SNE ENGINEERING CO LTD v. CHIM KEE MACHINERY CO LTD

CACV 101/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 101 OF 2016

(ON APPEAL FROM HCA NO. 2025 OF 2012)

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J U D G M E N T

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Hon Macrae JA (giving the Judgment of the Court):

Introduction

1.  This case concerns a subcontract which formed part of MTRC’s construction of the Express Rail Link, for the removal of H-piles and bored piles at a site near the Nam Cheong MTR Station, called Site 802, being preparatory work prior to the construction of an underground tunnel to the border with the Mainland.  The main contract had been awarded to Hsin Chong Construction Company (“HC”), who subcontracted the pile removal works to the plaintiff (“SNE”) under two subcontracts both dated 11 March 2011, although works had started prior to that date.  SNE in turn engaged the defendant (“Chim Kee”) for the purpose of hiring the necessary machinery and labour to carry out the works under the subcontracts, which had begun as early as September 2010.

2.  Following disputes between SNE and Chim Kee over the carrying out of those works, SNE commenced this action against Chim Kee, featuring several claims for damages against Chim Kee, and counterclaims by Chim Kee against SNE.  The matter came on for trial earlier this year in the High Court before Deputy Judge Burrell (“the Judge”), who handed down a Judgment dated 24 March 2016 (“the Judgment”).

3.  The relationship between SNE and Chim Kee was governed by a series of dealings evidenced by ongoing rental quotations, invoices and oral agreements, which were collectively referred to in the Judgment as the Machinery Hire Agreement (“MHA”).  On or about 3 July 2012, Chim Kee gave notice to SNE that it was terminating the MHA.

4.  At trial, SNE sought or made the following claims:

(1) A declaration that Chim Kee was not entitled to terminate the MHA in July 2012.

(2) Return by Chim Kee of a total sum of $3,815,330.58 being monies overpaid by SNE under the MHA before termination.

(3) Damages for breach of the MHA as a result of Chim Kee’s deliberate slow operation of the machinery from 3 July to 11 July 2012 (the date when SNE accepted Chim Kee’s termination) in the sum of $1,575,934.08.

(4) Damages for breach of the MHA as a result of Chim Kee’s failure to remove its machinery from the site after 11 July 2012 in the sum of $1,330,691.74.

(5) Damages for loss occasioned by HC’s termination of SNE’s two subcontracts which was caused by Chim Kee’s wrongful termination, being loss of profit in the sum of $34,061,327.45; and/or an indemnity for such damages that SNE may be liable to pay HC.

(6) Damages for the tort of conspiracy between HC and Chim Kee to injure SNE for the amounts referred to in (3) to (5) above.

(7) Damages for loss suffered by SNE caused by Chim Kee’s wrongful detention of SNE’s property at a workshop in Fanling, being the cost of renting alternative equipment, for $666,280 up to 30 November 2012 and for $116,236 per month thereafter.

5.  Chim Kee’s counterclaims were as follows:

(1) Outstanding rental charges under the MHA for pre-May 2012 in the total sum of $897,747.

(2) Outstanding rental charges under the MHA for May and June 2012 in the total sum of $7,986,827.

(3) Rental charges for use by SNE of Chim Kee’s machinery for July 2012 (up to 27 July 2012) in the sum of $3,309,306.

(4) Storage charges at the Fanling workshop from 1 March 2012 onwards in the sum of $387,900.

Judgment below

6.  The Judge dismissed all of SNE’s claims, allowed Chim Kee’s counterclaim for the pre-May 2012 rental charges of $897,747, allowed the counterclaim in respect of the May and June 2012 rental charges in the sum of $7,218,010, disallowed the counterclaim for the July 2012 charges, and allowed a sum of $250,000 as storage charges.  The total judgment sum came to more than $8.36 million.

7.  By a Notice of Appeal dated 20 April 2016, SNE appeals against the Judgment in respect of all of its Claims (1) to (7) above.  By a Respondent’s Notice, Chim Kee seeks to cross-appeal in respect of the quantum for the May and June 2012 rental charges, and contends that the Judge should have allowed the full amount.

