I PIPE TECHNOLOGIES & ENGINEERING LTD v. KWAN ON CONSTRUCTION COMPANY LTD

HCA 784/2023 and HCA 1030/2023

(HEARD TOGETHER)

[2024] HKCFI 3722

HCA 784/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 784 OF 2023

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AND

HCA 1030/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1030 OF 2023

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________________________

(HEARD TOGETHER)

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J U D G M E N T

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1.  The Defendant (in both HCA 784/2023 and HCA 1030/2023)  is appealing the order of Master KW Wong dated 30 April 2024 for: (1)  summary judgment of $8,038,000 against the Defendant in HCA 784/2023; and (2)  dismissal of the Defendant’s summons dated 18 December 2023 in HCA 1030/2023 to consolidate HCA 1030/2023 with HCA 784/2023.

2.  The Master granted unconditional leave to defend the remainder of $2,205,000 under HCA 784/2023, and the present Appeal does not touch on this part of the action.

3.  Before the hearing of the Appeal, the Defendant has taken out three Summonses all dated 26 July 2024 (1)  to amend the Defence and Counterclaim in HCA 784/2023 to add a counterclaim; (2)  to adduce new evidence in the Appeal; and (3)  for stay of execution pending the Appeal.

4.  The Plaintiff in HCA 784/2023 (I-Pipe)  does not object to the amendment adding the counterclaim to be tried with the remainder of the action where unconditional leave was granted, but it objects to the admission of new evidence for the Appeal based on the new Counterclaim.

5.  The Appeal was part-heard on 30 August 2024 and adjourned to 14 October 2024.  During the adjournment, I-Pipe took out a summons dated 4 October 2024 for adducing further evidence for the Appeal.

6.  I-Pipe has indicated that they would not enforce the summary judgment pending the determination of the Appeal.

Background

7.  In HCA 784/2023, the Plaintiff (I-Pipe)  carried on business of lining work and CCTV inspection of underground drainage pipes.  The Defendant was a civil engineering contractor and it contracted with I-Pipe to undertake drainage works.

8.  In HCA 1030/2023, the Plaintiff (“Multipipe”)  also carried on the business of lining works and CCTV inspection of underground drainage pipes, and the Defendant contracted with I-Pipe to undertake drainage works.

9.  I-Pipe was the sole contractor of Multipipe and I-Pipe carried out all the work contracted by Multipipe.

10.  In HCA 784/2023, I-Pipe is suing the Defendant for the unpaid sum of $10,243,000 pursuant to 38 invoices for work done.

11.  The Defence in HCA 784/2023 (before the amendment to add the Counterclaim)  was that the Defendant had overpaid Multipipe as averred in HCA 1030/2023, and there was an oral agreement to set-off the invoices issued by I-Pipe against (1)  the costs of materials, equipment and handling charge by the Defendant; and (2)  overpayment to Multipipe (“Set-off Agreement”).

12.  In HCA 1030/2023, Multipipe is suing the Defendant for $5,424,322.89 as the unpaid balance of 129 invoices for work done by the Multipipe for the Defendant (“Multipipe Contract”).

13.  The Defence and Counterclaim in HCA 1030/2023 is that the Defendant has overpaid Multipipe by $15,925,602.28, and is counterclaiming net overpayment of $7,887,607.28 after deducting the sum of $8,038,000 for costs of materials, and handling charge etc under the Set-Off Agreement.  The Defendant is also counterclaiming damages for wrongful detention of the Defendant’s equipment by Multipipe.

14.  The summary judgment was only for $8,038,000 and unconditional leave for of $2,205,000 was granted by the Master to defend the remainder of the sum made up of the costs of materials, equipment and handling charge where the Defendant alleged it was entitled to deduct under the Set-Off Agreement.  The Appeal did not touch on the sum under the unconditional leave.

Defendant’s Case

15.  The Defendant averred that they have overpaid Multipipe $15,925,602.28.  There was the common understanding between I-Pipe, Multipipe and the Defendant that the I-Pipe would be invited to tender for works by the Defendant, and the invoices of I-Pipe would be set-off against the Defendant’s overpayment to Multipipe. 

16.  More specifically, in or about January to February 2022, a meeting took place between Mr Carlman Chan, Managing Director of both I-Pipe and Multipipe, and Mr Yuan Gang, the Chief Executive Officer of the Defendant, and it was agreed that the invoices of I-Pipe would (1)  first be deducted against the materials, plants and equipment provided by the Defendant and a 5% handling charge; and (2)  the residual sum would be set off by the overpayments by the Defendant to Multipipe Contract.

17.  The sum of $2,205,000 where unconditional leave to defend was granted related to the alleged deductions for the costs of materials, equipment and handling charge referred to in para. 16 above.

