YU HON WAH ALEXIS t/a PERMANENT ENGINEERING CO v. Y M INTERNATIONAL REALTY LTD AND OTHERS

DCCJ 2371/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2371 OF 2014

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DECISION

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Introduction

1.  This is the 4^th defendant’s appeal against the decision of Master C W Cheung refusing to set aside a default judgment entered against him on 21 November 2014.

2.  The dispute concerns two renovation projects which took place in 2013.

The parties

3.  The plaintiff runs an interior design and renovation business.

4.  The 1^st, 2^nd and 3^rd defendants are Hong Kong companies.  In 2013, the 1^st defendant operated a real estate agency business; the 2^nd defendant a Japanese restaurant in Nathan Road; and the 3^rd defendant a business centre in Quarry Bay.

5.  The 4^th defendant and his wife, Madam Carmen Chau, had together owned the entire share capital of the 1^st defendant until 2011 when they transferred all their shares to a company in the British Virgin Islands.  They had also been the directors of the 1^st defendant until 2011 when the 4^th defendant resigned.  Madam Chau has since remained as a director.

6.  The 4^th defendant was, in 2013, and is still a director of the 2^nd and 3^rd defendants.

7.  It is common ground that the plaintiff carried out renovation works for the Japanese restaurant and the business centre in 2013.  I shall refer to the works as “the restaurant project” and “the office project” below.  In this action, he makes monetary claims against the defendants for the works done and materials supplied by him.  In this appeal, the major issue is the identity of the plaintiff’s contracting parties for these projects.  The issue stems from the fact that it was the 4^th defendant who communicated with the plaintiff throughout the projects and, as seen above, the 4^th defendant wore many hats at that time.  The question is – which hat was he wearing then?  Was he acting on behalf of the 1^st, 2^nd or 3^rd defendant such that the relevant corporate defendant was the contracting party; or was he acting in his personal capacity such that he himself may be held liable for the plaintiff’s alleged loss?

The plaintiff’s pleaded claims

8.  In respect of the restaurant project, the plaintiff pleads as follows:-

(a) In 2008, he undertook renovation works for the 4^th defendant’s dwelling house.

(b) In April 2013, the 4^th defendant contacted him and invited him to submit quotation for the restaurant project, which was pleaded as “a project which [the 4^th defendant] was person in charge”.

(c) Accompanied by the 4^th defendant, the plaintiff inspected the site.  The 4^th defendant “represented himself as director of the 1^st Defendant” and gave the plaintiff a name card showing that he was “Chief Executive Officer” of the 1^st defendant.

(d) The 4^th defendant directed the plaintiff to submit a quotation addressed to the 1^st defendant for his attention.

(e) Later, the 4^th defendant informed the plaintiff that the 1^st defendant had accepted the quotation and he paid the plaintiff an initial deposit by his personal cheque.

(f) The plaintiff carried out the renovation works according to the instructions of the 4^th defendant.

(g) He issued three invoices to the 1^st defendant in respect of works done and materials supplied.  They have not been fully settled.  The outstanding amount is $158,222.

9.  In respect of the office project, the plaintiff’s pleaded case is as follows:-

(a) In May 2013, the 4^th defendant informed the plaintiff that he would take charge in another project, namely, the office project.

(b) After site inspection, the plaintiff submitted quotation to the 1^st defendant for the attention of the 4^th defendant, again, as directed by the latter.

(c) Later, the 4^th defendant informed the plaintiff that the 1^st defendant had accepted the quotation.

(d) The plaintiff carried out the renovation works according to the instructions of the 4^th defendant.  The project was not completed when the plaintiff was asked to leave the site in late June 2013.

(e) He issued two invoices to the 1^st defendant in respect of works done and materials supplied.  They have not been fully settled.  The outstanding amount is $149,080.50.

10.  The plaintiff further pleads that the 1^st defendant initially “made use of poor workmanship and delay in delivery in justifying its delay and/or refusal in payment of the outstanding amounts” but subsequently in November 2013, the 1^st defendant, through the representation of the 4^th defendant, denied that the 1^st defendant is liable for the outstanding amounts as the restaurant project was a contract between the plaintiff and the 2^nd defendant whereas the office project was a contract between the plaintiff and the 3^rd defendant.