Application for stay of execution before the Court of Appeal

8.  On 5 May 2016, a statutory demand for the judgment sum was served on behalf of Chim Kee on SNE, as a precursor to winding up proceedings.  Garnishee orders nisi dated 10 May 2016 were obtained by Chim Kee in respect of monies owed or due to SNE by some of SNE’s debtors or banks, which orders were served on SNE on 13 June 2016.  Also on 10 May 2016, SNE filed a summons before the Court of Appeal, with which we are now concerned, applying for a stay of execution of the Judgment pending the hearing or disposal or determination of the appeal.

9.  The basis of SNE’s application is that it has arguable grounds of appeal and that the appeal would be rendered nugatory if a stay of execution were not granted; in other words, SNE would suffer (and has already suffered) deleterious consequences in that it will be brought to financial ruin if execution were to proceed.

10.  Chim Kee resists the present application, arguing that there are no merits at all to the appeal, that the evidence filed by SNE in this application failed to show deleterious consequences, and that if a stay were granted, Chim Kee would suffer great prejudice and the appeal would be rendered nugatory to Chim Kee in the event of a dismissal of the appeal.

Preliminary objection: no special circumstances

11.  Mr Pennicott SC, with him Mr Joseph Wong, appearing for Chim Kee, has raised a preliminary objection to the present summons.  Under O59 r13(1)(a) of the Rules of the High Court, both “the court below” and “the Court of Appeal” may exercise their discretion to order a stay of execution of a decision of the court below.  O59 r14(4) further provides:

“Wherever under these rules an application may be made either to the court below or to the Court of Appeal, it shall not be made in the first instance to the Court of Appeal, except where there are special circumstances which make it impossible or impracticable to apply to the court below.” (Emphasis supplied)

12.  No evidence has been submitted by SNE of any “special circumstances” making it impossible or impracticable to make the application before the Judge, although Mr Houghton SC, with him Mr Billy Kwan, for SNE, in his skeleton argument has referred to the fact that the Judge’s appointment as deputy judge expired soon after the trial and he had ceased to sit in the High Court by the time of this application.  Enquiries made by Chim Kee’s solicitors from the Registrar of the High Court revealed that the Judge’s appointment lasted until 24 March 2016 (the date of the Judgment); that on 30 May 2016, the Judge also handed down a “Decision on Costs and Interest” (a disposal on paper, we have been informed, following written submissions by the parties which were filed on 13 May 2016); and that the Judge is not due to sit again this year.

13.  This information should have been provided by SNE by way of supporting affidavit evidence along with the application.  SNE should also have enquired, prior to issuing the present summons before the Court of Appeal, whether despite the expiry of his appointment as deputy judge, the Judge would be available to hear the application for stay of execution.

14.  We would take this opportunity to reiterate to practitioners that an application for a stay of execution of a decision by the court below should in the first instance be made to that court.  Failure to do so before making an application to the Court of Appeal will result in the application being refused by the Court of Appeal, unless special circumstances exist (and have been shown to exist by proper affidavit evidence), demonstrating that it is impossible or impracticable to make the application for a stay of execution to the court below: see Hee Lee Investment Company Limited v Joy Express Limited unrep., CACV 222/2004 & CACV 164/2004, 14 January 2005 and 30 March 2005 respectively; Rhonda Jeanine Pohn v Mac Richard Pohn & Ors unrep., HCMP 3439/2015, 1 February 2016.

15.  The expiry of a deputy judge’s appointment, by itself, does not make it impossible or impracticable to make the application before him or her.  Often deputy judges are judicial officers from a lower court or legal practitioners in Hong Kong.  Section 11 of the High Court Ordinance (Cap 4) enables a deputy judge to deal with adjourned or reserved matters notwithstanding the expiry of his or her term of appointment.  In other cases, where necessary or desirable, a new appointment can be made so as to enable the deputy judge to hear outstanding matters in cases heard by him or her.  Practitioners acting for applicants in respect of stays of execution should not assume that deputy judges will not be able to hear such applications merely because their appointments have expired.  In other cases, the deputy judge may in fact be unavailable to hear such an application by the time it can be made ready for hearing.