18.  Mr Chan SC, leading counsel for the Defendant, submitted that in HCA 1030/2023, Multipipe had pleaded overpayment and there was no application for summary judgment against Multipipe, which means that there must be serious issues to be tried on the overpayment point. Further, there are 6 pieces of undisputed facts:

(1)  I-Pipe, Multipipe and the Defendant had a long course of dealings adding up to substantial sums, and it is not unreasonable there was some oral arrangement between them;

(2)  I-Pipe and Multipipe are closely related, with common ownership and management.

(3)  In the letter dated 27 February 2020 sent by I-pipe to the Defendant, it was described as that I-Pipe was the sole contractor of Multipipe and I-Pipe undertook all the work contracted by Multipipe, hence, only I-Pipe needed to take out labour insurance in relation to the Defendant’s contracts.

(4)  I-Pipe had never been paid at all ever since its first engagement by the Defendant and only Multipipe had been paid by the Defendant for over $47.5 million.

(5)  The purpose of holding the meeting in January/February 2022 was to discuss payment to Multipipe, and as a result, I-Pipe was invited to tender for work by the Defendant.

(6)  Ever since the meeting, 38 contracts were awarded to I-Pipe, and notwithstanding I-Pipe was involved for a relatively short of 1 year or so, I-Pipe had already invoiced $10,243,000.

19.  Mr Chan rhetorically asked why I-Pipe would continue to tender for work from the Defendant if none of its invoices was ever paid. The answer must be there some sort of special arrangement with the Defendant, in that I-Pipe’s invoices were to be set-off overpayment to Multipipe.  Hence, the oral agreement for set-off is not incredible.

20.  Mr Chan submitted that apart from the contractual set-off under oral agreement, an equitable set-off would also arise where the I-Pipe and Multipipe in fact formed one conglomerate and the underlying transactions from which the obligations arose was so connected as to form one transaction. (Qiyang Ltd v Mei Lei New Energy Ltd (HCA 420/2011 dated 5 March 2013)  per A To J §23-24).

21.  Hence, Mr Chan submitted that the Defendant should be entitled to set-off the invoices from I-Pipe against overpayment to Multipipe under the law.

22.  The proposed amendment of the Defence and Counterclaim against I-Pipe in HCA 784/2023 is in fact the Counterclaim against Multipipe for wrongful detention of vehicles and equipment provided by the Defendant under HCA 1030/2023.  I-Pipe was the entity actually carrying out the Multipipe Contract.  When I-Pipe left the sites, it had wrongfully detained the equipment. 

23.  However, in HCA 1030/2023, the Counterclaim for wrongful detention of goods was for damages to be assessed, but in HCA 784/2023, the proposed counterclaim is now a liquidated sum valued at the purchase price of the equipment of $8,268,829.12.

24.  The new evidence sought to be adduced by the Defendant for the Appeal related to the retention of the vehicles and equipment and their valuation.  There was also the explanation for the delay by Mr Yuan Gang that he was absent from Hong Kong and his subordinate responsible for the matter had left the Defendant.

I-Pipe’s Case

25.  Mr Ramanathan SC, leading counsel for I-Pipe, submitted that any set-off, whether by oral agreement or otherwise, could only arise on the basis of overpayment by the Defendant.  If the Defendant were unable to show any over-payment, the substratum for the set-off would fall.

26.  Mr Ramanathan submitted that apart from the bare assertion of Mr Yuan Gang and his colleague Mr Suen, there was not one contemporaneous document referring to any overpayment or set-off.

27.  Mr Carlman Chan of both I-Pipe and Multipipe attested that at the end of 2021 shortly before the alleged meeting and oral agreement, Multipipe had invoiced $33,154,963.33, and the Defendant had only paid $29,378,930.44, with underpayment of $3,776,032.89 as per supporting schedules of invoices and payments.  Hence, he called the meeting to demand payment by the Defendant.  At that stage, I-Pipe had not been engaged in any of the Defendant’s work.  I-Pipe was invited to tender for the Defendant’s work in December 2021, but was not awarded the contract.

28.  On the other hand, that Mr Yuan Gang of the Defendant had only made bare assertions of overpayment without any particulars until after commencement of the present proceedings.  There was not even any schedule of overpayment.

29.  According to the Defendant’s Sub-contractor Payment Statement dated 20 December 2021 prepared by Mr Dennis Chan, the Defendant’s quantity surveyor, the amount due to Mulitpipe for then was $2,070,000.  On the Statement, it was stated “to be endorsed by the senior management via WeChat”, which was eventually done.

30.  Hence, as at the end of 2021, there was no evidence or allegation of overpayment by the Defendant, but an amount due to Mulitpipe of $2,070,000.

