SECAN LTD. v. HSIN YIEH ARCHITECTS & ASSOCIATES LTD.

CACV 4062/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 4062 OF 2001

(ON APPEAL FROM HCCT NO. 69 OF 2001)

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J U D G M E N T

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Hon Le Pichon JA :

1. This is an appeal from the order dated 24 November 2001 made by Burrell J dismissing the defendant's appeal from the order of Master Lung granting leave to the plaintiff to serve its statement of claim out of time and dismissing the defendant's application to strike out the statement of claim for want of prosecution.

Background facts

2. The plaintiff was the developer of a commercial and residential complex known as South Horizons on Ap Lei Chau Island ("the development"). The defendant was the architect of the development. On 8 May 1993, a flood occurred in the Water Chilling Plant Room B which housed the system to supply flushing water causing damage to electrical equipment located in that room. The plaintiff's insurers instructed loss adjusters to advise on quantum and liability and their report was available by October 1994.

3. In May 1996, the plaintiff brought an action against Associated Consulting Engineers ("ACE"), the consulting engineers of the project, but the writ was not served until almost a year later, in April 1997. The statement of claim was served on 31 May 1997. ACE was a sole proprietorship, being the trading name of Wong Ping Wai. Wong Ping Wai died shortly after the service of the statement of claim and since 16 October 1997, the ACE action has proceeded against his personal representative.

4. On 4 December 1997, the plaintiff obtained a default judgment against Wong's personal representative. In October 1998, Findlay J set aside the default judgment. It is recorded in the judgment handed down on 30 October 1998 that ACE's job was to design a sea water supply and control system and the flushing water distribution system in a water chilling plant room. ACE maintained that it did not breach its obligation and that the reasons for the flood were that -

"(a) the ball float valve intended to shut off the water inflow remained partly open;

(b) an ultrasonic sensor intended to shut off another valve did not work;

(c) the water from the tank discharged directly onto the floor of the room; and

(d) the drainage system of the room was not capable of draining the water at the same rate as it was discharged from the water tank."

(see page 2 of Findlay J's judgment). The loss adjusters' report recorded that between 8 April and 8 May 1993, a "foreign object" in the form of a sliver of wood approximately 8mm long by 2mm diameter plus particles of small gravel and sand entered the flush water tanks and blocked the high pressure balancing port inside the valve, preventing the pilot operation of the main valve. During that period, the workers of "Defoe Construction" and its sub-contractors were still working in Water Chilling Plant B. It was also part of ACE's case that a central control system controlling the sea water pumps was not operational so the pumps or the valves should have been, and were up to 8 May 1993, switched off manually by others who were responsible for this; and further, ACE's design provided for attendance in the room, and if this attendance had been provided, the overflow would have been detected immediately. As regards the drainage arrangements, it was suggested that the responsibility for designing the drainage to cope with any overflow from the tank was not ACE's but the architect's i.e. the defendant in this action. Despite this, neither party to the first action joined the defendant as 3rd party and any attempt to join the defendant has long since been time-barred.

5. ACE filed expert evidence to support its allegations which, if established trial, would exonerate ACE. On that basis, Findlay J found that ACE had a meritorious defence and set aside the default judgment.

6. So far as this action is concerned, the salient dates are the following:

Date	Description
4 May 1999	Generally endorsed writ issued against defendant
10 May 1999	Writ of summons amended
2 May 2000	Service of the amended writ on the defendant
4 May 2000	Expiration of the 12-month period for service of writ
15 May 2000	Acknowledgement of service of amended writ and notice of intention to defend
29 May 2000	Last day for service of statement of claim under Ord. 18 r. 1
18 January 2001	Purported service of draft statement of claim on defendant without leave
8 March 2001	Plaintiff's application to serve statement of claim out of time and defendant's cross summons for dismissal of action for want of prosecution
9 April 2001	Defendant's insurers placed into liquidation
8 May 2001	Both applications were heard and extension of time granted by the Master
9 May 2001	Statement of claim served on the defendant

7. The two issues before the judge were:

(1) whether there had been a delay which was inordinate and inexcusable, and, if so,

(2) whether the delay caused at least a real risk of prejudice to the defendant.

