JEBSEN & CO LTD v. WATFIELD TECHNOLOGY LTD

cacv 117/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 117 of 2007

(on appeal from HCCT NO. 68 of 2003)

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D E C I S I O N

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1.  This is a summons under Order 59 rule 13 for a stay of execution of the order of Mr Recorder Kwok SC made on 13 March 2007 pending the outcome of the plaintiff’s appeal from that order on condition that the plaintiff pays the judgment sum plus interest up to the judgment date into court within seven days.  On 13 March 2006 Mr Recorder Kwok SC had dismissed the plaintiff’s claim against the defendant and granted judgment in favour of the defendant on its counterclaim in the sum of $1,919,465 with interest.

2.  The appeal has been set down but no date has yet been fixed for the hearing of the appeal. 

3.  The underlying dispute arose out of a construction contract.  The main contractor under a Government construction project had subcontracted part of the works to Chevalier (Envirotech) Ltd (“CEL”).  CEL subcontracted part of its works to the plaintiff who, in turn, subcontracted part of its works to the defendant (“the JW Contract”).  The issue for determination below was whether the defendant’s termination of the JW Contract on 23 November 2000 was lawful.  The judge held that the defendant was entitled to terminate the contract because time was of the essence and, even if it were not of the essence, it had been made of the essence by way of notice given by its former solicitors by letter of 30 October 2000.

4.  Mr Recorder Kwok SC refused the plaintiff’s application for a stay of execution.  He was not persuaded that the appeal was anything more than arguable and he was not satisfied that there was an appreciable risk of the defendant being unable to repay the judgment sum should the plaintiff succeed on its appeal.

5.  The applicable principles are not in dispute.  They are conveniently set out in the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Company Limited, unreported, HCA No. 4726/2001 recited in Wenden Engineering Service Company Limited v Lee Shing Yue Construction Co Ltd, HCCT 90/1999, unreported, 17 July 2002.  If strong grounds of appeal shown to exist, that in itself would constitute a good reason for a stay.  If the appeal is merely an arguable appeal, that is to say, one with reasonable prospects of success, the applicant will need to establish additional reasons to justify a stay such as an appreciable risk that the appeal would be rendered nugatory if the stay was not granted.

Merits

6.  Mr Mok SC submitted that the Recorder’s finding that time was of the essence of the JW Contract which was dated 12 April 1999 was wrong.  He sought to demonstrate that by reference to the Recorder’s holding (in paragraph 73 of his judgment) that the original programme of works had remained unchanged.  The defendant’s obligations under the JW Contract which included the fabrication of steel works depended upon the engineer’s prior approval of relevant drawings.  Mr Mok drew attention to the fact that under the original programme set out in paragraph 70 of the judgment, all but 4 of the 16 dates for the engineer’s approval pre-dated the JW Contract itself.  It would also appear that 3 of the dates for fabrication of steel works also pre-dated the JW Contract.  Mr Mok submitted that in those circumstances, the holding that those dates were of the essence when the JW Contract itself had not even been entered into did not make sense and had to be wrong.

7.  The second point made was that even if the conclusion that time was of the essence were correct, the defendant had based its rescission of the contract solely on the notice given by the letter of 30 October 2000 making time of the essence.  Therefore whether the defendant was entitled to rescind depended solely on the reasonableness of the notice.  Mr Mok submitted that 14 days’ notice was plainly unreasonable because the plaintiff was expected to perform the impossible, namely, to secure the engineer’s approval of some 480 drawings within that time.

8.  In dealing with a stay application, “it is impractical and even undesirable for the court … to go deeply into the merits and strengths of an appeal”.  The court has to form a preliminary view of these aspects.  Whilst I recognize the force of Mr Mok’s argument, I note that the JW Contract which was expressed to be supplemental to a letter of agreement between CEL and the plaintiff dated 11 September 1998 had many attachments to it as is evident from the judgment below.  Some of those attachments identified the defendant by name such as that referred to in paragraph 15 of the judgment.  But I cannot tell from the judgment itself whether any of the attachments was an original attachment to the CEL agreement.  If the defendant had been named in the attachment to the CEL agreement, then its involvement would have been much earlier than the date of the JW Contract.  There is also the Recorder’s finding (at paragraph 20) that the defendant’s first activity under the JW Contract was 4 December 1998.  Whether that was based on anything other than the date in the original programme itself is unclear.

