L & M SPECIALIST CONSTRUCTION LTD. v. WO HING CONSTRUCTION CO. LTD.

CACV 147/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 147 OF 2000

(ON APPEAL FROM HCCT 1/2000)

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J U D G M E N T

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Ribeiro JA:

1. This is an appeal by the defendant from the judgment of Burrell J dated 30 March 2000 whereby he granted the defendant's application to set aside the judgment entered in default of Defence, but on terms that the defendant pay into court the full amount of the claim in the sum of $2,152,208, plus interest at prime plus 1% from the date of the writ.

2. The defendant contends that the Judge imposed those terms under a misapprehension as to the merits of the defence compounded by his decision not to allow the filing of further evidence bearing on the defence. Accordingly, this court is invited to set aside the terms imposed.

The underlying facts

3. The plaintiff is a construction company which lays underground pipes using a specialised technique known as the "Trenchless Method". The defendant is a contractor appointed by the Drainage Services Department to build the Yuen Long-Tuen Mun Corridor Trunk Sewer.

4. In August 1997, the parties entered into a written agreement for the plaintiff to carry out pipe laying works at various locations using the Trenchless Method. In March 1998, in the course of such works, an incident occurred which resulted in the present proceedings. Equipment, referred to as a slurry shield forming part of the plaintiff's jacking equipment, became stuck when it met an unanticipated underground obstruction made of concrete on the proposed route of the pipeline.

These proceedings

5. The plaintiff issued a writ on 19 January 2000 alleging that the incident had caused it loss and expense for which the defendant is liable. It claims the cost of digging a shaft to retrieve the slurry shield and also for the loss of pipes previously laid which had become useless because damaged or misaligned. It also makes claims for work done and additional work required adjacent to the damaged pipeline. The total amount claimed is $2,152,208.00.

6. After acknowledging service on 31 January 2000, the defendant obtained the plaintiff's agreement that time for filing the Defence and Counterclaim would be extended until 29 February 2000, and a consent order to that effect was sealed on 23 February.

7. On 29 February, the defendant took out a summons returnable on 9 March 2000 seeking a further 14-day extension for filing its pleading. This was accompanied by an affirmation of Lau Yew Ming, the defendant's senior project manager, stating that the allegations in the Statement of Claim were disputed, that the defendant had a counterclaim and that although a draft Defence and Counterclaim had been prepared, some of its factual details required verification against original records which, because of "urgent Labour Tribunal matters" which Mr Lau had to attend to, made the further extension necessary.

8. In fact, by 7 March 2000, the draft Defence and Counterclaim was finalised. On 8 March, the defendant's solicitors wrote to solicitors for the plaintiff saying that the pleading was now ready, enclosing a copy and asking if they would consent to late filing so that the application for extension due to be heard on the following day could be vacated.

9. It appears that there was no response. Instead, on the same day, 8 March 2000, the plaintiff entered interlocutory judgment in default of defence.

Application to set aside the judgment

10. The defendant applied for the judgment to be set aside and, on 9 March 2000, the Judge gave directions for the hearing including leave to the defendant to file and serve its further affirmations by 15 March 2000 and leave to the plaintiff to respond, if so advised, by 20 March.

11. Further evidence filed by the defendant comprised first, an affirmation by its solicitor Chow Siu Nam, explaining why the original extension had been needed and how, although by 28 February, counsel had provided a draft of the pleading, it could not be finalised since Mr Lau was engaged in preparing a hearing before the Labour Tribunal. The draft Defence and Counterclaim is exhibited to show the merits of the defences relied on.

12. The gist of the defence is that the plaintiff's improper operation of its own specialist equipment caused the slurry shield to become stuck underground, a matter for which the defendant was not responsible. Indeed, it is alleged that this negligence on the part of the plaintiff caused the defendant loss in respect of the pipes now rendered useless, this being the subject of the counterclaim in the total sum of about $180,000.00. The defendant contends in the alternative that any liability it may have is strictly limited by the terms of the agreement.

13. Mr Lau also filed second and third affirmations dated 9 March and 14 March 2000 respectively. In his second affirmation, he simply verifies the draft Defence and Counterclaim. In his third, he makes a few minor corrections which do not affect its substance. He also exhibits contract documents, correspondence and a report which is relevant to the underlying dispute.

14. In response, the plaintiff filed the affirmation of Tai Hok Hoi, manager of its Geotechnic Division, dated 20 March 2000. Mr Tai joins issue with the draft Defence and Counterclaim concerning operation of the equipment and addresses issues on sums due for work done.

