KAILAY ENGINEERING CO (HK) LTD v. SIL VER FAITH HOLDINGS LTD AND OTHERS

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JUDGMENT

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The Proceedings

1. On 19 January 1998, the plaintiff issued a writ against the defendants. This was served on 20 January 1998. On 26 January 1998, the first defendant filed an acknowledgement of service. On 4 February 1998, the first defendant's solicitors faxed the plaintiff's solicitors with a request for particulars. On 5 February 1998, the plaintiff's solicitors wrote to the first defendant's solicitors saying that they were taking their client's instructions on the request for particulars. In the same letter, the plaintiff's solicitors gave notice of intention to enter judgment if the defence was not filed in time.

2. The defence was not filed in time, and the plaintiff's solicitors entered judgment against the first defendant on 17 February 1998. This judgment orders the first defendant to pay $26,544,681.54, with interest at the rate of 12.06%. On 20 February 1998, the first defendant issued a summons to set aside the judgment. This is one of the summonses before me.

3. On 27 February 1998, the first defendant issued a summons seeking an order striking out the name of the first defendant. This is the second summons before me.

4. On 3 March 1998, the first defendant issued another summons seeking an order striking out part of an affidavit and an exhibit filed by the plaintiff. Mr Coleman concedes that this order should be granted. Accordingly, I make an order in terms of that summons.

The Application to Set Aside

5. The first defendant suggests that the judgment is irregular. I do not accept this. The evidence is overwhelming that the notice was properly served and received at the offices of the first defendant's solicitors. It does seem that after it was received it went astray because it did not come to the attention of the solicitor handling the matter. There must have been some break-down in the system in the offices of the first defendant's solicitor but that does not make the judgment irregular.

6. So the first defendant must fall back on an application for me to exercise my discretion under Order 13, rule 9. Both counsel agree that the way in which this discretion should be discharged is largely an exercise of common sense, bearing in mind the guidelines that the first defendant should show more than an arguable defence; it should put up a case having a real prospect of success with evidence that carries some degree of conviction.

The Basis for the Plaintiff's Claim

7. Before examining the first defendant's defence, it is important to identify the basis for the plaintiff's claim because it is to the particulars of that claim that the first defendant must show his defence, not to some other basis for a claim that the plaintiff may have, but has not pleaded.

8. So far as it concerns the first defendant, the plaintiff's statement of claim pleads -

1. The plaintiff is a limited company duly incorporated under the provisions of the Companies Ordinance Cap.32 of the Laws of Hong Kong.

2. All of the defendants are limited companies duly incorporated under the provisions of the Companies Ordinance Cap.32 of the Laws of Hong Kong.

3. The 1st defendant was the Employer for a residential development at Peony Garden, Phase 1A, Beijing, People's Republic of China ("the Project"), whose registered office is situate at 15th floor, Bank of East Asia Building, 10 Des Voeux Road Central, Hong Kong.

4. The 2nd and the 3rd defendants are trading, and/or at all material times traded, as a joint venture, whose place of business was at 10th Floor, Inter-Continental Plaza, 94 Granville Road, Tsimshatsui East, Kowloon, Hong Kong, namely, Sum Tat - China Expand J.V. ("the Joint Venture").

5. The Joint Venture was the main contractor for the Project and the Architect for the Project was Taoho Design International Limited ("the Architect").

6. The 1st defendant's E & M Consultant for the Project is Far East Consulting Engineers Limited ("the BS Consultant").

7. By an agreement made between the plaintiff and the 1st defendant contained in and/or evidenced by, inter alia, a letter ("the Letter of Acceptance") issued by the Architect, as agent for and on behalf of the 1st defendant, dated 12 July 1994 ("the LOA Agreement"), the 1st defendant engaged the plaintiff to supply materials and render work for the air-conditioning, electrical, plumbing and drainage installation of the Project ("the BS Work").

8. It was an express term of the LOA Agreement, inter alia, that the LOA Agreement was to be binding on the plaintiff and the 1st defendant unless and until a formal agreement was prepared and executed.

9. It is averred that no such formal agreement, referred to in the express term hereinabove was entered into subsequent to the LOA Agreement.

10. In the circumstances, the LOA Agreement continued to be binding between the plaintiff and the 1st defendant at all material times.

