CHING LEE ENGINEERING LTD v. EMT CONSTRUCTION CO LTD AND ANOTHER

HCA 1488/2019

[2021] HKCFI 1517

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1488 OF 2019

________________________

________________________

____________________

DECISION

____________________

1.  On 24 June 2020, Master Kenneth KH Lee (“the Master”) refused to allow the plaintiff (“P”) application (“the Order 14 application”) for a summary judgment on a part of P’s claim against the 1^st and the 2^nd defendants (“D1” and “D2”, collectively “Ds”). The Master granted unconditional leave to defend to Ds and ordered that costs of the Order 14 application be in the cause.

2.  On 7 July 2020, P lodged an appeal against the Master’s decision.  P is seeking an order to set aside the Master’s decision and an order allowing the Order 14 application.

3.  By a letter dated 4 May 2021, Ds notify this court and P that they will cross-appeal the costs order made by the Master.[1]  Ds are seeking an order that costs here and below should be paid by P on an indemnity basis.

Background

4.  The background has been succinctly summarized by the Master in his written decision dated 24 June 2020 (“the Decision”)[2], in which he said:

 “1.  This is the application of the plaintiff for final partial judgment against both the 1^st defendant and the 2^nd defendant (collectively “defendants”) in the sum of HK$1 million.  The application is premised on a loan agreement (“Loan Agreement”) and a deed of guarantee (“Deed of Guarantee”) both dated 21 June 2018.  The total claim by the plaintiff against the 1^st defendant amounts to HK$3,486,864.60 (including the aforesaid HK$1 million).

……

3.The following facts are not or not seriously in dispute:

3.1  In 2017, the plaintiff (as main contractor) and the defendant (as sub-contractor) entered into four contracts (“Contracts”) for the construction works for a residential development at Hing Fong Road, Kwai Chung (“Project”).

3.2  The 2^nd defendant signed the Load Agreement (on behalf of the 1^st defendant) and the Deed of Guarantee.

3.3  The Loan Agreement was for a loan of HK$1 million to the 1^st defendant for the purpose of the 1^st defendant discharging its obligation to pay wages to its workers in respect of the Project.

3.4  The Deed of Guarantee was for the 2^nd defendant to guarantee the performance of the 1^st defendant’s legal obligations under the Loan Agreement.

3.5  There was no repayment by the 1^st defendant of the HK$1 million pursuant to the terms of the Loan Agreement before the due date, viz. 20 December 2018.

3.6  There was no repayment by the 2^nd defendant pursuant to the terms of the Deed of Guarantee.

4.It is in respect of this outstanding HK$1 million which the plaintiff sought summary judgment against the 1^st defendant (as debtor) and the 2^nd defendant (as guarantor).  On the other hand, the plaintiff has not applied for summary judgment for the rest of it claim (viz. HK$2,486,864.60) (“Residual Sum”) in this application.

Defence

5.The defendants relies on the following defences: -

5.1  duress, undue influence and breach of Unconscionable Contracts Ordinance (Cap. 458) on the part of the plaintiff when the Loan Agreement and Deed of Guarantee were entered into; and

5.2  set-off.”

5.  The matters set out in those paragraphs in the Decision are uncontroversial.

P’s appeal

6.  An appeal hearing under Order 58 is a de novo hearing.  Subject to the restriction in Order 58 rule 1(5), the hearing before me is an actual rehearing as if the application came before me for the first time[3].

7.  For the purpose of the appeal, Ds focus on the defence of set-off.

8.  In Karpex (HK) Ltd v Yasmine Printing (China) Ltd[4], Cheung JA said:

“9. Set-off is a well-recognized defence (Order 18 Rule 17). It is not the form of pleading, but the true nature of what is pleaded, that determines whether what is pleaded is or is not a set-off : Hanak v. Green [1958] 2 Q.B. 9 at 26.

10. It is important to bear in mind the nature of a set-off. The position is summarised in BICC Plc v. Burndy Corp [1985] 1 All ER 417 at 424-425:

(1) The first is set-off at law, or legal set-off as it is sometimes called, of mutual debts under the Statutes of Set-off, where the claims on both sides have to be liquidated debts or money demands which can be ascertained with certainty at the time of pleading......

(2) The second form of set-off arose as explained by Parke B in Mondel v Steel (1841) 8 M & W 858, [1835-42] All ER Rep 511 and was a development of the common law: where an action was brought for an agreed price of a specific chattel sold with a warranty or a work which was to be performed according to contract, the defendant was allowed to plead by way of defence in reduction of the claim that the chattel, by reason of non-compliance with the warranty, or the work in consequence of the non-performance of the contract, was diminished in value.

