CLINTON ENGINEERING LTD v. B-TECH (HOLDINGS) LTD

HCA3608/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. OF 3608 OF 1998

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D E C I S I O N

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1. Originally, there were two summonses before the court, both from the plaintiff. First, there was an application to strike out a number of paragraphs in the defence. Secondly, by a separate summons filed two months earlier, the plaintiff was seeking a determination of preliminary issues. At the hearing Mr J. Harris, for the plaintiff, applied to withdraw the Order 33 summons and pursue only the striking out application.

2. Further, of the various paragraphs sought to be struck out of the defence only paragraphs 2, 3 and 9 remained contentious. Ms Po Wing Kay, for the defendant, consented to paragraphs 21, 22 and part of 23 being deleted.

3. Paragraphs 2, 3 and 9 of the defence are as follows :

"2. Save that the Plaintiff is a company incorporated under the laws of British Virgin Islands and was at all material times not licensed to carry out any contractor works in the design, supply and installation of mechanical and electrical building services in the People's Republic of China ('PRC'), no admission is made to Paragraph 1 of the Amended Statement of Claim.

3. The Defendant further avers that under relevant laws, rules, regulations and legislations in PRC, it was and is illegal for the Plaintiff to carry out the Works without a licence and that if it did, the Plaintiff was not entitled in PRC to recover any of the Contract Sum.

...

9. In particular, the Defendant avers that the Employer did not owe any amount to the Plaintiff with respect to the Project and that all money required to be paid pursuant to the BS Contract had been duly paid by the Employer to the Plaintiff."

4. These three paragraphs give rise to a single issue for the purposes of this strike out application.

5. Firstly however, a brief resume of the background is necessary to place the issue in context.

Background

6. From 1994 onwards the plaintiff carried out mechanical and electrical works for a wholly owned subsidiary of the defendants (the employer) in China. In 1998 the employer commenced arbitration proceedings against the plaintiff in Foshan. An award of $12 million was made in the plaintiff's favour on its counterclaim in the arbitration. That award has now become enforceable in China.

7. These Hong Kong proceedings are based on a guarantee made by the defendant purportedly guaranteeing the employer's liabilities under the contract. (These liabilities having now been determined in arbitration.)

8. Also in 1998, the defendant applied to stay these Hong Kong proceedings pending the outcome of the arbitration. The stay application was heard and granted by Findlay J on 5 May 1998. The stay was lifted in September 2001 by Mr Recorder Liao SC. The award against the employer is a New York convention award and enforceable in Hong Kong. The plaintiff is suing the defendant on its guarantee and alleges that the guaranteed liabilities are those established by the award.

9. In their defence, the defendants, inter alia, plead that there is no liability to the plaintiff because the underlying building contract between the plaintiff and the employer was an illegal contract as the plaintiff did not have the necessary licence to carry out certain works.

10. However, the defendant in the 1998 stay application founded its case for a stay on the basis that the outcome of the arbitration would determine the amount that the employer owed the plaintiff for the purpose of determining liability under the guarantee. The issue of the illegality of the contract (denied by the plaintiff) was not raised either in the stay application or in the arbitration.

The issue

11. The issue which emerges from all this, and the sole issue in this application, is whether or not the defendant is estopped by the court's decision in the stay application from disputing that the arbitration award establishes the amount that the employer owes the plaintiff. If so, that amount, assuming the guarantee is valid, represents the amount owed by the defendant to the plaintiff.

12. Before a brief consideration of the law of issue estoppel is addressed the material part of the court's decision in 1998 should be noted. It is also important to note that the decision amounts to an acceptance by that court of the submission made to it by senior counsel on behalf of the employer.

13. Findlay J summarized the defendant's unequivocal submissions as follows :

"The Defendant's Case for a stay

The crucial argument in the defendant's case for a stay is the effect of the undertaking by the defendant. If it is the case that, assuming the undertaking to mean what it says, the defendant is bound to pay to the plaintiff what the arbitrator finds is due by the subsidiary to the plaintiff, and if the plaintiff can demand from the defendant no more than this, there is obviously a good case for a stay. If neither party, or only one party, is bound by the arbitrator's award, a stay would not be justified.

