Johnson Controls Hong Kong Ltd v. Associated Engineers Ltd

HCCT 47/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 47 OF 2011

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BETWEEN

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Before: Hon Au J in Chambers

Date of Hearing: 5 December 2011

Dates of Supplementary Written Submissions: 14, 20, 23 December 2011

Date of Judgment: 28 February 2012

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J U D G M E N T

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A. INTRODUCTION

1.There are two summonses before me.  One is the defendant’s summons dated 8 June 2011 (“the Amendments Summons”) seeking to amend the Defence and Counterclaim (“DC”).  The other is the plaintiff’s summons dated 30 August 2011 (“the Striking Out Summons”) asking to strike out the defendant’s counterclaim for want of prosecution.

2.To properly understand these applications, it is necessary to put them in their contextual background.

B. BACKGROUND

3.Unless otherwise stated, the following is the relevant uncontroversial background leading to this action.

4.By a sub‑contract dated 20 August 2001 (“the Sub‑Contract”), the defendant contracted with the main contractor to design, supply and install an automatic car parking system (“the Automatic Parking System”) for a building (“the Building”) located in Kowloon.  The main contractor in turn in 2000 entered into an earlier contract with the employer to complete the construction of the Building which included the Automatic Parking System.

5.The Automatic Parking System was supposed to be a sophisticated computerised parking system.  All that the visitor would have to do would be to park the car on a ground floor entrance pallet.  The pallet would then lift the car through a vertical shaft and shift it into a free space allocated by computer system.  When collecting the car, the visitor again only have to present the parking ticket, and the computer programme would, after payment of the appropriate parking fee, trigger the pallet to collect the car from its parking space and deliver it back to the ground floor entrance for the visitor to collect.

6.The Sub‑Contract therefore involved the design, supply and installation of the related computer system (“the Automation and Control System”) operating the Automatic Parking System.

7.For that purpose, the defendant subcontracted to the plaintiff the work in relation to the design, supply and installation of the Automation and Control System under a sub‑sub‑contract dated 12 October 2001 (“the Sub‑Sub‑Contract”).

8.It is the defendant’s case that:

(1) The Automation and Control System provided by the plaintiff did not meet the requirements under the Sub‑Sub‑Contract and suffered from various defects. These were apparent when it failed various site demonstration tests.

(2) The Building’s car park was scheduled to open in January 2003. The plaintiff engaged two other contractors, namely Thousand Port Engineering Co Ltd and Mice Engineering Ltd, to attempt to resolve the problems of the Automation and Control System without success.

(3) Thus, eventually on 21 October 2003, the defendant accepted the plaintiff’s repudiation of the Sub‑Sub‑Contract and terminated the same.

9.The plaintiff however said it was not in breach of the Sub‑Sub‑Contract and the defendant’s said purported termination of the Sub‑Sub‑Contract was wrongful.  As a result, on 14 November 2003, the plaintiff issued the present claim in the District Court under DCCJ 6497/2003[1] against the defendant for HK$372,638.80 as the outstanding sum due under the Sub‑Sub‑Contract.

10.The defendant filed the DC on 17 February 2004, and counterclaimed damages for delay, labour costs and damages to be assessed.  The defendant further filed its reply to the plaintiff’s request for further and better particulars on 6 April 2004. 

11.Since then (ie, April 2004), both parties had not taken any steps in the proceedings until the taking out of the Amendments Summons and subsequently the Striking Out Summons.

12.At the same time, between 2004 and 2005, it is the defendant’s case that the employer and Wilson Parking (the operator of the car park) continued to make repeated complaints to the defendant for problems related to the Automatic Parking System.  The defendant further says as a result, it had during this period engaged professional and consultant firms to seek to rectify the problems and complete the Automation and Control System. It says with the professional advice and assistance, it had to completely rewrite the software of the Automation and Control System and change or modify the hardware provided by the plaintiff.  The process was finally completed by the end of 2005.  It is also the defendant’s case that by early 2006, 95% of the problems with the Automation and Control System were solved.

13.After the above improvements made to the Automation and Control System, the defendant says it began to make repeated demands to the employer for the sums it had earlier withheld.  The employer however insisted on withholding the sums, alleging that there was still unacceptable level of breakdowns of the Automatic Parking System.

14.The defendant and the employer then engaged in negotiations well into 2007.

15.In July 2008, the employer commenced proceedings (“the Employer’s Action”) against the defendant for initially HK$35,000,000.00, which was later amended to HK$12,700,000.00 for damages.  In May 2010, the car park was sold to a third party.

16.In September 2010, the Employer’s Action was stayed for mediation.  In October 2010, mediation began between the employer and the defendant.  The plaintiff was invited by the defendant’s solicitors to participate in the mediation but it refused to do so.  It is pertinent to note that the plaintiff had no contemporaneous knowledge about the claim made by the employer and the Employer’s Action, until it was asked to participate in the mediation. 

17.A global settlement was finally reached on 23 February 2011 amongst the defendant, the employer and the main contractor, whereby the defendant agreed to pay the sum of HK$5,800,000.00. 

18.As mentioned above, by way of the Amendments Summons in June 2011, the defendant now seeks to amend the DC to (using the defendant’s counsel’s own words) “reflect the losses which had crystallised following the settlement with the employer”. At the same time, other than opposing the Amendments Summons, the plaintiff further asks to strike out the Counterclaim under the Striking Out Summons.

