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DCCJ 3474 / 2006
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO. 3474 OF 2006
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BETWEEN
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NG KWOK ON (吳國安) |
1st Plaintiff |
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LAM MAN LIN (林文蓮) |
2nd Plaintiff |
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and |
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RICH LEGEND LIMITED |
1st Defendant |
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TAM KEI MAN (譚基文) |
2nd Defendant |
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LAM TAI TAI (林帶娣) |
3rd Defendant |
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Coram : His Honour Judge Thomas Au in Chambers (open to public)
Date of Hearing : 27 July 2007
Date of Handing Down Judgment : 21 September 2007
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DECISION
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1. This is the 2nd and 3rd Defendants’ application under O 13 r 9 of the Rules of District Court to set aside the judgment (“the Default Judgment”) dated 21 November 2006 entered against them and the 1st Defendant in default of a notice of intention to defend.
2. The 2nd and 3rd Defendants say the Default Judgment should be set aside since (a) it is an irregular judgment as no proper service of the writ of summons had been effected on either of them, and (b) in any event they have a meritorious defence to the claim.
3. In order to understand the 2nd and 3rd Defendants’ grounds, it is necessary to set out the background leading to the present dispute and the Default Judgment as follows.
Background
4. The undisputed background facts are these.
5. The 1st and 2nd Plaintiffs are husband and wife. The 2nd and 3rd Defendants are also husband and wife.
6. The 1st Defendant, Rich Legend Ltd (“Rich Legend”), as tenant entered into a tenancy agreement (“the Tenancy Agreement”) dated 27 October 2003 with SHK (N.T.) Shopping Ltd as landlord (“the Landlord”) to rent a shop (“the Shop”) known as Shop No. 10 on Ground Floor of Eightland Gardens, Tai Po, New Territories, Hong Kong (“the Shop Address”) to operate a restaurant known as “大食貓澳門餐廳” (“the Restaurant”).
7. Section I and Part V of the First Schedule of the Tenancy Agreement restricts the user of the Shop for the operation of the Restaurant as a Portuguese and Macau style restaurant under the name of “大食貓澳門餐廳”. The tenant cannot change the user unless with the prior written permission of the Landlord.
8. Clause 18 (“Clause 18”) of Section V of the Tenancy Agreement provides expressly that, unless approved by the Landlord in writing, the tenant shall not assign underlet or otherwise part with possession of the Shop. Clause 18(iii) further provides that in the case of a tenant which is a corporation, any change in the person or persons who owns or own a majority of its voting shares shall be deemed to be in breach of clause 18 unless approved by the Landlord in writing.
9. At the time of the Tenancy Agreement, the only shareholders (collectively “the previous shareholders”) of the Rich Legend were Ho Kai Man (“Ho”), Fu Loi Chuen (“Fu”) and Chan Hoi Kin (“Chan”).
10. It is the 1st and 2nd Defendants’ case that on about 2 August 2005, they purchased the Restaurant business (“the Restaurant Business”) from the previous owners and thus all the shares in Rich Legend were also transferred to them.
11. By way of a written resolution of Rich Legend, on about 2 August 2005, the previous shareholders resolved to transfer all their shareholding in Rich Legend to the 1st and 2nd Defendants.
12. On 25 August 2005, the 1st Plaintiff and the 2nd Defendant both signed a Chinese agreement (“the Chinese Agreement”), whereby effectively it was agreed that the Restaurant Business operating at the Shop would be assigned to the 1st Plaintiff together with the Tenancy Agreement, the food licence, all the fixtures and business related utensils of the Restaurant.
13. The Chinese Agreement provides that the purchase price of the Restaurant Business was HK$600,000, and the completion date 10 September 2005.
14. It is the Plaintiffs’ case, and this is not disputed by the 2nd and 3rd Defendants, that the 2nd Defendant signed the Chinese Agreement for and on behalf of Rich Legend. In other words, it is the Plaintiffs’ own case that the Chinese Agreement only binds Rich Legend.
