深圳正高金屬製品有限公司 v. IU HO CONSTRUCTION ENGINEERING CO LTD

HCCT 33/2019

[2021] HKCFI 1253

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 33 OF 2019

(TRANSFERRED FROM HCA NO 435 OF 2018)

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REASONS FOR DECISION
AND
DECISION ON COSTS

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1.  This is an application by the defendant for security for costs of the action.  Unusually, the defendant abandoned its counterclaim at the hearing.  On that basis I made an order for security in the sum of $600,000.  These are my reasons for the decision and my decision on the costs of the security for costs application.

2.  The plaintiff’s claim, as pleaded in the statement of claim indorsed on the writ dated 22 February 2018, is exceedingly simple.  It is said that the plaintiff was engaged by the defendant as a supplier for aluminium handset panel system formwork for certain projects and that the plaintiff had completed and supplied works entitling it to payment of a total sum of about $75.8 million, with the following breakdown (in rounded figures): (i) TKO 125 site — $2 million; (ii) KT site — $13.6 million; (iii) TKO 93 and TKO 126 sites — $60.2 million; (iv) miscellaneous and transportation charges — $46,000.  Of the amounts due, only $50.9 million has been paid by the defendant.  The plaintiff therefore claims the outstanding balance in the sum of about $24.9 million.

3.  In its defence and counterclaim filed on 31 May 2018, the defendant says it was the subcontractor in four construction projects at four sites, namely, Tseung Kwan O Town Lot Nos. 93, 125 and 126 (the “TKO sites”) and Shatin Town Lot No. 585 at Kau To Shan (the “KT site”).  For the purposes of performing these subcontracts, the plaintiff needed system formwork (whether made of aluminium or otherwise) for the construction of reinforced concrete.  Between January and May 2016, the defendant entered into four oral agreements with the plaintiff in relation to the four projects respectively, whereby the plaintiff was engaged to design, manufacture and supply aluminium system formwork for the construction of reinforced concrete at the four sites.  The prices of the aluminium panels were agreed at various specified rates per square metre.

4.  The defendant alleges that the plaintiff breached the four oral agreements in a number of ways: (a) the system formworks were not of merchantable quality or fit for purpose, in that the aluminium handset panels could not be fitted with one another, or there were defects in the places reserved for water pipes recess and for welding, or the holes to be used for connecting the aluminium handset panels did not match in position; (b) the design of the system formworks was defective in that the stairway for a tower was in the wrong position and a large number of aluminium handset panels could not be removed after the concrete placing; (c) defects in the system formworks discovered and brought to the plaintiff’s attention during the inspection at the plaintiff’s factories had not been rectified; (d) the plaintiff failed to ensure timely delivery of the system formworks to the sites; (e) the plaintiff failed to supply all the materials necessary for the installation of the system formworks at the sites; and (f) the plaintiff applied the wrong materials for the installation of staircase at the TKO 126 site.

5.  As a result, the defendant alleges, it had to try to rectify the defects itself by employing more workers and ordering materials from other suppliers, at an estimated cost of some $20.3 million.  Notwithstanding these efforts, the main contractor imposed contra‑charges against the defendant by reason of the defects and breaches, estimated in the amount of about $54.1 million. The defendant claims damages for such losses estimated in the total sum of $74.4 million.

6.  In its reply and defence to counterclaim filed on 20 August 2018, the plaintiff disagrees with the defendant on the agreed unit prices of the aluminium panels and denies that there was any breach of contract on its part.

7.  By summons dated 29 January 2019, the defendant applies for security for costs.  The statement of costs exhibited to the supporting affirmation filed at the same time was drawn up to the stage of the filing of witness statements and expert reports.

8.  There is no dispute that the plaintiff is a Mainland company and resident outside the jurisdiction.  The discretionary power to order security for costs under RHC Order 23 is therefore engaged.  The plaintiff has referred to the Arrangements on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the HKSAR signed between the Supreme People’s Court and the HKSAR Government in January 2019.  But as I understand the position these arrangements are not yet in operation and there is no clear indication as to when they will be implemented.  On this basis for present purposes I do not think that a Mainland company such as the plaintiff can resist the requirement for security by reason of these arrangements.

The original position

9.  Until the hearing, the main argument had been whether the court’s discretion should be exercised to order security against the plaintiff, having regard to the fact that the defendant was advancing a substantial counterclaim.  The relevant principles as summarised by Yam J in Ai Zhong & another v Metrofond Ltd [2010] 1 HKLRD 213 at §22 are not in dispute between the parties.  But for the abandonment of the counterclaim as mentioned below, there was much force in the plaintiff’s argument that no security should be ordered, for the reasons stated in §§10 to 22 below.

