Apex Engineering & Contracting Ltd v. Hong Kong Switchgear Ltd
Read the full judgment text of HCA 1188/2010 on BabelCite. This High Court CFI judgment was delivered on 20 November 2012.
1. By a notice of application in response to the plaintiff’s summons for case management, the defendant applied for an order against the plaintiff to provide security for the defendant’s costs, in the following terms:
Cited by 3 cases · Cites 1 case
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HCA 1188/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 1188 OF 2010 ------------------------ BETWEEN
------------------------ Before: Deputy High Court Judge Woo in Court Date of Hearing: 13 November 2012 Date of Judgment: 20 November 2012 --------------------- J U D G M E N T --------------------- Introduction 1.By a notice of application in response to the plaintiff’s summons for case management, the defendant applied for an order against the plaintiff to provide security for the defendant’s costs, in the following terms:
2.The defendant also sought an order for the costs of the application to be the defendant’s costs in any event. 3.The matter was heard by Master Ho on 15 October 2012. The Master dismissed the defendant’s application with costs to the plaintiff which by way of summary assessment came to $38,000, to be paid forthwith to the plaintiff. 4.By a notice of appeal filed on 26 October 2012, the defendant appeals the Master’s order to a judge in chambers. It seeks that the plaintiff be ordered to provide security for the defendant’s costs of the action by:
5.This is the appeal before me. The party’s pleaded case 6.The plaintiff’s claim is against the defendant as the defendant’s sub‑contractor for civil works for the price of the works done under or incidental to the sub-contract. Paragraph 7 of the statement of claim sets out the various sums, which for the purpose of this appeal can be summarised as follows:
7.I detect a miscalculation in the sum of $691,374.09. If the administrative handling fee at 5% is based on the sum of $1,698,288.80, it should be $594,401.08 instead. 8.Against the plaintiff’s claim, the defendant has filed a defence and counterclaim. The major defence raised by the defendant is the plaintiff’s delay in the carrying out the sub‑contract works, although the defendant also complains of the plaintiff’s works being sub‑standard in quality and in safety. 9.Paragraph 24 of the defence pleads that, according to the defendant’s own fax dated 18 May 2010, the following calculations had been accepted by the defendant who was prepared to pay $181,115.60 to the plaintiff:
10.On top of the sums in the preceding paragraph that are alleged to be deductible from the amount due to the plaintiff, the defendant also claims in paragraph 24 of the defence for setting off a sum of $83,581.00 being “Retention money for 12 months” at 5% of $1,671,620 (ie, the $1,559,620 + $112,000). The defendant therefore pleads that the sum due to the plaintiff is $181,115.60, being:
11.Apart from the part payments agreed by the parties, the largest sum sought to be deducted as set-off is $798,876.00. This sum is reached by using $10,242 as the multiplicand, multiplied by 78 days. The basis is pleaded in paragraph 21 of the defence, as follows:
12.Unlike other items for set off as alleged by the defendant, one item has not been attached with a price tag, which is that the defendant needed to store one set of low voltage main switchboard in a warehouse and incurred extra transportation costs because of the plaintiff’s failure to build two transformer rooms in which the switchboard was to be installed without delay. 13.The defendant raises this storage and extra transportation costs as well as the liquidated damages calculated at $40,000 per day as reduced by $798,876.00 (the actual liquidated damages that AHK had charged it) as a counterclaim against the plaintiff. The liquidated damages claim comes to $2,321,124.00 being $3,120,000 (ie, $40,000 per day x 78 days) minus $798,876. 14.The importance of this counterclaim will be apparent below. The Law 15.The defendant’s application for security for costs is based on section 357 of the Companies Ordinance, Cap 32 which reads:
16.As usual, the White Book (Hong Kong Civil Procedure, 2012, Vol 1) is helpful on the various factors to be considered in this matter. Regarding the plaintiff’s inability to pay the costs of the defendant if successful in his defence, p 514 of the White Book states that apart from a company in liquidation, which is prima facie evidence of its inability, the application for security must be supported by an affidavit which credibly and reasonably shows the inability of the company to pay the costs of the successful defendant. The White Book continues:
17.The grounds of the belief relied upon by the defendant are set out in paragraph 3 of the first affirmation of Lim Willy which states:
18.It is unnecessary to make a decision whether the plaintiff is unable to pay the costs of the defendant if the defence is successful. I would rather examine other points of the relevant law and relevant facts for consideration of the merit of this appeal. 19.Other useful passages that can be found in the White Book are set out below (p 508):
20.Certain useful passages can also be found in the judgment in Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213, where it is stated at p 221 as follows:
21.The rationale behind the need to order security seems clear to me: it would be unjust and unfair to the defendant who comes to court to defend the plaintiff’s claim and incurs costs in doing so to face the situation where he has won the case or been fully vindicated in his defence but finds the costs order (that follows the event) in his favour unable to be satisfied because of the inability of the plaintiff to pay. 22.Where the defendant seeks security for costs, the fact that it raises a counterclaim may, as a rule, be a bar to his application. The court will not help such a defendant, for otherwise he would be assisted in the pursuit of his counterclaim. While he is forced to get involved in litigation in defending the plaintiff’s claim, there is no compulsion for him to bring the counterclaim. Where, however, his counterclaim is but a set-off, which is a properly recognized defence to the claim, the unwillingness of the court to assist him in his offensive should not apply because he is simply defending and not taking the offensive. He should not in such a case be discouraged in properly defending himself. 23.In the case where there is a counterclaim which is over and above a proper defence, insofar as the defendant drops the offensive portion of it over and above his defence to the claim, the rule of barring security for costs should not properly apply. But if the defendant only agrees to his counterclaim that exceeds his defence to be stayed in case the plaintiff’s claim is stayed by reason of the latter’s failure to comply with the order for security for costs, which means that the conditionally stayed counterclaim can or will be revived upon the plaintiff’s compliance with the order and the defendant in such an event is allowed to pursue his counterclaim against the plaintiff, it will offend the rule that the court will not order security in favour of an attacking defendant. The situation would be very different if the defendant agrees to drop his counterclaim altogether and only maintains his set-off as a defence. In such a case, the rule of protecting a defendant from an impecunious plaintiff in defending the claim instead of assisting the defendant to recoup costs for pursuing his own claim (by way of a counterclaim or an independent claim separate from the action he faces) will not be traversed. The law as applied to the facts in the present case 24.In the facts as pleaded in the pleadings that I cite above, it can be noted that the defendant does not dispute that the works done by the plaintiff under the sub‑contract or otherwise amounted to $2,118,331.60. The parties agree that the defendant had made part payments of $967,035.60 to the plaintiff. When the part payments are taken into account, the amount that the defendant admits to be due to the plaintiff comes to $1,151,296. The defendant has raised various amounts for setting off, namely, $798,876, $79,000, and $8,723.40. These sums total $886,599.40. The defendant’s entitlement to these set-offs is denied by the plaintiff and would have to be proved by the defendant. If the defendant were to fail to prove its entitlement, the plaintiff would be entitled to judgment on the said amount of $1,151,296 without further ado, purely based on the admissions of the defendant. It can be seen, therefore, that the plaintiff has a strong claim, and that a major purpose of the trial would be to examine the veracity and correctness of the set‑offs as raised by the defendant, rather than to examine the quality of the plaintiff’s claim. 25.Regarding the effect brought about by the counterclaim, the point was first mentioned before the Master, whose decision as reduced in writing records:
26.This suggested dealing with the counterclaim did not receive any favour from the Master, not indeed does it receive any favourable reading from me. The reason is, as far as I am concerned, the counterclaim as properly understood is only waived if the plaintiff fails to provide the security for costs as ordered by the court. If the plaintiff complies with the security order, the counterclaim is still extant and has full force against the plaintiff. That is what is objectionable. The defendant has, after the hearing before the Master, on 9 November 2012, obtained leave from the Master to amend the defence and counterclaim. The major effect of the amendments to the pleading is to add a new paragraph 26.1 to the defence, which reads:
27.To the counterclaim, the amendment adds a paragraph 30.1, as follows:
28.The purport of this paragraph 30.1 differs from the order sought in the notice of appeal cited in paragraph 4 of this judgment above. Further, apart from the fact that the proposed paragraph 30.1 is prolix and cumbersome, the defendant’s wish if it is true to waive its counterclaim can be achieved simply by deleting the counterclaim in its entirety. This can be done if the defendant truly believes in its argument that its counterclaim amounts to a true set‑off, being closely connected to and arising out of the subject matter of the plaintiff’s claim. Mr Lim, for the defendant, insists on maintaining the counterclaim, albeit in its amended form, for the purpose of ensuring that no order for costs can be obtained by the plaintiff against the defendant for its dropping the counterclaim. 29.Moreover, the counterclaim is based on two matters, namely, first, the loss and damage allegedly suffered by the defendant as a result of the plaintiff’s failing to timely complete the building of the two transformer rooms under the sub-contract. The loss that was allegedly caused to the defendant arose out of its need to hire storage for one set of main switchboard that was supposed to be installed in the transformer rooms. The delay of the plaintiff as alleged had caused the defendant to store the switchboard and then re-transport it back for installation when the transformer rooms were ready, thus incurring storage and extra transportation charges (see paragraph 12(1) of the defence). However, no sum is mentioned in the pleading or even its proposed amended form, indicating that no actual charges had been incurred. 