XCHRX POLLARD CONSTRUCTION CO. LTD. v. YUNG YAT FAN t/a GOLDEN YEAR & CO.

HCA9579/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9579 OF 1998

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J U D G M E N T

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The appeal

1. On 21st July 1998, the Plaintiff obtained judgment against the Defendant in default of defence. The Defendant applied to set aside the judgment.

2. The judgment was entered for $350,000. The Defendant contended that $105,000 had already been accounted for and the Plaintiff was only entitled to enter judgment for $245,000 (i.e. $350,000 less $105,000) and not $350,000. The Master refused the Defendant's application to set aside the judgment. She amended the judgment to $245,000. The Defendant now appeals.

Judgment for too large a sum

3. A judgment entered for too large a sum is an irregular judgment : Supreme Court Practice Note 13/1/3, 13/1/4 and 14/2/4. However, it is clearly recognised and accepted by both parties that the Court has the jurisdiction to correct the amount of the judgment : Honour Finance Co. Ltd. v. Chui Mei Mei [1989] 2 HKLR 146 per Hunter J; Muir v. Jenks [1913] 2 KB 412 at 417 and the discussion on this topic in Hong Kong Civil Court Practice, Vol.1, para.2756.

4. In considering whether the irregular judgment should be set aside or simply amended, one should consider the merits of the defence. If, for example, a party is bound to lose on a subsequent application for summary judgment, it would be pointless to set aside the existing judgment : see the observation of the English Court of Appeal in Faircharm Investments Limited v. Citibank International Plc The Times, February 20, 1998. It is therefore necessary for me to examine the merits of the defence.

Merits of the defence

The loan agreements

5. The Plaintiff's Statement of Claim relies simply on two loan agreements dated 20th December 1996 and 29th January 1997 respectively between the parties in which the Plaintiff lent $350,000 to the Defendant and the Defendant had failed to repay the $350,000.

The Defence

6. The Defendant was a building contractor and the Plaintiff had requested him to take over the work of one of the Plaintiff's former subcontractors. The Defendant agreed on the condition that the Plaintiff had to make an advance payment of $350,000 to him. This sum was to be set off by the amount of work to be done by the Defendant for the Plaintiff. Clause 3 of the two loan agreements (they were identical) states that :

"The principal amount of the Loan shall be repayable by the Borrower to the Lender by way of 5 equal monthly instalments by deducting each repayment instalment automatically from the interim or final payment due to the Borrower each month."

7. A construction contract was entered into by the parties on 30th December 1996. After commencing work, the Defendant submitted applications for payment to the Plaintiff. In respect of application on 25th May 1997 for $539,793.94, the Plaintiff only allowed payment of $27,779.57 to the Defendant. In respect of an application on 5th July 1997 for $558,021.94, the Plaintiff only allowed nominal sums to the Defendant. In respect of an application for $719,238.07, the Plaintiff did not make any payment to the Defendant. The Defendant claims that it is entitled to counterclaim the unpaid sums from the Plaintiff. The construction contract between the Plaintiff and the Defendant was terminated by the Plaintiff on 5th August 1997 with effect on 15th August 1997.

The Plaintiff's case

8. The Plaintiff accepts that $105,000 had previously been deducted but denies that the Defendant is entitled to set off the $245,000 from the amounts that the Defendant is counterclaiming. The Plaintiff gives two reasons :

(1) The Defendant's cross-claim is not an equitable set-off in that there is insufficient connection with the Plaintiff's claim.

(2) The cross-claim must be submitted to arbitration.

Set-off

9. The Plaintiff does not dispute that the loan agreements and the construction agreement are interrelated. However, it maintains that the cross-claim is not connected to the Plaintiff's claim. In Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] QB 927 Lord Denning, M.R. at 974 stated that :

"It is only cross-claims which go directly to impeach the plaintiff's demands that is so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim."

In Esso Petroleum Co. Ltd. v. Milton [1997] 1 WLR 938, Simon Brown LJ stated that :

"For equitable set-off to apply, it must therefore be established first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other."

10. Mr Lam, Counsel for the Plaintiff, submits that the parties had chosen two agreements instead of incorporating the terms into one and the terms of the loan agreements referred to a short-term loan which was described as an independent advance. He submits that the only material linkage between the two contracts is the repayment mechanism of the loan. This was to benefit the Plaintiff to ensure that it would not need to chase after the Defendant for repayment. The mechanism had broken down as the construction contract was terminated. Further, the Plaintiff had been generous in not insisting on strict performance of the repayment mechanism to mitigate the Defendant's cashflow problem.