31.  Mr Chan for the Defendant submitted that even if there was no existing overpayment at the end of 2021, this could be an agreement for set-off of “future overpayment”. 

32.  Mr Ramanathan pointed out that “future overpayment” was never mentioned by Mr Yuan Gang, and there was no indication of any expected future overpayment.

33.  Further, Mr Ramanathan pointed out that according to the Audit Confirmation dated 29 May 2023 sent by the Defendant’s auditor Crowe to both I-Pipe and Multipipe for the year ending 31 March 2023, the amount due to I-Pipe was $10,243,000 and the amount due to Multipipe was $4,425,311, while the amount due from Multipipe was $9,041.

34.  Mr Ramanathan submitted that if the Defendant had actually overpaid Multipipe by $15 million, it would have notified its auditor and the Audit Confirmation stating amount due to Multipipe from the Defendant would not have issued.  Hence, the defence of set-off of overpayment was totally undermined by the contemporaneous documents.

35.  Mr Ramanathan submitted that apart from the Audit Confirmations, Multipipe had sent to the Defendant various emails since 15 September 2022 demanding payment of overdue invoices to the tune of $12 million and later repeatedly threatened legal action.  The Summary of Statement dated 11 January 2023 sent by Multipipe to the Defendant stated that the amount due to Multipipe was $5,241,950 and the amount due to I-Pipe was $10,433,000, totaling $15,768,590.  The Defendant had simply not responded, nor asserted that there were overpayments and agreement for set-off until after the commencement of the proceedings  Mr Ramanthan submitted that it was wholly contrary to commercial sense, and inherently impossible for belief.

36.  As to the Summons for new evidence by I-Pipe during the adjournment of the Appeal, I-Pipe sought to put in Audit Confirmation dated 19 May 2024 sent by the Defendant’s auditor Crowe to Multipipe.  It was for the subsequent year ending 31 March 2024. The Audit Confirmation for the subsequent year end still showed amount due from the Defendant to Multipipe of $4,425,311 as opposed to the reverse.

37.  Mr Ramanathan explained that the new evidence of the subsequent Audit Confirmation was only picked up by the Defendant after the first day of hearing of the Appeal because it was sent to the Defendant’s registered in Shau Kei Wan as opposed to the Defendant’s operation address in Sheung Shui.  In any case, it was not available as at the hearing before the Master.  The effects of the Audit Confirmation were to show that amounts were due from the Defendant to Multipipe not just for one year but two consecutive years.

38.  The amendment of the Defence and Counterclaim in HCA 784/2023 was to plead the wrongful detention of equipment by I-Pipe, and it was the mirror of the Counterclaim by the Defendant against Multipipe in HCA 1030/2023. Mr Ramanthan did not object to the amendment, save that the new evidence on the value of the equipment detained should not be allowed to affect the summary judgment.

Legal Principles

39.  Under Order 14 of the Rules of High Court (Cap. 4A), the Court may enter summary judgment where there is no issue or question or no other reason ought to be tried.  The conditions will be satisfied if there is no serious material dispute of facts, and no legal issue which cannot be decided summarily. Where the facts are dispute, the Court will not embark on a mini trial on affidavit evidence, and will only be satisfied there is no issue of facts if the defendant’s assertion are unbelievable, it not capable of being believed rather than whether it ought to be believed, or even assuming them to be true, there is no defence as a matter of law (Ho Kuen Fai t/a Sun Hing Electrical Engineering)  v Chun Wo Construction and Engineering Ltd (HCA 1790/2007 dated 7 August 2008)  per DHCJ Lisa Wong SC (as she then was)  §17.

40.  Under Order 14, rule 3(1), RHC, “there ought to be some other reasons to be a trial” where the circumstances require investigation at a trial of an issue in dispute (Nice Plan Development Ltd v Ke Jun Xiang （CACV 259/2014 dated 25 June 2015）§19 per Chu JA (as she then was).

41.  Both contractual and equitable set-off are well-recognised substantive defence (Order 18, rule 17, RHC; Delco Participation BV v HWH Holdings Ltd [2019] HKCFI 3136 per Coleman J, §§38-39).

42.  The parties may agree and act to bring about a set-off (Derham on the Law of Set-off (4^th ed)  §12.03.  Contractual set-off can be expressed or inferred from conduct (Derham §16.01).

43.  Set-off is usually available when the obligations between the debtor and creditor are mutual, i.e. the obligations are held by the same parties, in the same right, interest or capacity.  But a defendant may assert the defence of set-off against the plaintiff relying on a third party’s debt in certain circumstances. 

44.  However, “mutuality” is not necessarily a rigid and strict requirement.  There is an inherent flexibility of equitable remedies (Derham §4.67-83). 