15. On 10 September 2005, that is the scheduled completion date under the Chinese Agreement, the 2nd and 3rd Defendants further executed a Chinese memorandum (“the Memo”) in which:
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They as shareholders of Rich Legend agreed to provide to the 1st and 2nd Plaintiffs the audited financial reports of the company by 10 November 2005, and undertook to settle all the debts or Rich Legend incurred before 10 September 2005. |
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They also warranted that the Plaintiffs would not suffer any loss, claims or lawsuit by reason of their taking over of the Shop (“the Warranty”). |
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The Chinese original of the Memo is as follows: |
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由：譚基文，林帶娣 |
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致：吳國安，林文蓮 |
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日期：2005年9月10日 |
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我們為盈能有限公司之股東，同意在2005年11月10日前提交盈能有限公司由2001年至2005年年度的核數報告給吳國安及林文蓮及承諾清繳盈能有限公司在2005年9月10日前之債務，並保証吳國安及林文蓮不會因接用大埔八號花園商場地下10號舖而受到任何損失、聲討或訴訟。是項保証將會在2005年9月10日後仍然有效。 |
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[signed] |
[signed] |
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譚基文 |
林帶娣” |
16. On this date, upon signing also the Memo, the Plaintiffs also paid the 2nd and 3rd Defendants HK$590,000 as balance of the purchase price under the Chinese Agreement. The 2nd and 3rd Defendants at the same time executed the relevant bought and sold notes to transfer all the shares in Rich Legend to the Plaintiffs.
17. Notwithstanding the Memo, the 2nd and 3rd Defendants have not been able to provide the Plaintiffs the audited financial reports of Rich Legend.
18. On the other hand, after taking over the Restaurant Business, the Plaintiffs changed the name of the Restaurant to “潮州小廚 (大食貓)” and its style to Chiuchownese cuisine without the prior approval of the Landlord.
19. The Landlord apparently through the managers of the shopping mall first came to notice the change of the name and style of the Restaurant, and later, in February 2006, also came to be aware of the change of the shareholdership in Rich Legend and that the Plaintiffs had by then become the only shareholders.
20. Since the Landlord had not given its approval to such change, it regarded Rich Legend in breach of Clause 18 and sought to terminate the same and to recover vacant possession of the Shop from Rich Legend.
21. In March 2006, the Landlord brought an action in the High Court against Rich Legend and the 1st Plaintiff for wrongful occupation of the Shop. The principal ground relied on by the Landlord in this action was that Rich Legend was in breach of Clause 18 by reason of its change of shareholdership without the Landlord’s prior approval.
22. Rich Legend eventually surrendered vacant possession of the Shop to the Landlord on 13 March 2006.
The Plaintiffs’ claim against the 2nd and 3rd Defendants
23. The Plaintiff’s claim against the 2nd and 3rd Defendants is premised on the 2nd and 3rd Defendants’ “warranty” set out in the Memo. Effectively the Plaintiffs say by reason of the Memo, the 2nd and 3rd Defendants agreed or guaranteed that they would be liable to the Plaintiffs for any loss or damage suffered by the Plaintiffs by reason of or in relation to the taking over of the Shop or by reason of any claim or law suits related to the Shop.
24. Given that the Plaintiffs had to surrender the Shop to the Landlord, they have therefore suffered loss in terms of all the expenses they had spent thereat for carrying out the Restaurant Business, the cost incurred for reinstating the Shop for surrender purposes (which amounted in total to HK$156,300), and the HK$600,000 paid for the purchase of the Restaurant Business. The Plaintiffs say these losses are related to the taking over of the Shop or to the litigation or claim brought by the Landlord concerning the Shop, which the 2nd and 3rd Defendants should be liable under the Warranty.
25. Although it is also pleaded in the Statement of Claim the facts that, under the Memo, the 2nd and 3rd Defendants shall provide to the Plaintiffs the audited accounts of Rich Legend by 10 November 2005 and that the 2nd and 3rd Defendants have failed to do so, on a proper reading of the pleading, this alleged breach on the part of the Defendants does not form part of the Plaintiffs’ claim for any loss or damage suffered therefrom. As such, I am not concerned with this allegation for the present purpose.
