MARCUS PRAETORIUS AND OTHERS v. HEAD ARCHITECTURE AND DESIGN LTD

HCA 1057/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1057 of 2013

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REASONS FOR DECISION

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1.  This is an appeal by Ceratec International (HK) Ltd, the 3^rd plaintiff (hereinafter called “International”) from an order dated 26 October 2015 (“the order”) requiring International and Ceratec Holdings Ltd the 4^th plaintiff (hereinafter called “Holdings”) to provide $700,000 by way of security for the costs (up to the stage of discovery) to Head Architecture and Design Ltd (“the 1^st defendant”) within 28 days. There is no appeal by Holdings. The amount of security ordered has been paid. At the conclusion of the hearing the appeal was dismissed. The reasons are set out below.

Background facts

2.  The underlying proceedings arise under a contract dated 13 December 2006 made between International and the 1^st defendant (“the Design Contract”) for the design and fitting out of the house and garden including a proposed swimming pool and associated structures covering Lot 762, Lot 131 and Lot 131 (Section A) (collectively “the site”),.

3.  At the time of the Design Contract the 1^st plaintiff was the registered owner of the site.  The house and garden situate on the site are occupied by the 1^st plaintiff and his wife (the 2^nd plaintiff) as their home.

4.  On 10 October 2008, the 1^st plaintiff assigned the site to Holdings for a nominal sum.  It was not an arm’s length transaction.  At that time the 1^st plaintiff owned 50% of Holdings but became its sole owner from 22 March 2011.

5.  The action against the 1^st defendant is an action in contract and in tort for negligent professional services and advice.  It is alleged that the 1^st defendant carried out part of the work under the Design Contract by way of services provided by the 2^nd defendant whether as the 1^st defendant’s servant, agent or domestic sub‑consultant and that the 1^st defendant is liable directly or vicariously for the latter’s acts and omissions.

6.  It is alleged that the 2^nd defendant provided negligent advice in that International was advised that no consent was required from the Buildings Department for building the swimming pool and associated structures on the site.  However, on 9 October 2008, the Buildings Department issued a notice to the 1^st plaintiff requiring unauthorised building works (principally the swimming pool and associated structures) to be demolished.

7.  Following the assignment to Holdings on 10 October 2008, the Buildings Department issued a superseding order on Holdings on 29 December 2008. The plaintiffs seek damages in excess of $12 million.

8.  The 1^st defendant denies liability on the basis that (1) the 2^nd defendant was an independent consultant; (2) the plaintiffs did not rely on advice from the 1^st defendant; (3) advice on the need for Buildings Department consent was outside the scope of the 1^st defendant’s services; and (4) it did not give any such advice in any event.

9.  The master ordered that security in the sum of $700,000 be provided by International and Holdings within 28 days, that proceedings be stayed pending payment and if such security was not provided as ordered, the action be dismissed.

10.  International brings this appeal on the several grounds considered below.

Whether liability under the order was joint and several

11.  International submitted that as the order did not expressly provide for joint and several liability the correct construction must be that each of International and Holdings be responsible for putting up security in the sum of $350,000.  Mr Cohen, counsel for International, did not appear at the hearing below but on instructions he advised the court that the master was asked at the time to clarify what the split was but the master apparently did not respond.

12.  The 1^st defendant’s counsel Mr Cheuk (who was at that hearing) disagreed: he had no recollection of the question being posed.  In any case he submitted that if International did ask about it being a split order, the fact that the master did not respond must mean that it was not intended to be a split order.

13.  Leaving aside the competing versions, in determining the proper construction of the order, the court can only look at its terms against the relevant factual context.

14.  Mr Cohen drew attention to the fact that the order provided not only that pending payment of the security ordered, all further proceedings be stayed but also that if such security was not provided “the action be dismissed”.  He submitted that if the order is read as a joint and several order and either the 3^rd and/or 4^th defendant were to fail to make the requisite payment, then under its terms, the entire action falls to be dismissed.