16.  It is therefore incumbent upon practitioners to make proper and timely enquiries as to the availability of the deputy judge concerned, as soon as they realise that there may be a need for a matter or application to be dealt with by the deputy judge after his or her appointment has expired.  This does not seem to have been done in this case.

“The court below”

17.  Mr Pennicott goes on to argue that the reference to “the court below” in O59 r14(4) does not mean the particular trial judge in the court below, but simply means a judge of the level of the court below.

18.  He relies on Singh Arjun v Secretary for Justice [2014] 2 HKLRD 678, in which Lam VP explained the importance, in the context of an application for leave to appeal against an interlocutory decision (under O58 r2(6) of the Rules of the District Court, the equivalent of O59 r2B(4) of the Rules of the High Court), of making a first-tier application in the court below.  It gives the judge below, who is seized of the proceedings before him, has heard and is familiar with the relevant arguments, and who appreciates how an interlocutory decision may affect the conduct and progress of those proceedings, the opportunity to filter out unarguable grounds, thereby focussing the parties’ attention on the relevant issues and merits of their claims, and assisting them in formulating more concise and focussed submissions for any second-tier application for leave to the Court of Appeal.  The other important consideration is that in these circumstances, the first-tier decision can be dealt with swiftly, in most cases within 30 minutes.

19.  Mr Pennicott argues that the considerations set out by Lam VP above would apply equally to an application for a stay of execution under O59 r13, certainly where the first-tier application is heard by the trial judge himself.  Where the application is heard by another judge of the same jurisdiction, that other judge would not be familiar with the proceedings and the arguments relevant to the case, but nevertheless a first-tier application would still serve the same important functions of a “filtering” exercise and of focussing the parties’ minds on the essential issues and the merits of their arguments.

20.  We have no doubt that the Court of Appeal will always be assisted by a reasoned decision of a judge below, particularly where the first-tier decision on an application to stay is made by the judge who made the order which is sought to be stayed.  He will have heard all the relevant arguments in favour of and against the making of the said order and hence the merits of any grounds of appeal.  He may also, in some though not necessarily in all cases, have knowledge of circumstances which may throw light on how a stay of execution might affect either party.

21.  Where, however, the first-tier decision on an application for stay of execution is made to a different judge, he would have to make a decision as someone who is completely new to the case, just as the Court of Appeal will have to make a decision when that Court is new to the case.  The benefits of such a first-tier decision may well be attenuated, and the time estimate for the first-tier application which Lam VP had in mind may or may not apply, depending on the complexity of the case.  In terms of achieving the objectives of O1A of the Rules of the High Court, in particular the need to have a sense of reasonable proportion and procedural economy in the conduct of proceedings, to which Lam VP alluded in Singh Arjun v Secretary for Justice at para 8, a rigid insistence on having a first-tier application made, even where it is impossible or impracticable for the application to be heard by the original maker of the decision in respect of which a stay is being requested, may not necessarily serve the said objective.

22.  Mr Pennicott has also contrasted the reference in O59 r13(1) to “the court below” with the reference in O59 r2B(2) to “the judge or master against whose judgment or order leave to appeal is sought.”  Since O59 r13(1) refers only to “the court below” and not to the trial judge or master in the court below, it must be referring, so Mr Pennicott contends, to the Court of First Instance generally.

23.  In this regard, Mr Pennicott has very properly drawn to our attention a decision by Chung J in HY & HT Lee Brothers & Company Limited, unrep., HCCW 275/1998 and HCCW 467/1998, 23 November 2000.  That case concerned an application by the petitioner of two winding-up petitions to stay the execution of the order for taxation of costs after the trial judge had dismissed the two petitions with costs.  By the time of the application for stay, the trial judge had been promoted to the Court of Appeal, and the application was consequently heard by Chung J, who decided that the application was made pursuant to O59 r13.  An objection was taken that Chung J had no jurisdiction to determine the application for stay under O59 r13, on the ground that “the court below” meant the trial judge who made the decision in respect of which a stay of execution was being sought.