The service of the Writ leading to the Default Judgment
26. The Plaintiffs’ former solicitors, Messrs Hui & Lam (“H&L”), served the present Writ on:
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The 2nd Defendant by posting it by way of registered post to the address of香港新界沙田何東樓落路下村141號 (“the Residential Address”) as his last known address. |
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The 3rd Defendant by posting it by way of registered post to the Shop Address as her last known address. |
27. Having received no acknowledgment of service and notice of intention to defend, the Plaintiffs proceeded to obtain the Default Judgment on 21 November 2006. H&L’s clerk filed an affirmation of service to confirm that the firm has not received any returned mails.
28. On 15 December 2006, H&L then posted by way of ordinary post a copy of the sealed judgment to the 2nd Defendant and the 3rd Defendant respectively again at the Residential Address and the Shop Address.
29. It is the 2nd Defendant’s own evidence that he received a copy of the Default Judgment. He and the 3rd Defendants then instructed solicitors to apply to set it aside.
Regular or irregular judgment
The applicable principles
30. Mr Tam for the 2nd and 3rd Defendants submits that the applicable principles concerning the setting aside of default judgments are as follows:
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The presumption of good service by way of registered post sent to the defendant’s last known or usual address under O 10 r 3(a) of the Rules of District Court is a rebuttable one. |
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The real test for service is whether the writ is brought to the defendant’s notice and not whether it has been delivered to his usual or last know address: Chu Kam Lun v. Yap Lisa Susanto [1999] 3 HKC 378, para 5 per Leong JA; Kwan Kam Wah v. Chan Wai Ming [2000] 2 HKC 378, para 24 per Chu J. |
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If there is an irregular judgment, the defendant is entitled to set it aside as of right without consideration of the merits of the defence, subject to the Court’s discretion to impose conditions, which depends on factors such as whether the defendant is at fault in not receiving the writ as served pursuant to the rules, or whether there is inexcusable delay on the part of the defendant in seeking to set aside the irregular judgment: Kerry Freight (Hong Kong) Ltd v. Del Prado Asia Ltd [2005] 3 HKLR 804; Po Kwong Marble Factory Ltd v. Wah Yee Decoration Co Ltd [1996] 4 HKC 157 (CA), 161C-G, 162E-F; Hong Kong Civil Procedure 2007, paras 13/9/4, 13/9/10. |
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On the other hand, even if a judgment is regular one, the court still retains a wide discretionary power to set it aside, with or without conditions. The guiding principle in the exercise of such discretion is to avoid injustice. Such injustice is generally (but not always or automatically) shown where the defendant can show a meritorious defence with a real prospect of success or which carries some degree of conviction: Hong Kong Civil Procedure, para 13/9/12, 13/9/13. |
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In assessing the merits of the defence, it requires the Court to form some provisional view of the probable outcome of the action. Where the outcome depends on whose evidence is likely to be accepted, the appropriate test is to ask whether the defence witnesses could well be believed at trial: L&M Specialist Construction Ltd v. Wo Hing Construction Co Ltd [2000] 3 HKLR 262, paras 16-17 per Rogers JA (as he then was); Hong Kong Civil Procedure 2007, para 13/9/14. |
31. These principles are generally well established and Ms Mok for the Plaintiffs does not dispute them.
Whether the service on the 3rd Defendant is regular or not
32. The service of the Writ on the 3rd Defendant was effected at the Shop Address. The 3rd Defendant denies in her affirmation having received the Writ purportedly so served.
33. It is clear that at the time of service, the 3rd Defendant was no longer at the Shop Address, given that (before the purported service) the Shop had already been handed over to the Plaintiffs, who later surrendered it to the Landlord. The Plaintiffs or their solicitors have not provided any explanation as to why, despite the fact they should know that the 3rd Defendant was no longer contactable at the Shop Address, they still served the Writ on her by sending it to the Shop Address.
