SAM YU CONSTRUCTION CO. v. WINNING GODOWN LTD. AND ANOTHER

1986, No. 6145

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

-----------------------

__________

DECISION

__________

1. This is an application by the Defendant for a stay of proceedings pursuant to Section 6(1) of the Arbitration Ordinance

2. By a standard form of Building contract which was apparently signed on 5th November 1985 the Defendant employed the Plaintiff to build a godown, completion being scheduled for November 1986. The contract contained the usual arbitration clause in clause 35. For reasons which are the subject of dispute but upon which I need not dilate, the Defendant purported to determine the contract on 20th October 1986 in accordance with clause 25 of the contract. It is equally disputed whether the notice purporting to determine the contract was itself properly given.

3. On the morning of 24th October the Defendant entered the site with security guards and took possession of it. Consequently, later that day the Plaintiff was unable to obtain access to the site or to recover equipment and other property from the site. On 29th October, the Plaintiff obtained an ex parte injunction from Liu J. by which the Defendant was restrained from taking possession of, removing or damaging the Plaintiff's property except for the purposes of delivering it up to the Plaintiff. The effect of this Order was to paralyze the site. The following day the Plaintiff issued a writ and at the same time took out an inter partes summons for the continuation of the injunction.

4. On 4th November the Defendant applied to Mortimer J. ex parte by affidavit on notice to the Plaintiff for the Order made by Liu J. to be varied. Mortimer J. varied the Order by excluding from it the crane, hoists and other building equipment, thus enabling work to re-commence on the site. At the same time the Defendant filed affidavits in opposition to the Plaintiff's inter partes summons.

5. On 7th November the parties appeared before Hooper J. for the hearing of the Plaintiff's summons. Because of lack of time the Judge adjourned the hearing to an early date.

6. On 12th November the Defendant filed an acknowledgment of service. On 19th November the Defendant filed its application for a stay of the proceedings and, in addition to an affidavit in support of that application, an affidavit in opposition to the Plaintiff's summons.

7. Against that background there are two issues for me to resolve. First, the construction of the following words appearing in S.60(1):-

"..... any party to those legal proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to that court to stay ....... "

8. The second issue is, what constitutes a step in proceedings?

9. It is Mr Swaine's contention that on the true construction of Section 6(1) only a step after appearance, or acknowledgement of service as it now is, and before the application for stay is made will disable the applicant from obtaining the relief sought. The application by the Defendant to Mortimer J. and the affidavits filed at that time occurred before the acknowledgement of service was filed and therefore do not disable the Defendant. Subsequent affidavits were filed on the same date as or after the filing of the acknowledgemeat. Again these do not disable the Defendant. The only act by the Defendant between filing the acknowledgement and the application for stay was the appearance before Hooper J. on the return day for the Plaintiff's summons.

10. In aid of his construction, Mr Swaine cited Continental Corporation (No.2) v. Vincenzo Fedele (a firm)⁽¹⁾. In his Judgment .

at page 217 Mills-Owens J. said:-

"Mr. Ching submits that by appearing and opposing the proceedings under Order 26 the defendants, through Mr. Serio Sergio, took a step in the action. He has referred to a number of authorities in the question of what is a 'step'. Mr. Wimbush has made two points: first, he submits, section 6(1) refers only to a step following entry of appearance; secondly, the taking of a step must be construed as the taking of a voluntary step - was Mr. Serio Sergio disentitled to resist the constrainment of his personal liberty until proceedings to stay the action had been drawn up, served, heard, and decided? The sub-section refers expressly to steps taken after appearance, and Mr. Wimbush submits that this is deliberate as the court would invariably refuse to hear a defendant who had not yet entered an appearance before hearing a defendant, otherwise difficulties might arise. There might be a question whether the court had jurisdiction by submission, whether service was to be challenged as invalid, or the writ set aside for some reason. "

11. Mr. Swaine also cited a passage from Roussel-Uclaf v. Searle⁽²⁾. I derive no assistance from this passage in view of the particular circumstances relating to the Defendant concerned.

12. It is Mr. Mumford's argument that the entry of an acknowledgement does not govern the step in the proceeding. In other words, the time for making an application for a stay is after acknowledgement but the application must be before the delivery of any pleading or any step whether that step occurred before or after the acknowledgement.  He said it would be absurd if a Defendant can approbate an action but that this will not count against him simply because he has not filed an acknowledgement. He submitted that the decision of Mills-Owens J. in Continental Corporation was wrong.

13. I accept the construction sought by Mr. Mumford. I respectfully disagree with the decision of Mills-Owens J. In my view the acknowledgement of service is simply the key which opens the door for a Defendant to make an application for a stay. In the same way, the provisions of Order 13 rule 8 require a Defendant to acknowledge service and give notice of intention to defend before he can raise such basic issues as a dispute as to jurisdiction or proper service of the writ. So in the majority of cases a defendant will be unable to do any act or seek any relief until after acknowledgement. I do not see, however, why a defendant who delays acknowledging service but in the meantime manages to come before the court should obtain an unfair procedural advantage. I do not think the acknowledgement of service also provides a reference point after which no step must be taken. I do not think the wording of S.6(1) requires this. I find that once proceedings have been commenced, any     step by a party will preclude a stay.