11.  In the pleading, the plaintiff also refers to a letter dated 14 November 2013 from S T Cheng & Co who then acted for the 1^st, 2^nd and 3^rd defendants confirming the identity of the contracting parties was as alleged by the 1^st defendant and stating that the 1^st defendant was only a realty agency arranging for the tenancies of the two sites.

12.  The plaintiff then pleads the following alternative claims:-

“17. In the premises, … the Plaintiff holds the 1^st [Defendant] liable to pay the outstanding accounts under the [the restaurant project] and [the office project] and hence, the Plaintiff claims against the 1^st [Defendant] the sum of HK$307,302.50 being the outstanding fees for service rendered, work done and material supplied as particularized in the statement of account referred to … herein.

18. Alternatively, if the 4^th Defendant had no authority to enter into the agreements in respect of [the restaurant project] and [the office project] on behalf of the 1^st Defendant, by reason of the 4^th Defendant impliedly warranted that he was authorized to enter into the said agreements and the Plaintiff entered into the same in reliance on the said warranty which resulted in the Plaintiff having suffered loss and damage, the Plaintiff claims against the 4^th Defendant a sum of HK$307,302.50 being the sum the Plaintiff may seek to enforce against the 1^st Defendant had the 4^th Defendant not in breach of the said warranty.

19. Further and/or alternatively, in reliance upon the representation of Messrs. S.T. Cheng & Co. in its letter dated 14^th November 2013 and the fact that the 4^th Defendant is the director of the 2^nd Defendant and further by reason of the matter as pleaded in paragraph 14 herein, the Plaintiff claims against the 2^nd Defendant the sum of HK$158,222.00 being the outstanding amount due for work done and material supplied by the Plaintiff on [the restaurant project]. And in reliance upon the representation of Messrs. S.T. Cheng & Co. in its letter dated 14^th November 2013 and the fact that the 4^th Defendant is the director of the 3^rd Defendant and further by reason of the matter as pleaded in paragraph 14 herein, the Plaintiff claims against the 3^rd Defendant the sum of HK$149,080.50 being the outstanding amount due for work done and material supplied by the Plaintiff on [the office project].” (emphasis added)

13.  In summary, the plaintiff claims against the defendants in the alternative.  He first claims against the 1^st defendant for a liquidated sum, which comprises the outstanding fees of the two projects; alternatively, against the 4^th defendant for breach of warranty of authority; or, further alternatively, against the 2^nd and 3^rd defendants for liquidated sums, namely, the respective outstanding fees for the restaurant project and the office project.

14.  Relevant to the present appeal is the prayer in relation to the claim against the 4^th defendant.  It asks for:-

“1. The sum of HK$307,302.50;

2. Interest on the said sum of HK$307,302.50;

3. Costs; and

4. Further and/or other reliefs.” (emphasis added)

History of the proceedings

15.  The writ was served on all the defendants at the same time in June 2014.  

16.  No notice of intention to defend having been filed by the 1^st, 2^nd and 3^rd defendants, default judgment was entered against them on 29 October 2014.  It is necessary to set out the judgment in full:-

“(1) the 1^st and 2^nd Defendants do pay the Plaintiff the sum of HK$158,222.00 together with interest thereon at the rate of 8% per annum from 18^th June 2014 to the date hereof and thereafter at judgment rate until payment;

(2) the 1^st and 3^rd Defendants do pay the Plaintiff the sum of HK$149,080.50 together with interest thereon at the rate of 8% per annum from 18^th June 2014 to the date hereof and thereafter at judgment rate until payment; and

(3) the 1^st, 2^nd and 3^rd Defendants do pay the Plaintiff HK$7,680.00 fixed costs.”