24.  Chung J referred to O59 r14(4), which provision applied to an application under O59 r13, and held that as a matter of construction, the reference in r14(4) to “special circumstances which make it impossible or impracticable to apply to the court below” indicated that “the court below” meant the particular judge who made the decision rather than the level of the court in the court hierarchy.  If “the court below” were to mean the Court of First Instance generally, Chung J could not see how it would ever become impossible to make an application to that level of court.  The qualifying words “it shall not be made in the first instance to the Court of Appeal, except where there are special circumstances which make it impossible or impracticable to apply to the court below” would be redundant.  Accordingly, he held that the application to stay should have been brought either before the trial judge or, since it was considered impossible or impracticable to do so in that case, before the Court of Appeal.

25.  We would agree with the reasoning of Chung J in HY & HT Lee Brothers & Company Limited and are persuaded that upon a true construction of O59 r14(4), the words “the court below” therein refer to the judge who made the decision or order in respect of which a stay of execution is being sought.  Therefore, where it is impossible or impracticable for that particular judge to hear the application for stay, the applicant may apply directly to the Court of Appeal.

26.  If, on the other hand, O59 r14(4) envisages any judge of concomitant jurisdiction in the court below, then like Chung J, we wonder what circumstances would make it impossible or impracticable to make the application before any judge of that jurisdiction?

27.  We should make clear that in our view the position regarding applications for leave to appeal against interlocutory judgments or orders under O59 r2B is quite different.  O59 r2B(2) specifies that

“So far as is practicable, the application must be made to the judge or master against whose judgment or order leave to appeal is sought.”

Where that is not practicable, the application may be made to another judge or master of concurrent jurisdiction. O59 r2B(3) then goes on to provide that

“Where the Court” – that is the Court of First Instance – “refuses the application, a further application for leave to appeal may be made to the Court of Appeal within 14 days from the date of the refusal.”

It can be seen that O59 r2B provides a clear sequential structure for applications for leave to appeal against interlocutory judgments or orders of the Court.

Should this application be entertained?

28.  Whether or not the Judge would have been available to hear the application for stay, had SNE made proper enquiries when it filed its application, we are now faced with a situation in which the Judge is no longer available to hear the application (which matter is not now in issue between the parties), in circumstances where further delay may cause injustice to SNE if it has arguable grounds of appeal.  Furthermore, even if we were to dismiss the application now on the ground that SNE has failed to properly prove the “special circumstances” referred to in O59 r14(4), this matter would simply come back to the Court of Appeal if the Judge is not available until next year.  We have therefore reluctantly decided to entertain the present application, particularly as we are seized of the matter and are familiar with the papers and the issues in the proposed appeal.

29.  We would, however, like to make it clear that any future applications under O59 r13 to the Court of Appeal, made in the absence of properly attested and sufficient proof of the special circumstances referred to in O59 r14(4), will almost certainly be dismissed.

Principles on the granting of a stay of execution pending appeal

30.  The legal principles governing the grant of a stay of execution of a judgment or order pending appeal are not in dispute between the parties.  They have been conveniently summarised by Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84.

31.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay, by demonstrating that good reasons exist, one will not be ordered.  Good reasons for a stay can exist in a variety of forms and it would be wrong to attempt to set out an exhaustive definition of what would constitute good reasons.

32.  The existence of a strong appeal will usually by itself constitute a good reason for granting a stay.  The existence of an arguable appeal (ie one with reasonable prospects of success) cannot by itself amount to sufficient reason for a stay.  It is a minimum requirement.

33.  Where there exists an arguable appeal, the appellant must provide additional good reasons to justify a stay.

34.  An example of a good reason is that the appeal would be rendered nugatory if a stay were not granted.  This does not mean that the appellant must in all cases show that he would face financial ruin if a stay were not granted. Demonstrating that the failure to grant a stay would have a serious deleterious effect is enough.

35.  At the same time, the court must never forget the position of the successful party and must consider the prejudice that would be caused to the successful party if a stay were granted.  If necessary, the court may impose conditions so as to minimise the prejudice caused to him.  A fortiori, the court must consider any contention that the appeal would be rendered nugatory (in the event that the appeal is dismissed), should a stay be imposed.