15. An attempt was made by Mr Lau to file his fourth affirmation dated 22 March 2000 to answer certain points made by Mr Tai. However, the Judge refused leave to rely on the same.

When default judgments are set aside

16. Order 13 r 9 of the Rules of the High Court empowers the court "on such terms as it thinks just" to set aside or vary any judgment entered in pursuance of that Order, ie, any default judgment.

17. The principles upon which the court exercises its discretion are well known. The discretion is there "to avoid the injustice which may be caused if judgment follows automatically on default." Where, as in the present case, the judgment was regularly entered, the court will consider the nature of and reasons for the default but it will focus primarily on whether defence has sufficient merits. As the learned editors of the Supreme Court Practice 1999 put it (at 13/9/18) :-

"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 defence as to how the default occurred."

The defence must generally have "a real prospect of success" or to "carry some degree of conviction", requiring the court to form some provisional view of the probable outcome of the action (Alpine Bulk Transport Co Inc v Saudi Eagle Shipping Co Inc, The Saudi Eagle [1986] 2 Lloyds Rep 221); unless such a provisional view cannot be formed without a trial of the facts (Allen v Taylor [1992] PIQR 255).

Refusal of leave for the fourth affirmation

18. I will deal first with the ground of appeal concerning refusal of leave to rely on the fourth affirmation of Mr Lau. In my view, that ground is without substance. As the Judge pointed out, refusal of leave did not defeat the defendant's application. The issue was not whether the court should accept the allegations of Mr Lau or of Mr Tai as true, but whether the issues raised by the defence were sufficiently substantial to merit going to trial. The court was plainly able to make that assessment without the fourth affirmation and the Judge was perfectly justified in excluding it.

The defendant's procedural default

19. In reaching his decision, the Judge considered when and how the default judgment was entered and took the view that no criticism should be levelled against the plaintiff for entering judgment in the circumstances. However, he also noted that it was a tactical step, throwing onto the defendant a higher burden for staving off judgment (by requiring it to show "real prospects of success") than it would have faced if the plaintiff had chosen to apply for summary judgment (when it would have to show merely an "arguable defence"). The Judge also made the following comment :-

"However, the fact remains that had they waited one more day and allowed the defendant to apply for further time to file its defence, the overwhelming likelihood is that a short extension would have been allowed. Even one day would have been sufficient for the defendant because its pleading would have been, by 9 March, ready to be filed."

For my part, I find it very hard to see why the plaintiff chose to enter judgment in the circumstances which I have described.

20. The plaintiff was not faced with a defendant playing for time. The action had only been started on 19 January. This gave the defendant until 2 February to acknowledge service. It did so on 31 January. Under O 18 r 2, the defendant had until 16 February to file its defence. Accordingly, in agreeing to an extension until 29 February for the filing, the plaintiff had consented to a 13-day extension. The summons sought a further 14 days, which would have taken the time-limit for filing to 14 March. In asking for this extension, the defendant provided an explanation and also indicated that the draft had already been prepared but merely needed checking, which indicated that this was not a mere delaying tactic.

21. In fact, the defendant did not wait until the hearing of its summons to provide the plaintiff with the pleading. It provided the plaintiff with a copy on 8 March, eight days after expiry of the first consensual time extension in the whole case, inviting them to agree to its late filing and to vacate the 9 March appointment. Instead of replying to the letter, the plaintiff, as I have said, entered default judgment on the same day. That has led to this arid satellite litigation involving two court appearances before Burrell J, his having to write a judgment and an appeal to this court, necessitating the preparation of another judgment, and substantially increasing the costs bill.

22. True it is that the rules are there to be obeyed. However, one must always bear in mind their purpose and to exercise commonsense in their enforcement. The power given under the rules to enter a default judgment provides the ultimate sanction against a defendant who does not serve his defence in due time. If there were no such power, a defendant without a substantive defence might simply play out time. However, in the present case, that power was invoked on the very day that the plaintiff was supplied with the draft defence and asked to accept service out of time. In pursuing the default judgment the plaintiff was therefore obviously not using the procedure as a sanction against non-delivery of the defence. Whatever the plaintiff's motives for taking the course it took, it is clear that the procedural infraction committed by the defendant is, on any view, of very minor significance and could not constitute a barrier to setting aside the judgment.

The merits

23. The Judge identified the "core issue" as follows :-

"The core issue in this case is who should bear the responsibility for the fact that an underground tunnelling device got seriously stuck and the financial implications thereafter."