11. Pursuant to the LOA Agreement, the plaintiff supplied materials and rendered works in connection with the BS Work, worth HK$42,306,320.41 in total.

12. The BS Consultant has assessed part of the plaintiff's works and has recommended that payments totalling HK$21,201,540.27 be made to the plaintiff.

13. The plaintiff has received payments totalling HK$15,761,638.87, leaving an outstanding balance of HK$26,544,681.54.

14. Notwithstanding the plaintiff's requests, the 1 st defendant has failed to and/or refused to pay the plaintiff the said sum of HK$26,544,681.54 (which includes the balance sum of HK$5,439,901.40 recommended by the BS Consultant) or any part thereof.

9. So, the case in respect of which the first defendant should show a defence having a real prospect of success with evidence that carries some degree of conviction is, in essence, that the architect, as agent for the first defendant, entered into the agreement alleged in terms of the letter of 12 July 1994, that it was an express term of that agreement was to remain binding until a formal agreement was executed, and that there is no such formal agreement.

10. The plaintiff's claim is plain and clear. There is nothing fancy about it. There is no allegation of a collateral agreement or estoppel, or anything of that nature.

The First Defendant's Evidence

11. In support of the application, Mr Tso Wai Cheung Edwin (Mr Tso) filed an affirmation on behalf of the first defendant. This was affirmed on 20 February 1998.

12. Mr Tso said that he was the general manager of Silver Faith Development Limited "a wholly owned subsidiary of" the first defendant. In his second affirmation, Mr Tso says that he had thought this, but, having been shown a copy of a company search, he realised that the companies did not have this relationship, but were in the same ownership.

13. Mr Tso produced a draft defence by which the first defendant intends to plead that it was not the employer, but a company called Beijing Grand Canal Real Estate Development Company Limited (BGC) was. In the draft defence, the first defendant says that a letter of intent issued by BGC dated 15 June 1994 was accepted and endorsed by the second and third defendants on behalf of a joint venture as main contractors and their signatures witnessed by the architect on 18 June 1994. As to the letter of 12 July 1994, the first defendant says that it did not enter into that agreement as alleged or at all, and that BGC was the "client" on whose behalf the architect issued the letter. The first defendant denies that the agreement is binding on it.

14. Mr Tso produces a copy of the letter of intent of 15 June 1994. It is addressed to the second and third defendants as a joint venture. It says that the general contract will be awarded to them but they must confirm certain clauses. The work was to commence on 17 June 1994. BGC signed on 15 June 1994 and the second and third defendants signed on 18 June 1994.

15. Mr Tso goes on to say that BGC was set up as a joint venture company by Silver Faith Development Limited and Beijing Tian Xu Group. Mr Tso says that this explains how the letter of credit I will mention later came about.

16. Mr Tso says that the letter of 12 July 1994 was copied to him acting on behalf of Silver Faith Development Limited as joint venture party of BGC.

17. The letter of 12 July 1994 is addressed to the plaintiff. The relevant parts read-

"On behalf of the Client, we would like to confirm the award of the above captioned works to your company . . . subject to the following terms:

          3. You will enter into a nominated sub-contract [the joint venture] . . .

Contract documents are under preparation and you will be notified when they are ready for execution. Unless and until a formal agreement is prepared and executed, your submitted tender and post-tender correspondence together with this letter of acceptance shall constitute a binding contract."

18. The letter is copied to "Silver Faith - Mr Edwin Tso" and to two consultants.

19. Nowhere in this affirmation does Mr Tso say that the first defendant was the project manager for the project; and this is not alleged in the draft defence.

20. On 27 February 1998, Mr Liu Kin Sing (Mr KS Liu), the first defendant's solicitor filed an affirmation. In that, he said that he met Mr Tso and Mr Joseph NL Lui (Mr NL Lui), the electrical and mechanical consultant for the scheme. At the request of Mr KS Liu, Mr NL Lui prepared a letter dated 27 February 1994 in which Mr NL Lui said, in somewhat strong terms, that the plaintiff knew well that employer was BGC. He also said that "from time to time . . . [the first defendant was]. . . acting on behalf of the Employer as manager of the Project."

21. Later, Mr NL Lui swore and affidavit confirming the contents of this letter. He also points out that the name of BGC was clearly stated in the tender documents as employer, and in other documents BGC is described as the employer.

