M & L INVESTMENT CO. LTD. AND ANOTHER v. KWAN ON BUILDING CONTRACTORS LTD.

HCCT9/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.9 OF 2000

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J U D G M E N T

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BACKGROUND

1. A resume of the history of this action warrants particular mention because the contract which is the subject of the litigation is dated 17 years ago and was terminated 16 years ago. The contract was in relation to a project which was part of the development of Tuen Mun, a New Territories "new town", as it was then.

2. The 1st plaintiff ("M & L") was a sub-contractor of the defendant ("Kwan On B.C."). The 2nd plaintiff ("Yee Sang") had supplied M & L with steel to the value of $2,121,427. Yee Sang were not paid. They obtained a default judgment against M & L in May 1985.

3. M & L left the site in May 1985 and went into liquidation in March 1986. Yee Sang then commenced, and obtained on a nisi basis, a garnishee order against Kwan On B.C. in the latter part of 1985. The garnishee order nisi was discharged in April 1986.

4. Between 1986 and 1991, the Official Receiver ("O.R.") investigated the validity of M & L's claim against Kwan On B.C. which was for a much larger sum of approximately $15 million. In March 1991, the O.R. recommended that no further action be taken and that the claim be formally released, to which, Yee Sang, objected.

5. On 9 May 1991, seven days before the expiration of the limitation period, a protective writ was issued, with M & L as the sole plaintiff.

6. A year later, the writ was renewed for a year.

7. Another year later, in May 1993, the writ was served on the defendant. At the same time and with O.R.'s consent, by a deed of assignment Yee Sang took over M & L's role in the litigation and for all practical purposes became the sole plaintiff.

8. In December 1993, Kwan On B.C. took out a summons to set aside the renewal of the writ and, in November 1994, another summons to strike out the claim.

9. Four years later, in November 1998, these summonses were heard by Barnett J who found against the defendant. The action therefore proceeded, pleadings were drafted and in the relatively short time of about three years later, it has come to trial.

10. Needless to say, 16 years on, personal recollections of events are virtually non existent and the loss of original documents has been a serious difficulty.

PLAINTIFFS' APPLICATION FOR SECURITY FOR COSTS

11. The trial commenced on 7 May 2001. The plaintiffs' claim had been trimmed down to about $12 million, of which Yee Sang wanted the $2.1 million for the unpaid steel it had supplied in 1984, plus interest. The only other factor of concern to Yee Sang was that by the 1986 Deed of Assignment it had agreed to pay 10% of whatever judgment it was ultimately awarded, to the O.R.

12. On the third day of the trial, Ms Teresa Cheng, SC, counsel for the plaintiffs, issued a summons for security for costs. This was prompted by certain evidence given by Mr Tong Chin Shing. Mr Tong had been appointed as a director of Kwan On B.C. in January 2001. It transpired that, as the plaintiffs had suspected, Kwan On B.C. had been a dormant company for 12 years and the litigation had been funded by Kwan On Construction Corporation ("Kwan On C.C."). Kwan On B.C. had only remained in existence for the purpose of resisting the claim and even though Kwan On C.C. was funding the legal costs it would not be honouring any judgment which might be awarded against Kwan On B.C.

13. Having heard Ms Cheng and Mr Anderson Chow (counsel for the defendant) I declined the plaintiffs' application for security for costs and indicated that I would give brief written reasons in due course, which I now do.

(a) The general rule is that a defendant is not required to give security for costs.

(b) An exception to the general rule, namely, where the counterclaim arises out of a different matter and is more in the nature of a cross-claim, does not apply in this case. To the extent that there are some differences in the nature of the counterclaim, those differences are not sufficient to warrant an exercise of the court's discretion in the plaintiffs' favour.

(c) The application seeks security for the costs of pursuing the Statement of Claim whereas security, if ordered, may only be in relation to the costs of defending the counterclaim.