9.  In relation to the second point, Mr Mok raised a new argument, namely, that the giving of notice constituted a waiver by the defendant of any rights it had by reason of the ‘time of the essence’ requirement so that the sole question to be determined on appeal would be the reasonableness of the notice given.  The waiver point was not one of the grounds in the notice of appeal and so not one that Mr Clayton could have been expected to deal with.  Whilst the point is plainly arguable, the correspondence between the parties would need to be looked at with care which is not an exercise that can be conducted in a stay application.

10.  In the result, I am of the view that this appeal falls within the wide band of arguable appeals considered in Star Play.  Undoubtedly, within that band itself there can be gradations in terms of the likelihood of success.  Clearly some appeals have better prospects of success and therefore can be said to be stronger than others.  But that does not mean that those will fall into the category of what was described in Star Play as ‘extreme’ situations.  In World Trade Centre Group Limited v Resourceful River Ltd, CACV 70 of 1993, unreported, 12 May 1993, Litton JA (at paragraph 4 of his judgment) made reference to the applicant being able to demonstrate “that he has very strong grounds of appeal, that something has greviously gone wrong with the process of the law in the court below” (emphasis added).  In my view, the threshold is a high one and is unlikely to be attained save in rare cases.

Whether appreciable risk shown

11.  The defendant was established in 1985 and has a paid-up share capital of $5 million.  According to the affirmation of its managing director Ho Shek On, Simon it is “an experienced, well-established and specialised contractor” and is the holder of seven specialised licences issued by the Government so that it could undertake specialised work within the construction industry.  It is also a registered general builder contractor. 

12.  The plaintiff’s concerns arise out of the fact that the defendant appears to be operating “under a cloud”.  First, two of its directors including Mr Ho have been charged by the ICAC for conspiring to falsify accounts in relation to work previously undertaken by the defendant for the Hong Kong Housing Authority.  Those charges made in December 2004 are still pending.  Second, of the seven specialised licences, six are now held by the defendant “on probation”.  There is evidence to the effect that a holder of such licences may be “on probation” for one of two reasons: either because it is new or has been demoted or downgraded.  In the present case, the first reason would not seem to be applicable.  Third, the defendant is not debt free given the charges that have been shown to exist to secure banking facilities.  The plaintiff submitted that the first two of these matters are likely to affect the defendant’s turnover and thus its profitability in that those factors are almost bound to impinge adversely on the defendant’s ability to secure large contracts, particularly Government contracts and that in turn would affect its cash-flow.  In Mr Ho’s affirmation, he had listed 12 projects (most of which involved ‘E&M’ work) that the defendant had ‘recently’ completed all of which were Government contracts.  As no dates had been given, quite what ‘recent’ meant can only be a matter of speculation but it would seem that Government contracts form an important part of the defendant’s business.  In any event, there was no evidence that the bulk of its business is generated from the private rather than the public sector.

13.  During the hearing, the defendant intimated that it was willing to produce its audited accounts for the court’s perusal.  At the court’s suggestion, Mr Clayton SC who appeared for the defendant took instructions from his client and agreement was reached that the defendant’s audited accounts would be shown to the plaintiff’s legal advisers only and upon their respective undertakings (which were given) that the accounts would only be for use in these proceedings, that copies were to be handed back and the information would not be used hereafter.

14.  Having perused the audited accounts for the years 2003 to 2006 and having heard the submissions of leading counsel for the parties, I am satisfied that there is an appreciable risk that the defendant would be unable to repay the judgment sum and interest in the event of a successful appeal.

15.  Given the confidential nature of the accounts, it would not be appropriate for me to go into them in any detail.  Whilst the defendant is solvent and that is apparent from its balance sheet, its net profits are minimal and it has virtually no free assets.  Given the amount of net profits shown for the years ended the 30 June 2005 and 2006 and the defendant’s overall cash-flow situation, there would not appear to be any ready explanation for the dividend payments of $1 million and $1.7 million respectively for those years.  I note that no dividends had been declared in the earlier years when the defendant was in better financial shape.  Thus the possibility of a further dividend being declared after receipt of the judgment sums cannot be ruled out.  If that were to happen and the appeal were successful, the risk that the defendant would not be able to make the repayment is obvious.

Conclusion

16.  Having regard to my conclusion above as to the existence of an appreciable risk, I would order a stay of execution pending the outcome of the appeal on condition that the plaintiff do pay the judgment sum plus interest up to judgment date in the respective sums of $1,919,465 and $1,017,147.31 into court within seven days of the date of this order.  I further direct that the parties do attend before the clerk of court within seven days of this order to fix a date for the hearing of the appeal.  I would also order nisi that the costs of this application be in the cause of the appeal.