HOPESON ENGINEERING LTD v. ABLE ENGINEERING CO LTD

HCA 1668/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1668 OF 2003

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D E C I S I O N

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Background

1. This is the Plaintiff's appeal against the decision of Master G Shaw given on 20 June 2003. The Plaintiff instituted two actions against the Defendant, one in the District Court (DCCJ No. 40/2003) (the "First Action") and a second action in the High Court (HCA No. 24/2003) (the "Second Action"). This appeal is related to the First Action originally instituted in the District Court. By a summons dated 24 March 2003, the Plaintiff applied for summary judgment/interim payment in the First Action in the District Court. The entire action was then transferred from the District Court to the High Court with direction on the hearing of the Plaintiff's application for summary judgment. The First Action became HCA No. 1668 of 2003. On 20 June 2003, Master G Shaw entered a summary judgment in favour of the Plaintiff in the sum of $201,855 with interest at 1% above prime rate from 3 January 2003, i.e. date of the issue of the Writ of Summons but ordered the stay of execution of the judgment until trial of the Defendant's counterclaim or further order. The Plaintiff now appeals against Master G Shaw's decision ordering stay of execution and the date from which interest is to run.

2. The Plaintiff's claim was founded on a construction project in a school in Tsuen Wan (the "Tsuen Wan School Project") in which a final payment certificate in the sum of $201,855 dated 3 August 1999 was certified by the architect. The Defendant relied on equitable set-off in a counterclaim in another similar action by the Plaintiff, HCA No. 24/2003, i.e. the Second Action. That counterclaim was based on an allegation of delay on the part of the Plaintiff in four other school projects (the "Four Schools Projects"). Should the Defendant succeed in its counterclaim, the Plaintiff will have to pay the Defendant a balance of around $1.34 million, net of the Defendant's counterclaim and set-off in both actions.

3. The issues raised by this appeal are (1) whether the execution of the judgment obtained by the Plaintiff in the First Action (i.e. HCA No. 1668 of 2003) should be stayed pending the Defendant's counterclaim in the Second Action (HCA No. 24 of 2003) instituted by the Plaintiff; and (2) whether the award of interest with effect from the date of issue of the writ accords with settled legal principle.

The Appeal - Issue (1)

4. In Shenzhen Baoming Ceramic Co Ltd v Companion-China Ltd [2000] 2 HKC 790 at 796, Keith JA cited with approval the following passage from the Supreme Court Practice 1999 Vol. 1 at 179 which has now been adopted in Hong Kong Civil Procedure 2002, Vol. 1 at 158:

"An analysis of the authorities as to what orders should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a)	where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court had not discretion;
(b)	where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;
(c)	where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;
(d)	where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd v Peter Robinson Ltd, unreported, March 26, 1991, CA Transcript 91/0297, per Bingham LJ).

5. The Defendant is now relying on equitable set-off as a defence. An equitable set-off arises where 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 claim: see Hanak v Green [1958] 2 QB 9 at 23. The mere existence of a cross-claim is not enough. The cross-claim must have in it an equity that goes to the very root of the plaintiff's claim so that it would be manifestly unjust to allow the plaintiff to recover without taking into account the cross-claim. In his felicitously expressed statement of the principle in Compania Sud Americana De Vapores v Shipmair BV (The Teno) [1977] 2 Lloyd's Rep 297, Parker J (as he then was) said:

"... where the cross claim not only arises out of the same contract as the claim but is so directly connected with it that it would be manifestly unjust to allow the claimant to recover without taking into account the cross claim there is a right of set-off in equity of an unliquidated claim."

This statement of the law has been expressly approved by Goff LJ in the Federal Commerce case in the Court of Appeal [1978] QB 927 at 987.

6. The real issue to be determined is whether the two actions are so closely connected that there is an equity in the Defendant's counterclaim in the Second Action which goes to the root of the Plaintiff's claim in the First Action. Mr Chiu submitted that there are connection between the Tsuen Wan School Project and the Four Schools Projects in time, parties, subject matter and in the identity of the ultimate employer. To that submission, I agree.

7. The two projects were awarded to the Defendant within three months. The Tsuen Wan School Project was sub-contracted by the Defendant to the Plaintiff in June 1997 and completed in April 1999. The Four Schools Project was sub-contracted to the Plaintiff in February or early March 1997 and completed by the Plaintiff in January 1998. Hence, the two sub-contracts were entered into within a few months of each other and the period of performance overlapped each other in time. The parties under the two sub-contracts are the same and performed the same role. The Defendant was the main contractor and the Plaintiff was its piling sub-contractor. Both sub-contracts were concerned with piling work undertaken by the Plaintiff for public schools in Hong Kong and for the same employer, i.e. the Architectural Services Department of the Hong Kong Government.