C. THE STRIKING OUT SUMMONS

19.I agree with Mr Pennicott for the plaintiff that, logically, I should deal with the Striking Out Summons first, as it seeks to strike out the counterclaim in its present form without the proposed amendments.

C1. The applicable principles

20.Under the Striking Out Summons, the plaintiff relies solely on the second limb of the grounds established under Birkett v James to strike out the counterclaim for want of prosecution.  Under this well established ground, in order to succeed, the plaintiff as applicant must demonstrate[2]:

(1) Inordinate delay; and

(2) Inexcusable delay; and

(3) Prejudice to the plaintiff caused by the delay[3]; and

(4) No other reason why the Court’s discretion should not be exercised.

21.The principles on striking out for want of prosecution or dismissal for delay have recently been comprehensively reviewed by the CFA in Hong Kong in The Liquidator of Wing Fai Construction Co Ltd (In Compulsory Liquidation) v Yip Kwong Robert[4].  After reviewing a long line of authorities both in Hong Kong and England, and by reference to the introduction of the procedural reforms after CJR, the learned Chief Justice Ma has restated the principles at paragraphs 69‑76 as follows:

“69. Seen in this way, and particularly given the consequences of a strike out (namely, that a plaintiff will be deprived of the opportunity to go to trial to have his dispute with the defendant adjudicated), resort to a striking out must be a remedy of last resort. I must, however, elaborate on this last statement in case there is any room for arguing that this may signal a more relaxed approach on the part of the courts regarding delays in litigation. It does not.

70. Under the CJR regime, the combination of greater case management by the courts and the obligation on all parties to proceedings to assist the court in achieving the underlying objectives, should ensure that delays are kept to a minimum. While certain delays may be unavoidable, certainly the type of delays that have been in the past led to applications to strike out for want of prosecution, should now be consigned to history.

71. As seen above, the Court now has in its arsenal a number of different powers to ensure that an action is proceeded with expeditiously and that its orders are complied with. Some of these powers have always been available to the Court, while others have been introduced under the CJR. Peremptory orders are now more readily made than before, the Court is able to act on its own motion even where the parties have not applied to court, conditions such as ordering payments into court to be made or other conditions can be imposed, and stringent order for costs (even summary assessment) can be made. The Rules also prescribe the remedy of striking out in certain circumstances: for example, under O25 r1(4), (5) and r1C.

72. Accordingly, under the CJR regime, I would expect to see virtually no applications (at least very few) to strike out for delay, unless peremptory orders have not been complied with, or provisions such as O25 r1(4), (5) or r1C apply. Unlike the pre‑CJR position, the court should only in rare cases have to face such an application arising from delay. With its greater case management powers and duties, and the obligation on all parties to get on with an action, no proceedings should get to the stage where a delay will prompt an action to strike out for want of prosecution. This was the precise point made in England when the Woolf Reforms took place: see Biguzzi v Rank Leisure PLC [1999] 1 WLR 1926, at 1933C per Lord Woolf MR. This had been the sentiment of the English Courts even before the Woolf Reforms were implemented: see Department of Transport v Chris Smaller (Transport) Limited [1989] 1 AC 1197, at 1207F‑H; Grovit v Doctor at 643B‑644F.

73. Moreover, when delays do occur, greater use of the court’s powers can, and should in the majority of cases, be made rather than an application to strike out: see here also the remarks of Lord Woolf in Biguzzi at 1933D. Orders for striking out should only be applicable in plain and obvious cases, and where there has been abuse. It should be an application made in the last resort. The courts ought not to be faced with an ‘all or nothing’ approach whereby it is left only with the choice of either allowing the action to be continued or to strike it out. Nowadays, the court has more options than just these two extreme positions: cf Annodeus Entertainment Limited v Gibson.

74. But in those (hopefully rare) cases where the court is faced with an application to strike out for want of prosecution, what are the applicable principles? I must also deal with the position of those cases which ‘straddle’ the CJR, namely, where proceedings have commenced before the CJR came into effect, such as the present case.

75. It is not appropriate to deal on a comprehensive basis with the many nuances that can arise in an application to strike out for want of prosecution (such as the different shades of prejudice that can arise when proceedings have been subjected to delay) but the following principles ought to be borne in mind in most cases:

(1) It is first important to bear in mind that striking out is a remedy of the last resort, as stated above, and only where it would be plain and obvious to do so. If there are other measures that are more appropriate to be taken, they ought to be.

(2) Abuse of the process of the court is the foundation for the exercise of the jurisdiction to strike out for delay.

(3) Abuse can take many forms. The Birkett v James second limb will continue, where it is proved, to be a form of abuse so that inordinate and inexcusable delay causing real prejudice would be an abuse. Thus, where a delay which is inordinate and inexcusable causes a substantial risk that a fair trial is not possible, this is perhaps the most compelling form of prejudice to a defendant: cf Birkett v James at 318C‑D. There may be other forms of prejudice, such as the prejudice caused by proceedings hanging over the head of a defendant, causing undue anxiety (‘Biss’ prejudice: see para 17(5)(c) above). Another form of prejudice might be that caused by the existence of an interim injunction (say, a Mareva injunction) pending trial; in such cases, undue delay might aggravate that prejudice.

