XCHRX LEUNG SHING ON CONSTRUCTION CO. LTD. v. WING HONG CONSTRUCTION LTD. AND ANOTHER

HCCT85/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.85 OF 2000

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D E C I S I O N

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1. The plaintiff, Leung Shing On Construction Company Limited (LSO"), is a demolition sub-contractor. The 1st defendant, Wing Hong Construction Ltd ("Wing Hong"), is the main contractor and the 2nd defendant, Hung Kei Mechanical Engineering Co. ("HKME"), is the plaintiff's sub-subcontractor.

2. The original contract to carry out demolition work at a site in To Kwa Wan between LSO and Wing Hong was in July 1999. That contractual relationship was modified by three subsequent agreements, which the plaintiff describes as follows :

(i) The Participation Agreement : By this agreement made on 17 January 2000, LSO and HKME agreed that the "net income" (as defined in the agreement) would be shared : 40% to LSO and 60% to HKME.

(ii) The special payment arrangement : By this arrangement, payments due to LSO under their contract with Wing Hong would be made directly to HKME. Each payment should be physically delivered to LSO who would issue a receipt for it, before it was paid on to HKME.

(iii) Variation : The Participation Agreement was varied as a consequence of the special payment arrangement. HKME was liable to pay either 4% or 13% (the percentage is a matter of dispute) to LSO from the money it received. It was also obliged to pay all the contractual expenses, including payments to suppliers.

3. LSO contend that, effectively, these arrangements were carried out until April 2000. However, since May 2000, payments were made by Wing Hong directly to HKME without complying with the provisions of the special payment arrangement. Moreover, HKME have not paid suppliers with the money it received. Those suppliers had contracted with LSO and so are now suing LSO for payment, whereas, the money, so LSO contend, has been paid to HKME.

4. Arising out of this, a number of summonses are before the court.

5. Firstly, the plaintiff seeks orders that :

1. Judgment be entered for the plaintiff against the 1st defendant, pursuant to Order 14, rule 1 of the Rules of the High Court, for a declaration that so called the special payment arrangement between the plaintiff and the 1st defendant was terminated by 12 April 2000 regarding plaintiff's acceptance of the 1st defendant's repudiation of that contract between the plaintiff and the 1st defendant.

2. A declaration that the 2nd defendant indemnify the plaintiff against the claims by its suppliers as pleaded in paragraph 27 of the Statement of Claim.

3. The 1st and/or 2nd defendant do make an interim payment to the plaintiff, pursuant to Order 29, rule 10 of the Rules of the High Court, for HK$3,824,632.85 or such amount as the court thinks fit, on the ground that if the action proceeds to trial, the 1st defendant and/or the 2nd defendant will be liable to pay the plaintiff substantial sums and/or damages.

6. Secondly, the 1st defendant seeks an order :

1. That pursuant to section 357 of the Companies Ordinance, Cap.32 and/or Order 23, rule 1 of the Rules of the High Court, Cap.4, the plaintiff do provide security for the 1st defendant's costs in this action to the satisfaction of this honourable court within 14 days from the date of the Order to be made herein.

2. That until such security is given all further proceedings in the claim by the plaintiff be stayed.

7. Thirdly, the 2nd defendant seeks an order that :

1. Judgment be entered for the 2nd defendant against the plaintiff, pursuant to Order 14, rule 1 of the Rules of the High Court, for :

(a) An account for :

(i) all money the plaintiff received from the 1st and/or 2nd defendant under the sub-contract;

(ii) all payments it made for the expenses incurred for the demolition works; and

(iii) all money it received from sale of scrap metals or materials of the site.

(b) A declaration that the 2nd defendant is entitled to be paid by the plaintiff and/or the 1st defendant the amount, including interim payments already made and such amounts for additional and variation works, under the sub-contract and be entitled to retain 60% of the balance of the total payment after :

(i) first discharging of any such liabilities or expenses incurred and/or to be satisfied for the demolition works;

(ii) inclusion of such money received from sale of scrap metal or materials (including those received and be reimbursed by the plaintiff upon account herein); and

(iii) thereafter payment, subject to the matters provided under sub-paragraphs (c) and (d) hereinbelow, to the plaintiff the balance, if any, of HK$1,500,000.00 under the term of the participation agreement.