34. It is trite that where the plaintiff is aware that the defendant is no longer at the address at the time of service, O 10 r. 1(3)(b)(i) is not satisfied: Philips Securities (HK) Ltd v. Lam Chi Bin Stanley [2002] 1 HKC 432; Hong Kong Civil Procedure 2007, para 10/1/23.
35. Further, in the light of the evidence, I also have no reason to doubt the 3rd Defendant’s disposition that she has not received the Writ through the purported service. Cf: Wei Bingqing v. Xie Diangrong (unrep., HCA 2654 of 2003, reasons for decision, 1 April 2006), paras 34-37 per Chung J; Hong Kong Civil Procedure 2007, para 13/9/5, p 161.
36. I therefore hold that the service of the Writ on the 3rd Defendant is an irregular one. The Default Judgment obtained against her is therefore also irregular.
Whether the service on the 2ndDefendant is regular or not
37. The service was effected on the Residential Address. The 3rd Defendant also denies having received it in his affirmation.
38. However, he never denies that he lived at or was contactable at the Residential Address at the time of the purported service. There is also nothing from the 2nd Defendant to explain why he would not have received this letter given that (a) it is apparent that this is his residential address, and (b) he managed to receive the letter subsequently sent by H&L by ordinary post to the same address enclosing therewith a copy of the Default Judgment.
39. On the other hand, in his 2nd Affirmation, he further deposes to the effect that he was informed by his solicitors’ firm that, upon their inquiry, the General Post Office has informed his solicitors’ firm that, although the office did not keep any record of registered posting for 6 months and thus they were not able to provide a formal reply in writing to the inquiry, their “internal records” revealed that the registered letter posting the Writ had been returned by the post office to H&L undelivered. Upon my question, Mr Tam further clarified that it was a staff of his firm who had had the telephone conversation with the post office’s staff and that it was this staff who had in turn informed the 2nd Defendant the contents of this telephone conversation.
40. Although I am not wholly satisfied with the state of this evidence, in particular where the purported staff of Mr Tam’s firm has not provided an affirmation to confirm his telephone conversation with the post office staff, I cannot (as I do not have sufficient basis to) simply dismiss this part of the 2nd Defendant’s evidence as incredible. I therefore also cannot dismiss his affirmed evidence that he has not received the Writ. Cf: Wei Bingqing v. Xie Diangrong, supra, paras 34-37 per Chung J; Hong Kong Civil Procedure 2007, para 13/9/5, p 161.
41. Even though H&L’s clerk disposed in the affirmation of service that the registered post with the Writ sent to the Residential Address was not returned, in light of the conflicting evidence, which cannot be resolved on the affirmations.
42. However, given that this is a Default Judgment and that the 2nd did Defendant did seek to set aside the Default Judgment once he received it, I would give the benefit of doubt to the 2nd Defendant and conclude that the service of the Writ on him is an irregular one.
Should the Default Judgment be set aside
43. Given my conclusion that the Default Judgment is an irregular one as against both the 2nd and 3rd Defendants, I would on this basis alone set it aside.
Is there a meritorious defence
44. However, in case I am wrong on my conclusions above as to the irregular service of the Writ, and given that the issue has been fully argued before me, I would in any event proceed to further consider the question on whether the 2nd and 3rd Defendants have shown a meritorious defence.
The defence
45. The principal defence raised by the 2nd and 3rd Defendants in the affirmations as against the basis of the Plaintiffs’ above claim is as follows.
46. It is the 2nd and 3rd Defendants’ case that before they signed the Memo, they had expressly drawn the Plaintiffs’ attention to the restriction of subletting by way of change of shareholding under Clause 18. They had also repeatedly emphasized to the Plaintiffs that the transaction must be carried out “under the table”, in the sense that all information concerning the transfer of the Restaurant Business must be kept away from the Landlord, and that the name of the Restaurant and its style must not be changed. They further told the Plaintiffs that if otherwise, the Tenancy Agreement would be affected due to its restriction on subletting and user.