17.  Unlike the corporate defendants, the 4^th defendant did file an acknowledgment of service.  He however failed to file his defence within the prescribed time. Default judgment was entered against him on 21 November 2014 for “the sum of $307,302.50” together with interest and costs.  On its face, it is a final judgment for a specified sum.

18.  What is also relevant here is that after being served the writ, the 4^th defendant applied for legal aid in late June 2014.  The application was refused in mid-August.  The 4^th defendant applied again in late August, which was also refused.  He had been acting in person in these proceedings until he was finally granted legal aid shortly before this appeal hearing.

19.  According to Mr Adrian Leung, counsel for the plaintiff, the plaintiff’s intention has always been to pursue against all the defendants at the same time.  It was due to the statutory stay triggered by the 4^th defendant’s two legal aid applications in 2014 that the plaintiff applied for default judgment against him later than against the three corporate defendants.  (The two judgments are almost one month apart.)  But for the legal aid stay, the plaintiff, confirmed Mr Leung, would have applied to enter judgments against all four of them at the same time.

20.  Then, in May 2015, the 1^st defendant, acting through Madam Chau, and the 4^th defendant applied to set aside the default judgment.  Master Cheung refused both applications.  Only the 4^th defendant appeals against that decision.

21.  It is readily apparent from the chronology that the 2^nd and 3^rd defendants have never taken any step in this action and it would seem from the papers filed and the submissions made on his behalf that the 4^th defendant, being a director of both companies, is quite content for the judgment against these companies to stay.  His only concern in this appeal is his personal liability arising out of the default judgment entered against him.  Ms Shannon Leung, appearing for the 4^th defendant, contended that the judgment ought to be set aside on two grounds, to which I now turn.

The 4^th defendant’s grounds for setting aside

22.  First, Ms Leung argued that the judgment is a regular judgment given that the 4^th defendant had acknowledged service of the writ and, further, that based on his affidavit evidence, the 4^th defendant has demonstrated that he has two meritorious defences which have a real prospect of success at trial.  They are:-

(a) In respect of the restaurant project, the contract was between the plaintiff and the 2^nd defendant.  Ms Leung relied on certain quotations which were purportedly countersigned by the 2^nd defendant.  The 4^th defendant is therefore not liable on the contract.

(b) In respect of the office project, the contract was between the plaintiff and the 3^rd defendant or, alternatively, the 1^st defendant.  The alternative case against the 1^st defendant is based on the latter’s admission included in an email dated 11 July 2013.  In either case, the 4^th defendant is not liable on the contract.

Ms Leung submitted that according to well-established principles, the court should exercise its discretion to set aside the default judgment against the 4^th defendant.

23.  Secondly, Ms Leung submitted that since the plaintiff’s claims against the four defendants are alternative and mutually inconsistent claims, the default judgment signed against the 1^st to 3^rd defendants, which was entered first in sequence, amounts to an election on the plaintiff’s part to abandon his claim against the 4^th defendant.  The subsequent judgment signed against the 4^th defendant cannot stand in view of the election and must be set aside.  In this regard, Ms Leung relied on the House of Lords decision in Morel Brothers & Co Ltd v Earl of Westmorland [1904] AC 11 and the Court of Appeal’s decision in Hong Kong in Bonus Garment (a firm) v Karl Rieker GmbH & Co KG [1995] 3 HKC 721.  (To be more precise, the claim in respect of the restaurant project is made against the 1^st, 2^nd and 4^th defendants and the claim in respect of the office project the 1^st, 3^rd and 4^th defendants, in each case on an alternative basis.)

24.  At the hearing, Mr Leung was invited to make submissions on a third potential ground for setting aside.  Given that the cause of action against the 4^th defendant is breach of warranty of authority, the appropriate relief generally lies in unliquidated damages.  The default judgment now obtained being a final judgment for a liquidated sum, should it not be set aside on this ground alone?

25.  I shall deal with the above three grounds in reverse order.

Analysis – Third ground

26.  At the hearing, Mr Leung readily accepted that for the plaintiff’s claim against the 4^th defendant for breach of warranty of authority, his relief lies in unliquidated damages.  In this regard, Mr Leung referred the court to §18 of the statement of claim (quoted in §12 above) in which it was properly pleaded that the plaintiff has suffered “loss and damage” as a result of the breach and the plea continued to quantify such loss to be $307,302.50.