8. The judge first considered a preliminary issue regarding the actual period of delay. The judge found that the period of delay started with the issuance of the writ in May 1999 and ended with the actual service of the statement of claim which was in May 2001, i.e. a period of two years. He further found that the delay was inordinate and inexcusable. There is no cross-appeal against those findings.

9. As to the issue of prejudice, the defendant identified two respects in which there was a real risk of prejudice. First, on 9 April 2001, its insurers became insolvent with the result that the defendant has since had to fund the litigation and any judgment against it itself. Second, it has been severely disadvantaged in defending the claim because the plaintiff has had the benefit of investigating and reviewing the matter for many years whereas the defendant's investigations could only begin some 9 years after the incident. Although the judge considered it to be a borderline case, he rejected the defendant's submissions that the delay had caused a real risk that it had been prejudiced.

This appeal

10. This appeal centred on the two aspects of the issue of prejudice.

Prejudice to the defendant's financial interests

11. The judge accepted that 'prejudice' includes not only prejudice to the defendant's case but also prejudice to the defendant's financial interests such as the loss of insurance. See Antcliffe v Gloucester Health Authority [1992] 1 WLR 1044 at 1050 C-G. In reaching his conclusion that the loss of insurance since April 2001 did not amount to sufficient prejudice to the defendant, the judge considered that there was but a delay of a 10 months since, had the plaintiff served its statement of claim in time, that would have been served by 29 May 2000, and therefore only 10 months before the insurers were placed into liquidation. Thus, in considering the second issue, the judge applied a period that was different from the period of actual delay that he had found under the first issue. Logically, it is difficult to see why a different period should be adopted since the two issues are inter-related. Was the judge correct in so doing?

12. Mr Westbrook SC for the plaintiff submitted that the judge was correct, relying on the following passage in the speech of Lord Diplock in Birkett v James [1978] AC 297 at 323G-H for the proposition that the period allowed by the rules could not be taken into account:

"To justify dismissal of an action for want of prosecution some prejudice to the defendant additional to that inevitably flowing from the plaintiff's tardiness in issuing his writ must be shown to have resulted from his subsequent delay (beyond the period allowed by rules of court) in proceeding promptly with the successive steps in the action. The additional prejudice need not be great compared with that which may have been already caused by the time elapsed before the writ was issued; but it must be more than minimal; and the delay in taking a step in the action if it is to qualify as inordinate as well as prejudicial must exceed the period allowed by rules of court for taking that step."

But that passage has to be juxtaposed against the passage from the earlier part of Lord Diplock's speech (at 322G-H):

"... time elapsed before the issue of a writ within the limitation period cannot of itself constitute inordinate delay however much the defendant may already have been prejudiced by the consequent lack of early notice of the claim against him, the fading recollections of his potential witnesses, their death or their untraceability. To justify dismissal of an action for want of prosecution the delay relied upon must relate to time which the plaintiff allows to lapse unnecessarily after the writ has been issued. A late start makes it the more incumbent upon the plaintiff to proceed with all due speed and a pace which might have been excusable if the action had been started sooner may be inexcusable in the light of the time that has already passed before the writ was issued.

On the need for greater speed when the writ is issued late there is consistency in the judgments of the Court of Appeal ..." (emphasis added)

That last passage makes it abundantly clear that the relevant delay is post writ delay and that in a late start case (which is the present case), there is all the more need for greater speed. The reference (at 323G) to "subsequent delay (beyond the period allowed by rules of court)" in proceeding promptly with the successive steps in the action meant that unless these was a delay beyond the period allowed by the rules of court for taking a particular step creating prejudice additional to that flowing from the late start, the delay could not qualify as being inordinate or inexcusable. That was the threshold that had to be met. But in assessing the overall prejudice to the defendant, it is the post writ delay period which is relevant.

13. In my judgment, the judge below erred in failing to draw this distinction. By treating the 10 months elapsing between the last day for serving the statement of claim under the rules and the liquidation of the insurance company as the relevant period of delay, the judge overlooked the fact that this was a late start case in respect of which there was a greater need for speed after the issuance of the writ. Whilst his approach might well have been correct had this not been a late start case, in the present case, the judge was wrong in evaluating the prejudice or the likely prejudice to the defendant by reference only to the 10-month period. See also Hymer v Mass Transit Railway Corp. [2000] 2 HKLRD 589 at 606J.