Grounds of Appeal

36.  The grounds of appeal consist of 35 grounds, an all-encompassing appeal against almost every aspect of the Judge’s decision.  Most of them are appeals against his findings of fact.  This appears to be no more than a reprise of all the arguments made at trial.  With the greatest of respect, we would hope that in due course, and sooner rather than later, greater focus will be brought to the appeal before it comes on for hearing.

37.  Mr Houghton submits on behalf of SNE that there are arguable grounds of appeal and has wisely concentrated on three particular matters.

(i)  Variation of the MHA by the Tripartite Rental Agreement (“TRA”) (Claim 5)

38.  The primary basis on which Chim Kee terminated the MHA on 3 July 2012 was that SNE had failed to pay Chim Kee in accordance with the MHA.  SNE’s case at trial was that the terms of payment under the MHA had been varied by the TRA entered into by SNE, Chim Kee and HC, whereby HC assumed the responsibility of paying rental fees on behalf of SNE in certain circumstances, with SNE assuming responsibility to certify payments within 21 days.  Mr Houghton argues that Chim Kee had accepted a change of the paying party, or at least accepted a change of the mechanism by which payments were to be processed.

39.  The Judge held that the TRA did not have the effect of varying the terms of the MHA, since there was no consideration moving from SNE to Chim Kee.  Any consideration that there might have been, came from HC.  More importantly, he went on to say, the primary obligation to pay Chim Kee remained on SNE.

40.  Mr Pennicott submits that the Judge was correct.  Consideration must move from the promisee.  In order for SNE to be able to enforce the TRA against Chim Kee, SNE must show that it has provided consideration.  He also submits that the Judge was right in holding that SNE remained primarily liable for payment.

41.  Mr Houghton relies on Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1, for the proposition that consideration exists if one party obtains in practice a benefit or obviates a disbenefit from another party.  Mr Pennicott argues that the issue is not whether consideration was provided, but whether SNE provided the consideration.

42.  While there is some force in Mr Pennicott’s argument, we are not prepared at this stage to conclude that the TRA was not enforceable by SNE against Chim Kee because no apparent consideration moved from SNE.  We think that it is arguable, in a situation where three parties engaged in business activities, each having a real interest in resolving the apparent deadlock over the payment to one of the parties, have come to an agreement concerning an alternative mode of payment, so that there is no question of lack of privity, that SNE has provided some form of consideration, for example, by promising to certify payments within 21 days; particularly when consideration need only be sufficient but need not be adequate.

43.  We are also of the view that while SNE may well have remained the party ultimately obliged to pay, it is arguable that SNE was entitled to rely on the mode of payment under the TRA and that, therefore, Chim Kee’s purported termination of the MHA based on the terms of payment thereunder may arguably have been wrongful.

44.  The next question is whether SNE has suffered loss as a result, and if so, what is the quantum of damages.  Unfortunately, the Judge does not appear to have dealt with the issue of quantum at all or the evidence relating thereto, which SNE claims amounts to over $34 million, in addition to being exposed to liability towards HC.  For present purposes, since the Judge does not appear to have rejected SNE’s evidence on quantum, the issue is still at large and SNE has an arguable claim for damages under this head.

(ii) Appeals in respect of Claims (3) and (4)

(a) Implied term of non-obstruction

45.  SNE claimed that from 3 July 2012 when Chim Kee gave notice of termination of the MHA, until 11 July 2012 when SNE accepted the termination, and onwards until 26 July 2012 when HC took over the majority of the site, Chim Kee had been deliberately slow in operating the machinery while it was still carrying out works at the site, and obstructive in refusing to remove its machinery from the site after SNE accepted the termination.  This forms the basis for SNE’s respective Claims (3) and (4) above.

46.  The Judge accepted that there was an implied term in the MHA that Chim Kee shall not obstruct or cause delay to SNE’s works unreasonably during the MHA and after its termination: see the Judgment at para’s 45 and 47.  Yet, he went on to hold that after Chim Kee’s lawful termination of the MHA on 3 July 2012, all mutual rights and obligations ceased, including the implied term: see the Judgment at para 48.