22. Minutes of site meetings reveal the presence of representatives of BGC and of the plaintiff, but no representation by the first defendant.

23. The plaintiff's payments applications are addressed to the second defendant.

The Plaintiff's Evidence

24. The evidence for the plaintiff comes from Mr Chang Wei Jeng Andy (Mr Chang). He made his affirmation on 13 May 1998.

25. Mr Chang says that, in early in 1994, Mr Tso, acting for the first defendant, approached him to see if the plaintiff would be interested in tendering to the first defendant for the project. After orally agreeing to tender, he received formal invitations to tender. There are three of these letters relating to different work dated 23 May, 6 June and 4 July 1994. They are from the electrical and mechanical consultants on the project. They all say "On behalf of Silver Faith Holdings Ltd.. we have pleasure in inviting you to tender for the above nominated sub-contract. 1 set of tender documents and drawings are enclosed herewith for your necessary action." The letters are copied to the first defendant and two consultants.

26. After dealing with his receipt of the invitations to tender, Mr Chang then, in a new paragraph, speaks of receiving the tender documents and noticing that the tender forms were addressed to BGC.

27. Mr Chang says he was concerned by the fact that the tender documents were in the name of BGC as employer, and spoke to Mr Tso. Mr Chang says that Mr Tso assured him "our client would still be Silver Faith Holdings Ltd in Hong Kong, and that it would be the one assessing the tenders and letting the contracts and that payments would also be made here in Hong Kong." Mr Chang says the reason for this was that the plaintiff would not contract with PRC companies and would work only with and for Hong Kong companies. Mr Chang also says that, when he expressed concern "as to how my company would be protected if the main contractor failed to make payments to us for any reason, I was advised by Mr Tso that if this should happen, then Silver Faith Holdings Ltd would pay us direct.". Mr Chang says that the main contractor did fail to pay and Silver Faith Holdings Ltd paid the plaintiff $7.5 million by letter of credit.

28. The rest of Mr Chang's evidence recites facts and describes documents that indicate that the first defendant was heavily involved in the project, and, without more, might lead to the conclusion that the first defendant was either the employer or was acting on behalf of the employer.

The First Defendant's Response

29. Mr Tso responds to Mr Chang's evidence. Many of the factual allegations by Mr Chang are denied. Mr Tso explains that, in about December 1995, Mr Chang complained that the main contractor was withholding money payable. In essence, Mr Chang told him that without money the work would not progress. That is a story familiar to any judge dealing with construction matters. Mr Tso says that the first defendant arranged the payment on behalf of BGC so that the work would proceed.

Assessment of the Evidence

30. The evidence of the both parties is to the effect that the first defendant was closely involved with the work. They differ as to what conclusion I should draw from this.

31. The first defendant says that it was involved because it was acting on behalf of the employer BGC. Mr Tso says so, and is supported in this by Mr NL Lui, the engineering consultant.

32. The only possible basis for criticising this evidence is that the first defendant did not say this in Mr Tso's first affirmation filed in support of the application to set aside.

33. Mr Coleman suggests that the evidence of the first defendant has "shifted" and has been "tailored". He says that Mr Tso changes the way he deals with the case and that the bundle of documents disguises that shift. He points out that Mr Tso does not say initially that the first defendant was closely involved because it was the project manager.

34. I do not think that this criticism is fair.

35. As to the first defendant's evidence having "shifted", it is true that Mr Tso's first affirmation did not mention the position it occupied in becoming involved in the project, This affirmation was short, and this is understandable because the first defendant would have been under great pressure to make its application quickly. The first defendant had a judgment against it for over $26 million. It was necessary to make an application to set aside this judgment and gain a stay of execution quickly. Having done so, and before Mr Tso knew the details of the plaintiff's evidence, the first defendant then filed further evidence to support its case, and the first defendant's case based on that evidence has not changed. In its early evidence, the first defendant does not pretend that it was divorced from the project. It explains that BGC was set up by an associated company.

36. Regarding the allegation that the first defendant's evidence is "tailored", one must ask "tailored" to what? Usually, this allegation is made when a party gives a story after knowing the opponent's version. This is not the case here. The first defendant did not tailor its evidence to the plaintiff's version by saying on 27 February 1998 that it was the project manager because the plaintiff's version was not revealed in evidence until 13 May 1998. There might have been something in this point if Mr Tso had raised the allegation of the first defendant being the project manager only after the plaintiff had given its story, but this is not so.