27.  Notwithstanding that paragraph, the plaintiff went on to seek “[t]he sum of $307,302.50” as a relief in the prayer, instead of “damages”.  It thus became doubtful whether the plaintiff intended to claim a liquidated sum (wrongly) or an unliquidated one (rightly).  One mistake followed another and the reference to the liquidated sum was carried through to and incorporated into the default judgment subsequently entered against the 4^th defendant – see §17 above.

28.  This clearly falls foul of the rules in relation to default judgment, as governed by Order 19 of the RDC.   Order 19 rule 2 provides that where a plaintiff claims against a defendant for a liquidated demand only, in default of service of the defence within the prescribed time, the plaintiff may enter final judgment for a sum not exceeding the sum claimed in respect of that demand.  On the other hand, Order 19 rule 3 provides that where the claim is for unliquidated damages, in a default scenario, the plaintiff may enter interlocutory judgment against the defendant for damages to be assessed.  In the latter case, the judgment is final as to liability and “interlocutory” as to quantum: Hong Kong Civil Procedure 2016 at 13/2/1.

29.  Here, final judgment as to both liability and quantum was entered against the 4^th defendant.  This is plainly wrong.  Given the nature of the cause of action, the plaintiff should have entered judgment pursuant to Order 19 rule 3 with the consequence that the amount of damages should be left to a formal assessment.  In the circumstances, the default judgment is irregular and ought to be set aside as of right and without regard to the merits of the proposed defence: Hong Kong Civil Procedure 2016 at 13/9/4.

30.  Mr Leung for the plaintiff submitted, however, that the judgment should be allowed to stay because to set it aside would be a waste of time and costs because, based on the evidence presently available, the damages payable by the 4^th defendant is bound to be assessed as the sum now stated in the judgment, ie, $307,302.50.  

31.  I do not agree with this submission.  Mr Leung did not refer the court to any authority in support of his proposition that in such a case, the court should exercise its discretion to allow a wrong judgment to stay.  But even assuming that his approach is sound in principle, I fail to see how the damages are bound to be so assessed.

32.  Damages flowing from a breach of warranty of authority are measured by considering the difference in the position the plaintiff would have been in had the warranty been true and the position he is actually in in consequence of its being untrue.  In cases such as the present one, it would be the amount which the plaintiff has lost by being unable, by reason of falsity of the warranty, to sue the alleged principal on the purported contract: McGregor on Damages (19^th ed) at §§34-002-34-003.  Accordingly, here, the amount of damages against the 4^th defendant would in principle be the amount which the plaintiff could have recovered from the 1^st defendant had the 4^th defendant had the authority to act on its behalf.  The question then becomes this – is it a must that the plaintiff would have been able to recover at least the judgment sum from the 1^st defendant in respect of the two renovation projects?

33.  In my view, the answer is clearly “no”.  In the evidence presently before the court, there are allegations of delay and defects in the works (see, eg, the letter from S T Cheng & Co referred to in §11 above), which, if pursued and upheld, may go to reduce the plaintiff’s claims.  Consequently it is by no means certain that the plaintiff could have recovered the full judgment sum (or any sum) from the 1^st defendant. 

34.  Mr Leung argued that such evidence is not credible or cogent and it is now too late for the 4^th defendant to adduce any further evidence in this regard.  I do not propose to engage in an evaluation of the evidence in issue because, in my view, this argument is untenable as a matter of principle. 