Sufficient connection shown

11. I think even in the loan agreements themselves, reference is made to the fact that the loan was an additional working capital for the Defendant under the construction contract. I do not think that the repayment method was adopted solely to benefit the Plaintiff. The Defendant was at the same time doing work for the Plaintiff and was expected to be paid for the work. Clearly, it was also to the benefit of the Defendant that what he was to repay should come from the money due to him by the Plaintiff, otherwise he would on one hand be forced to repay the loan without in turn receiving the benefit of his labour. As to the Plaintiff's argument on being generous, the fact is that there was nothing to be deducted because it had disallowed the Defendant's application for payment.

12. While the Plaintiff had explained why deduction was not made subsequent to the one and only deduction of $105,000, the Plaintiff had not given any reason for not deducting the instalment from the commencement of the construction contract.

13. Leaving aside the question of arbitration, in my view, the two matters are clearly so closely connected that it would be unjust to disregard the cross-claim.

Arbitration clause

14. The difficulty in this case is really on the arbitration clause in the construction contract. Whether the Defendant is entitled to payment of the sums he had submitted to the Plaintiff is clearly a dispute within the meaning of the arbitration clause. If the Defendant sues the Plaintiff on such claim, the proceeding is bound to be stayed pursuant to s.6 of the Arbitration Ordinance. The Court has no discretion in this matter : Westco Airconditioning Ltd. v. Sui Chong Construction & Engineering Co. Ltd. [1998] 1 HKC 254. In Aectra Refining and Manufacturing Inc. v. Exmar N.V. [1994] 1 WLR 1634, Hoffman LJ (as he then was) stated that :

"In my view, it is of the essence of independent set-off in English law that the defendant should be entitled to have the merits of his cross-claim tried by the court in which he has been impleaded. The machinery for the Statues of Set-Off simply cannot operate unless this is possible ..... If, therefore, the defendant is faced with a procedural bar to having his claim determined, for example, because he has agreed to the jurisdiction of another tribunal, he cannot assert an independent set-off."

15. It is clear that in the present case the Defendant cannot rely on the cross-claim as a set-off in this case. Mr Liu, Counsel for the Defendant, refers me to Bulk Oil (Zug) A.G. v. Trans-Asiatic Oil Ltd. S.A. [1973] 1 Lloyd's Rep.129; and Mustill & Boyd, The Law and Practice of Commercial Arbitration in England, 1989, 2nd ed., p.469, and submits that even if the cross-claim is to be arbitrated, it does not prevent a defendant from raising it by way of defence to an action on the issues that had been referred to arbitration. In my view, it is doubtful if the authorities referred to by Mr Liu can still stand in the light of the Aectra decision.

16. Mr Liu further asked me to ignore the arbitration clause. His suggested approach is this : if the Court sets aside the judgment, the Defendant would not file a counterclaim but merely a defence. The counterclaim can be dealt with by arbitration. In my view, this is not satisfactory. Even if no counterclaim is raised, the Court is, in effect, asked to deal with the disputes which come within the terms of the arbitration clause.

Implied term

17. Mr Liu further argued that independent of the question of set-off, the Plaintiff had been in breach of an implied term that the Plaintiff would assess and certify the Defendant's payment submissions promptly and would not withhold the Defendant's payment unreasonably. This is a matter that has not been pleaded or raised in the Defendant's affirmations or draft defence.

Waiver

18. It is also argued that the Plaintiff had somehow waived the arbitration clause by suing on the loan. I disagree. The dispute is on the sums due to the Defendant under the construction contract and not under the loan agreements. No question of waiver arises.

The Master was correct

19. In my view, the Master was correct in her decision in refusing to set aside the judgment and instead ordered the amendment of the judgment.

Stay of execution

20. The Defendant also applies to stay the execution of the judgment pending the determination of the counterclaim as an alternative relief. Although no formal application was lodged, Mr Liu undertakes to file a summons within today on this matter. I allow the Defendant to argue on this issue and no objection was raised by Mr Lam on the procedure adopted, although he challenged the application by the Defendant on the merits.

21. Considering what I have said earlier, in my view justice is best served by staying the execution of the judgment pending the determination of the counterclaim by the Defendant to be raised in the arbitration proceeding and I will so order.

Conclusion

22. Accordingly, the Defendant's appeal is dismissed and the execution of the judgment is stayed on the terms I have just indicated.

Costs

23. The Plaintiff is to have the costs of the appeal. The Defendant is to have the costs of the application for stay. The costs of the hearing today are to be apportioned equally between the parties. The order of the Master on costs remains.