(4) In the context of abuse, some mention should be made of ‘warehousing’. I have already referred to this earlier. Merely for a party to start proceedings and then delay (which will often involve a failure to comply with the applicable rules of court) will not necessarily amount to an abuse justifying an order to strike out an action. The appropriate remedy in such cases may be for the court to exercise some of the powers I have already mentioned (such as the making of peremptory orders, the payment into court of substantial sums etc). In order for the ‘warehousing’ of claims to justify striking out, it must be clear that the plaintiff is abusing the process of the court. Accordingly, where the ‘warehousing’ of claims indicates that there is simply no intention to bring proceedings to a conclusion or there is a ‘wholesale disregard’ of the rules or court orders, abuse can be found to exist: see Grovit v Doctor at 647G‑H; Arbuthnot Latham at 1436F‑G. In Arbuthnot Latham, reference was made to ‘stale proceedings which bring the litigation process into disrespect’ (at 1437C‑D). I also place emphasis on another passage contained in Lord Woolf’s judgment in that case (at 1437E): ‘The courts exist to assist parties to resolve disputes and they should not be used by litigants for other purposes’. In Grovit v Doctor, as we have seen, the abuse took the form of the plaintiff refusing to progress the proceedings despite a letter from the defendants’ solicitors asking the plaintiff to proceed with the action or abandon it: at 645H‑646A.

(5) It is still important when looking at the aspect of delay that it should be both inordinate and inexcusable, and that abuse is shown. It has never been the law that mere delay will be sufficient to justify an order to strike out: see Arbuthnot Latham at 1432H‑1433B; New China at para 13 [393E‑G]; A & M Manufacturing at para 63. I would also adopt what was said by Neuberger J in Annodeusregarding the court’s consideration of delay:

‘Ninthly, it appears to me that it is normally relevant to consider the following factors. First, the length of the delay; secondly, any excuses put forward for the delay; thirdly, the degree to which the claimant has failed to observe the rules of court or any court order; fourthly, the prejudice caused to the defendant by the delay; fifthly, the effect of the delay on trial; sixthly, the effect of the delay on other litigants and other proceedings; seventhly, the extent, if any, to which the defendant can be said to have contributed to the delay; eighthly, the conduct of the claimant and the defendant in relation to the action; ninthly, other special factors of relevance in the particular case.’

(6) In Nanjing Iron and Steel (see para 57 above), it would appear that one of the grounds relied on by the Judge to strike out was the delay of two years, coupled with the lack of an excuse. Reyes J specifically referred to the underlying objective contained in O1A r1(b). It is important here to emphasize that properly understood, Reyes J was not saying that simply because the delay was both inordinate and inexcusable, this was somehow enough to justify a striking out order being made. There also had to be the element of what I have referred to as abuse. In that case, this was established from the fact that having invoked the Admiralty procedure of the court by obtaining security for their claim and despite securing an extension of the limitation period, the plaintiffs then chose to do nothing.

(7) I now deal with prejudice. I agree with the proposition that where abuse is clearly demonstrated, proceedings can be struck out even where prejudice to the defendant cannot be shown. For example, where there is contumelious conduct on the part of a plaintiff, no prejudice to the defendant need necessarily be shown. However, in the majority of applications to strike out for delay, the aspect of prejudice to the defendant will often be extremely relevant. Mr Barlow submitted at one stage that post‑CJR, prejudice will not be relevant at all. That is not a correct submission. In my view, prejudice to the defendant (whether it exists or not) can still be very much a factor. It is a factor that may well be relevant to the overall justice of the case: see Purefuture Limited v Simmons & Simmon[2001] CP Rep 30 at para 54(2).

(8) As to the conduct of the parties, this will of course remain a relevant consideration of the court. Mr Barlow submitted that post‑CJR, applications to strike out for delay should not be (as he put it) ‘fault based’. He meant by this submission that the court should primarily look at the question of delay from the viewpoint of the trial, specifically whether as a result of the delay a fair trial was still possible, and also from the point of view of the administration of justice (an aspect with which I deal below). I have no quarrel with the court having to consider the very important fact of whether a delay has made a fair trial possible nor with the court having to consider the overall administration of justice, but it is wrong to say that the conduct of the parties is not a relevant consideration. Quite the contrary, it will be relevant both to the critical question of abuse as well as to the overall justice of the case. Thus, post‑CJR, where all parties to the proceedings have the obligation to prosecute the proceedings and assist the Court in furthering the underlying objectives, it would be highly relevant to consider any failure on the part of the parties here. As far as the defendant is concerned, I would say once again that there is no place anymore for defendants to adopt the attitude of “letting sleeping dogs lie”. No longer will it be possible (if it ever was) for a defendant to sit idly by and do nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted. If it is sought to be argued that time has dimmed the memories of witnesses, the court will usually want to know what steps have been taken by the defendant to take instructions, or proof or locate witnesses: cf the remarks of Ribeiro JA in Hymer v Mass Transit Railway Corporation [2000] 2 HKLRD 589, at 610D‑J. The court will certainly want to know what the true nature of the defence is, in order to assess the extent of the prejudice suffered by a defendant.

(9) As observed above (see para 44), the attitude of the court in considering applications to strike out under Birkett v James, had very much been to look only to the position of the parties themselves. With the coming into effect of the CJR, courts must now have regard to wider considerations. The underlying objectives of ensuring that the court’s resources are distributed fairly (O1A r1(f)) is referable to the administration of justice. The court must bear in mind its own practical limitations and take into account the fact that there are other litigants who are entitled to have their disputes resolved and their day in court. Thus, one of the reasons why the non‑expiry of any applicable limitation period should no longer be regarded as a factor militating against striking out for want of prosecution, is because a plaintiff (who is guilty of inordinate and inexcusable delay and has abused the process of the court) should no longer be permitted to gain advantage of instituting another action at the expense of other, far more deserving litigants. There is another facet of the administration of justice here. As I have mentioned above, the policy of the CJR is for disputes to be expeditiously, effectively and efficiently resolved. The Reform seeks to achieve this objective by ensuring that parties to litigation get on with the proceedings, by complying with the Rules and orders of the Court. When Rules and orders are not complied with, this results in the type of unnecessary interlocutory activity that the CJR strives to eliminate. This regard to the administration of justice is supported by authority: see Grovit v Doctor at 643B‑D, Arbuthnot Latham at 1436C‑F; Biguzzi at 1933E. It is interesting to note that even as early as Allen v McAlpine, Diplock LJ referred to ‘the prejudice to the due administration of justice’ if stale claims were permitted to continue: at 261B‑C.

(10) I have made several references now to the factor of the non‑expiry of the limitation period. From now on, it should be made clear that this should no longer be a factor which will militate against an order for striking out. I have already referred to some aspects of the administration of justice. It seems to me wrong as a matter of principle, and certainly not logical, that where a plaintiff has otherwise abused the process of the court, he should be allowed to continue with a stale action simply on the basis he would be free to institute another action within the limitation period. In Birkett v James, Lord Diplock recognized that where abuse occurred, the non‑expiry of the limitation period would not enure[sic] to the benefit of the defaulting plaintiff: at 320H‑321A. Where there is abuse, the court ought to strike out the action for delay and leave it to the plaintiff to institute fresh proceedings. Once the plaintiff does so, he may well be met by an application to strike out or stay on the basis that the fresh proceedings, in view of the history, constitute an abuse and should not be permitted to continue: see Arbuthnot Latham at 1436H‑1437A; Securum Finance Limited v Ashton [2001] Ch 291, at 308B‑309G. The burden will be very much on the plaintiff to justify why he should be permitted to continue with the second action. At that stage, he has already been given an opportunity to have his claim ventilated before the court or to put another way, he has had the chance to have his day in court, and he must justify a ‘second bite at the cherry’.

(11) I would also reiterate that under the new CJR regime, it remains the position that the fact any delay was caused by the plaintiff’s legal representatives, will not be relevant to the exercise of the court’s discretion. This was the position before: see Birkett v James at 324A‑E. For better or worse, acts done or omitted to be done by a party’s legal representatives will be attributable to that party.

76. So what of cases such as Birkett v James and the many authorities, both in England and in Hong Kong following that decision? In the light of the restated principles, I would think that it will seldom be necessary to refer to those authorities that do not take into account the procedural changes under the CJR (or the Woolf Reform).”

22.As with the Wing Fai case, the present case (with the alleged delay period) straddles across the introduction of CJR. The determination as to whether the plaintiff has established those requirements under the second limb of Birkett v James ground must now be looked at under these restated principles (in particular at paras 75(3) to (11)) set out by he learned Chief Justice.  For the present purposes, in summary:

(1) The fundamental consideration is whether there has been abuse of process by the party causing the delay.

(2) Generally, mere delay per se may not be considered to be an abuse of process. Under the second limb of Birkett v James, abuse is usually demonstrated by proving that there is inordinate and inexcusable delay which has caused real prejudice.

(3) In considering the question of delay, the Court is entitled to and should look at, inter alia, the extent (if any) to which the applicant (for striking out) has contributed to the delay.

(4) Further, prejudice can take many forms. One of which is where there is a substantial risk of not having a fair trial caused by the inordinate and inexcusable delay. But this has to be shown clearly. Under this, the applicant can no longer rely on adopting an attitude of “letting sleeping dogs lie” to hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted. Thus, if the applicant seeks to show prejudice of not having a fair trial by, for example, arguing that time has dimmed the memory of witnesses or some witnesses have been lost, it would be incumbent upon him to demonstrate by evidence as to matters such as what steps he has taken to take instructions, or proof from these witnesses or to locate them. He should also identify clearly how this “evidence” would be relevant to what issues under the claim. It must be noted that these matters would also be relevant for the court to view the conduct of the parties, which the court is also entitled to and should look at in considering the question of prejudice.

(5) Further, striking out must be regarded as the last resort and should only be granted in the clear and obvious case of abuse.

23.Bearing these principles in mind, I now turn to deal with the present application.

C2. The delay

24.It is common ground that since April 2004, no active steps had been taken by either party in these proceedings until the following:

(1) The defendant filed a Notice of Intention to Proceed on 8 October 2010.

(2) The defendant took out the Amendments Summons on 8 June 2011[5].

(3) The plaintiff took out the Striking Out Summons in August 2011.

25.The plaintiff thus says there has been a delay of at least 6 years and 5 months (between May 2004 and October 2010 when the defendant issued the Notice of Intention to Proceed), which must be inordinate in any analysis. 

26.I agree.  In fact, in its submissions opposing the striking out application, the defendant (fairly and rightly so) does not appear to contend otherwise.

C3. Is the delay inexcusable

27.The only explanations provided for the delay are that the defendant was during that period of time focussing on dealing with the Employer’s Action, while at the same time there was a change of ownership and management of the defendant. 

28.The plaintiff submits, and I agree, that these explanations are clearly not good reasons to “excuse” the delay.  Other than for its own convenience, there is nothing in these explanations which can reasonably justify the defendant in not taking any steps in pursuing its counterclaim.  Again, the defendant’s counsel in his submissions (rightly and fairly I think) does not seek to oppose the application on the ground that the delay is excusable.

29.I therefore accept the delay is also inexcusable.

C4. Prejudice

30.The defendant however opposes the striking out application on the main ground that the requisite prejudice has not been shown.

31.In relation to this, the prejudice that plaintiff says it would suffer is that it would not have a fair trial because of the inordinate and inexcusable delay. The relevant supporting evidence is set out in the Affirmation of Chuk Kwok Wai as follows:

“29. The Sub‑Sub‑Contract works were carried out between 2001 and 2003, and the legal proceedings became dormant in 2004. Since then, the following relevant personnel of the plaintiff who worked on the Sub‑Sub‑Contract have ceased employment with the plaintiff, and their further assistance in this Action is practically unattainable:‑

(1) Mr Liu Chi‑wing Tommy, titled General Manager of System Installation Branch, left the company on or about 28 January 2008;

(2) Mr Lai Chi‑kok Bruce, Business Unit Manager, left the company on or about 31 July 2002;

(3) Mr Kwong Kwok‑ho Gary, Engineer, left the company on or about 11 April 2003.

30. No witness statements were taken at the material time. Save the documents provided to the plaintiff’s solicitors in or before 2004, the plaintiff no longer has documents relating to this Action.

31. As I mentioned in paragraph 6 above, the plaintiff engaged various other parties in supplying software, hardware and technical assistance in the works. It is now unlikely that evidence could be collected from these parties. It would also seriously prejudice the plaintiff in its ability to claim contribution from these parties as a result of the defendant’s delay in prosecuting its Counterclaim, because of the probable loss of right to claim against them by reason of the Limitation Ordinance (Cap 347).

32. It is alleged by the defendant that between 2003 and 2006, the defendant had engaged the following professionals in inspecting the Sub‑Contract works (including but not limited to the Sub‑Sub‑Contract works) and/or repairing the Sub‑Sub‑Contract works:‑

(1) between November 2003 and March 2004, Dr David Yuen, a lecturer in the Department of Mechanical Engineering of the Hong Kong Polytechnic University carried out some software modifications to the Sub‑Contract works;

(2) in 2004, J R G Control Systems carried out inspection and tests on the Sub‑Contract works;

(3) in 2005, X Control Ltd carried out some system modifications and upgrade of the Sub‑Sub‑Contract works;

33. The plaintiff was not informed by the defendant of its engagement of the aforesaid parties and consequently the plaintiff never had any engagement with them and it is unlikely that they will assist the plaintiff in relation to this Action.

34. Even if the plaintiff’s former employees, and/or suppliers and subcontractors, and/or the aforesaid professionals are found and could provide evidence in this Action, the effect of the long lapse of time on the memory of the witnesses will likely prejudice the plaintiff in the fair preparation of its case.

35. It is stated in paragraph 34 of the Employer’s Amended Statement of Claim (provided to the plaintiff on 15 November 2010) that the Employer had sold the car park consisting of the Sub‑Contract works in May 2010 to a third party for HK$5 million.

36. As such, it is virtually impossible for the parties, particularly the plaintiff to have any reasonable prospect of properly investigating the cause of the alleged problems in the Project (including but not limited to the Sub‑Sub‑Contract works), and ascertain the true nature and extent of the defects in the Sub‑Sub‑Contract works now alleged by the defendant.”

32.The alleged prejudice is summarised by Mr Pennicott in his skeleton as follows:

(1) Material factual witnesses have left the plaintiff’s employment and no witness statements were taken at the time.

(2) The plaintiff no longer has any documents relevant to the action.

(3) Evidence from third parties engaged by the plaintiff would be difficult if not impossible to obtain.

(4) Expert evidence, which will inevitably be required, will be difficult if not impossible to obtain because the alleged defects cannot now be properly investigated since the evidence has effectively been destroyed.

(5) Even if there was anything material left to inspect, the car park has now been sold to a new owner and the logistical difficulties are self‑evident;

(6) Almost certain loss of rights to claim against other parties engaged by the plaintiff.

33.Mr Pennicott then further elaborates the effect of the prejudice in the following ways.

34.Counsel says, in summary, this is a case about alleged highly technical defects in an automation system (ie in hardware and software).  An important part of the exercise will be to distinguish those alleged defects for which the plaintiff might be responsible and those for which others may be liable, bearing in mind that the works sub‑contracted to the plaintiff were only a modest part of the defendant’s overall works.  Given the mutual allegations of repudiation arising out of the termination of the Sub‑Sub‑Contract in October 2003, it will be necessary to thoroughly investigate the factual position as at that date to determine which party repudiated the Sub‑Sub‑Contract. Such a task has clearly been made very much more difficult with the passage of time and by reason of the factors summarised above.  Post‑termination, the steps taken by the defendant and/or third parties acting on its behalf, without the plaintiff’s involvement, will require detailed consideration, together presumably with the conduct of the employer and possibly the main contractor.

35.With respect to Mr Pennicott, after applying the principles set out above, I am not satisfied that the plaintiff has established the requisite prejudice under the Birkett v James ground. My reasons are as follows.

36.First, insofar as the loss of the three ex‑employees as witnesses is concerned, two of them (Mr Lai and Mr Kwong) had left even before the commencement of the present proceedings.  Prejudice (if any) so caused is clearly not caused by the delay.  This is therefore irrelevant for the purpose of striking out.

37.In relation to other witness (Mr Liu), there is no evidence to show why the plaintiff had not taken any instructions or witness statement from him.  As such, this is a prejudice not caused or mainly caused by the delay but at the very least is also contributed by the plaintiff’s own conduct in failing to preserve the evidence.  This is further underlined by also the lack of evidence as to what steps, if any, the plaintiff has taken to locate these “lost” witnesses. 

38.In relation to this, one must also now bear in mind the observation of Chief Justice Ma in Wing Fai, supra, that the natural fading of memories of witnesses can no longer be regarded as a good basis per se to establish prejudice for the purpose of striking out applications, unless there is evidence to explain why witness statements or instructions from these potential witnesses had not been taken in the first place.

39.Secondly, insofar as the loss of documents are concerned, this also cannot be a good reason in the present state of evidence to support the alleged prejudice because (as rightly submitted by Mr Man for the defendant):

(1) The plaintiff has simply failed to identify which documents, if any, which it says are relevant but have lost since 2004.

(2) Further, if the plaintiff had other relevant documents (which it has not identified in Chuk’s Affirmation) in the first place, there is no reason (and no reason has been offered) why the defendant should have disposed them after 2004, given that both their own claim and the counterclaim were still pending. Again, no evidence has been given as to why it has not preserved these documents.

(3) On the other hand, if it had no other documents in the first place, then no prejudice could be caused by the delay.

40.Thirdly, the plaintiff’s contention that it would now be difficult if not impossible to obtain evidence from those third parties that supplied it with software and technical assistance for the Automation and Control is again a vague assertion and not supported by sufficient evidence to establish the requisite prejudice.  In particular, there is no identification of:

(1) Who these potential third parties are.

(2) What evidence these third parties would be able to provide which are relevant to what specific issues under the counterclaim.

(3) The reasons why it would be difficult to obtain evidence from them, and what steps had been taken by the plaintiff to so obtain such evidence from them.

(4) Why no instructions or statements had been taken previously from them.

(5) What steps have been taken by the plaintiff to ask these third parties to assist in its evidence, to show that they are not unwilling or unable to assist the plaintiff.

41.Fourthly, in relation to the plaintiff’s contention that it can no longer inspect the defects since the Automation and Control System was rewritten and that the car park was sold to a third party, I also do not accept that the requisite prejudice has been established:

(1) There is no explanation as to why no attempt has been made to inspect them earlier (say after the DC was filed in 2004), in particular when it must have been objectively clear to the plaintiff that the defendant had been complaining about the failure of the Automation and Control System and the counterclaim was related to that. It must be emphasised that, as said in the Wing Fai case, it is not an answer for the plaintiff to say that it has adopted a “wait and see” attitude.

(2) In any event, the Automation and Control System was rewritten in 2004 and 2005 and completed in 2005. The alleged prejudice in not being able to revisit it cannot be said to be caused by the inordinate delay.

42.Lastly, the loss of rights to claim those third parties identified by the plaintiff could well have been preserved by the plaintiff issuing a protective writ.  That has not been done.

43.The plaintiff’s above unexplained failure to preserve any of the purported relevant evidence shows that it is its own conduct which has contributed to the alleged prejudice.

44.For these reasons, the plaintiff has failed to show the alleged substantial prejudice and/or that it is the defendant’s delay that has principally caused the alleged prejudice. 

45.I am therefore not satisfied that this is a clear case of abuse of process by the defendant in its delay in pursuing the counterclaim. 

46.This is particularly so, as the plaintiff had by itself acquiesced and condoned the delay in not taking any procedural steps to “push” the defendant to proceed with the counterclaim, and in also at the same time failing to pursue its own claim against the defendant.

C5. Conclusion under the Striking Out Summons

47.The plaintiff has not shown that there has been an abuse of process by the defendant in its delay in pursuing the counterclaim. The application for striking out for want of prosecution must fail.  I would therefore dismiss the Striking Out Summons, and make an order nisi that costs of the Striking Out Summons be to the defendant to be taxed if not agreed.  This order shall be made absolute 14 days from today unless any of the parties applies by summons to vary it.

D. THE AMENDMENTS SUMMONS

D1. An overview of the proposed amendments

48.The defendant seeks substantial amendments to the DC.  The proposed amendments are set out in the draft Amended Defence and Counterclaim (“ADC”).

49.In the DC, the defendant’s defence and counterclaim was premised on the plaintiff’s breach and wrongful repudiation of the Sub‑Sub‑Contract under various pleaded express and/or implied terms.  The various breaches relied upon have also been pleaded specifically in the DC.  The defendant counterclaims damages in the respective sum of $1,099,882.00 (as the contractually provided liquidated damages) and, $886,041.00 (as cost and expenses incurred by it in rectifying and completing the Automation and Control System up to January 2004), the breakdown of this rectifying cost has been set out in Annex 3 of the DC.

50.The draft ADC contains substantial amendments. The pleading has increased from its original 14 pages to 33 pages.  Other than some cosmetic and streamlining (a term used by the defendant’s counsel) changes, the defendant seeks to, in gist, introduce major amendments in the following aspects:

(1) New references to various express terms of the Sub‑Sub‑Contract. In particular, there is a new plea of (a) an indemnity term (“the Indemnity Term”) thereof, and (b) an additional part of the guarantee executed by the plaintiff on 17 October 2001 (“the Indemnity Part of the Guarantee”)[6]. The Indemnity Term and the Indemnity Part of the Guarantee provided that the plaintiff shall indemnify the defendant against “all costs, expenses, losses, damages and claims including but not limited to legal costs”, on full indemnity basis arising from or occasioned by the plaintiff’s negligence or breach of the Sub‑Sub‑Contract.

(2) Basing on the newly pleaded Indemnity Term and the Indemnity Part of the Guarantee, a counterclaim of $5,800,000.00 (as the settlement sum paid by the defendant) and $2,687,759.70 (as its legal costs incurred under the Employer Action).

(3) Various new or additional particulars on (a) the plaintiff’s breaches of the Sub‑Sub‑Contract[7], and (b) the rectifying cost and additional labour cost incurred by the defendant to cover the period between February 2004 and June 2006[8]. This part of the counterclaim has thus been increased from the original sum of some $886,000.00 odd to $4,340,000.00 odd.

51.As a result, the total amount claimed under the counterclaim has been increased from a total of around $2,000,000.00 in the DC to $12,800,000.00 odd in the draft ADC.

52.The plaintiff objects effectively to these major amendments as summarised above on the principal bases that (a) they are new causes of action which are now time barred, and (b) in any event, the plaintiff would suffer serious prejudice which is not compensatible by costs if these amendments are allowed.

D2. Discussion

53.It is common ground that the following general principles apply on an application for amending the pleadings:

(1) The Court has a discretion to allow any party to amend his pleadings in any manner at any stage of a set of proceedings. See O 20 r 5(1).

(2) An amendment should only be allowed where it is necessary for disposing fairly of the matter or saving costs. See O 20 r 8(1A).

(3) Otherwise, amendments should generally be allowed unless they cause prejudice which cannot be compensated by costs: Hong Kong Civil Procedure 2012 § 20/8/6.

(4) An amendment may be allowed notwithstanding that the effect would be to add a new cause of action after any relevant period of limitation has expired if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment. See O 20 r 5(2) and 5(5).

(5) O 20 r 5(5) should be given a “broad and liberal interpretation”. There is no need for a “complete overlap of facts”, a “significant overlap” of the factual matrix will do. See Leung Kin Fook v Eastern Worldwide Co Ltd (No 2)[1997] 1HKC 524 (CA) at 528C‑E (per Litton VP) and 529F‑I (per Liu JA).

54.Bearing these principles in mind, I would now consider these amendments.

55.In my view, the counterclaim based on the Indemnity Term and the Indemnity Part of the Guarantee is clearly a new cause of action.  That is why the defendant would have to plead these new terms to support this proposed part of the counterclaim.

56.Mr Pennicott for the plaintiff then argues that since the cause of action for breach of contract accrued at the time of breach, which was October 2003 in the present case, but not at the time of damage, this cause of action for indemnity thus expired in October 2009.  The defendant’s new counterclaim based on the indemnity clauses is therefore time barred.

57.However, I think well established authorities[9] show that when does the cause of action based on an express indemnity clause or contract start to accrue depends on the construction of the terms of the clause or contract.  Unless the clause can be construed to indemnify against liability, the cause of action will usually accrue when the loss or damage suffered by the indemnified party has been established and ascertained but not at the time of the breach of the main contract by the indemnifying party. 

58.Applying this in the present case, I am of the view that it is at least arguable that, on a proper construction of the Indemnity Term and the Indemnity Part of the Guarantee[10], the newly pleaded cause of action based on indemnity did not arise until at the time when the loss or damage was suffered and ascertained, ie, at the earliest when the settlement was reached in February 2011.  Thus, this part of the counterclaim now sought to be introduced in the draft ADC is at least arguably not time barred.

59.Mr Pennicott also contends that this new cause of action on indemnity is in any event based on new factual materials, which will involve (a) an investigation into the allegations that the employer made against the defendant in the action of which the plaintiff had no knowledge of, and (b) the defendant’s conduct in defending these allegations.  He emphasises that in the Amended Statement of Claim in the Employer Action, whilst the employer makes unparticularised complaints about the “computerised control system”, it has also made repeated allegations that the car parking system was “not of sufficient mechanical strength [and] is not efficiently operational and functional”.  It follows that (Mr Pennicott further says) the implicit suggestion that the entirety of the sum paid the employer and the costs involved in defending the Employer’s Action all resulted form the plaintiff’s alleged breaches is, at the very least, open to very serious doubt.

60.With respect, these are not good reasons for not allowing the amendments:

(1) Given my view that this cause of action is (at least arguably) not time barred, the defendant arguably could only commence the indemnity claim in February 2011 (about a year ago). The fact that the claim would require investigation as to the potential merits of the Employer’s Action and the reasonableness of the settlement sum is but a necessary consequence of the nature of such claim. In other words, what have been submitted by Mr Pennicott above cannot amount to any good grounds to prevent the defendant from say commencing a fresh action based on the Indemnity Term and the Indemnity Part of the Guarantee.

(2) The argument that the entire settlement sum in any event should not be visited upon the plaintiff under the indemnity is one which the plaintiff is fully entitled to take and argue at trial. The mere suggestion that at least part of the defendant’s claim is doubtful cannot be a good reason to refuse the amendments at this stage.

61.For these reasons, I would allow the amendments relating to the counterclaim based on the Indemnity Term and the Indemnity Part of the Guarantee.  This is of course without prejudice to the plaintiff’s right to argue substantively at trial that this part of the counterclaim is in any event time barred.

62.On the other hand, I would disallow the proposed amendments on the additional or new particulars and allegations of breaches.  My reasons are as follows.

63.Although I would accept that these amendments do not amount to pleading new causes of action, these are new factual allegations. The plaintiff has now said on affirmation that it would suffer serious prejudice in not having been able to deal with these new allegations properly since (a) it has lost certain witnesses and documents from which it could obtain evidence concerning these allegations, and/or (b) the memory of these witnesses would have faded over this long passage of time. 

64.I agree with the plaintiff that if these amendments are allowed, it would suffer prejudice in not having a fair trial on these new allegations which is not compensatible by costs.  This is so because:

(1) Substantive parts of these new allegations on breach relate to what actually happened during various meetings, site tests and demonstrations held in 2002 and 2003, some 10 years ago. The evidence from the personnel actually attending these meetings, site tests and demonstrations is thus highly relevant and important.

(2) Given the long passage of time, the memory of these witnesses would have faded. Although the natural fading of memory of witnesses with time would not (for the reasons I have explained above) support the striking out for want of prosecution of the original counterclaim, it would amount to prejudice to be suffered by the plaintiff in relation to these new and additional factual allegations if the related amendments are allowed.

(3) Even if the plaintiff had taken instructions or witness statements before the loss of these witnesses or documents, it would not have helped as these instructions or statements would not have been able to cover these new or additional factual allegations. The plaintiff cannot now be criticised for not having taken instructions or statements earlier with these witnesses on these new allegations. Similarly, it cannot be said that the prejudice is caused by the plaintiff itself.

(4) In the premises, even if the plaintiff is able to find or locate these witnesses to assist, it would still suffer irreparable prejudice in dealing with these new allegations.

65.I would therefore refuse these amendments on additional or new particulars of breaches of the Sub-Sub-Contract.

66.However, the same cannot be said about the proposed amendments on the additional labour cost incurred after January 2004[11] and the additional cost (a total of $939,569.73) incurred by the defendant in engaging the professional and consultants to assist in rectifying the Automation and Control System[12].

(1) Insofar as the additional labour cost is concerned, this is the continuing cost alleged to have been incurred by the defendant under the original particulars provided at para 39(a) of the DC. It is specifically pleaded in the DC that the then pleaded sum of $886,041.00 was incurred up to January 2004 (around the date of the DC) and was continuing. Thus, it is not open to the plaintiff now to say it is prejudiced if it has not taken any steps to preserve or prepare any evidence do deal with this continuing part of the defendant’s claim.

(2) Insofar as the additional rectifying cost is concerned, the burden is on the defendant to prove (a) the actual engagement of these professional and consultants, and the steps taken by them, and (b) that these were necessary and reasonable to rectify the pleaded failure of the Automation and Control System which was caused by the pleaded breaches of the plaintiff under the Sub‑Sub‑Contract. As I have disallowed the additional amendments on the additional breaches, the plaintiff is not prejudiced in dealing with the failure of the system and breaches of the Sub‑Sub‑Contract that have already been pleaded in the DC. However, once if the defendant could establish and prove the pleaded failure of the system and that it was caused by the plaintiff’s breaches, it is a matter of expert evidence for dealing with the appropriateness and reasonableness of the engagement of these consultants and the pleaded steps taken by them to rectify the problems causing the failure. The plaintiff has not said anything or provided any evidence to show that its experts would somehow be prejudiced in giving an opinion on these questions.

67.I am therefore not satisfied that the plaintiff would suffer any prejudice not compensatible by costs if I allow these parts of the amendments on the additional labour cost and rectifying cost.  I would allow them.

D3. Conclusion under the Amendments Summons

68.For the above reasons, I would disallow any amendments relating to and consequent on pleading the new allegations of breaches or particulars of the breaches of the Sub‑Sub‑Contract. I would however allow the other amendments proposed in the ADC.  Given the way these amendments are presently put in the draft ADC, I think it is more appropriate and practicable for the defendant to redraft the ADC with the amendments in accordance with my ruling above.  The defendant shall then provide the new draft to the plaintiff within 14 days from the date of this judgement for it to agree.  If no agreement can be reached within 7 days thereafter, there be liberty to apply to this court for determination.

69.As set out in the Amendments Summons, I would further make an order nisi that costs of and thrown way by reason of the amendments be to the plaintiff and that costs of the application be in the cause.

70.The costs order nisi shall be made absolute 14 days from today, unless any of the parties applies by summons to vary it.

Mr Ian Pennicott, instructed by Deacons, for the plaintiff

Mr Bernard Man, instructed by Hogan Lovells, for the defendant