He thought the plaintiff appeared prima facie to have a good case, pointing in particular to clause 3.17 of the contract placing liability for "the recovery costs" on the defendant in the event that the equipment became stuck underground. However, he considered that the defendant's prospects of successfully resisting all or part of the plaintiff's claim could not be called "unreal". Nonetheless, he concluded that "for a combination of all the matters set out above", he ought to order the judgment set aside only on "the most stringent conditions while remaining within the bounds of reasonableness", resulting in his imposition of the abovementioned term requiring payment into court of the entire claim amount with interest.

24. With respect to the Judge, his judgment does not make clear what aspects of the matters discussed in the earlier part of his judgment were thought to justify the imposition of such a stringent condition.

25. The plaintiff no doubt has a prima facie case. I have already described the gist of the main defence, namely, that the loss was entirely due to the plaintiff's mismanagement of its own equipment, for which the defendant ought not to be held responsible, in accordance with alleged implied terms arising out of the plaintiff's specialist expertise and control over its own equipment. If the defendant is right in law on this contention, questions of fact concerning how the incident occurred, whose fault it was and what losses flowed therefrom will require investigation.

26. The defendant also argues that even if it is wrong to deny liability altogether, its liability is limited to the relatively minor cost of recovering the slurry shield and does not extend to various heads of consequential loss making up the bulk of the plaintiff's claim.

27. I will at this stage say nothing as to the merits of the abovementioned arguments save to say that I agree with the Judge that they constitute a defence which cannot be dismissed as lacking any real prospects of success or conviction. It therefore follows that the case ought to be allowed to go to trial and that the judgment should be set aside, as the Judge concluded.

Terms for setting judgment aside

28. However, with respect, I part company with the Judge on the imposition of the stringent condition for setting judgment aside.

29. There is no doubt, as O 13 r 9 itself makes clear, that the Judge had jurisdiction to impose any appropriate terms in the exercise of his discretion. The Supreme Court Practice 1999, at 13/9/18, cites a number of examples of how the power is exercised in practice. Most of these involve terms requiring payment of the other party's costs (Cockle v Joyce (1878) 7 Ch D 56; In re Hartley [1891] 2 Ch D 121; Hughes v Justin [1894] 1 QB 667; Wright v Mills (1889) 60 LT 887).

30. In Richardson v Howell (1892) 8 TLR 445, money was ordered paid into court as a condition of setting aside judgment where the defendants were debtors who appeared to be playing for time and the court :-

"came to the conclusion that the 'affidavit of merits' failed to show a defence to the two actions now in question, which it was necessary to show in order to entitle him to set aside a judgment regularly entered by default. The defence shadowed forth in the affidavits was met by documents produced, signed by the defendant." (at p 446)

One might remark that given that view of the merits, it is somewhat surprising that the court decided to set the judgment aside at all.

31. In City Construction Contracts (London) Ltd v Adam, The Times January 4 1988, the English Court of Appeal confirmed the court's power to impose a condition requiring money to be brought into court even where there was a good arguable defence, "not to punish the defendant but to encourage the proper future conduct of the litigation and to provide a measure of security for the plaintiff." In that case, this was apparently the basis for the order but, since the Judge had given no reason for choosing ￡50,000 as the sum to be brought into court, the Court of Appeal reduced it to ￡10,000.

32. In my view, it must be rare that a payment into court is made a condition of setting aside a judgment. It may in theory do so, as the court apparently did in the relatively old case of Richardson v Howell, where the defence is considered shadowy and in what one might call "conditional leave to defend territory". However, there is a certain logical tension between a court deciding that the defendant has real prospects of succeeding in his defence and the court considering at the same time that the defence is in shadowy realms. While I do not consider such an outcome impossible, I would expect it to be exceedingly rare. I do not consider the present case to come within that category.

33. As the Court of Appeal in City Construction Contracts (London) Ltd v Adam pointed out, there may be other reasons for requiring payment into court. There, it was a perceived need "to encourage the proper future conduct of the litigation and to provide a measure of security for the plaintiff". As I have pointed out, the procedural infraction in the present case is very minor and no basis has been made out for providing the present plaintiff with security, either for its claim or for its costs.

34. The abovementioned examples of course are not exhaustive. However, to my mind, what they show is that where the defendant has a reasonably arguable defence which ought to be allowed to go to trial, there must be something specific in the defendant's conduct or in the case which justifies the imposition of a condition such as that imposed here. There must, in other words, be some material upon which the court can exercise its discretion in that manner : Ratnam v Cumarasamy [1965] 1 WLR 8.

35. In the present case, I am unable to detect any feature of the case providing a foundation for the stringent term. I am therefore not satisfied that it was correct as a matter of principle to impose such a term and would accordingly allow the appeal, setting aside the condition of payment into court.

Rogers JA:

36. I agree.