37. I do not understand the allegation that the bundle of documents disguises the alleged "shift". The bundle of evidence is not arranged in the usual chronological order, but I cannot see any sinister motive for this. It is quite clear for all to see the order in which the evidence was filed.

38. But all this is largely by the way because the plaintiff's real difficulty is that, if one looks at the relative prospects of success of the parties, the plaintiff could not possibly succeed at trial on its pleaded case even on its own evidence.

39. Mr Chang seems to want me to accept that, because the invitation letters said that the invitation was issued on behalf the first defendant, he believed that the first defendant was the employer. But he could not possibly have entertained that belief because the tender documents that accompanied the letters said quite clearly that BGC was the employer. Mr Chang deals with the tender documents in a separate paragraph commencing "Upon receiving the tender documents I noticed" the name of BGC. I do not know if it is deliberate or not, but a less than close reading of Mr Chang's description of receiving the invitations to tender and receiving the tender documents, without considering the other evidence, creates the impression that he is saying these things were separated in time.

40. Mr Chang gives the impression that he was surprised that the tender documents described BGC as the employer, yet he gives no solid basis for this attitude. Even on his own version, all that had happened before he received tender documents describing BGC as the employer was a meeting early in 1994 at which Mr Tso asked if he would be interested in tendering "to Silver Faith Holdings Ltd" for the work. In my view, this should not have led him to believe that some other company would not be the employer.

41. In spite of what Mr Chang says about the plaintiff's reluctance to contract with BGC, quite clearly the plaintiff took a step in this direction when it responded to the invitation to tender to BGC without any qualification. The tender documents make it abundantly clear that BGC was the employer. No one reading them could have been in any doubt about this.

42. Surprisingly, Mr Chang does deal specifically with this crucial act of the plaintiff of making the tender to BGC. He does not say what he had in mind when he did this. He must have known that the plaintiff was, by tendering, making an offer to BGC as the employer. The plaintiff addressed its tender to BGC. When the plaintiff received the letter of 12 July 1994, on which it founds its action, it could not possibly have believed that the reference to "the Client" was a reference to the first defendant because that letter was in response to the plaintiff's offer to BGC as the employer. The letter quotes the precise figures tendered by the plaintiff to BGC. In spite of this, Mr Chang talks about receiving the letter "advising us 'On behalf of the Client' (that is, Silver Faith Holdings Ltd) that we had been awarded the nominated sub-contracts". It simply cannot be so that any reasonable businessman who makes an offer to one person and receives a reply from an agent referring to a "client" would believe, without more, that the "client" is some person other than the one to whom he made his offer.

43. The plaintiff pleads an agreement "contained in and/or evidenced by, inter alia" the letter of 12 July 1994. One of the "alia", referred to in the letter itself, was "your submitted tender". If the plaintiff had pleaded this tender, which was the offer to contract, it would have been immediately apparent that the plaintiff was relying on an acceptance of an offer made to BGC, and, in accepting the tender, the "Architect" could not possibly have been acting "as agent for and on behalf of" the first defendant. The letter of 12 July 1994 refers to itself as a "letter of acceptance", and it could be only an "acceptance" of the offer to BGC, not to the first defendant. There was no offer to the first defendant.

44. It is not necessary to examine Mr Chang's evidence about what he says were the assurances or representations, or whatever they are said to be, by Mr Tso, and decide what difference they would make to the clear conclusion from the evidence that the plaintiff contracted with BGC, because they are not pleaded.

45. Accordingly, my finding is that the first defendant has advanced a case having a real prospect of success with evidence that carries some degree of conviction. In fact, the evidence adduced before me shows, in my judgment, that the plaintiff could not possibly succeed on its pleaded case.

Is the "Employer" Liable?

46. Mr Scott advances a second argument on the basis that, whoever the "Employer" might be, it is not liable on the agreement alleged by the plaintiff.