35.  Where a default judgment is a regular one, if the defendant wishes to set it aside, the burden is on him to show merits of his defence and in so doing he needs to adduce potentially credible evidence and meet the threshold of a real prospect of success.  Here, Mr Leung’s submission is apparently premised on this burden of proof being applicable. But it has obviously overlooked the fundamental fact that the judgment now entered against the 4^th defendant is irregular as it is wrong on its face.  The burden of proof applicable to a regular judgment does not apply in this case.  It is not for the 4^th defendant to show that he may be liable for a lesser amount.  In fact it is quite the other way round.  It is for the plaintiff to satisfy the court that the damages would be assessed at no less than the judgment amount.  It is because the plaintiff is in substance asking the court to stand by and endorse a wrong judgment on the basis that the circumstances of the case is such that the judgment, though initially entered on a wrong premise, would ultimately be proved right in its effect.

36.  I should add that if the plaintiff had complied with Order 19 rule 3, the next step in these proceedings would have been the assessment of damages.  In the assessment exercise, it would have been open to the 4^th defendant to adduce evidence on the quantum of the purported liability of the 1^st defendant.  From a practical standpoint, given his relationship with the corporate defendants, he is certainly in a position to do so if he so wishes.

37.  In conclusion, the default judgment against the 4^th defendant has been wrongly entered and must not be allowed to stand.  Mr Leung did not put forward any fall-back position insofar as this ground is concerned and there is no application to have the final judgment amended to an interlocutory one pursuant to RDC Order 2 rule 1(2) or otherwise.  In any event, I consider that the appropriate thing to do in the circumstances is to set aside the default judgment and I so order.

Analysis – Second ground

38.  Notwithstanding my decision on the third ground, I shall also address the second ground of “alternative and mutually inconsistent” claims (see §23 above).  Ms Leung drew support from the principle endorsed by the Hong Kong Court of Appeal in Bonus Garment. That case went on to appeal and the decision of the Privy Council is reported at [1997] HKLRD 735. 

39.  Lord Browne-Wilkinson stated the principle as applied by the Court of Appeal as follows (at 737J):-

“[The Court of Appeal] regarded the decision in the Morel case as deciding that where a plaintiff makes two alternative claims against two defendants which are dependent upon mutually inconsistent allegations of fact and takes judgment against one of them, he cannot thereafter pursue his claim against the other.” (emphasis added)

40.  In Bonus Garment, the plaintiff had at an earlier stage entered default judgment against the 2^nd defendant.  It was held by the Court of Appeal (at 728B-C, 729B) that the plaintiff was thus barred from pursuing the 1^st defendant, on the basis that the causes of action against the two defendants, as pleaded, were alternative to and inconsistent with each other.  The decision was premised on the basis that the signing of the default judgment against one of the defendants in such circumstances amounted to a conclusive election to abandon the claim against the other.

41.  On the issue of election, Nazareth VP said as follows (at 728F-H):-

“It is of course fundamental to effective election that it be informed and unequivocal. There is no suggestion that it was not. On the contrary, the plaintiff was legally represented throughout. … The obtaining of judgment is a step of such consequence that it must upon the authorities be taken as conclusive election by the plaintiff (see e.g. per Sir Richard Collins MR in Morel supra). The judgment here is no less a judgment, for being entered in default.” (emphasis added)

42.  The Court of Appeal’s decision was overturned by the Privy Council on the ground that as disclosed by the facts of that case, the alleged liability of the two defendants were in fact not alternative (see 738A-C).  However, the Privy Council did not see fit to take the opportunity to consider the principle endorsed by the Court of Appeal.  (See also the commentary on these decisions in Hong Kong Civil Procedure 2016 at 15/4/11.)  As things stand, I am therefore bound to follow the principle.

43.  Here, on the plaintiff’s pleaded case, the claims against the defendants are made in the alternative.  (See §23 for a more precise formulation of the claims in respect of the two renovation projects.)  In particular, as far as the claims against the 1^st and 4^th defendants are concerned, they are clearly alternative to each other and based on mutually inconsistent assumption of facts.  And it is so pleaded in the statement of claim.  Applying the Bonus Garment principle, I hold that the signing of the first default judgment against the corporate defendants has the effect of barring the plaintiff from pursuing the 4^th defendant.  As such, the default judgment entered against him must be set aside.