8. Furthermore, Mr Chiu submitted that there is proximity in time between the Plaintiff's claim under the First Action and the Defendant's counterclaim under the Second Action. The sub-contract from which the claim under the First Action arose was not completed by the Plaintiff until about April 1999 and the sum due under that sub-contract was calculated in the Final Payment Certificate dated 3 August 1999. On the other hand, the last piece of piling and planking works under the sub-contract from which the counterclaim under the Second Action arose was completed by the Plaintiff in respect of school "S49" on 20 December 1997. The bulk of the alleged damages were sustained by the Defendant between December 1997 and 13 March 1998 when the Four Schools Project must be completed. Hence, the damages claimed under the Defendant's counterclaim in the Second Action arose before the Plaintiff's claim under the First Action. But for the amount of the Plaintiff's claim based on the Tsuen Wan School Project was within the District Court's jurisdiction, it would have been more convenient to have the two claims tried at the same time as the trial of the Second Action on the basis that the rights to be relief claimed under both sub-contracts arose out of the same series of transaction. If the claim under the First Action were within the jurisdiction of the High Court and instituted as a separate action in the High Court, the two actions would have been consolidated under Order 4 rule 9 of the Rules of the High Court.

9. The identity of the parties and the ultimate employer under two sub-contracts were the same, the nature of the work to be undertaken under the two sub-contracts were similar and the two sub-contracts were performed at about the same time. In my view, the two actions are so closely connected that they could be limited as one contract and there would be manifestly unjust to allow the Plaintiff to recover under the First Action without taking into account the Defendant's right of set off in equity in respect of its counterclaim in the Second Action. There is nothing to suggest that the Defendant's counterclaim is not arguable or bona fide. The Defendant has a plausible counterclaim which could not be said to have arisen out of a separate and distinct transaction or to be wholly foreign to the claim. Hence, the Master was right to enter judgment for the Plaintiff on the claim in the First Action but order stay of execution until trial of the counterclaim in the Second Action.

The Appeal - Issue (2)

10. As to the time when interest should become payable, the matter is in the discretion of the Court: see section 48 of the High Court Ordinance. The general rule, however, is that interest is to compensate for the loss of use of money and not for a cause of action. The authorities have established the following principles.

11. In Jefford v Gee [1970] 2 QB 130, a case concerning interest in personal injury cases, Lord Denning referred to the authorities and said at 143:

"In 1893 in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429, Lord Herschell LC stated the principle, which he thought should be applied, in these words, at p. 437:

'... I think that when money is owing from one party to another and that other is driven to have recourse to legal proceedings in order to recover the money due to him, the party who is wrongfully withholding that money from the other ought not in justice to benefit by having the money in his possession and enjoying the use of it, when the money ought to be in the possession of the other party who is entitled to its use. Therefore, if I could see my way to do so, I should certainly be disposed to give the appellants, or anybody in a similar position, interest upon the amount withheld from the time of action brought at all events."

12. The learned writers of McGregor on Damages, 16th ed wrote at paragraph 658:

"It is incontrovertible, in the first place, that interest cannot run for any period of time which is anterior to the accrual of the plaintiff's cause of action. In the second place, it would seem that, cases of unwarrantable delay by the plaintiff apart, in principle interest should commence to run from the moment the cause of action does accrue in respect of loss which also then accrues, and, in respect of loss which accrues at a later date falling before the date of judgment, then from such later date."

13. The learned authors of Halsbury's Laws of England, Vol. 9(1), 4th ed, para 1012 drew a distinction between damages for breach of contract and claim for a debt arising under a contract and wrote as follows:

"A claim for damages for breach of contract must be distinguished from a claim for a debt arising under a contract: an action in debt lies upon a primary obligation to pay, whereas an action for breach of contract is a secondary obligation arising from breach of any other primary obligation of performance."

14. The Plaintiff relied on a final payment certificate certified by the Defendant's project manager and general manager which the Plaintiff accepted and signed on 3 August 1999 and the oral representation by the Defendant's staff that a cheque would be issued in two to three days thereafter. Mr Chung submitted that the cause of action accordingly accrued at the date of the certificate, i.e. 3 August 1999 and interest should start to run from the same date or alternatively if no time was fixed for payment by the certificate, within a reasonable time thereafter.

15. In my view, the payment certificate only certifies the quantities of work done and the amount payable by the Defendant under the contract. It does not amount to a promise that the amount certified will be paid on the date of the certificate and that interest would be paid in default of payment with effect from that date. When payment should be made and interest payable would have been a matter of contract. But no evidence on these contractual terms has been adduced, save the oral representation of the Defendant's staff that a cheque would be issued in two to three days. There is no evidence whether that employee has ostensible or actual authority to bind the Defendant. On the other hand, when the Plaintiff issued its demand for payment in December 2002, its solicitor only demanded payment within seven days and made no demand for interest. The Defendant would still have been perfectly entitled to pay in December 2002 without any interest. In the circumstances, I cannot see any reason for not following the normal rule that interest is to run from the date of the issue of the writ, which followed shortly after the expiration of the time for payment under the Plaintiff's letter of demand. In addition, as the Defendant's counterclaim, if successful, would probably earn interest from the same date, justice would be best served by ordering interest to run from the date of the issue of the writ.

Conclusion

16. For the above reasons, the Plaintiff's appeal is dismissed with costs to the Defendant to be taxed if not agreed.