47. In its tender documents addressed to BGC, the plaintiff gave an undertaking in the following terms -

"We agree that, before the candidate for the general contract has been selected, the Employer may accept this tender on behalf of the general contractor, and all the rights and obligations of the general contractor stated in this contract shall temporarily be treated as the rights and obligations of the Employer. After the candidate for the General Contractor has been selected, the temporary rights and obligations of the aforesaid Employer shall be reverted to the General Contractor, and the formal contract shall be signed between and performed by us and the General Contractor, and there shall not be any contractual relationship between us and the Employer."

48. This undertaking was accepted by the letter of 12 July 1994.

49. So the agreement between the plaintiff and the employer was that "After the candidate for the General Contractor has been selected, the temporary rights and obligations of the aforesaid Employer shall be reverted to the General Contractor". I read this reversion of the rights and obligations to the general contractor being dependent only on the selection of the general contractor, and not on any formal contract between the plaintiff and general contractor. At the very least, the acceptance of this view at trial has a real prospect of success.

50. The undisputed evidence is that the general contract was awarded to the second and third defendants on 18 June 1994. This was, of course, before the letter of 12 July 1994, but I do not see that this makes any difference. This award to the second and third defendants cannot be other than a "selection" of them as the general contractor. The fact that this selection had already happened when the agreement between the plaintiff and BGC was concluded on 12 July 1994 means that the employer never had any "temporary rights and obligations", but these were immediately vested in the general contractor.

51. The fact that the plaintiff recognised that its contractual relationship was with the second and third defendants, and not the employer, is clear from the uncontradicted evidence that the plaintiff submitted its formal requests for payments to the second defendant.

52. So, it seems to me, the first defendant has a real prospect of success on this ground also.

Striking Out

53. As I have said, there is also a summons before me by the first defendant seeking to strike out its name as first defendant.

54. The first basis on which the first defendant seeks to do this is that the first defendant has "been improperly and unnecessarily joined." I do not think that this is a proper basis on which I could strike out the first defendant's name. The first defendant's real complaint is that the cause of action pleaded against it cannot succeed, but there is no case for saying that there has been a misjoinder.

55. The second ground is that the statement of claim fails to disclose any reasonable cause of action. On this ground, no evidence is admissible. I must look at the pleading alone. In my view, it is only the evidence that shows the weakness of the plaintiff's case. The pleading itself, if proved, provides a good cause of action.

56. The other grounds are that the claim is scandalous, frivolous, vexatious, may prejudice, embarrass or delay a fair trail or is otherwise an abuse of the process of the court. At this stage, I do not see a clear case for relief under these grounds. The plaintiff's pleading on the basis of the evidence is not in good order, but there may be room for putting it in order on the basis of the evidence given by Mr Chang. It seems to be that it would be a waste of time and costs to make an order that would, in effect, require the plaintiff to commence fresh proceedings against the first defendant. If, however, the plaintiff does not amend its statement of claim to make allegations consistent with its evidence and such that will render the first defendant liable if proved, the continuance of these proceedings by the plaintiff may well be an abuse of the process of the court.

The Result

57. In the result, I find that the first defendant has established its case to have the default judgment set aside. Accordingly, it is set aside. I have to say that, even if the first defendant had not established a case required by the guidelines, I would have been inclined to exercise my discretion to set aside the judgment. It is perfectly obvious that the first defendant always intended to defend the action. And when it knew about the slip-up, it acted with all due speed to put things right. In my view, it would be quite wrong to have allowed a default judgment for over $26 million to stand in these circumstances because of a minor break down in the system of the office of the solicitors for the first defendant where the first defendant has at least an arguable defence.

58. I have said that the continuance of these proceedings by the plaintiff on the present cause of action may well be an abuse of the process of the court. Accordingly, I give leave to the plaintiff to apply within 21 days to amend its statement of claim to deal with the weaknesses I have identified in this judgment. If it does so, the first defendant has leave to file its defence to that amended claim within 21 days of the amendment. In the event that the plaintiff fails to apply to amend, I give leave to the first defendant to reapply to strike out its name as a defendant in these proceedings. The plaintiff may decide to appeal against this judgment. If it does so, my orders, are stayed until the outcome of that appeal. In this event, execution under the judgment is stayed until the outcome of that appeal.

The Costs

59. The matter of consts has not been argued. It seems to me, however, that, without argument, the proper order is that the first defendant pay the costs of the applications under the summonses dated 20 and 27 February 1998 on an unopposed basis, and that the plaintiff pay the costs of the opposition. I make an order nisi in these terms.