XCHRX LANBASE SURVEYORS LTD. v. HOLYROOD LTD.

HCA481/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.481 OF 1999

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REASONS FOR DECISION

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1. This is the Defendant's appeal against the order of Master Cheung dated 6 July 1999 dismissing the Defendant's application to set aside the default judgment entered on 9 February 1999.

2. At the end of the hearing on 26 August 1999, the default judgment was partially set aside and leave to defend was granted conditional upon the Defendant making a payment into court. The following are the reasons for the decision.

3. The Plaintiff brought this action against the Defendant for an alleged outstanding balance of fees payable for work done and services rendered. Mr Yuen for the Defendant fairly accepted that the default judgment was entered regularly. It is therefore necessary to examine the proposed defence to see if the Defendant can establish that the defence has merits.

4. There is no dispute between the Plaintiff and the Defendant that they entered into an agreement evidenced by a letter dated 13 May 1998. The letter was a typed-up document on the Plaintiff's letterhead. Since part of the defence is related to its terms, I propose to set out the relevant parts therein :-

"... In view of the current market conditions, the chance of obtaining a premium reduction is reasonably high. It would take about two weeks to prepare the premium appeal submission and about two months for the Lands Department to process it.

Our fees for lodging an appeal and subsequent negotiation with the Lands Department are :-

1. A fee of $30,000 for the preparation of the appeal, 50% payable on the confirmation of instruction and 50% payable on submission.

2. A negotiation fee at 8% of the reduction in premium, such fee shall be payable on receipt of the revised assessment from government." (underline supplied)

5. The scope of work to be undertaken by the Plaintiff thereunder has been described in the affirmations filed by the respective parties : at paras.8 to 9 of the affirmation of Mr Woodhouse dated 21 April 1999 (for the Defendant) and at paras.7 to 9 of the 3rd affirmation of Mr Chan (for the Plaintiff).

6. According to the Defendant, a premium appeal is comprised of two stages. Stage one involves lodging written submissions with the Lands Department. Stage two involves negotiations with the Lands Department which includes arranging and attending meetings with officers of the Lands Department.

7. According to the Plaintiff, the procedure of a premium appeal involves :-

1. preliminary considerations;

2. preparation of the appeal;

3. lodging the written submissions;

4. preliminary approval of the written submissions by the District Lands Office;

5. processing of the appeal by the Lands Department; and

6. discussions/negotiations with the Valuation Section of the Lands Department.

8. The Plaintiff stated that it is no longer necessary to arrange or attend meetings with officers of the Lands Department and discussions/negotiations (described as stage-two by the Defendant) are now undertaken by way of telephone conversation. Revised submissions may sometimes be necessary.

9. Up to now, the only sum paid by the Defendant to the Plaintiff pursuant to the agreement was $15,000 (i.e. the 50% of fee for the preparation of the appeal). The default judgment entered on 9 February 1999 was for :-

(a) $15,000 (being the other 50% of the fee for the preparation of the appeal).

(b) $952,800 being the negotiation fee at 8% of the amount of premium reduced.

10. The said letter dated 13 May 1998 evidencing the agreement was signed and accepted by the Defendant on 18 May 1998. According to the Plaintiff, the written submissions were lodged on 19 June 1998 : see para.14 of Chan's affirmation. This has not been disputed by the Defendant : see para.15 of Woodhouse's affirmation. In fact, during the hearing, Mr Yuen accepted that the submissions had been lodged by the Plaintiff.

11. The Defendant's complaint regarding the written submissions was that it was only lodged on 19 June 1998, about one month after the Defendant's acceptance of the letter dated 13 May 1998, and not within the two-week period promised by the Plaintiff. Even if the Defendant's contention of delay was correct, I do not consider that this would entitle the Defendant to rescind the agreement. In fact, the Plaintiff's conduct from at least 19 June 1998 to the end of September 1998 was consistent with an affirmation of the agreement. The Defendant cannot therefore now rely on this delay to rescind the agreement. The Defendant has also failed to establish that it suffered any loss arising from this delay. I therefore find that the Defendant has not been able to establish any defence regarding the Plaintiff's claim for $15,000 which remains outstanding. In fact, Mr Yuen for the Defendant did not seek to argue against this part of the default judgment.