30.The second head of the defendant’s counterclaim is based on the liquidated damages provided for in the main contract between it and AHK (the main contractor). It is alleged in paragraph 21 of the defence that the stipulated liquidated damages were $40,000 per day. AHK instead charged the defendant a sum of $10,242 per day for such damages, the total of which for 78 days ($798,876) is pleaded in the defence as a set off against the plaintiff’s claim. However, in the counterclaim, the defendant raises the stipulated liquidated damages of $40,000 for the alleged 78 days of delay against the plaintiff, and gives credit to the plaintiff for the damages for delay based on the $10,242 a day as pleaded in the defence, resulting in a difference of over $2.3 million claimed against the plaintiff. The basis for this claim is that the defendant is entitled to the liquidated damages as stipulated in the main contract although in fact the loss that it had suffered from the plaintiff’s delay that was apparently accepted by AHK was less than $800,000. Regardless of whether or not the defendant had paid this $800,000 to AHK, the basis for it to claim a higher sum from the plaintiff is very questionable: it is seeking from the plaintiff enrichment by a contractual term allegedly providing for liquidated damages, as opposed to penalty, and not recovery of actual loss for the plaintiff’s breach of contract. 31.It is ironic that on the one hand the counterclaim as raised by the defendant is nothing but weak and yet on the other hand the defendant seems reluctant to give it up even for the purpose of lending support to its application for security for costs. Moreover, one does not know what position the defendant will take if it fails in this appeal. Whatever the true reason or cause may be for making and keeping the counterclaim, the unsatisfactory nature of this aspect of the case is one of the reasons why I am not persuaded that I should exercise my discretion in ordering security in favour of the defendant. Admitted sums and the amount of the costs sought to be secured 32.Apart from the sum of $181,115.60 admitted by the defendant as due to the plaintiff, the defendant also admits that it has retained a sum of $83,581 as retention money for a period of 12 months. Whether the counting should start from 18 May 2010 (the date of the fax) or from 28 September 2010 (the date of the defence), the period of 12 months has long expired. Therefore the amounts admitted by the defendant that are due to the plaintiff without any need for further argument would be $264,696.60. However, Mr Lim draws my attention to the correspondence between the parties’ solicitors where it was alleged that the plaintiff was not entitled to have this retention money because it failed to comply with a contractual term to provide some documentation to the defendant. Yet, this matter has never been pleaded, not even in the recent amendment of 9 November 2012. I am not persuaded that I should simply accept this explanation. The fact that it has not yet been included in the pleading tells against its strength if not its validity. This sum is important when one bears in mind the appropriate size of costs that ought to be secured if the defendant is held entitled to be properly and justly protected. 33.According to the breakdown of the estimated costs, the costs that had allegedly been incurred came to slightly over $84,000 which included attendance by a consultant solicitor admitted in 1994, drafting of pleadings, summons and affirmation, as well as review of the plaintiff’s pleading and summons and of documents obtained from all parties. The second part of the skeleton bill is for costs to be incurred that include attendance with client, with counsel and with the plaintiff’s solicitors, attending interlocutory hearing and attending the trial which is estimated to be for three days, for the drafting of pleadings, witness statements, list of documents, summons, affirmation, questionnaires etc, and review of the plaintiff’s pleadings, summons, witness statements, list of documents, questionnaires. This second part requires almost a total of 80 hours of work of the consultant solicitor. Counsel’s fee including that for the estimated three-day hearing amounts to $150,000. I must say that the estimated work of the consultant solicitor is repetitive and looks highly inflated. I am told by Mr Lim that this skeleton bill of costs does not include any costs for the counterclaim or for its prosecution. This accentuates the problem rather than diminishes it. I consider that a proper amount of costs to be secured, if the defendant were justly entitled to such an order, would be around the sum admittedly held by the defendant in favour of the plaintiff, namely, $270,000. It would not seem proper or appropriate in the circumstances for me to exercise my discretion to order security for costs. Conclusion 34.By reason of the matters I set out above, this is a case where the application for security for costs against the plaintiff should be dismissed. The appeal sought by the defendant therefore fails and I make an order nisi that the defendant pay the costs of this appeal to the plaintiff forthwith, to be taxed on a party and party basis, if not agreed.
Mr Billy N P Ma, instructed by Yeung and Chan, for the plaintiff Mr Willy Lim, of Henry Wan & Yeung, for the defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment