot arise if there is an existing contract between the parties to pay an agreed sum unless, inter alia, the work is outside contract : Keating on Building Contracts, 7th ed., paras.4-24 - 4-25. Whether the alleged extra works are "extra works" as such depends on the construction of the Agreement. Despite the fact that certain specifications are set out in the Agreement, the tenor of the Agreement is that the defendant would produce three sets of bathtubs to "the standard of specifications of the plaintiff" and "to the satisfaction of the plaintiff". On a proper construction, the Agreement is a lump-sum contract and the scope of works and the contract price of the Agreement include any reasonable variation of the proposed specifications : Keating on Building Contracts, 7th ed., paras.4-02 - 4-03. If the work is included in the original contract sum, the defendant must carry it out and cannot recover extra payment for it. Further, in the absence of express provision, both "indispensably necessary" and "contingency necessary" work will be regarded as included in the contract sum under "the inclusive price principle" : Keating on Building Contracts, 7th ed., paras.4-28 - 4-30; Hudson's Building and Engineering Contracts, 11th ed., para.4.038. In the premises, counsel contends that the defendant's claim on the basis of quantum meruit is lacking in merits.

23. Again, I find myself in complete agreement with Mr Westbrook. I accordingly rule that, the expenses incurred by the defendant in the alleged extra works were not incurred at the plaintiff's request or with the plaintiff's approval and that the defendant's counterclaim on quantum meruit is bounded to fail.

CONCLUSION

24. For the above reasons, I am satisfied that the defendant had been unable to raise a defence with a reasonable prospect of success or a defence that could well be established. The plaintiff is undoubtedly be entitled to recover the sum of HK$1.2 million either under clause (h) of the Agreement or on the ground of total failure of consideration : Rover International Ltd v. Cannon Film Ltd [1989] 1 WLR 912 at pp.923E-925C. The default judgment should stand.

25. Accordingly, I allow the appeal, set aside the master's order, restore the default judgment and order that costs of this appeal and the costs before be to the plaintiff, to be taxed if not agreed, with a certificate for counsel for the hearing before the master.