12. The Defendant's defence to the Plaintiff's claim for $952,800 can be summarized as follows. The agreement provided that stage-two work ought to be carried out in two months' time, i.e. by about 18 July 1998. However, in breach of this provision, the Plaintiff failed to do so even up to the end of September 1998. As a result, the Defendant decided to terminate the agreement and this was communicated to the Plaintiff at the end of September 1998.

13. The above defence was denied by the Plaintiff who claimed that it never received any notice from the Defendant to terminate the agreement. The Plaintiff, however, admitted that it received a letter dated 8 October 1998. This was in the following terms :-

"... Furthermore in view of the current economic situation in Hong Kong there is a sentiment in the market that the Government is encouraging developer to build, ... and is in fact happening. Government is reducing the land premium across the board.

Moreover, our project like many others has come to a standstill waiting for the market to improve. Until there is improvement it is not at all profitable for us to proceed.

In view of the above, we are not prepared to pay your requested high negotiation fee of 8% (bearing in mind you have already breached your promise in the first place by failing to submit the appeal in two weeks)." (underline supplied)

14. This letter is at least arguably consistent with the Defendant's assertion that it did not want to proceed further with the agreement. Various issues arise out of this alleged notice (not to proceed further with the agreement) which include :-

(a) whether the Defendant has given the said notice of termination at the end of September 1998;

(b) if so, whether the Defendant was justified in doing so. This will in turn depend on whether :-

(1) the Plaintiff has breached the agreement by reason of undue delay regarding the stage-two work (or, as the Plaintiff contended, the two-month provision in the agreement was merely an estimate);

(2) the Plaintiff has in fact performed (wholly or in part) stage two of the agreement, and if so, whether the stage-two work was performed before the notice of termination was given;

(c) whether the reduction in the premium was brought about by the Plaintiff's stage-two work even if the Plaintiff has performed such work.

15. Mr Yuen's submissions regarding point (c) above were based on the legal principles relating to commissions payable to agents. I do not consider that they are relevant because the $952,800 claimed by the Plaintiff was negotiation fee for work done and services rendered.

16. Mr Cheung, for the Plaintiff, argued that even if these arguments were available to the Defendant in theory, they are insufficient for the purpose of an application for setting aside a default judgment. This is because in order for the Defendant to succeed in such an application, the defence raised must not only be "arguable" but must carry with it a real prospect of success. In order to find out whether his argument is correct, it is necessary to consider this area of the law.

17. The law in Hong Kong regarding the test to be adopted in determining what defence is sufficient to justify setting aside a regular default judgment is not without difficulties. The difficulties arise from what is at least an apparent difference between the approach adopted by the Hong Kong Court of Appeal and that by the English Court of Appeal.

18. In Hong Kong this point seems to have been stated authoritatively in Premier Fashion Wears Ltd. v. Li Hing Chung [1994] 1 HKC 213. The Court of Appeal said at pp.219-20 :-

"... it is generally not sufficient for a defendant merely to show an arguable defence although that alone would justify leave to defend being given under O.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so, he must satisfy the court that his case and the evidence he has adduced in support of it carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success."

19. In the English Court of Appeal case of Day v. RAC Motoring Services Ltd. [1999] 1 All ER 1007, the Court of Appeal decided inter alia that "the court did not need to be satisfied that there is a real likelihood that the defendant would succeed, but merely that the defendant had an arguable case which carried some degree of conviction". This was expanded in the judgment of Ward L.J. at p.1011 as follows :-

"... That yet again raises the question as to the proper approach for the court to adopt in an application of this kind. The approach has seemed to change. It moved from the view taken by the court in Vann v Awford (1986) Times, 23 April that an arguable case was sufficient. That movement was shown in the judgment of Sir Roger Ormrod in Alpine Bulk Transport Co Inc v Saudi Eagle Shipping Co Inc, The Saudi Eagle [1986] 2 Lloyd's Rep 221. His Lordship there endeavoured to review the 'general indications to help the court in exercising the discretion' (Evans v Bartlam [1937] 2 All ER 646 at 656, [1937] AC 473 at 488 per Lord Wright). ..."