15.  He submitted that the order must be fundamentally flawed as there can be no basis for staying the action brought by the 1^st and 2^nd plaintiffs who are not parties to the summons, in circumstances where it is the 1^st defendant’s pleaded case that the legal assignment by the 1^st plaintiff of his cause of action to Holdings was not effective in law.

16.  While normally one would expect an order to affect only the parties to the application culminating in the order, if circumstances so warrant, I am not aware of rule that would prevent an order being made that would have a broader effect.

17.  The pleadings show that Holdings is and has since 10 October 2008 been the registered owner of the site and that on 27 May 2013 the 1^st plaintiff assigned to Holdings all rights of action, damages and other claims he had against inter alia the 1^st defendant arising out of or otherwise in connection with the unauthorized building works affecting the site: see §§28 and 31 of the statement of claim.

18.  In those circumstances it is clear that the 1^st plaintiff has not only divested himself of title to the site but also all rights of action in connection with the unauthorised works on the site.  Therefore Holdings is the only party to be adversely affected by the demolition order.  It would follow that neither the 1^st plaintiff nor the 2^nd plaintiff his wife has any cause of action against the 1^st defendant and cannot show damage.

19.  The 1^st defendant submitted that had joint and several liability not been contemplated, the order would have gone on to provide that if either the International or Holdings failed to pay its share, proceedings be stayed only as against the non‑paying party.  It did not.

20.  Reading the order as a whole and against the pleaded factual matrix, I am unable to accept the construction advanced by International.  The order was clearly intended to take effect as a joint and several order.

Whether credible evidence of the 3^rd plaintiff’s inability to pay

21.  When security for costs is sought against a company, the defendant needs to establish by credible evidence that there is reason to believe that the plaintiff company will not (as opposed to may not) be able to pay the costs of the defendant: section 905 of the Companies Ordinance.  The issue raised is whether the 1^st defendant’s evidence on International’s inability to pay met the test.

22.  What the evidence in support shows are the following circumstances: International is a BVI company with a nominal paid‑up capital; it has a business registration certificate that states its business as “trading”; a web search did not produce any information about International; it does not appear to have a website although it allegedly “trades”; the web search revealed the website of a company named “Ceratec (Hong Kong) Ltd” that is not a party to these proceedings but whose address appears to be the same as International’s. In any event there is nothing at that web address that shows International as being somehow related or associated with it.

23.  The 1^st defendant’s solicitor went on to state in her supporting affirmation that she had been informed by a director of the 1^st defendant that the latter was not aware that International had a place of business or engages in any business activities in Hong Kong nor was he aware of any substantial property owned by International.

24.  Mr Cohen was particularly critical of the allegations made in the preceding paragraph when the steps Mr Atkin (the 1^st defendant’s director) had taken that led him to form his belief had not been identified.  He asked rhetorically, had an investigator visited the registered office or were enquiries made of the plaintiffs?  He submitted that the supporting evidence did not pass the threshold test to shift the evidential burden to International.

25.  In that connection, it is relevant to state that by letter dated 24 November 2014 the 1^st defendant’s solicitors (after outlining the sparse information publicly available that they were able to find relating to International) expressed concern that they had found “no information indicating any assets and operations of [International]” and requested the provision of security “[s]ubject to any evidence proving the contrary”.

26.  International’s solicitors reply dated 29 December 2014 adopted the stance that the burden was on the 1^st defendant to produce credible testimony.

27.  The burden on the 1^st defendant is to make out a prima facie case of inability to pay.  What would suffice would depend on the circumstances of each case.  While each of the circumstances in the present case looked at individually and of itself may not be sufficient, collectively viewed they may well pass the threshold test.

28.  Where a company professes to trade but information regarding its activities is not readily available, that is a matter that obviously gives rise to concern as to whether it is a company of substance and genuinely engaged in trading.  In the present case given the circumstances referred to, I have no difficulty in reaching the conclusion that the threshold test has been met and therefore the evidential burden shifted to International but it has not seen fit to provide evidence in that regard.