10.  In the present case the major issues that would arise at trial were mostly those arising from the defence and counterclaim including in particular the alleged defects in the products and breaches of agreement by the plaintiff.  Further, as submitted by Mr Adrian Leung on behalf of the plaintiff, the plaintiff’s claim and the defendant’s counterclaim were intertwined and closely connected to each other.

11.  The defence to the plaintiff’s claim and the defendant’s counterclaim would raise exactly the same issues, since the defence was relied upon and repeated in its entirety for the purpose of the counterclaim.  The counterclaim was relied upon for the defence of set‑off. The issues raised in the defence would have to be tried in any event in the course of determining the counterclaim.  The counterclaim was for an amount estimated on the pleadings at $74.4 million, three times the amount of the plaintiff’s claim.

12.  In these circumstances the following principles mentioned in §22 of Ai Zhong were particularly pertinent:

- At §22(c): “Application should also be refused when the cost[s] incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.”

- At §22(e): “It is pertinent to ask whether in the particular case the counterclaim is a cross‑action or operates as a defence, that is to say merely operates as a defence.”

- At §22(f): “In determining the question in (e), the most important factor to consider is whether ‘the claim by the plaintiffs and the cross‑claim by the defendants — raise essentially the same issues and are going to be fully litigated anyway so far as one can tell’.”

- At §22(g): “In determining the question in (e), the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross claim is also a relevant factor.”

- At §22(h): “A defendant should not be required to give security for costs if he is only defending himself from the plaintiff’s claim.”

13.  The present case was not unlike the situations in Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149; Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Incorporated (HCA 994/2003, 25 October 2004) and B J Crabtree (Insulation) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43, where a plaintiff’s claim for unpaid price or fees for goods or services supplied were met by the defendant’s counterclaim for damages for allegedly defective performance of the contract by the plaintiff and reliance on that counterclaim for the defence of set‑off.  In these cases the courts refused to order security, taking into account all the circumstances including in particular the fact that the action and the counterclaim raised essentially the same issues and were going to be fully litigated anyway so far as one could tell.

14.  The independent vitality of the counterclaim in this case could in my view be seen from the nature of the claim and counterclaim.  The plaintiff’s claim is straightforward, being one for the price of goods sold and/or fees for services supplied.  By contrast, the defendant raised various allegations of defects and breaches of contract in its counterclaim which would probably require much factual and expert evidence to resolve.  The fact that the defendant’s detailed case was pleaded in the defence and repeated by reference for the counterclaim was a mere matter of form — the reverse could have been adopted with equivalent effect.  Such a counterclaim was really a cross‑claim and only gave rise to a defence if the conditions for equitable set‑off were satisfied, which could not, on the limited materials I have seen, be assumed.  It seems to me, for example, whether a cross‑claim by the defendant relating to the TKO 125 site may be relied upon as a set‑off against the plaintiff’s claim arising from the KT site may well be open to debate.  There was, in addition, the fact that the counterclaim was treble the amount of the plaintiff’s claim.

15.  The defendant said that it had no intention to bring a claim against the plaintiff and would not have done so had the plaintiff not sued the defendant first.  Whilst self‑serving, I would be prepared to accept this statement for present purposes, but it was in my view not determinative, albeit a relevant factor.  The fact that the plaintiff started the action first did not necessarily mean the defendant was not equally an attacker.  As I have already noted, the defendant had not limited itself to a set‑off, but sought on its counterclaim a much larger sum of damages (as estimated) than the amount the plaintiff claims in the action.  By raising and maintaining the counterclaim, the defendant was clearly seeking to prove the plaintiff had done it a wrong and pursuing the prospects of recovery of very substantial damages from the plaintiff.

16.  Mr Paul Leung tried to make a virtue out of the defendant’s own dilatoriness in the course of this action to contend that it was not an attacker.  I would not place much weight on this, nor was I impressed at all with the defendant’s failure to prosecute its summons for security with diligence.  The fact is that after the evidence in reply on the summons was filed in July 2019, the proceedings had become inactive for over a year.  I cannot speculate the reasons behind this or the alleged “inaction” on the part of the defendant.

17.  The defendant also offered, in counsel’s skeleton submissions (but not before), an undertaking that in the event that the plaintiff was ordered to pay security and fails to do so within the time limit set by the court (as extended, if applicable), the defendant would withdraw its counterclaim in its entirety.  Such an undertaking may be significant in a case where it appears an order for security will stifle the action, and may be offered to counter the principle in Ai Zhong at §22(b), namely:

“ Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim.”

But here the evidence from the plaintiff is that it is a solid company involved in numerous projects in Hong Kong from which it continues to derive substantial income.  The defendant had not disputed this and in fact relied on it to contend that an order for security would not stifle the action.