14. The next issue is, what is a step and has the Defendant taken one? Mr. Swaine's case is that a step must be a positive act by way of offensive in the action. He relies upon the decision of Graham J. in Roussel-Uclaf v. Searle. In that decision the learned Judge said at page 231: -

 

It seems to me that the mere filing of affidavits in defence to a motion for a receiver is not in the nature of an application to the court, and consequently not a step in the proceedings' within the meaning of the section. By such a 'step' is meant a substantive step taken by a party. It may be that a very limited application to the court such as taking out a summons for extension of time - would be enough. That has been so decided in Ford's Hotel Co. v. Bartlett. In Brighton Marine Palace and Pier, Limited v. Woodhouse before Mr. Justice North the motion was ordered to stand over to the trial, and it does not appear whether affidavits had been filed or not. "

 

Later in his judgment Graham J. said at page 231:

"On the whole, I think that the statute is contemplating some positive act by way of offence on the part of the defendant rather than merely parrying a blow by the plaintiff, particularly 'where the attack consists in asking for an interlocutory injunction. "

15. Mr. Swaine submitted that the application to Mortimer J. to vary the ex parte injunction and the filing of the affidavits in respect of the Plaintiff's inter partes summons were all defensive steps.

16. Mr. Mumford contended that Roussel-Uclaf has been discredited because the case of Zalinoff v. Hammond upon which Graham J. relied has been overruled by the English Court of Appeal; He referred me to Turner & Goudy v. McConnell and others⁽³⁾ a building contract case in which the Defendants filed an affidavit in answer to an application for summary judgment under Order 14. On the first return day of the summons the Defendants' solicitors appeared before the Master who adjourned the application. Some weeks later, the Defendants applied to stay the proceedings.

 

A fortiori, said Mr. Mumford, the application to Mortimer J. Dillon L. J. then continued:-

"It is also clearly established by authority binding on this court that if the defendant opposes an application for summary judgment and fails in his opposition, it is then too late for him to apply for a stay. That was decided in Pitchers Ltd. v. Plaza (Queensbury) Ltd. [1940] 1 All E.R. 151. In his judgment Slesser L.J. said, at p.154:-

17. Thus it is clear that the filing of an affidavit can constitute a step in an action.

18. Later in his judgment, when discussing the same case, Dillon L.J. cited with approval the following statement of Goddard L.J.:

"It seems to me that, if a defendant who is sued wants an action stayed, he should take out a substantive application at the earliest possible moment. " '

19. Dillon L.J. then went on to deal with Zalinoff. He said at page 903:-

"If the basis of that decision is that the step in the action has to be a substantive application to the court initiated by the defendant, it plainly cannot stand in the face of the decisions in County Theatres and Hotels Ltd. v. Knowles [1902] 1 K.B. 480; Richardson v. Le Matire [1903] 2 Ch. 222 and Pitchers Ltd. v. Plaza (Queensbury) Ltd. [1940] 1 All E.R. 151, to which I have referred. "

20. Mr. Mumford said that it is unsatisfactory to draw distinctions between positive and defensive acts. This leads to confusion, difficulty for legal advisers and to arguments as in the present case. He said that the real answer is that a defendant should make an application for a stay as a matter of urgency.

21. Mr. Swaine argued that even if Turner overruled Zalinoff in relation to a substantive step, nevertheless the principle exemplified in arrest and injunction cases remains valid, that is, that action to protect person or property is defensive.

22. The thrust of Turner is certainly against fine distinctions and constitutes a clear signal to a defendant to get on with a substantive application to stay. On the authority of this case I think that what Mr. Mumford would like me to say is that virtually any action on the part of a defendant, other than acknowledging service and applying for a stay, will constitute a step in the proceedings. This could lead, however, to severe practical consequences. It is now settled law that the court cannot re-open an architect's certificate. If the application to stay fails because, perhaps inadvertently, a defendant has done something which constitutes a step in the proceedings he would be deprived of the opportunity to ventilate in court a matter which might well merit close scrutiny.

23. Alternatively, if an architect's certificate is at the centre of the dispute between the parties, there appears to me to be nothing to prevent the parties proceeding to arbitration anyway to resolve issues over which the arbitrator has jurisdiction but over which the courts have not. Accordingly, there would be the inconvenience and expense of judicial and arbitral proceedings running in tandem.

24. It is clearly undesirable that such consequences should depend upon what is essentially a fine procedural point. I am confident that this is not the meaning to be attributed to the word 'step'. In my view the acid test is whether a defendant has done something in the proceedings which shows he is submitting to the court's jurisdiction rather than an arbitrator's to try the real issue between the parties. Whether the act is offensive or defensive is irrelevant.

25. How does this test apply in the Defendant's case. In view of my finding on the construction of Section 6(1) all acts on the part of the Defendant from 4th to 19th November fall to be considered.

26. There is clearly a distinction to be drawn between taking what I might call a regular step, such as resisting Order 14 proceedings, and contesting an application for injunctive relief. As Mr. Swaine said in relation to Turner, steps to protect person or property fall into a different category.

27. It is necessary, I think, to assess the true nature of the injunctive relief sought. If the relief relates to the merits of the dispute between the parties, to resist it is to take a step in the proceedings. If, however, the relief does not affect the merits of the action, as would be the case in respect of a Mareva Injunction, resistance to this would not constitute a step. In the latter case, the injunctive relief is, as it were, ancillary to the main action.

28. In the present case one of the issues between the parties is whether or not the Defendant has the right to use the Plaintiff's equipment. The Plaintiff is seeking to prevent the Defendant from using the equipment and prays for an injunction to enforce that. The application for the interlocutory injunction to this effect, therefore, clearly goes to the merits of the dispute between the parties. By resisting the injunction the Defendant was not seeking to protect his own property but to have the use of the Plaintiff's property, such use being a matter in dispute. I do not regard this as being ancillary but as going to the merits of the action.

29. Accordingly, the Defendant's application for stay is dismissed.

(1) 1964 H.K.L.R. 213
(2) (1978) 1 Lloyds L.R. 225
(3) (1985) 1 W.L.R. 898