(3) The third form of set-off, often referred to as equitable set-off, arose in cases in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff’s claims; these were particularly cases where the cross-claim was related to the subject matter of the claim and there were factors which would have rendered it unjust in the eyes of equity that the claim should be enforced without regard to the cross-claim.

For ease of reading, I have numbered the three types of set-off.”

9.  As to the defence of set-off, the Master said the following in the Decision:

“7. The plaintiff’s case on the construction work related claim for the Project was summarised in its Statement of Claim as follows: -

Description	Amount in HK$
Omission works for the 1st Contract	575,481.60
Omission works for the 2nd Contract	88,400.00
Omission works for the 3rd Contract	358,900.00
Sums paid by the Plaintiff to the 1st Defendant by virtue of Interim Payment Certification Nos.1 to 19	8,844,000.00
The Loan	1,000,000.00
The Advanced Sum	1,864,840.00
Payment to the Labour Department	962,025.00
Other expenses	664,150.00
Less:-
1st Contract Sum	(8,827,799.00)
2nd Contract Sum	(88,400.00)
3rd Contract Sum	(370,000.00)
4th Contract Sum	(200,000.00)
Variation Orders	(1,384,733.00)
Total:	3,486,864.60

8.  As can be seen from the above table, the subject HK$1 million is a component in the plaintiff’s calculation.

9.  Many of the items in the table are however disputed by the defendants in their Defence: -

9.1  “Omission works” are denied.  The defendants deny having in any way omitted and/or failed to perform various works under the relevant Contracts.  It is further alleged by the defendants that if the plaintiff has suffered damages for wages to complete works and/or was forced to engage third parties to complete those works, those losses were induced by the plaintiff’s own acts when it forbade the employees, agents, and/or workers of the 1^st defendant from entering the construction site to finish the relevant work.

9.2  The total amount under the “Variation Orders” is disputed.  According to the defendants, the sum entitled by the defendant should be HK$3,241,708.00, instead of the HK$1,384,733.00 alleged by the plaintiff.  I must confess I had some difficulty following the respective cases of the parties under this head.  In their respective lists of variation orders, there seems to be different amounts pleaded by the respective parties regarding the same variation orders.  Further, it is not entirely clear whether any money, and if so how much, has been received by the 1^st defendant under this head.

9.3  The “Advance Sum” is denied.

9.4  The “Payment to the Labour Department” is denied.

10.  According to the 1^st defendant, the relevant calculation should instead be as follows: -

	Amount in HK$
Contract 1	8,827,799.00
Contract 2	88,400.00
Contract 3	370,000.00
Contract 4	200,000.00
Variation Orders	3,241,708.00
Less amount paid	(8,884,000.00)
Outstanding Amount	3,843,907.00

11.  The 1^st defendant therefore counterclaims for HK$3,843,907.00

12.  This is of course not the avenue to decide which of the above calculations is correct.  Further, apart from the HK$1 million under the Loan Agreement and Deed of Guarantee, it is not the plaintiff’s case that the said set-off defence in respect of the Residual Sum is unarguable.  The liability for the HK$1 million cannot be decided in isolation of the defendant’s case on the other disputed sums.

13.  In the circumstances, I find the set-off defence to be arguable in respect of the 1^st defendant.

14.  I find that the 2^nd defendant can also rely on the same defence. This is because if a principal debtor has a cross-claim against the creditor which is available as a set-off against the debt, the creditor should not be able to avoid the set-off by proceeding against a guarantor: see Derham on the Law of Set-Off (4^th ed.) at §§18.01-18.07.

15.  Further, although the Deed of Guarantee provided that the 2^nd defendant “shall be liable as a principal debtor”, such a “principal debtor clause” would usually only reinforce the guarantor’s claim to rely on the debtor’s set-off because the guarantor’s legal position is to be treated as if he were the principal debtor: see The Modern Contract of Guarantee (2^nd Ed.) at §11-82.

16.  The above principles are not disputed by the plaintiff.”

10.  Having examined the pleadings, the evidence and the submissions made by the parties and having considered the matter as if the same came before me for the first time, I am of the view that the Master is correct and I endorse his ruling that the defence of set-off is an arguable defence to P’s claim for the loan of HK$1 million.

11.  I am of the following view:

(1)   Both the HK$1 million claimed by P and the HK$3,843,907 counterclaimed by D1 are liquidated money demands.  D1 may rely upon legal set-off as a defence to P’s claim for the HK$1 million.