45.  English authorities recognize the Court has an “inherent discretion” to allow a set-off in respect of judgments even when there is no identity of parties (Tarlochan Singh Sahota & anor v Harkewal Singh [2018] EWHC 2646 §29 & §33).

46.  Equitable set-off arises in cases in which a court of equity would have regarded the cross-claim as entitling the defendant to be protected in one way or another against the plaintiff’s claim, particularly when the cross-claim was (a)  related to the subject matter of the claim, and (b)  there were factors which would have rendered it unjust in the eyes of equity that the claim should be enforced without regard to the cross-claim (Karpex (HK)  Ltd v Yasmine Printing (China)  Ltd [2008] 1 HKLRD 199 §9-10 per Cheung JA).

47.  In Muscat v Smith [2003] 1 WLR 2853, the English Court of Appeal held that a tenant who was sued for arrears of rent by the landlord who was an assignee of the previous landlord was entitled to an equitable set-off for damages for disrepair accruing under the previous landlord.

48.  Muscat v Smith was applied in Hong Kong where the Court would look at not strict mutuality but the reality of the situation to see if the parties have mutual obligations in the same right, interest and capacity (Qiyang Ltd v Mei Lei New Energy Ltd (HCA 420/2011 dated 5 March 2013)  per A To J §23-24).

49.  In Qiyang Ltd v Mei Lei New Energy Ltd, it was held where a number of co-plaintiffs were involved in closely related transactions and were so closely related to one another as to form one party, there was no reason why the principle in Muscat v Smith should not be extended to meet what justice and fairness in the modern reality demand [§24].  The principle of equitable set-off in Muscat v Smith has been extended amongst co-parties where they in fact form one conglomerate and the underlying transactions from which the obligations arise are so connected as to form one transaction [§23].

Discussion

50.  Before I deal with the various summons, I shall go to the core of the matter first, i.e. the existence of the overpayment to Multipipe by the Defendant, and the availability of the defence of set-off to the Defendant where there is no strict mutuality between I-Pipe, Multipipe and the Defendant.

51.  Mr Ramanathan is absolutely correct that there is neither contemporaneous documents on overpayment nor the oral Set-Off Agreement.  On the contrary, the Audit Confirmation for year ending 2023 (even without that for the subsequent year ending 2024)  showed that an amount was due from the Defendant to Multipipe rather than the reverse. 

52.  Mr Ramanathan submitted that I-Pipe and Multipipe are separate legal entities, and the defence of equitable set-off should not be available to circumvent of the lack of documentary evidence on the oral Set-Off Agreement.

53.  If the matter stops there, the Defendant should not be allowed to bring up the overpayment point at the trial of HCA 784/2023.  However, there is going to be a trial on overpayment between Multipipe and the Defendant in HCA 1030/ 2023.  The issue of overpayment will be alive in any event.  That constitutes “there ought for some other reason to be a trial”

54.  And as to the relationship between I-Pipe and Multipipe, they share the same share ownership and management, and statements issued on the state of payments cover both entities.  And given all works under the contracts with Multipipe were in fact undertaken by I-Pipe, it is arguable that they were in reality one commercial entity or conglomerate.  Although there is no appellate decisions on the defence of equitable set-off under such circumstances, it is arguable that the defence is available.

55.  That said, the lack of contemporaneous documents militates against the Defendant, I am persuaded leave of defence will be given only on the condition that the full sum of $8,038,000 under the summary judgment be paid into Court.

56.  The amendment of the Defence and Counterclaim in HCA 784/2023 in pleading wrongful detention of equipment etc. against I-Pipe is not objected to.  Hence, it is allowed.

57.  Since the issues of overpayment to Multipipe as well as wrongful detention of equipment against I-Pipe and Multipipe will be alive in both HCA 784/2024 and HCA 1030/2023, it is convenient that they be determined by the same tribunal of fact.  Hence, consolidation is allowed.

58.  That leaves the two summonses for new evidence for the appeal.  Both of them are late, and the explanation of departure of staff on the part of the Defendant and inattention on the part of the Plaintiffs are not very convincing.  In any case, they are not necessary by reason the conditional leave granted.  Hence, both summonses are dismissed.

59.  The Defendant might perhaps had wished that the change from in the quantum from damages to be assessed against Multipipe to liquidated damages against I-Pipe might assist them with unconditional leave to defend. Firstly, the last minute change is hardly convincing, and secondly, liquidated damages based on historic costs must have been inflated given the inevitable depreciation.  Hence, quantum should be left to the trial rather then as new evidence for the Appeal.

Costs

60.  In view of the granting of conditional leave to defend, I make the order nisi that costs be in the cause, to be made absolute in 14 days unless submissions otherwise.

61.  Lastly, may I thank Mr Ramanathan and Mr Chan for their helpful submissions.