XCHRX SKK (H.K) CO. LTD. v. IP KIN KEUNG t/a ASIA CONTRACTING CO.

HCCT22/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.22 OF 2001

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D E C I S I O N

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1. In this action a defence should have been served on 4 April 2001. In default, the plaintiff entered a regular judgment on 10 April 2001. By this summons, the defendant seeks to set aside the judgment and defend the action.

2. There is no dispute between the parties as to the legal test to be applied. In Hong Kong, the proper test is as laid down by Sir Roger Ormrod in The Saudi Eagle [1986] 2 Lloyd's Report 221 which is helpfully elaborated upon in the Hong Kong Civil Procedure 2001 in the following terms :

"Discretionary powers of the court - The discretionary power to set aside a default judgment which has been entered regularly is unconditional, and the court should not lay down rigid rules which deprive it of jurisdiction. The purpose of the discretionary power is to avoid the injustice which may be caused if judgment follows automatically on default. The primary consideration in exercising the discretion is whether the defendant has merits to which the court should pay heed, not as a rule of law but as a matter of common sense, since there is no point in setting aside a judgment if the defendant has no defence, and because, if the defendant can show merits, the court will not prima facie desire to let a judgment pass on which there has been no proper adjudication. Also as a matter of common sense the court will take into account the explanation of the defendant as to how the default occurred. ... The Saudi Eagle ... the following propositions may be derived :

(a) It is not sufficient to show a merely 'arguable' defence that would justify leave to defend under O.14; it must both have 'a real prospect of success' and 'carry some degree of conviction'. Thus the court must form a provisional view of the probable outcome of the action.

(b) If proceedings are deliberately ignored this conduct, although not amounting to an estoppel at law, must be considered 'in justice' before exercising the court's discretion to set aside."

3. I regard the word "real" to mean genuine or actual. It is not necessary to demonstrate a likelihood of success but the defendant must show more than a remote chance of winning. The word "success" must encompass partial success. If the defendant has a real prospect of reducing the plaintiff's claim, it would be unjust to deprive him of that opportunity. In such circumstances an order setting aside part of the judgment may be appropriate.

4. The plaintiff was the defendant's sub-contractor carrying out external renovation work at the Matilda Hospital. The plaintiff sub-sub-contracted all the work to "Hon Fung". The defendant has paid invoices totalling $898,052.95. The plaintiff claims $2,390,703.81 remains due and owing. All works have been completed.

5. In outline the defendant says either that the sums are not due or if any sums are due, the claim is premature. It relies on four grounds.

6. Firstly, according to clause II of the agreement (as pleaded in the draft defence), the plaintiff is only entitled to 50% of the contract sum prior to the issuance of the certificate of practical completion, which has not yet been issued.

7. Secondly, clause VI of the agreement states :

"... The actual completed area shall be subject to the final site measurement upon work completion ... The quantity should only be finalized by the agreement of both parties ... For any case of dispute, the qualified Quantitative Surveyor would be appointed for clarifying the issue... ."

As yet there has been no agreement.

8. Thirdly, there is a significant disagreement as to the appropriate measurements. A report on which the defendant relies ( a four-page report) certifies an area of 7,229.2 sq.metres. The plaintiff's report (over 200 pages including photographs) calculates a figure of over 16,000 sq.metres.

9. Fourthly, there is an issue as to alleged defects in Hon Fung's work. It is unnecessary to list the defects. They are pleaded in the draft counterclaim.

10. Mr Thomas Lee, for the plaintiff goes some way in taking the shine off these points. He submits :

(a) That as a condition precedent, clause II is unclear and confusing. I do not propose to recite it herein. All that need be said that it is indeed unhappily drafted but, at trial, the court would have to grapple with it and give it some meaning. The court would no doubt be guided by the passage quoted to me from Keating on Building Contracts, 7th ed. para.5-02 :

"The court leans against a construction making the approval of the employer [here, ACC] a condition precedent to payment, and prefers a construction making the promise to complete according to the employer's approval, and the promise to pay, independent of one another. In such a case if the work does not meet with the employer's approval he cannot refuse to pay under the contract, but can only seek a reduction in the contract price by way of set-off, or counter-claim for damages. "

The plaintiff makes two further points. If the meaning of the clause is that the plaintiff must wait for a certificate from the defendant, the defendant cannot withhold it "unreasonably, dishonestly or capriciously". Here, the works were completed 12 months ago and the certificate has still not been issued. Finally, even if, which is not admitted, the plaintiff is only entitled to 50% of the contract sum (at the moment), then, according to the plaintiff's figures, less than 50% has in fact been paid.