His Lordship then referred to a number of passages in Evans v Bartlam and traced the various observations made on the point in Grimshaw v Dunban [1953] 1 QB 408, The Saudi Eagle [1986] 2 Ll Rep 221 and Allen v Taylor [1992] PIQR 255 and continued (at pp.1013-4) :-

"I note, however, that when the court came to apply their own test to that case we see (at 224) that when the issue of the construction of the charterparty was being considered what was looked for was : 'The real question is whether it is a 'prima facie' defence ... a 'serious' defence ... or has merits to which 'the Court should pay heed' ...'

The rigour of that test was commented upon by Dillon LJ in Allen v Taylor [1992] PIQR P255 at P259. Having recited from The Saudi Eagle, he said :

'It is quite impossible to be dogmatic about the extent to which the court must be satisfied of the validity of the suggested defence. There must be numerous cases where the issue will turn entirely on the assessment of the facts at trial; each party's case would carry conviction if it stood alone and without conducting a trial the court is not able to say which will succeed. The present [case] is, it seems to me, one of those cases. If the case briefly indicated in the statement of claim is right, the plaintiff will win. If however there was, as the defendant claims, adequate supervision and one child chose to jump on the plaintiff unexpectedly, it could well be established that there was no fault on the part of the defendant or in the system which he established.'

That apparent divergence of views has now received comment in the notes to The Supreme Court Practice 1999, part of which I have already read. The editors (para 13/9/18) say of the view in Allen v Taylor (that it is enough that certain exculpatory facts 'could well be established') that it -

'is not easily reconcilable with the robust approach of The Saudi Eagle and is a dilution thereof. The preferred view is that unless potentially credible affidavit evidence demonstrates a real likelihood that a defendant will succeed on fact no 'real prospect of success' is shown and relief should be refused.'

For my part, I am a little concerned about that note. I think it is yet another move of the goalposts. This may be largely a matter of semantics and it would be better if the differences in language in these cases could be viewed as the emphasis in a particular case to the particular facts of that particular case. Perhaps the best guidance of all is in Sir Roger Ormrod's judgment that this is not a rule of law but a matter of common sense. Thus, it is usually easy to identify the case which is hopeless and say 'there is no real prospect of success'. I add the emphasis to make the point that one is looking at the matter negatively. The approach is distorted if one uses 'real prospects of success' as a positive test. That wrongly encourages a test of judging fact on affidavit and then coming to a provisional view of the probable outcome. I agree, however, that the arguable case must carry some degree of conviction but judges should be very wary of trying issues of fact on evidence where the facts are apparently credible and are to be set aside against the facts being advanced by the other side. Choosing between them is the function of the trial judge, not the judge on the interlocutory application, unless there is some inherent improbability in what is being asserted or some extraneous evidence which would contradict it." (at pp.1013-4) (underline supplied)

20. The observation in Allen v Taylor at p.259 (quoted above) applies most aptly to cases where the outcome of the case depends on credibility and each side's affidavit is as credible standing on its own as the other side's. A literal application of the "real prospect of success" test would almost invariably lead to a refusal to set aside the judgment because, in such a case, the court cannot properly conclude whether to believe the plaintiff or defendant, the defendant cannot be said to have shown a defence with a real prospect of success.

21. It could be that there was no real difference between the test propounded in the Day case and that in Premier Fashion apart from semantics. The language used in the two cases however was sufficiently different for it to be arguable that the Hong Kong court intended that a different test should be applicable. This is particularly so when the Hong Kong Court of Appeal stated in effect that the hurdle for the defendant is higher in a setting aside application than in a summary judgment application.

22. I am bound by the Hong Kong Court of Appeal decision. For present purposes, I will determine the merits of the defence assuming that a higher hurdle must be surmounted by the Defendant.

23. Mr Yuen argued that the Defendant has shown a real defence as to whether the Plaintiff has performed any stage-two work. He referred to exhibits "CKC-6" and "CKC-7" to the affirmation of Mr Chan and argued that these attendance notes do not establish any "negotiation" work but merely telephone enquires about the progress of the appeal. On the other hand, Mr Cheung referred me to :-

(a) para.17 of the affirmation of Mr Chan; and

(b) exhibit "CRW-8" (to the affirmation of Mr Woodhouse) being the revised written submission dated 30 September 1998.