(2)   The purpose of having the Loan Agreement is to enable D1 to discharge its obligation to pay wages to its workers in respect of the Project.  According to D1, P’s failure to pay the sums due to D1 under the 4 Contracts and the Variation Orders is the cause of D1’s inability to pay wages to its workers.  Arguably, P’s claim under the Loan Agreement and D1’s counterclaim pursuant to the 4 Contracts and the Variation Orders are connected with each other, and allowing P to enforce the Loan Agreement without regard to D1’s claim under the 4 Contracts and the Variation Orders would be regarded as unjust.  D1 may rely upon the equitable set-off as a defence to P’s claim.

(3)   With respect to D2, I agree with the analysis said by the Master in [14] and [15] of the Decision. 

12.  Mr Kevin Hon for P submits that Ds have failed to adduce evidence to show an arguable defence and failed to condescend upon particulars.  With respect, I am unable to accept this submission.

(1)   According to the table in [38] of the Statement of Claim (“P’s Table”, which has been reproduced by the Master in [7] of the Decision), the total of the sums payable by P to D1 would be HK$10,870,932.

(2)   The total of the sums which have already been paid to D1 is HK$8,844,000.

(3)   The “Omission works”, the “Advanced Sum”, the “Payment to the Labour Department” are denied by Ds, and the “Other expenses” are not admitted by Ds.  There is no dispute that in relation to these items, there are triable issues.  In the event that P is unsuccessful in claiming these amounts at the trial, based upon the figures in P’s Table which are not in dispute, the amount due from P to D1 would be more than HK$1 million.

(4)   By reason of the aforesaid, in relation to P’s claim for the loan of HK$1 million, clearly Ds have shown an arguable case by relying upon the defence of set-off.

13.  Mr Simon So for Ds submits that P is well aware of the fact that in relation to P’s claim for the loan of HK$1 million, Ds are entitled to both legal and equitable set-off.  I agree.

(1)   P accepts that it has entered into the 4 Contracts with D1. D1 is entitled to the contract price of these 4 Contracts, and P has not paid D1 the contract price of under these 4 Contracts and the Variation Orders.[5]

(2)   P acknowledged that the Loan Agreement and the Deed of Guarantee were for the purpose of settling the wages and out-of-pocket expenses of D1 in performance of the 4 Contracts.[6] 

(3)   Further, P has expressly in its pleading admitted that the contract price of the 4 Contracts could be set-off against the Loan of HK$ 1 million.  See P’s Table.

14.  I hold that P knew that Ds would be able to rely upon set-off as a defence to its claim before P making the Order 14 application.  In these circumstances, in my view, the proper order should be an order dismissing the Order 14 application, not an order granting unconditional leave to defend to Ds.[7] Although there is no formal notice seeking an order dismissing the Order 14 application, I may still make that order.[8]

15.  I would dismiss P’s appeal, and at the same time order that the Order 14 application be dismissed.

Ds’ cross-appeal

16.  In my view, there is no merit in the Order 14 application.  Costs here and below must be paid by P to Ds forthwith.

17.  In Global Marketing Enterprise (GME) Ltd & Anor v Blue Box Int’l Ltd [9], DHCJ Le Pichon dismissed a summons for summary judgment and awarded costs on an indemnity basis. The Learned Judge said:

“18. An application for summary judgment should only be brought in appropriate cases. Where it is obvious that there are triable issues arising on the facts, a party ought not resort to and/or pursue a summary judgment application.

……

20. It is abundantly clear from the Decision that the present case was not one that was suitable for summary judgment. That the plaintiffs felt aggrieved, their grievance could be ventilated and resolved at trial but that is not sufficient reason to warrant the making of a summary judgment application.

21. For the reasons stated above, the court should mark its disapproval by an award of costs on an indemnity basis. Considerable judicial resources have been needlessly taken up by an unwarranted application when they could have been otherwise usefully deployed for other litigants.” (Emphasis added)

18.  I have said that there is no merit in Order 14 application and P knew that Ds have an arguable defence to its claim before making the application.  In these circumstances, Ds’ application for indemnity costs is justified.

19.  I would allow Ds’ cross-appeal.

Disposition

20.  I dismiss P’s appeal.  I order that the Order 14 application be dismissed.  This order should replace the Master’s order granting unconditional leave to defend to Ds.

21.  I allow Ds’ cross-appeal.  Costs of the appeal and costs of the O14 application in the court below be paid by P to Ds forthwith on an indemnity basis and those costs be summarily assessed.  There be leave to Ds to file and serve a bill of costs for summary assessment within 7 days, and leave to P to file and serve a written reply to the said bill within 7 days thereafter.

22.  I thank counsel for the assistance rendered to the court.