Whether sanctioned payments a relevant consideration

29.  This involves a matter of principle.

30.  Citing Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609 and the Court of Appeal decision in KJM Industries Ltd v JPM Resources Ltd [2005] 4 HKC 100 Mr Cohen submitted that a sanctioned payment is a relevant consideration and must be taken into account and that this court is bound by authority to do so.

31.  Parkinson concerned an application for security for costs against the plaintiff by a defendant who had made an open offer intended to be “the equivalent of a payment into court in High Court proceedings” with a corresponding effect on the plaintiff’s liability for costs should an award be made in plaintiff’s favour below the figure mentioned. 

32.  The reasoning of Lord Denning appears at 627B:

“I am quite clear that a payment into court, or an open offer, is a matter which the court can take into account. It goes to show that there is substance in the claim: and that it would not be right to deprive the company of it by insisting on security for costs.” (emphasis added)

33.  Earlier in his judgment when listing the relevant circumstances to be taken into consideration Lord Denning observed (at 626G) that:

“If there was a payment into court of a substantial sum of money (not merely a payment into court to get rid of a nuisance claim), that, too, would count.”

34.  Cairns LJ approach was different.  In that case the amount of the security involved was £1500 (that being the amount the master had awarded and which the judge thought was a proper sum), a figure that Cairns’ LJ accepted (at 628A).  He considered that if on the information that the court had before it the right conclusion was that the amount recoverable would be likely to be more than that sum (ie £1500), no award of the security should be made because to that extent the party applying for security has in effect got security: (at628C‑D).

35.  I do not consider that Parkinson lays down any firm rule that on an application for security for costs, in every case where there has been a payment‑in, the court must take that payment‑in into consideration.  While I agree that the court could take it into account, it is not mandatory.  It would depend on all the circumstances of the particular case.  Even Lord Denning recognised that where the amount paid in was a nominal amount to get rid of a nuisance claim it could be disregarded.

36.  It should be noted that the question whether it is permissible to disclose a payment‑in did not arise in Parkinson since the offer made was an open offer.

37.  As regards the KJM Industries, in my view, holding (1) of the headnote accurately summarises what the Court of Appeal decided and is no different from Lord Denning’s approach in Parkinson:

“(1) If a defendant admitted so much of the claim as would be equal to the amount for which security would have been ordered, the court might refuse him security, for he could secure himself by paying the admitted amount into court. A payment into court, or an open offer, was a matter which the court could take into account. It went to show that there was substance in the claim and that it would not be right to deprive the plaintiff of it by insisting on security for costs…” (emphasis added)

38.  In that case, the defendant who had applied for security for costs had no defence as regards approximately US$118 million in a claim of approximately US$451 million for goods sold and delivered.  The amount of security the judge ordered was only HK$460,000.  It was in that context that the Court of Appeal took into account the payment‑in taken when considering whether security should be ordered.

39.  But the question whether it is permissible to disclose a payment‑in is a different matter and was not directly addressed by the court in either Parkinson or KJM Industries.  The focus of those cases was whether it was a consideration that could be taken into account.  However the question posed did arise in Tse Tsz Chong v Law Sze Man [2015] 1 HKLRD 1120 where the Court of Appeal (differently constituted) had to consider the question whether it was permissible to disclose a sanctioned payment in an application for interim payment that involved both liability and quantum.  

40.  The court held (at §12) that:

“the disclosure of a sanctioned payment in interlocutory proceedings is permissible if such disclosure will not cause embarrassment to the court or unfair prejudice to a party in the determination of the interlocutory issue in question. Hence, much depends on the purpose of the disclosure and the relevance of such disclosure to the issues that the court needs to decide in the context of that application.”