18.  In Apex Engineering & Contracting Ltd v Hong Kong Switchgear Ltd (HCA 1188/2010, 20 November 2012), DHCJ Woo stated (at §23):

“ … if the defendant only agrees to his counterclaim that exceeds his defence to be stayed in case the plaintiff’s claim is stayed by reason of the latter’s failure to comply with the order for security for costs, which means that the conditionally stayed counterclaim can or will be revived upon the plaintiff’s compliance with the order and the defendant in such an event is allowed to pursue his counterclaim against the plaintiff, it will offend the rule that the court will not order security in favour of an attacking defendant. The situation would be very different if the defendant agrees to drop his counterclaim altogether and only maintains his set‑off as a defence. In such a case, the rule of protecting a defendant from an impecunious plaintiff in defending the claim instead of assisting the defendant to recoup costs for pursuing his own claim (by way of a counterclaim or an independent claim separate from the action he faces) will not be traversed.”

19.  Responding to a similar undertaking offered in the case of Hong Kong Zhixin Financial News Agency Ltd v China Maple Leaf Educational Systems Ltd [2019] HKCFI 2921, K Yeung J said (at §37):

“ … the Undertaking will only bite if (1) P is ordered to give security, (2) P fails to put up the security ordered, and (3) P’s claim is stayed or dismissed as a result. But if P is ordered to put up security but is able to do so, both the claim and the counterclaim will proceed. I agree with Mr Li that it will be unfair in that scenario to order only P to put up security when D is ‘at least as much also an attacker or plaintiff’ which has raised issues common to those framed by the RASoC and beyond.”

20.  In the same vein, in Mau I Business Centre Ltd v Tenford Holdings Ltd (DCCJ 731/2008, 26 August 2008), where a similar undertaking was offered by the defendant for the purpose of its application for security for costs, DDJ Richard Khaw said (at §29):

“ … given the conditional undertaking offered by the Defendant, the court still has to decide, as a matter of principle, if discretion should be exercised in favour of ordering security for costs. It is because the court is required to take into account the effect of the Defendant’s counterclaim (which still exists) and cannot second‑guess whether the Plaintiff will comply with an order for security, if granted. Hence, I am of the view that this conditional undertaking does not take the Defendant’s case any further in this application.”

21.  The same reasoning was in my view apposite here.  I did not think therefore that the undertaking offered in the defendant’s skeleton tilted the balance in its favour.

22.  The present case is quite different from that in Autoweld Systems Ltd v Kito Enterprises LLC [2010] EWCA Civ 1469.  That was a case where the defendant was at “very serious risk” of not recovering any damages on their counterclaim even if it was established; and there might well be no continuing litigation if the claimant’s claim were to be dismissed in default of security for costs being provided (see §§59-60); cf. Key Success (Asia) Ltd v Cheung Kong Machinery (HK) Ltd [2020] HKDC 591, §§28‑37. By contrast, I was not satisfied based on the existing materials that in running its counterclaim here the defendant was merely “going through the motions” without any real hope of recovery even if it succeeded.

23.  Taking account of all the matters originally advanced on the defendant’s behalf, I would nevertheless have come to the conclusion that security should not be ordered.

The new position

24.  In the course of his submissions at the hearing, however, Mr Paul Leung surprisingly said, after some vacillation, that the defendant would unconditionally abandon its counterclaim and would only rely on the substantive pleaded allegations for the purpose of its defence.  This, as explained by DHCJ Woo in Apex Engineering, fundamentally changed the picture, so that the defendant can no longer be said to be mounting any attack beyond merely defending itself from the plaintiff’s claim.  What the defendant will henceforth be seeking in the proceedings is merely an order that the plaintiff’s action be dismissed with costs.

25.  It is most unsatisfactory that the defendant had failed to indicate its true position until during the hearing.  Its conduct smacks of a tactical manoeuvre made in the light of comments from the court.  Nevertheless, the plaintiff did not oppose that abandonment.  As Mr Adrian Leung recognised, with the defendant’s new concession, much of his argument fell away.

26.  In the light of the abandonment of the counterclaim, I considered that an order for security would be just, and ordered the plaintiff to give security for the defendant’s costs up to and including the stage of witness statements and expert reports.  In assessing the quantum of security, I considered that much of the past costs should be excluded, both because of the defendant’s delay in prosecuting its own application and because the counterclaim was only abandoned at the hearing.  On that basis, on a broad‑brush approach I ordered security in the amount of $600,000.

27.  I also directed that the defendant file a summons for leave to amend its defence and counterclaim to reflect the abandonment of the counterclaim.

28.  As to the costs of the application, as stated above, but for the abandonment of the counterclaim, the defendant’s application would have failed.  The abandonment was only offered at the very last minute, after virtually all the costs had been incurred.  I consider it just that in these exceptional circumstances, the defendant should be ordered to pay forthwith the costs of the application including the costs of the hearing, to be taxed if not agreed.