SNE ENGINEERING CO LTD v. HSIN CHONG CONSTRUCTION CO LTD AND ANOTHER

CACV 88/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 88 OF 2014

(ON APPEAL FROM HCA NO. 1466 OF 2012)

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REASONS FOR DECISION

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Hon Cheung JA (giving Reasons for Decision of the Court) :

1. The plaintiff sued the defendants for infringement of its short term patent in respect of a rotate and wedge method for the extraction of foundation piles in construction sites. After a 20-day trial the plaintiff failed in its claim. Deputy High Court Judge David Lok (as he then was) held that the patent was invalid for a number of reasons. The plaintiff appeals and the 1^st defendant applied for security for costs against the plaintiff.

2. The plaintiff was awarded costs nisi below.  The 1^st defendant estimated the costs at $4-5 million.  The Judge had recently heard an application by the plaintiff to vary the costs order because the 1^st defendant on the third day of trial i.e. 6 September 2013 obtained leave to amend its objections to the patent on the issue of ‘obviousness’ by misrepresenting to the Court that it only become aware of a prior art as a result of recent disclosure by the plaintiff, whereas the 1^st defendant had already obtained the report at least on 2 August 2013.  The Judge has not yet given a decision on this application.

3. The issue of obviousness is only one of the many issues that were raised below concerning the validity of the patent.  Even assuming the plaintiff is successful in its variation application, it is still liable for a substantial amount of the costs below. No offer has been made by the 1^st defendant to pay for the balance of the costs.

4. The Court of Appeal may under special circumstances order an appellant to pay security for costs of its appeal.  One of the established grounds is that the appellant is impecunious and is unlikely to pay for the costs of the appeal if it failed in the appeal.

5. The 1^st defendant submits that the plaintiff is impecunious because it owes substantial debts, namely,

1) it owes debts to Japanese creditors;

2) it has cash flow problems and had required financial assistance from the 1^st defendant and its persistent failure to honour payments to its sub-contractors;

3) it owed the 1^st defendant nearly $90 million;

4) it does not have any known significant assets in Hong Kong; and  

5) it has refused and failed to show any relevant financial documents which established its solvency or liquidity.

6. The plaintiff claims that it will repay the loans to its Japanese creditors by way of capitalisation.  It claims it is common practice for main contractor (i.e. the 1^st defendant) to offer short term assistance to its sub-contractors (i.e. the plaintiff).  It claims while the 1^st defendant had helped to pay for the fees of the plaintiff’s own sub-contractors, the 1^st defendant had been fully reimbursed when it deducted such payment from the fees due by the 1^st defendant to the plaintiff.  While it does not dispute that it owes $90 million to the 1^st defendant, it says that this sum is expected to be renegotiated.  Further the 1^st defendant owes it $250 million for breach of contract and the 1^st defendant has refused to refer the matter to arbitration.  Its assets in the form of equipments are detained by the 1^st or the 2^nd defendant.  It further reveals that it recently has received two contracts of the sums of $7.2 million and $30 million although it is not prepared to disclose the two contracts.

7. It is not necessary to go into these disputes in detail because the overall picture that emerges is that the plaintiff is cash strapped.  The way the plaintiff operated its business in Hong Kong was based on financial assistance that it received from the 1^st defendant who went as far as to advance payment to the plaintiff’s own sub-contractors.  This was very much a ‘hand to mouth’ existence on the part of the plaintiff.  The two new contracts which it said it has secured do not assist the plaintiff’s case because of the lack of information on payment terms and whether the plaintiff will also require the same kind of assistance in their contractual performance from its employers like that of the 1^st defendant.  The plaintiff said that it is prepared, subject to confidentiality arrangement, to disclose the contracts only to the 1^st defendant’s counsel but not its solicitors.  This suggestion simply does not work because this would put the 1^st defendant’s counsel in an impossible task in terms of taking instructions from his own client.  The correspondence does not indicate that there is any expectation of renegotiation of the $90 million sum.

8. In our view the plaintiff’s impecuniosity is apparent.  The plaintiff has really not shown that it has the financial resources to pay for the costs below and of the appeal which is listed for six days and for which the 1^st defendant’s estimated costs is in the region of $1.8 million.  One, of course, has to recognize that if the plaintiff’s impecuniosity is caused by the 1^st defendant then the 1^st defendant will have no proper basis of complaint. However, it cannot be said at this stage that the 1^st defendant is guilty of such misconduct.  The cause of termination of the contract between the 1^st defendant and the plaintiff is very much in dispute and must be subject to final resolution.  The 1^st defendant’s refusal to refer the matter to arbitration is justified by the agreement between the parties that the referral will only begin after its main contract with Mass Transit Railway Corporation (‘MTRC’) has been completed which is a common term in the construction trade.

9. The Court also has to consider the merits of the appeal because if the appellant can show that its chance of success is high, the Court will not stifle a genuine appeal by imposing terms that it cannot meet.  This is not such a case here.  At most the plaintiff has reasonably arguable grounds of appeal which are not sufficient to cause the Court to exercise the discretion in its favour.

10. In our view the plaintiff is required to pay security for costs of its appeal and we made the following order :

1)  The plaintiff is required to pay into Court on or before 4 June 2015 $1.5 million as security for costs of its appeal.

2)  Pending payment in, the appeal against the 1^st defendant is stayed.

3)  In default of payment in, the appeal against the 1^st defendant is dismissed with costs to the 1^st defendant.

4)  The plaintiff is to pay the 1^st defendant the costs of this application in any event.