KWONG KEY CONSTRUCTION & ENGINEERING LTD v. SUNLINK LTD

CACV 457/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 457 OF 2002

(ON APPEAL FROM HCA 3264 OF 2002)

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REASONS FOR DECISION

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Hon Ma JA:

The appeal

1. On 25 November 2002, Deputy Judge Carlson made an order allowing the Defendant conditional leave to defend the Plaintiff's claim. The condition was that the Defendant had to pay into court the full amount of the Plaintiff's claim ($2,193,138.30) within 42 days.

2. By a Notice of Appeal dated 20 December 2002, the Defendant appealed to this court. On 20 May 2003, the Defendant applied by motion seeking leave to amend its Notice of Appeal by adding a ground to the effect that in considering whether or not to impose a condition on the Defendant allowing it leave to defend, the learned judge failed to consider the Defendant's financial ability to meet this condition.

3. At the hearing of the appeal, the Defendant/appellant was represented by Mr Simon Yip. Mr Thomas Au acted for the Plaintiff. At the conclusion of Mr Yip's arguments, we dismissed the appeal, having considered the amendments sought to be introduced by the motion for leave to amend as well as the affirmations relevant to them (there were three). We had earlier given the Defendant leave to amend as well as leave to refer to the three affirmations.

Was the learned judge right to order conditional leave to defend?

4. The Defendant was engaged as a piling contractor in relation to a project at the site located at 4 Monmouth Terrace, Wan Chai. In turn, the Defendant engaged the Plaintiff as its sub-contractor for the prebored H-Piling works under the project. The sub-contract price was $4,074,130.00.

5. Work having been carried out by the Plaintiff, the parties signed an agreement (in Chinese) dated 24 April 2002 ("the Agreement"). The Agreement was contained in a document using the Defendant's letterhead.

6. The Agreement contained the following important features:-

(1) It was headed "Agreement on Completion of Works under Sub-Contracting Contract" (emphasis added).

(2) On its face, the Agreement clearly stated that the balance of moneys payable to the Plaintiff of $2,193,138.30 had been verified by the Plaintiff and the Defendant and was an agreed figure for the "final" calculation of what was due to the Plaintiff for work done.

(3) The finality of the calculations was further emphasised by the last paragraph of the Agreement:-

"The offeror merchant and offeree merchant agree that the above calculations are correct. The sums unpaid listed therein are total and final. From now on, there shall not be any further requests for compensation and payment (including construction works under the original contract, extra construction works, supply of labour, deductions and any other sums.) Thus this document is hereby made."

7. No part of this sum, however, was paid by the Defendant to the Plaintiff. In the circumstances, it was therefore not surprising at all that a writ was issued and an application made for summary judgment.

8. The Defendant's position as contained in an affirmation of one of its directors, Mr Kan Hou Sek, Jim ("Mr Kan") and in its Defence dated 29 October 2002, is essentially as follows:-

(1) On 24 April 2002, one Mr Liu of the Plaintiff met Mr Kan to discuss the sums due to the Plaintiff for completing the sub-contract works (both original and additional).

(2) Both men knew that the construction work at the site had not been completed, work having been suspended since November 2000.

(3) However, Mr Liu was "eager and anxious" to have confirmation of sums due for the work carried out by the Plaintiff. Mr Kan continues in his affirmation, "Under such circumstances, Mr Liu and I have signed a letter of confirming the total and final calculation of the sums hereinbefore mentioned". This was, even taking Mr Kan's version of events to be the correct one, the reason why the Agreement was made.

(4)) Mr Kan then states his view that at this stage it was not possible to know whether the Plaintiff had properly performed the piling works or needed to rectify defective works until much later. He states that in normal circumstances, this was why retention moneys are not released until 12 months after completion of pile foundation works. Mr Kan says:-

"Under such circumstances, I, for and on behalf of the Defendant has made it clear that though the calculation of the sum are correct and final, the sums are not due for payment until and unless the quality of piles are found satisfactorily, in that a superstructure to be erected in the Site and monitoring to be carried out for the observation of performance of the proposed foundation."

9. Mr Yip submits on the basis of the evidence that unconditional leave to defend should have been ordered by the learned judge. This was in fact the order made by Mr Registrar Chan on 16 October 2002.

10. Deputy Judge Carlson found the defence "shadowy". He was of the view that what the Defendant said amounted to bare assertions, unsubstantiated by any other evidence, documentary or otherwise. However, he gave the benefit of the doubt to the Defendant and thought that what was asserted by Mr Kan may be sufficient in law to provide an exception to the parol evidence rule (namely, that evidence in aid of the interpretation of a contract, although extrinsic to the written terms, was admissible).

11. As the Plaintiff has not cross-appealed nor sought an order that there be summary judgment, I need not consider anything more than whether the learned judge was right to order conditional leave to defend. In my judgment, there was ample reason for such an order to be made:-

(1) The terms of the Agreement are clear in stating the apparent intention of the parties to agree on a "final" figure in respect of the works carried out by the Plaintiff. I have already referred to the relevant terms above. Part of the Defendant's evidence supports this view of the parties' intention:- see paragraph 8(3) above.

(2) What the Defendant seeks to do is to mount a case qualifying, if not actually contradicting, the express words of the Agreement. I have serious doubts as to whether what the Defendant says about Mr Kan's meeting with Mr Liu (even if accepted) can be used legitimately as an aid to construing the Agreement. Mr Yip was not able to point to any part of the Agreement which required a special interpretation by reference to extrinsic or parol evidence. Rather, I suspect, he was really trying to say that parol evidence should be permitted in the present case to explain the true nature of the Agreement:- see Chitty on Contracts (28th Edition) Volume 1 at paragraph 12-111. Whether or not this will succeed even as a matter of law, will be a matter for trial.

(3) Even on the Defendant's case in which it is alleged that Mr Kan made it clear to Mr Liu that the agreed sum was conditional, there is no allegation that Mr Liu actually agreed to this. The alleged conditions are also vague and unparticularised. Before us, Mr Yip sought to supplement the inadequacy of the allegations by suggesting what he thought might have been agreed between the parties. With respect, this was totally unconvincing and, in my view, quite unacceptable. In an application for summary judgment, a defendant must condescend to particulars. The Defendant has failed to do so in the present case.

12. The defence is no doubt shadowy. On one view, the Defendant can probably count itself as being quite fortunate that on the facts before him, the learned judge concluded that only conditional leave to defend should be given. As to the approach of the courts in deciding whether or not to grant conditional leave to defend in summary judgment applications, I would refer to the approach of Godfrey J in Unic Company v Centus Developments Limited [1988] HKC 643, at 647-8.

13. Before turning to the question of whether the learned judge failed to consider the Defendant's financial means, I would just like to add this in relation to the merits of the case. Leave to defend has been given by the learned judge (albeit conditionally) and this has been upheld by us as a matter of principle. The dispute will have to go to trial (subject to the condition for leave to defend being fulfilled). Any views we have expressed as to the strengths or weaknesses of either party's case will be irrelevant at the trial. Any observations on the merits of the case can only be, on analysis, views on the state of the evidence at this stage, although such views are necessary given the nature of the application before the court. However, the trial judge is not bound nor should he be influenced by these views. See here a useful discussion in the judgment of Litton VP in Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225, at 229-230 (in the context of an Order 86 application).

14. I now turn to the question of the condition imposed by the learned judge.

Did the learned judge consider the financial means of the defendant in ordering conditional leave to defend and was he right to impose such a condition?

15. The amendments to the Notice of Appeal add a ground of appeal to the effect that the learned judge, in ordering conditional leave to defend, failed to consider the financial means of the Defendant to meet the condition. The condition was, it will be recalled, that the Defendant had to pay into court within 42 days the full amount of the Plaintiff's claim for $2,193,138.30.

16. It appears that, the learned judge was not asked at any stage to consider the aspect of the Defendant's financial means. I recognise of course that in resisting an application for summary judgment, it would not be practicable at the initial stages for a defendant to provide evidence of his financial means to meet any condition which may possibly be imposed by the court in allowing him leave to defend. Apart from the cost of preparing affidavit evidence dealing with this aspect, an impression might be given that the Defendant somehow implicitly accepted that his case was weak. In Hwang Yiou Kwa Victor v Morgan Guaranty Trust Company of New York [1985] 1 HKC 294, at 296 Kempster JA said that as a general rule, it was not necessary to go to the expense of preparing evidence as to a defendant's means prior to an indication from the court that an order for conditional leave to defend will most likely be given. I believe this to be the correct practice even though some delay may be involved in this process.

17. In the present case, it does not appear that the learned judge did give any such indication. It was not until after the order for conditional leave had been made that he considered any evidence going to the Defendant's means. By this stage, this was in the context of the Defendant's application for a stay pending appeal, which was granted by the learned judge on 20 January 2003. In support of the stay application, the Defendant served two affirmations (both from a partner of the Defendant's solicitors) exhibiting bank statements and the audited accounts of the Defendant for the year ending 31 March 2002.

18. In the circumstances as set out above, we therefore allowed the Notice of Appeal to be amended and admitted into evidence the said two affirmations as well as an affirmation of another of the Defendant's directors, one Ms Huang Danning ("Ms Huang").

19. The relevant principles regarding the court's approach as to the question of a defendant's means in relation to an order for conditional leave, are well known. The courts in Hong Kong have consistently applied the principles set out in the speech of Lord Diplock in Yorke Motors (a firm) v Edwards [1982] 1 WLR 444. I have already referred to the decision of this court in Hwang v Morgan Guaranty, where two features were highlighted:-

(1) Where a defendant seeks to argue his impecuniosity in order to avoid a financial condition being imposed, the onus is on him to put sufficient and proper evidence before the court as to his means. He must make full and frank disclosure. The reason for this evidential burden (on top of the legal burden) is that usually it is the defendant rather than the plaintiff who will have any knowledge of his own financial position.

(2) A defendant must show not that it is difficult for him to fulfil the condition sought to be imposed, but that it is impossible for him to fulfil it. Here, the possibility of a defendant obtaining financial assistance from, say, friends, relatives, financial institutions or (in the case of a company) related or associated companies, must be satisfactorily dealt with by him.

20. Once a defendant satisfies the court of these two matters, the correct order would then be unconditional leave to defend even if the defence is shadowy. As Godfrey J said in Unic Company v Centus Developments Limited at 648:-

"Further, leave to defend should not be made conditional where on the evidence as to the financial circumstances of the defendant, it is plain, or even probable, that to give the defendant leave to defend only upon condition that he pays the whole sum into court would be tantamount to refusing him leave to defend at all."

21. I am of the view, however, that in the present case, the Defendant has failed to discharge the onus on it:-

(1) While the financial information before the court would suggest that the Defendant is not trading and is "in the red", no evidence has been adduced dealing with the question whether or not the Defendant is able to obtain some form of financing from either its own directors or its associated companies.

(2) As far as its directors are concerned, there appear to be only two:- Mr Kan and Ms Huang. In Ms Huang's affirmation, it is said that Mr Kan has been adjudicated bankrupt. As for herself, she simply baldly asserts that she has no money to lend to the Defendant. This bald assertion at once begs the question of her own financial means, which remained unknown and undisclosed. This is an important aspect because she seems to be saying that were it not for her own inability (not unwillingness) to lend, she would.

(3) Further, I take what Ms Huang says with a certain degree of skepticism. In the accounts of the Defendant for the year ending 31 March 2002, it is stated that the amount owing to "a director" was $2,637,360.00. In the unaudited management accounts as at 31 March 2003 (exhibited in Ms Huang's affirmation), this figure had increased to $7,880,981.00. Obviously, a director (whoever he or she may be) has been willing to lend money or invest in the Defendant over the past year when the company was in apparent financial difficulties. No real explanation was proffered by Mr Yip as to this.

(4) As to associated companies, it is clear from the accounts that the Defendant is part of a group of companies. Indeed, the Agreement itself was contained in a document printed with the Defendant's letterhead which stated that it was "A MEMBER OF BOUSTEAD PLC". No evidence was adduced by the Defendant giving any details of Boustead Plc or any other associated or related company. More important, the willingness or unwillingness of associated or related companies to assist the Defendant was not touched upon at all in the Defendant's evidence.

(5) Furthermore, in the accounts for the year ending 31 March 2002, the amounts due from associated or related companies came to just over $18 million. In the 31 March 2003 management accounts, this figure had dropped to $7,204,025.00. As Yeung JA inquired in the course of Mr Yip's submissions, why could the Defendant not simply collect in this indebtedness? The only answer that Mr Yip could give was to refer to Ms Huang's affirmation in which she said that all indebtedness due to the Defendant were retention moneys relating to projects that had been suspended. No details, however, were given of this, particularly in relation to the indebtedness owed by associated or related companies.

(6) In the circumstances, I am simply unable to reach a conclusion that the Defendant has shown it is impossible (or even unlikely) for it to obtain any form of assistance in order to meet the condition imposed by the learned judge.

Order

22. For the above reasons, the Defendant's appeal was dismissed.

23. Finally, I will just set out again the order we made at the conclusion of the appeal:-

(1) Appeal dismissed with costs.

(2) Unless the Defendant do pay into court the sum of $2,193,138.30 within 42 days of the date hereof (27 May 2003), the Plaintiff will have leave to enter judgment for the amount claimed in this action with interest at the rate of 1% over prime from the date of the issue of the Writ to judgment and thereafter at the judgment rate, with the costs of the action to be paid by the Defendant, such costs to be taxed if not agreed.

 

Hon Yeung JA:

24. I agree.