14. The loss of insurance is a serious matter for any litigant. It leaves him totally exposed and vulnerable financially. The judge appeared to reach his conclusion that the loss of insurance fell short of prejudicing the defendant on the basis that what might have happened had it been sued earlier was "largely speculative and unsupported by evidence". But it is not entirely clear what kind of evidence the judge had in mind. In fact, it is difficult to conceive of any evidence that could have been adduced since the exercise would necessarily involve a hypothesis of events rather than actual events. The judge was wrong inasmuch as he considered that it was a matter about which the defendant could and should have adduced evidence. Rather, it is really a matter of common sense that once insurers are involved, they would review and evaluate the claim and take appropriate steps to resolve the claim where possible. Furthermore, the strength of any party in negotiations is often affected by its perceived ability to finance litigation. The period (be it 10 or 23 months) was sufficiently long to enable that to be done. The defendant was therefore deprived of the opportunity of having the benefit of that review and any possible settlement that might have ensued. In my judgment, that prejudice is real and not speculative.

Prejudice to the defendant's case

15. As regards this aspect of the case, the judge considered that the issues between the parties were limited to (1) whether the drainage pipes were too small to cope with the inflow and outflow pipes and (2) whether the outflow pipe was defectively designed in that it discharged water directly onto the floor. But what is clear from the loss adjusters' report made shortly after the flooding incident as well as ACE's defence considered by Findlay J when he set aside the default judgment, causation is likely to loom large in any action brought against the defendant. It stands to reason that the defendant would seek to demonstrate that the loss was attributable to factors other than defective design. The issues identified by the judge took no account of the possibility (which is a real possibility) that the flooding was caused by other factors rather than because of any defective design on the part of the defendant. Those defences involve factual matters which the lapse of time may well have rendered it impossible for the defendant to pursue. That is real prejudice.

16. Even if one were to confine the issues to those identified by the judge, the defendant may well be prejudiced by the fact that any claim it might have against third parties in respect of any specialist advice and/or design of the pipes concerned would be time barred. Mr Westbrook SC, counsel for the plaintiff, referred to section 3 of the Civil Liability (Contribution) Ordinance, Cap. 377 which allows for claims to contribution to be made within two years of the judgment against the party making the claim. It was suggested that this provision would enable the defendant to make claims for contribution from other parties once there was a judgment against the defendant in this action. By parity of reasoning, Mr Westbrook also suggested that if this court were to allow the appeal and the plaintiff's action was struck out for want of prosecution, that would not necessarily be the end of proceedings against the defendant, inasmuch as section 3 of Cap. 377 would enable ACE to seek contribution from the defendant once there was a judgment against ACE in the ACE action.

17. In my judgment, those submissions are misconceived. In the first place, I do not see that section 3 of Cap. 377 has any relevance. That provision only enables a party liable for damage suffered by another to seek contribution from 'any other person liable in respect of the same damage'. Assuming that the plaintiff were to prevail in the ACE action and ACE were to be held liable, that fact would not trigger section 3 of Cap. 377 to enable ACE to sue the defendant since the defendant would not be a person 'liable in respect of the same damage' because there would have been no determination of liability between the plaintiff and the defendant in the ACE proceedings. It would be quite remarkable if any action can be brought by ACE against the defendant when it is no longer in a position to join the defendant as a 3rd party to the ACE action. In the second place, Mr Westbrook's submissions could only have been made in ignorance of the real state of affairs as regards the ACE action. The court file revealed that on 18 October 2001, Burrell J made an 'unless' order. Time for compliance expired on 7 November 2001. Suffice to say that there is no indication on the court file that the order has been complied with and the consequence would be that the statement of claim in the ACE action has been struck out. In those circumstances, the prospect of any judgment being obtained by the plaintiff against ACE is wishful thinking and the suggestion that the defendant remains at risk under section 3 of Cap. 377 wholly fanciful, quite apart from the fact that, for the reasons already stated, the defendant would no longer be vulnerable to a section 3 claim.

18. For these reasons, I would allow the appeal. The judgment below is to be set aside and HCA 7274/1999 dismissed for want of prosecution. I would also make an order nisi for costs (here and below) against the plaintiff.

Hon Rogers VP:

19. I agree. There will therefore be an order as proposed.