(d) There has been exceptional delay in this case and accordingly, exceptional delay in this application. I am not satisfied that the reasons for the delay are the fault of the defendant to such an extent that the delay would be a relevant consideration to be held against the defendant in this application.

(e) The fact that the defendant's holding company is funding the litigation and that the defendant itself will not be able to meet any judgment or costs order against is that it is an unfortunate fact of life. The defendant itself cannot be criticized for defending the action at the expense of its parent company.

(f) Given the fact that 16 years ago the O.R. recommended that M & L's claim be not pursued and given the fact that the contract itself is 16 years old, the lack of documentation is as much as matter of regret as criticism.

(g) If the plaintiff had suspected that the defendant was dormant, unable to pay a judgment and being funded by someone else it could have taken steps to investigate and confirm its suspicions many years ago.

OVERVIEW

14. Such an old case carries with it inherent difficulties. On the face of it a company which has been in liquidation for 15 years is suing a company whose only raison d'être is to defend the proceedings. Whatever happens neither company will rise from ashes, more likely they will very probably both disappear forever. In the middle is the 2nd plaintiff who has been waiting for over 16 years to be paid for $2.1 million worth of steel which they supplied to the 1st plaintiff. They were the 1st plaintiff's main creditor at the time of liquidation. No one disputes that the 2nd plaintiff has never been paid. The issue for this court is, having stepped into the 1st plaintiff's shoes for the purpose this action, with the consent of the O.R. in 1991, can the 2nd plaintiff now prove that the defendant is liable to pay the 1st plaintiff sums due under the 1984 sub-contract.

15. There are three primary questions to be addressed. The answers to all of them relate to events which have long since been forgotten and depend on documents which, in many instances, are either missing or have been destroyed and on witnesses who have left Hong Kong or cannot be traced. The three questions are :

(a) What is the total value of the work done by M & L under the sub-contract?

(b) Should that sum be reduced to reflect the value of materials purportedly supplied to M & L by the defendant?

(c) Should that sum be further reduced to reflect sums paid by the defendant to M & L and other parties at M & L's request.

16. In the claim M & L says the answer to (a) is $17,182,841.38.

17. In the defence and counterclaim the defendant says the answer to (b) is $9,576,311.54 and (c) is $7,283,912.21. These are the main figures in issue. There are other lesser issues to which I shall refer later.

THE CLAIM

18. Even though, because of the passage of time, some original documents are missing and some copy documents are also unavailable, there are still a prodigious number of documents before the court, occupying 17 box files. Both counsel have helpfully summarised the numerous items in their closing submissions. As far as M & L's claim for work done is concerned the court is in the fortunate position of needing to look no further than the pleadings themselves to determine a fair starting point. The pleadings contain admissions in relation to key engineer's certificates, salaries, deductions for materials and excepted works and so on. Before I set out the court's starting point for M & L's claim based on the pleadings, I deal with one preliminary matter.

19. It is suggested in the defendant's closing submission that the fact that M & L in fact carried out the work was not proved. I reject this contention. It does not form part of the defendant's pleaded case. The contract itself shows M & L were to carry out the work. It was not suggested to any witness that they had not. Finally, the important engineer's certificate No.12 verifying the figure of $18.58 million for work done (before deductions) by M & L is admitted.

20. In the pleadings the following figures are admitted :

Engineer's Certificate No. 12
(the 12th and last of 12 monthly certificates)

21. The calculations done by the defence result in a relatively smaller figure, namely, $16,512,056.19. The defence further argues that the evidence in relation to the "plus" items above is lacking and, therefore, the starting point figure should be further reduced by those items. Whilst, for reasons of caution, I accept the defence's first figure, namely, $16,512,056.19, I disagree that any further reductions should be made. In my judgment paragraph 22 of the defence is pleaded in such a way as to constitute a pleaded admission which should be taken into account.