(c) An order that the plaintiff shall make good and/or reimburse for the benefit of the participation agreement such amount, including those upon account to be provided by the plaintiff and the said HK$50,000.00 pleaded in paragraph 49 of the Defence and Counterclaim herein, as found due from the plaintiff herein;

(d) A declaration that in the event the plaintiff shall be in default of the matter stated in sub-paragraph (c) herein the 2nd defendant is entitled to deduct and set off, from the amount of money or share or profit that the plaintiff shall be entitled to upon completion of the demolition works, such amount found due from the plaintiff.

2. Judgment, pursuant to Order 27, rule 3 of the Rules of the High Court, be entered for the 2nd defendant against the plaintiff for the sum of HK$100,000.00 as pleaded in paragraphs 46 and 47 and in paragraph 5 of the prayer of the Defence and Counterclaim herein, with interests.

8. The plaintiff's case, in outline, is firstly, that Wing Hong should not have paid all the interim payments since 5 May 2000 to HKME because LSO had notified Wing Hong that the special payment arrangement was not being performed by HKME (i.e. it was not paying the suppliers) and it should therefore be cancelled. Secondly, LSO contends that payments by Wing Hong to HKME after May 2000 are not valid contractual discharges of debts due from Wing Hong to LSO. LSO should now be paid some or all of those monies so that it can discharge its liabilities to its suppliers who have not been paid by HKME. Thirdly, LSO contends that its liability under the special payment arrangement and the varied agreement has been discharged as from the date of its notice to Wing Hong and HKME that the agreements were not being properly performed.

Interim Payments

9. Of the six issues which arise from the three summonses, I consider it logical to deal with the plaintiff's application for interim payments first. The approach to be adopted is to ask : Will the plaintiff receive a substantial sum after taking into account every real likelihood that the sum claimed will be reduced by the defendants' contentions?

10. The relationship between Order 14 applications and Order 29 interim payment applications was considered in some detail by Browne-Wilkinson V-C in British & Commonwealth Holdings plc v. Quadrex Holdings Inc. [1989] 3 All ER 492 at p.508 :

"Under Ord 29, r 11 the court is required to approach the matter in two stages. At the first stage, the court has to be 'satisfied' that the defendant has admitted liability for damages or that a judgment for damages to be assessed has been obtained or (and this is the present case) 'that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages ...' Only if the court is so satisfied at the first stage can the court proceed to the second stage where it assesses the reasonable interim payment 'not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered ...' The question is whether the court can, at the first stage, be 'satisfied' that the plaintiff will obtain judgment at the trial when the same court has already reached the view that there is a triable issue entitling the defendant to unconditional leave to defend.

In Shearson Lehman Bros Inc v Maclaine Watson & Co Ltd [1987] 2 All ER 181 at 187, [1987] 1 WLR 480 at 489 Lloyd LJ said:

'Something more than a prima facie case is clearly required, but not proof beyond reasonable doubt. The burden is high. But it is a civil burden on the balance of probabilities, not a criminal burden. This involves no lasting hardship on the defendants, since there is provision for readjustment at the trial in the case of an overpayment.'

In Shanning International Ltd v George Wimpey International Ltd [1988] 3 All ER 475, [1989] 1 WLR 981 the judge had given unconditional leave to defend and then made an order for interim payment under Ord 29. Two issues were considered by this court: first, whether at the first stage the court has to take into account any cross-claim or set-off by the defendant in deciding whether it is satisfied that the plaintiff will obtain judgment at the trial; second, whether if the court has sufficient doubt to give unconditional leave to defend under Ord 14 it can be sufficiently 'satisfied' that the plaintiff will succeed at trial for the purposes of Ord 29. Glidewell LJ, after reciting counsel's submission that the test under Ord 29 is less stringent than under Ord 14, said ([1988] 3 All ER 475 at 483, [1989] 1 WLR 981 at 990):

'... Shanning, in order to bring itself within r 12(c), in order to satisfy the first stage, must satisfy the court on the balance of probabilities but to a high standard. Once it accepts that Wimpey has a genuinely arguable claim for an amount which may equal or exceed its admitted claim ... it cannot in my view satisfy this burden.' (My emphasis)

Nourse LJ agreed with Glidewell LJ on both points (see [1988] 3 All ER 475 at 484, [1989] 1 WLR 981 at 992).

Three weeks later, in Ricci Burns Ltd v Toole [1989] 3 All ER 478, [1989] 1 WLR 993 another division of this court had to consider the same point. The judge had given unconditional leave to defend but made an order for interim payment under Ord 29. On this occasion, the court reached exactly the opposite conclusion, the Shanning decision not having by then been reported or drawn to their attention. Ralph Gibson LJ referred to the passage from the judgment of Lloyd LJ to which I have referred and to a decision of the Court of Appeal, Gibbons v Wall [1988] CA Transcript III, in which May LJ said:

'... the civil burden of proof ... is a flexible test ... and it depends on the nature of that which has to be proved where on the flexible scale of the balance of probabilities one has to pitch the burden ... in the context of an application for an interim payment ... the burden is a high one within that standard if only because litigation of its nature involves no certainties. A plaintiff with what may appear on paper to be a strong case may find it fail at trial. If he does then he will have to repay the whole or to the extent that he fails, part of the interim payment. But ... the plaintiff may spend it ... If he does it may be difficult ... to recover ... Clearly the burden resting on an applicant in those circumstances is towards the top of the flexible scale.'"

11. The court ultimately held :

" (3) The court had no jurisdiction to make an order for interim payment under RSC Ord 29, r 11 where a defendant had been given unconditional leave to defend under Ord 14, because the court could not be satisfied on the one hand that the plaintiff would succeed at trial and on the other hand that the defendant had an arguable defence sufficient to warrant unconditional leave to defend. However, where the court entertained sufficient doubt as to the genuineness of the defence to give only conditional leave to defend it could make an order for interim payment if in all the circumstances such a payment appeared to be sensible and desirable." (emphasis added)

12. In the present case, Mr M. Side, for the plaintiff, submits an interim payment of at least as much as it is being sued for by its suppliers is both "sensible and desirable". The irony will be, in the particular circumstances of this case, that if no interim payments are made, LSO will inevitably go into liquidation, they will drop out of the picture in this action, their suppliers will not be paid and HKME, who received the payments (wrongly, it is submitted) will receive a windfall; there being no contractual relationship between HKME and the suppliers. Mr Side further prays in aid the fact that HKME have in fact paid two "suppliers" directly in spite of HKME's contention that they have no obligation to do so, thus demonstrating that the terms of the special arrangement were indeed as contended for by LSO.

13. LSO primarily relies on correspondence and documents in support of its case on the existence and meaning of the "special" and "varied" agreements. The defendants, on the other hand, rely on "oral" agreements to a different effect. Reliance on oral agreements in the face of correspondence and contemporary documents, will inevitably be regarded dubiously and viewed with an element of suspicion. More so, when the first allegation of an oral agreement comes after the event. LSO has also pointed to the clear written notices to the defendants that their agreements were not being performed. It relies also, on certain subsequent events (viz. payments made by HKME) as further evidence in support. The court also attaches some weight to the peculiar situation which has arisen in relation to LSO's highly vulnerable present position, as described above, when deciding if an award of some interim payments is "sensible and desirable". In short, I am satisfied that the first limb of the test - will LSO achieve a significant judgment against Wing Hong - has been satisfied.

14. The second question is how much should be paid. Mr Side has helpfully prepared three short schedules demonstrating the cash position in three different circumstances. Firstly, if all the money paid out by Wing Hong after 5 May 2000 were paid back to LSO. Secondly, if only the value of the retention money being held by Wing Hong plus the value of the variation works is paid to LSO and, thirdly, the same situation, using Wing Hong's figures.

15. The final schedule produces the smallest figure and is the one I propose to start with. The figures are as follows :

16. Wing Hong has a counterclaim. Failing a settlement and the matter goes to trial there will be a live counterclaim. An attempt must be made to give credit for it either wholly or in part. Mr Side has already accounted for $928,601 worth of backcharges in his schedule. There are other heads of counterclaim in addition to those conceded. They are for liquidated damages ($225,000), labour claims ($50,000) and a demolition licence ($626,000). I consider the safe course is to make a further reduction in respect of the labour claims and demolition licence. This would reduce the award to $1,435,535. The plaintiff, through its solicitors in correspondence, has consistently stressed that its motivation is to pay those suppliers to whom they are contractually indebted. In the Statement of Claim, writs against LSO from suppliers totalling $1,008,991 have been particularized. In an effort to recognize that the sole purpose of the interim award is to pay the suppliers (the necessary legal test having been satisfied), I make a further reduction so that the sum ordered is sufficient to meet these claims plus an extra amount to meet possible new claims and interest. I award $1,200,000. The sum shall be paid to the plaintiff's solicitors for use solely for the payment of LSO's suppliers. The plaintiff is aware, and the court has taken into account of the fact, that any interim payment is reversible at trial. At least the facts of this case enable the court to make an order by which the innocent suppliers should be paid.

Order 14 applications

17. In view of the court's decision on interim payments, all Order 14 applications can be dealt with succinctly. The competing submissions on quantum in this case are somewhat complex. Not so complex that the court felt unable to make an interim payment, but nonetheless complex.

18. Counsel for both Wing Hong and HKME have submitted that a number of triable issues are apparent. Primarily, those issues concern the nature of, parties to and terms of the various agreements and the existence of collateral oral agreements. Even though LSO are not asking for a summary money judgement against the defendants, rather, they are seeking a declaration against Wing Hong and an indemnity against HKME, it seems to me not to be a suitable case for summary judgement. Fundamental to the defence is the existence of an oral collateral agreement. Reliance on oral agreements which, on their face, are inconsistent with the contemporaneous documents are shadowy and suspicious. However, the court is reluctant to dismiss them without giving the parties an opportunity of being heard on the matter. Thus, bearing in mind also, the fact that the court has awarded interim payments against the 1st defendant their leave to defend will be conditional upon its paying the interim payment within 21 days of this judgement.

19. HKME's application for Order 14 judgement for an account and a declaration against LSO was, to use Mr Cheung's expression, "to counter" LSO's application against them. As he concedes, there is an element of illogicality to submit that there are triable issues in LSO's claim against them but in same breath, say, there is no defence to their claim against LSO for an account and a declaration. To be fair, he does not pursue this matter with particular enthusiasm. An account will clearly be necessary in due course, but not now via an Order 14 summons.

20. The 2nd defendant does, however, pursue with enthusiasm its claim for $100,000 under Order 27, rule 3 based on the plaintiff's alleged admission of liability. In view of the overall complexity of the quantum issues, I find no merit in slicing off a relatively small amount and make it the subject of a separate judgement. The plaintiff's position is that it should be taken into account in the final analysis. This is the more attractive approach and I decline the application for this reason.

The 1st defendant's application for security for costs

21. The 1st defendant's claim for security for costs is based on the plaintiff's impecuniosity. LSO does not deny that, at present, it is impecunious. A balance, therefore, has to be struck between, on the one hand, the prejudice to the 1st defendant in having the resist a claim from an impecunious plaintiff and, on the other hand, the prejudice to the plaintiff in having a bona fide claim stifled by being ordered to pay security.

22. The court has a discretion whether or not to order security. The principles to be applied when deciding whether or not to exercise the discretion were considered in Wing Hing Provision, Wine & Spirits v. Hanjun Shipping Co. Ltd [1998] 4 HKC at p.464 :

"1. The court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

3. The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

4. In considering all the circumstances, the court will have regard to the plaintiff company's prospects of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

5. The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

6. Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation."

23. The court's view about the merits of the plaintiff's case, "without going into the merits in detail", can be inferred from the award for interim payments already made. It is further, more than probable, in this case, that an award of security will stifle the claim. The consequence of that has also already been noted, namely, an injustice to the suppliers who are not involved in this litigation.

24. A further factor which can be weighed in the balance is that LSO's present precarious financial situation has been brought about, either wholly or largely, by the facts which have caused them to sue the defendants.

25. To summarise, I make the following orders :

On the plaintiff's summons :

1. In respect of paragraph 1 - leave to the 1st defendant to defend the action conditional on the 1st defendant complying with paragraph 3 below.

2. In respect of paragraph 2, I make no order.

3. In respect of paragraph 3, the 1st defendant shall make an interim payment of $1.2 million. The sum shall be paid to Messrs Tanner De Witt, solicitors for the plaintiff, within 14 days of this order, and used to discharge liabilities disclosed in paragraph 27 of the Statement of Claim. Any sums, remaining after such payments have been made, may be utilized in a like manner to pay other suppliers.

4. Costs of this summons shall be in the cause.

On the 1st defendant's summons for security for costs :

26. The summons is dismissed with costs to the plaintiff.

On the 2nd defendant's summons under Order 14 and Order 27 :

27. The summons is dismissed with costs to the plaintiff.