XCHRX UNITED BUILDING MATERIAL (HONG KONG) LTD. v. E MAN CONSTRUCTION CO. LTD.

HCCT108&109/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NOS.108 & 109 OF 1999

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J U D G M E N T

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1. The plaintiff by two summonses seeks summary judgment pursuant to Order 14, rule 1 of Rules of High Court on two contracts for the supply of ceramic tiles by them and delivered to the defendant. For ease of reference, the two contracts are referred to as No.109, on which $3,071,992.75 is claimed and No.108, on which $2,923,834.29 is claimed. The two summonses were heard together but required separate consideration.

Contract 109

2. There is no dispute that the tiles were delivered. Some were delivered to a site in Queens Road Central, others were delivered to a site in Fanling. In respect of both deliveries, the Defence and Counterclaim is based on the allegation that the tiles were defective. The defendant points to experts reports which confirm the defects. Their counterclaim is based on the cost of remedial works which were necessary because the defects only became apparent after they had been mounted on the various walls and a sum of $3,000,000 in liquidated damages for the delay caused by the remedial works at Queens Road Central.

3. The cost of remedial works claimed is $2,546,936.39 at Queens Road Central and $5,061,571.44 at Fanling. The total of the counterclaims and set-off is therefore $10,608,507.83.

4. The plaintiff submits that the counterclaims are either unsustainable, wrong or grossly inflated. Mr Shaw, for the plaintiff, carefully went through each item in the counterclaim and endeavoured to explain why, in his submission, it was bound to fail. I do not consider it necessary to recite the arguments for and against each item. The short answer is that in order to obtain summary judgment, the plaintiff must cross a high threshold. The court must be satisfied that the defendant is simply not entitled to its day in court.

5. The defendant is entitled to raise an unliquidated or unascertained claim as an equitable set-off. This is expressly provided by Order 18, rule 17. It is also clear that the proposed counterclaim and damages flowing from the defective goods supplied, arise out of the same transaction as the claim, for non-payment of the goods delivered. If Mr Shaw's analysis of the events, as outlined to the court, is correct, the plaintiff will be either 100% or nearly 100% successful at trial. However, I find myself unable to conclude that the Defence is unarguable. The issue will be one of quantum. If successful, the counterclaim will exceed the claim. It seems plain that the factors which will determine whether the Defence has any substance are triable issues of fact.

6. I have considered whether the plaintiff's arguments, albeit not sufficiently compelling to justify summary judgment, are nonetheless sufficiently cogent to warrant an order that the defendant's leave to defend is made conditional on a payment into court. However, once again I have decided that however attractive the plaintiff's case may be, the defendant, on contract 109, should be given unconditional leave to defend.

Contract 108

7. For this contract, the situation is entirely different. The only defence to contract 108 is a set-off of any monies allegedly due to it arising from its counterclaim in contract 109. The defendant accepts that the monies claimed in 109 do not constitute a liquidated debt. Its claim therefore is for an equitable set-off in 108. To be entitled to an equitable set-off, the defendant must show a sufficient nexus or connection between the two contracts. If a real connection is demonstrated, the court may either give leave to defend or give summary judgment with a stay of execution pending the outcome of contract 109. The reality is that all the defendant has been able to point to is the facts that the parties to the two contracts are the same and the subject matter is the same, namely tiles. There the nexus ends. It is a case where the counterclaim arises out of a separate and distinct transaction. Apart from the nature of the goods supplied, it is unrelated.

8. Further considerations which the court may take into account when exercising its discretion whether or not either to give leave or grant a stay are :-

(i) the defendant's prospects of success in the other action;

(ii) the plaintiff's ability to satisfy a judgment against it on the other action should the counterclaim succeed; and

(iii) the relative sizes of both claims and the counterclaim.

9. It is true to note that the amount of the counterclaim in 109 exceeds the sum of the two claims. However, the plaintiff's submission that the counterclaim is grossly inflated is not without merit. The plaintiff in such circumstances should not be deprived of monies due to it on contract 108. Finally, the defendant expresses concern that the plaintiff may not be able to satisfy any judgment against it on the counterclaim. That concern goes no further than a bare assertion. The evidence in support is wholly inadequate for the purposes of persuading the court to order a stay of execution.

10. To conclude, I direct that there be unconditional leave to defend on contract 109 and summary judgment entered without a stay of execution on 108.

11. I make an order nisi as to costs. The two actions are the subject of two separate Order 14 summons. On HCCT108/99, costs of the action shall be to the plaintiff. On HCCT109/99, costs shall be in the cause.