41.  On the facts of that case, the court considered that the reference to a sanctioned payment was irrelevant in an application for an interim payment as it has no bearing on the proper assessment of quantum.  Earlier in the judgment of the court (at §15) delivered by Lam VP, the court had opined that it would be wrong to equate such payment with the defendant’s assessment of the worth of the claim..  An additional reason given (at §16) was that it would be unfairly prejudicial and would infringe the spirit of the sanctioned payment regime that was to provide a mechanism to foster settlement without prejudicing the contest of the issues in the litigation process which the court considered was similar to “without prejudice negotiations”. It is trite law the “without prejudice” matters cannot be disclosed.

42.  I do not read Tse Tsz Chong as authority that a sanctioned payment is a circumstance that can never be disclosed in an application for security for costs.  It must depend on whether it would cause embarrassment to the court or be unfairly prejudicial and in that context it would be legitimate to take note of the objectives of the CJR and the general trend towards fostering the settlement of disputes. So, the instances when it would be permissible to disclose a sanctioned payment would be relatively rare.

43.  In my view, as a general rule, a sanctioned payment should not be disclosed save where there is an admission of liability as in KJM Industries but it will be for the party making the disclosure to justify such disclosure.  Even then, it is a matter for the court to decide whether it is a relevant circumstance to be taken into consideration.

44.  It was said that the sanctioned payment of HK$1 million in the present case was clearly not a nominal amount intended to get rid of a nuisance claim and therefore has to be taken into account.  Whether an amount is nominal or whether it shows that the plaintiff’s claim will depend on the particular circumstances.  

45.  In the present case, no part of that claim is admitted: contrast KJM Industries.  In this connection, it would be wrong to equate the amount of payment in by a party with admission of up to that amount of the claim.  As Lam VP stated in Tse Tsz Chong v Law Sze Man [2015] 1 HKLRD 1120 (at §15):

“there could be many reasons behind the making of a sanctioned payment at a particular level. It is speculative to draw an equal sign between the amount of a sanctioned payment and a fair assessment of the worth of a claim.”

46.  International complains that the master erred in making the order for security for costs.  As the master’s reasons for ordering security are not known, it is impossible to say whether or not the sanctioned payment was a circumstance that was taken into account.

47.  For my part, applying the principles set out in Tse Tsz Chong, I do not consider that the sanctioned payment made in the present case should have been disclosed.  It would be different if there was an admission of liability as such on the part of the 1^st defendant of an amount that would overtop the amount of security that otherwise would have been ordered as in KJM Industries.

48.  Even if, contrary to my view, it were permissible to disclose the sanctioned payment, I do not consider it a circumstance that the court is bound to take into account.  Turning to the present case, as the court intimated at the hearing, this is one of those cases where it is impossible to come to any prima facie view on the plaintiffs’ prospects of success.  Much will depend on viva voce evidence and as to whose evidence is ultimately accepted, what obligations arose under the Design Contract and whether they were varied by the e‑mail correspondence pleaded as well as the question whether the 2^nd defendant was an independent contractor.

49.  In the context of a claim in excess of $12 million, a sanctioned payment of $1 million does not of itself imply recognition of a strong claim or a claim of substance or that International is bound to recover at least $1 million.  There may be a host of other considerations such as professional time and resources to be invested in litigation that are better deployed elsewhere, particularly where litigation is likely to last for several years.  Business and professional considerations may dictate or contribute to the level of the sanctioned payment.  I cannot see that on the facts of this case it has any practical relevance.

50.  The question was put to Mr Cohen as to how that circumstance if taken into consideration would affect the exercise of the court’s discretion.  All that was said was that would go into the basket of considerations in the weighing exercise.  I hasten to emphasize again that it would be quite wrong to equate the amount paid in with the worth of International’s claim.  If it is a circumstance to be taken into consideration in the present case, it would make no difference to the outcome.  Its impact (if any) on the ultimate decision is at best negligible and is certainly not a matter that would tip the balance.

51.  For those reasons the appeal was dismissed with costs which were summarily assessed at the hearing.