(b) Mr Lee contends that the defendant's argument concerning the dispute of measurements in disingenuous. The defendant's report (the "Leader" report) is over simplistic. There is ample affidavit evidence highlighting its shortcomings. Moreover, it was prepared some time before the works were completed. It cannot be accurate. The plaintiff's report on the other hand (the "Chong" report) although not an agreed report and not one prepared pursuant to contract is plainly a more helpful and reliable document. It was commissioned at the conclusion of the works, its author is an experienced surveyor and it is very detailed. Furthermore, the plaintiff only commissioned it because the defendant failed to attend a meeting which was designed to reach agreement on measurement, so that any future agreement was rendered impossible (in July 2000).

(c) As to the alleged defects, Mr Lee relies on the lateness of the complaints. The first written complaint was made in May 2000. According to the plaintiff's affirmations the complaints largely related to remedial work that is invariably necessary at the conclusion of a contract such as this. None of the complaint letters from the Hospital itself were ever copied to or passed on to the plaintiff. The plaintiff was not informed of the alleged cost of rectification of the defects. Finally, the defendant relies on a letter of 22 September 2000 sent by them concerning the defects. The letter should be treated with caution for a variety of reasons. It is addressed to a non-existent person allegedly holding a non-existent position in the plaintiff's company. The plaintiff's witnesses affirm that the letter has never been received. Finally, it is set out in a format which is different from all other correspondence from the defendant.

11. These are the arguments for and against there being real prospects of success. The court must look at the whole case and endeavour to take a common sense view. The plaintiff's criticism of the defendant's conduct in the litigation may also be weighed in the balance.

12. The court's starting point is that if judgment for the full amount were allowed, then there is a real prospect that it would be an unjust outcome for the defendant. I am not inclined therefore, in spite of the merit in the points made by Mr Lee, to simply refuse the application to set aside.

13. The second stage in the court's approach is to state that the defendant has no prospect of resisting the plaintiff's claim to 50% of the contract sum, at the very least. I consider it safe and fair to rely on the Chong report in determining what 50% amounts to. The fact that the Chong report was not commissioned pursuant to contract is neither here nor there for these purposes. The court can and does use it to assess a minimum figure of the plaintiff's entitlement. 50% of the invoiced sum is $1,644,378.38 of which $898,052.95 has been paid. The difference, namely, $746,325.43 will therefore not be set aside from the sum entered in default. However, the rest of the judgment sum, $1,644,378.38 will be set aside.

14. The third stage is to decide what if any conditions should be made when giving leave to defend, limited to this sum.

15. I am satisfied that this is a case in which a payment into court should be made. The criticisms of the reasons advanced by the defendant as to why the judgment should be set aside cannot be overlooked. In the court's judgment the real "real prospects" in this case are those of the plaintiff ultimately being awarded a sum in excess of that already allowed. The counterclaim is shadowy and the award of 50% to the plaintiff is by no means intended to reflect their ultimate entitlement, once the dispute as to measurements has been either agreed or adjudicated upon.

16. In my judgment about half the remaining sum claimed should be paid into court, namely $800,000.

Order

(1) The application to set aside the whole judgment is refused.

(2) Judgment for $746,325.43 is not set aside.

(3) Leave to defend the balance of $1,644,328.38 is granted upon the defendant paying into court the sum of $800,000.00 within 21 days of the handing down of this decision. If the payment in is not made in time the judgment entered in default on 10 April 2001 is restored.

(4) The defence to be filed and served forthwith.

(5) Interest on the judgment sum at (2) above will be at prime + 2% from the date of the writ to the date hereof and at the judgment rate thereafter.

(6) Both counsel having addressed the court on costs I make the following final order that the costs of and incidental to this application and the costs of the defendant's unsuccessful time summons dated 12 April 2001 and the costs of the directions summons before Sakhrani J. on 24 April 2001 shall all be to the plaintiff in any event.