The relevant paragraph of Chan's affirmation said :-

"As three months had lapsed since the filing of the written submission ... I [i.e. Mr Chan] considered it necessary to make adjustment to the premium assessment in the written submission. I had a discussion with Mr James Cho [of the Lands Department] ... After the discussion, I prepared a revised premium assessment and submitted it to the Lands Department on 30 September, 1998 for their consideration." (underline supplied)

The relevant part of the revised written submission dated 30 September, 1998 (exhibit "CRW-8") stated :-

"As per request, we submit herewith our revised premium assessment for your reference." (underline supplied)

Mr Cheung argued that these passages show that negotiation work had been undertaken at least prior to the preparation of the revised written submissions.

24. As regards the issue of whether the Defendant had given a notice of termination at the end of September 1998, Mr Yuen submitted that the Defendant's letter dated 8 October 1998 was consistent with this part of the Defendant's case. On the other hand, Mr Cheung argued that the Defendant's allegation relating to the notice of termination was incredible because :-

(a) the letter dated 8 October 1998 never mentioned that the agreement had been terminated;

(b) the subsequent letters from the Defendant's architect to the Plaintiff were inconsistent with it.

25. As regards Mr Yuen's argument that there is a real defence as to whether the Plaintiff's work caused the Lands Department to reduce the premium, I agree with Mr Cheung's argument that the letter dated 19 October 1998 was sufficient evidence to such effect. The relevant parts of this letter stated :-

"I refer to your letters dated 20 May and 30 September 1998, appealing against the premium assessed ...

... After reviewing the case with reference to your submission, Government is now prepared to revise the premium to $1.89 M." (underline supplied)

The above passages show that the reduction of premium was clearly related to the Plaintiff's revised written submission dated 30 September 1998.

26. Thus, I consider that the Defendant has shown that there is an arguable defence regarding :-

(1) whether the Defendant had given a notice of termination at the end of September 1998;

(2) whether the Plaintiff had performed any stage-two work, and if so, whether it did so prior to the notice of termination (if any).

However, on the materials now before me I do not find that the Defendant had established any defence regarding what caused the reduction of premium. The Defendant may be able to adduce further evidence at trial in support of its case regarding this point at a later stage. This, however, is not something which is relevant to my decision.

27. Bearing in mind the high standard of proof which a defendant in Hong Kong must face in a setting aside application, I consider that although it is appropriate to give leave to the Defendant to defend the Plaintiff's claim for $952,800, leave to defend should only be given conditional upon the Defendant paying the whole sum into court.

28. The appeal was allowed to the extent indicated above.

29. By agreement of the parties, costs of the appeal were ordered to be in the cause of the action.

30. As regards the costs of the application before the Master taken out on 21 April 1999 (and returnable in the 3-minute chambers list on 26 April 1999), the costs order I made on 26 August 1999 was :-

(a) the costs of that application on and before 26 April 1999 be to the Plaintiff in any event;

(b) the costs of that application after 26 April 1999 be in the cause of the action.

31. I indicated on 26 August 1999 that the reasons for making this costs order would be given later. These are the reasons.

32. Since the Defendant accepted that the default judgment sought to be set aside was a regular one, I consider that the usual rule set out in The Supreme Court Practice 1999, Vol.1, para.13/9/18 (at p.160) citing Cox (Peter) v. Thirwell [1981] 12 S.J.481 to be applicable. Thus, the costs of the Defendant on or before 26 April 1999 must be awarded to the Plaintiff in any event.

33. However, neither the Defendant nor the Plaintiff has been wholly successful in relation to this application (as shown by the outcome of the appeal). The Plaintiff was unsuccessful in resisting the application in that the Defendant managed to obtain leave to defend the disputed part of the Plaintiff's claim. On the other hand, the Defendant has not been successful in that leave to defend was only given conditionally.

34. For the above reasons, I consider the appropriate order for the costs incurred after 26 April 1999 to be that costs should be in the cause of the action (following the parties' agreement as to the costs regarding this appeal).