22. I find, therefore, the value of the work done by M & L is $16,512,056.19. I now turn to the somewhat more difficult questions of by how much that figure should be reduced arising from the counterclaim and defence of set off.

COUNTERCLAIM

23. The burden of proof is on the defence to prove it paid for materials supplied to M & L and made other payments to them on their behalf. However one approaches this difficult task, sight must not be lost of the fact that in 1991, the O.R. advised that no further action be taken in M & L's claim. Had that been the end of the matter, or even if the defendant had been successful in the finely divided issue before Barnett J in 1998, then M & L would have received nothing in this litigation. The action has only been kept breathing by the intervention of Yee Sang as the 2nd plaintiff. In a sense any judgment over and above the $2.1 million owed to Yee Sang by M & L will be in the nature of a windfall to Yee Sang (subject to the agreement that Yee Sang will pay 10% of any judgment to the O.R.). "Windfall" is perhaps putting it too high. The court acknowledges that by stepping into M & L's shoes it also took on the risks of litigation which, by virtue of the age of the case, would be not insignificant.

24. I now deal with the issues on the counterclaim under three heads :

(a) The plaintiffs' admissions.

(b) The defendant's primary case based on Gloria McFarlane's file note.

(c) The defendant's alternative submissions.

(a) The Plaintiffs' admissions

25. To determine part of the issues on the counterclaim, once again, the court need look no further than the pleadings. In paragraph 12 of the Statement of Claim, the sum of $2,660,987.54 is admitted as being a reduction for materials supplied to M & L and the sum of $3,489,818.27 is admitted as being a reduction for other payments made at M & L's request to itself or others. The plaintiff submits that no further deductions can be safely proved. Such an approach would result in a judgment to the plaintiff in the sum of $10,361,250.

26. As will be seen from (c) below, however, I do not consider that this approach results in a just outcome on the evidence. Further reductions will be made. But first, I now dispose of the "Gloria McFarlane's file note" issue.

(b) Gloria McFarlane's file note

27. If the court places reliance on this file note in the way contended for by the defence, then the whole of the plaintiffs' claim disappears.

28. Ms Gloria McFarlane worked in the O.R.'s office until 1990 when she left Hong Kong. It is a note taken in the course of the O.R.'s investigation in the winding up of M & L. Mr Chow, for the defendant, contends that the notes can safely be relied on as admissions. A reading of the note immediately suggests that Ms McFarlane was unable to make any certain findings. It is littered with expressions such as "the ledger is incomplete ..." or "missing", "No relative information can be found", "I am unable to follow the amount payable", "The source of ... is unknown". All these reflect the state of affairs in 1986.

29. In my judgment, the document is plainly insufficient and inadequate (through no fault of Ms McFarlane) to be treated as an admission.

30. It is hearsay and the hearsay notice to admit it was made 15 years after the interview which it purports to record. I have no hesitation in attaching no weight to it whatsoever.

(c) Alternative submissions on set off

(i) Set off for materials purchased

31. The task of calculating a true and accurate figure representing the amount to be set off under this heading is impossible. This statement is equally true for the following issue, namely, "the set off for payments made". Even the most patient, meticulous and experienced quantity surveyor would be thwarted by imponderables, missing documents and lost information. A figure must, nonetheless, be determined.

32. The only realistic approach is to start with what is agreed and then decide if that agreed figure should be increased, based on an evaluation of admissible and relevant evidence, to try and reflect the overall justice of the case. In an attempt to achieve a just result, the court keeps in mind some general features of the action. These features are not all pro plaintiff or all pro defence. They go both ways. For example, the extraordinary delay has been caused by factors for which neither party is entirely innocent. Other factors include the fact that, the 2nd plaintiff, Yee Sang, is broadly speaking "an innocent party" in the litigation. They have never been paid by M & L. M & L are long gone, whatever the outcome of this case, they will remain so. Yee Sang are claiming a judgment well in excess of the cost of the steel they supplied in 1985 because they have taken on the risks of litigation. Kwan On, on the other hand, rightly say that sympathy for Yee Sang is misplaced because the issues are solely between themselves and M & L, and they strongly believe M & L's claim is grossly inflated.