47.  Mr Houghton submits that where the implied term was obviously intended to apply to a post-contract situation, it must be able to survive a termination of the contract.  Indeed, other contract terms commonly survive the termination of a contract, including, for example, exclusion clauses.  This is in our view an arguable point.

(b) Breach of implied term of MHA and consequential loss

48.  On the other hand, in order for SNE to succeed in Claims (3) and (4) above, SNE must go on to prove in respect of each claim that Chim Kee was in breach of the implied term, and that SNE suffered loss as a result.  On these two issues, the Judge found against SNE.  In respect of Claim (3), he found that Chim Kee had agreed to “stand by”, which it did under SNE’s instructions until 11 July 2012 when SNE accepted Chim Kee’s termination of the MHA: see the Judgment at para 56.  In respect of Claim (4), he concluded that it was reasonable for Chim Kee to require SNE to provide a demobilisation plan before Chim Kee could remove the machinery from the site: see the Judgment at para 66.  On the question of loss, in a brief paragraph, the Judge said he was “doubtful” about SNE’s evidence of loss in respect of both Claims (3) and (4): see the Judgment at para 68.

49.  In the light of our conclusion on the Variation ground, we find it unnecessary to express any views on the arguability of these two claims on the appeal.

Appeal rendered nugatory

50.  SNE has filed evidence for the purpose of showing that it is impecunious and that it is not capable for the time being of satisfying the judgment.  Its main asset is the cash balance in certain bank accounts, which has been dwindling ever since the making of this application.  Its shareholders have apparently declined to provide further financial support.  However, SNE has outstanding claims to be settled by other parties, including a very substantial claim against HC, which is in dispute and has to be resolved by arbitration.  It also avers that it has every intention of carrying on with its business and has bid for other projects.  On 26 June 2016, Chim Kee commenced winding up proceedings against SNE.  The mere commencement of proceedings has already presented serious difficulties for SNE in its attempt to carry on with its business.

51.  Mr Houghton submits that if execution of the judgment is not stayed, SNE will suffer serious deleterious damage, and the appeal will be rendered nugatory, even if SNE succeeds on the appeal.

52.  Mr Pennicott argues that the evidence filed by SNE is not of sufficient quality to prove the deleterious effect it will suffer if a stay of execution is not granted.  No audited accounts have been provided, only management accounts.  Further, even in the event of liquidation, the liquidators can still pursue the appeal if they consider the appeal meritorious and pursue the claim against HC in the arbitration.  He also makes the point that the longer Chim Kee has to wait, the less assets there will be available for enforcement.  There will be a real risk that if the appeal fails, Chim Kee will not be able to recover anything.  Relying on the decision of Chow J in Astro Nusantara International BV v PT Ayunda Prima Mitra, unrep., HCCT 45/2010, 8 December 2015, he urges this Court, in the event that we are minded to grant a stay of execution, to impose a condition of payment into court of the judgment sum including interest.

53.  After reviewing the evidence of the potential effects of the granting or refusal of a stay on both parties, and the considerations arising therefrom, we accept that SNE will suffer a degree of deleterious effect if execution is to proceed at this stage before the hearing of the appeal.  At the same time, we are not satisfied with the evidence that SNE’s shareholders will not continue their financial support of SNE, particularly when SNE has, as it claims, a genuine substantial claim against HC, which will require further financial support if SNE is to continue to pursue it.  Furthermore, we are concerned that between March and May 2016 SNE’s available cash, according to its bank statements, has reduced from roughly $4.3 million to $1.2 million for reasons which have not been satisfactorily explained.

54.  In those circumstances, we consider it appropriate, in the exercise of our discretion, to order a stay of execution of the judgment, on condition of payment into court of $4.3 million, representing roughly half of the judgment sum plus interest.  Such payment into court shall be made within 21 days hereof.

Costs

55.  Having heard the parties, we order that the costs of this application, with a certificate for two counsel, be in the cause of the appeal provided that the above condition is met, failing which the plaintiff shall pay the costs of the application to the defendant, to be taxed if not agreed.