44.  Mr Leung for the plaintiff made two counter-arguments.  First, he submitted that there is no election in the present case since all along the plaintiff has intended to pursue all the defendants at the same time.  He drew support from the fact that the writ was served on all four of them simultaneously.   He further confirmed that but for the legal aid stay applicable to the 4^th defendant, default judgment would have been entered against all four defendants at the same time – one can see that the first default judgment was made against all the corporate defendants.   Mr Leung did accept the Bonus Garment principle but contended that it has no application here as there has been no election. On what constitutes an effective election, he relied on Clarkson Booker Ltd v Andjel [1964] 2 QB 775 and L C Fowler & Sons Ltd v St Stephens College Board of Governors [1991] 3 NZLR 304.

45.  I am unable to accept this submission.  While it may be true that the plaintiff’s subjective desire had been to proceed against all the defendants simultaneously, the objective fact remains that the two default judgments were obtained one after another.  It was open to the plaintiff to hold off entering judgment against the corporate defendants until the legal aid stay expired.  He did not do so.  In any event, the submission clearly goes against the authority in that it was definitively stated in Bonus Garment that the obtaining of the first default judgment itself amounted to a conclusive election by the plaintiff.

46.  Secondly, Mr Leung said that the plaintiff is prepared to give an assurance to the court that he will not enforce the judgment against the corporate defendants and that on that basis there is no risk of the plaintiff recovering more than he is entitled to.  In my view, such assurance is neither here nor there.  Bonus Garment makes it clear that the election has already been made conclusively by the plaintiff in this case and, in my view, it is plain that he will not be able to “undo” that election unilaterally by giving such assurance.

47.  Having dealt with and decided against the plaintiff’s submissions, there is one final matter which I need to address.  The default judgment signed against the corporate defendants, as quoted in §16 above, is inconsistent with the claims as pleaded.  According to the judgment, in respect of the restaurant project, the 1^st and 2^nd defendants are together liable for the outstanding amount and in respect of the office project, the 1^st and 3^rd defendants are together liable.  This is to be contrasted with the pleaded case, taking the restaurant project as an illustration, that if the 1^st defendant is liable, the 2^nd defendant is not and vice versa.  As such, the default judgment appears to be defective in that it does not reflect the alternative claims as pleaded.  When asked whether the judgment had been wrongly entered, Mr Leung accepted that the judgment ought to have reflected the alternative claims and said that it could have been done in a better way but he fell short of saying that it was wrong.

48.  In my view, notwithstanding the defect in that judgment, it remains to be a conclusive election on the part of the plaintiff to pursue the corporate defendants to the exclusion of the 4^th defendant.   Hence the defect does not affect the conclusion which I have reached in §43 above.

Analysis – First ground

49.  At the hearing, the plaintiff sought to highlight a number of inconsistencies in the 4^th defendant’s factual case and his u-turn on his position on which of the three corporate defendants should be held to be the contracting parties (instead of him).  It follows that the 4^th defendant, argued the plaintiff, has failed to demonstrate a meritorious defence which enjoys a real prospect of success at trial.  I do not propose to address these points as it is unnecessary to do so, given the conclusion which I have reached above.

Conclusion and orders

50.  On the whole, in pursuing his claim against the 4^th defendant, the plaintiff made a series of mistakes at both the pleading stage and the default judgment stage.  This seems to be attributable to a failure to appreciate the true nature of the plaintiff’s claim (which led to a final judgment having been wrongly entered) and the interplay of the different claims against the different defendants (which led to a pre-mature but conclusive election being made).  In my view, the circumstances are such as to warrant the court exercising its discretion to set aside the default judgment on either of these two grounds.  Both parties should give some careful thoughts to how to proceed with the matter from this point onwards.

51.  In conclusion, I allow the 4^th defendant’s appeal and order that the default judgment entered against him be set aside.

52.  I also make an order nisi that the 4^th defendant’s costs of the appeal as well as the setting aside application be borne by the plaintiff, to be taxed if not agreed, with certificate for counsel and that the plaintiff’s own costs and the 4^th defendant’s own costs be taxed in accordance with the Legal Aid Regulations.