33. The defence case, which was originally an attempt to erode the plaintiffs' claim entirely has received two setbacks. Firstly, in the course of the trial, a significant number of documents were ruled inadmissible because of the extraordinarily late application to admit them. Secondly, I have determined that no weight should be attached to the Gloria McFarlane's file note.

34. I have carefully considered what remains of the evidence and I have carefully considered the very helpful competing closing submissions from Ms Cheng and Mr Chow. Both arguments have been skillfully constructed and both contain submissions which have merit and some force.

35. Given the fact that Mr Chow recognizes that, on his alternative case, concessions have to be made, resulting in a significant payment to the plaintiffs and given the attractiveness of many of the points he makes, I will adopt, as the basis of this judgment, his approach to the issues, although I do not select his choice of figures in every instance. I approach the task under three headings :

(a) Admissions

36. The original amount pleaded for set off for materials supplied was $9,576,311.54. The sum admitted by the plaintiffs is either the $2,660,987.54 pleaded in the Statement of Claim or the $2,679,716.49 admitted in the plaintiffs' affirmation from Yu Der Yee. I adopt the latter figure, it being contained in the relatively recent affirmation of 28 April 1998.

(b) "Yee Sang Invoices"

37. There is evidence of three invoices, in the total sum of $2,351,922.26, which were paid by the defendant to Yee Sang. In my judgment the plaintiffs' witness, Miss Eva Yu, attempted to deflect these payments from the account unsuccessfully. The invoices exist and they, prima facie, are evidence that the sums therein should be deducted. The plaintiffs' argument that they should not be deducted has two serious weaknesses. Firstly, when the O.R. investigated the matter, seven years after the dates on the invoices, Yee Sang's initial response was to suggest that the invoices had not been paid at all. In fact, they had been. Eight years after that response, the plaintiffs' case, in recent evidence, was that the payments related to deliveries to an adjoining site and not the one in question. This is too little too late. In short, I am satisfied that the "Yee Sang Invoices" are proper deductions to make.

(c) Mr Tse Cho Tseung's evidence

38. Mr Tse was the assistant general manager of the defendant at the material time. His evidence concerned deductions for materials supplied to the 1st plaintiff, details of which were contained in four letters dated between August and October 1984. He was closely and carefully cross-examined at some length. The four letters were not relied on simpliciter, there were also approximately 40 pages of invoices and other documents in support. It is true that some of the invoices were made out to "Kwan On Construction Company" and not the defendant "Kwan On Building Contractors". However, I am satisfied that the former was never involved in the contract at all because it did not come into existence as a separate legal entity until 1991 and the contract number on the invoices was correct. Other invoices relied on by the defendant were made out to "Kuen Lee". Mr Tse explained that these were, nonetheless, properly deducted from the 1st plaintiff's account. The staff of Kuen Lee were the same as the staff of the defendant and, in any event, the goods were delivered to the relevant site for the contract in question.

39. The total sum deductible under these letters was $1,684,873.46.

40. The total set off sums under (a), (b) and (c) above is $6,716,512.21. Some of the items are duplicated within each of the headings. Mr Chow has very helpfully identified the duplications. The net amount to be set off is $4,342,821.04.

(ii) Set off for payments made by the defendant

41. The pleaded amount to be set off in the defence is $7,283,912.21. Once again, the starting point is a figure representing an amount which is admitted by the plaintiffs.

42. In the pleadings a sum of $3,489,818.27 is admitted. More recently, again in April 1998 Affirmation of Yu Der Yee, the figure has been revised upwards to $3,889,818.27. For the same reason as before, I adopt the latter figure.

43. The defence argument for increasing this figure depends to a large extent on the 1st plaintiff's ledgers which were admitted into evidence. Mr Chow relies on the fact that the ledgers record various payments made by the defendant to the 1st plaintiff in the total sum of $5,168,095.74. In a detailed schedule he reduces this figure by eliminating those items contained within it which are duplicated in the admitted sum. It is submitted that a net amount of $2,763,095.74 should be added to the admitted sum of $3,889,818.27.

44. Ms Cheng makes the following criticisms of the ledger evidence :

i) It is not an admission.

ii) Its maker is not identified.

iii) There is no evidence it formed part of M & L's accounts or accounting system.

iv) Many of the entries are confusing.

v) Many of the entries are suspicious and should not be included in a company ledger of this type.

vi) In some instances cheques were allegedly issued and paid to M & L or others from the Hong Kong Bank and the Kwangtung Provincial Bank before the accounts with those banks had been opened.

vii) No bank statements exist covering some of the relevant periods.

45. Thus, it is submitted by Ms Cheng that the defendant has failed to discharge the burden on it to prove its set off under this head. I agree to the following extent. The criticisms of the ledger evidence are well founded. The result is that the defence are unable to prove an increase to the admitted sum in the amount argued for. However, the evidence is sufficient to prove, on the balance of probabilities, that some extra payments, over and above, the admitted sum, were made. It would be wrong to ignore this reality. In order to recognize this reality all the court can do is enhance the admitted sum by an amount which, on the evidence, the court considers represents a fair and reasonable increase. To this end, I will increase the admitted sum by one half of the net additional sum claimed by Mr Chow, namely half of $2,763,095.74. In making this assessment, I have taken into account both the shortcomings of the ledger evidence and the inevitable duplication of items in the ledger and items in the admitted amount. The net amount to be set off under this head is, therefore, $5,271,365 ($3,889,818 + 50% of $2,763,095). The total figure to be set off is therefore $5,271,365 + $4,342,821 = $9,614,186.

46. There will be judgment for the two plaintiffs on the claim in the sum of $16,512,056. There will be judgment for the defendant on the counterclaim in the sum of $9,614,186.

47. This results in a net sum due to the 2nd plaintiff in the sum of $6,897,870.

INTEREST

48. Given the history of this case the question of both the rate of and period of interest is bound to be contentious.

(a) Rate

49. I consider the appropriate rate for the payment of simple interest should be prime plus 1%.

(b) Period

50. Both sides lay the blame for delay, primarily, at the door of the other. As a matter of principle, I accept that a party who is responsible for culpable or unreasonable delay may be punished by interest not being allowed for the periods of such delay.

51. On the one hand, Mr Chow points out that between 1986 and 1991 the 1st plaintiff could have done far more than it did in pursuing its claim. Also, nothing of any substance appears to have happened between 1994 and 1998. Given that the garnishee proceedings were discharged in 1986 and the O.R. recommended no further action in 1991, it is not surprising that the defendant cannot trace many documents.

52. On the other hand, Ms Cheng points out that all interlocutory skirmishes were instigated by the defence and were unsuccessful. In 1993, the defendant tried to set aside the order renewing the Writ. In 1994, they sought to strike out the Statement of Claim. The issues on these matters were finally heard by Barnett J in 1998 who found for the plaintiffs. Although not always expeditious, the 2nd plaintiff has been tenacious in hanging on to its claim and its pursuit of a fair judgment.

53. As Barnett J said in his judgment, the circumstances and history of this case are exceptional. That statement is no less true today. The period of interest should be more than the period argued for by Mr Chow, namely a period within which the litigation could have been completed, say four years; but less than the actual effluxion of time since the course of action accrued, namely, 16 years.

54. Interest for eight years at prime plus 1% is ordered, on the judgment of $6,897,870 in the plaintiffs' favour.

55. I finally make a costs order nisi also in the plaintiffs' favour.