47. The 2nd and 3rd Defendants also say they had before the signing of the Memo provided to the Plaintiffs’ accountant, one Mr Tom Kim Fung, various documents which they had previously signed with Ho, Fu and Chan on 2 August 2005 concerning the 2nd and 3rd Defendants’ purchase of the Restaurant Business from them. In the circumstance, according to the 2nd and 3rd Defendants, the Plaintiffs were fully aware of the previous change of shareholdership of Rich Legend. The Plaintiffs have not sought to file a supplemental affirmation to deny the allegation that Mr Tom had received these documents.
48. However, after the Plaintiffs had taken over the Restaurant Business, they changed the name and style of the Restaurant (which is not in dispute). These changes had drawn the attention of the Landlord leading to its discovery of the change of shareholdership of Rich Legend. This ended up in the Landlord seeking the return of the Shop by reason of the breach of the Clause 18.
49. The 2nd and 3rd Defendants’ defence is thus in substance that:
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With the above factual background (in particular the Plaintiffs’ knowledge of the restriction on subletting and change of user and name of the Restaurant), on a proper construction of the Memo, the 2nd and 3rd Defendant’s warranty should be interpreted not include any loss or damage (albeit related to the taking over of the Shop) suffered by the Plaintiffs which is caused by the Plaintiffs’ own acts in changing the name and style of the Restaurant. |
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Given the Plaintiffs’ own acts of changing the name and style of the Restaurant which had led to the Landlord’s action to recover the Shop, the Plaintiffs’ alleged loss in losing the Shop was caused by these acts and thus is excluded from the Warranty. In the circumstances, the 2nd and 3rd Defendants are not liable to the Plaintiffs as alleged. |
50. The 1st Plaintiff in his affirmation (filed on behalf of the 2nd Plaintiff as well) denies, before the signing of the Memo, having been allegedly told by the 2nd Defendant those matters set out above. He also denies having his attention being drawn to Clause 18 as alleged or having been told about the previous change of shareholdership of Rich Legend.
Whether the defence carries some degree of conviction
51. In my view, if the 2nd and 3rd Defendants’ evidence is accepted at trial, this would provide a good defence to the Plaintiffs’ claim. This is so because with those parts of the evidence accepted, there is a reasonable likelihood that the Court would also accept the 2nd and 3rd Defendants’ contention that the Warranty, properly construed under those circumstances, should not and does not extend to cover any of the Plaintiffs’ loss suffered as a result of their own acts.
52. In light of the conflict of the affirmations evidence, I cannot at this stage come to a view that there is no reasonable chance that the 2nd and 3rd Defendants’ evidence would be accepted at trial.
53. Quite to the contrary, given that there is no doubt that they were aware (since they had a copy of the Tenancy Agreement themselves) the restriction of subletting set out in Clause 18, I am of the provisional view that it is inherently likely that, when they were agreeing to the warranty provision in the Memo, the 2nd and 3rd Defendants would try to limit their exposure to liability by telling the Plaintiffs’ that they should not let the Landlord know about the change of shareholdership and matters of change that might catch the Landlord’s attention.
54. In the premises, on the evidence presented before me, the 2nd and 3rd Defendants have satisfied me that their allegations made in support of the defence carry some degree of conviction.
55. For these reasons, even if the Default Judgment were a regular one, I would have also set it aside on the basis that the 2nd and 3rd Defendants have shown a meritorious defence.
Conclusion
56. For the above reasons, I therefore order that the Default Judgment be set aside as against the 2nd and 3rd Defendants.
57. I would also make an order nisi that the Plaintiffs are to (a) bear their own costs of signing the irregular Default Judgment, and (b) to pay the 2nd and 3rd Defendants’ costs of this application to be taxed if not agreed.
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(Thomas Au)
District Court Judge |
Ms. M. Mok of Messrs Li & Partners for 1st & 2nd Plaintiffs.
Mr. Gary K.W. Tam of Messrs Gary K.W. Tam & Co. for 2nd & 3rd Defendants.
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