The undertaking, to paraphrase it, and to ignore the condition 'if [the subsidiary] were unable to meet its commitment', which has no relevance for present purposes, is to pay to the plaintiff what the subsidiary is obliged to pay under the contracts

Mr Dennis Chang, SC, on behalf of the defendant, argues that the defendant's undertaking is to pay what the arbitral award finds that the subsidiary was liable to pay because this is the subsidiary's obligation under the building contract. And the plaintiff can obtain from the defendant no more than this. Until that award is published, it cannot be known what the subsidiary is obliged to pay, and, therefore, it cannot be known what the defendant is obliged to pay." (emphasis added)

He went on to decide :

" In the case before me, the terms of the defendant's undertaking, which was negotiated with, and agreed to, by the plaintiff, is such that both parties to this action will be bound by the arbitrator's award as far as the defendant's liability to the plaintiff is concerned. The defendant's obligation is to pay to the plaintiff what the arbitrator finds is due by the subsidiary, and the plaintiff cannot impose on the defendant any greater obligation than that."

14. In spite of this the defendant now seeks to argue that the contract, upon which the arbitrator made an award which established the employer's liability, was an illegal contract. The defence, in effect, includes a claim that the award does not establish the guaranteed liability of the defendant. The plaintiff submits that the defendant should be estopped from advancing an argument which is inconsistent with the position they took in the stay application as it would be an abuse of process to permit them to do so.

Issue estoppel

15. The classic citation for the requirements as to when issue estoppel applies is that from the speech of Lord Brandon in The Senna (No.2) [1985] 1 WLR at page 499 :

"... in order to create an estoppel of that kind [issue] , three requirements have to be satisfied. The first is that the judgment in the earlier action relied on as creating an estoppel must be (a) of a court of competent jurisdiction, (b) final and conclusive and (c) on the merits. The second requirement is that the parties (or privies) in the earlier action relied on as creating an estoppel, and those in the later action in which the estoppel is raised as a bar, must be the same. The third requirement is that the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as that decided by the judgment in the earlier action."

16. In the present case the difficulty is not with the application of these general principles but with the fact that the estoppel being sought is in the course of interlocutory proceedings.

17. It is true that it is more difficult for a party to persuade a court to apply res judicata and issue estoppel in interlocutory proceedings. However there is no rule of law which forbids it. If the primary requirements are satisfied the court is permitted to take an overall view and exercise a discretion in the applicant's favour if it is satisfied that it is just and reasonable to do so. In the present case I find the underlying facts of the plaintiff's submissions to be compelling. The point is made, with some force, that five years ago the defendant argued successfully that an issue should be determined in a particular way. Now, their defence on the same issue is not merely inconsistent, it is, to all intents and purposes, the reverse.

18. In S.C.F Finance v. Masri [1987] 1 QB 1028 the same principle was considered, albeit on very different facts, when the estoppel sought was based, not on a judicial decision upholding counsel's submissions [as in the present case] but on an admission or concession underlying a consent order. Ralph Gibson L.J. said.

"... If a party puts forward a positive case, as the basis of asking the court to make the order which that party seeks, and then at trial declines to proceed and accepts that the claim must be dismissed, then that party must, in our view, save in exceptional circumstances, lose the right to raise again that case against the other party to those proceedings"

19. Having accepted that the principle of issue estoppel is applicable at this early stage of the proceedings I must finally go on to consider if it should actually be applied in this case. A high threshold has to be reached in strike out applications, particularly so when, if granted, a party will be denied an opportunity of running a particular defence.

20. In all the above circumstances my decision whether or not to exercise the court's discretion in the plaintiff's favour has not been easily made. However, ultimately one is faced with the reality that in order to obtain a stay in 1998 the defendant accepted the validity (and hence the legality) of the building contract. Now, by the Defence dated 16 April 2002, they say they owe the plaintiff nothing because of illegality. I consider it plain and obvious that they should not be permitted to advance such a defence. In the circumstances it is unsustainable and consequently an abuse of process. The mere fact that the plaintiff would be required to deal with an issue for the first time many years after the material events is, in itself, prejudicial.

21. Although not a factor in my decision, it is of considerable comfort to note that the defendant is not being denied its day in court as a result. What remains in the real crux of this case, namely the validity of the guarantee upon which the plaintiff sues. The effect of this judgment is to strike out (a) those parts of the defence which the defendant concedes should be deleted and (b) those parts of the defence which rely on the plea of an illegal contract. The core issue remains in tact.

22. Accordingly I grant the plaintiff's strike out application in respect of paragraphs 2, 3, 9, 21, 22 and 23 (in so far as it refers to paragraph 22 of the Statement of Claim) of the Defence with an order for costs of the strike out application to the plaintiff.

23. Further, I grant the plaintiff's application to withdraw its summons under Order 33 for the determination of a preliminary issue with costs to the defendant. However, in view of the similarity of issues between the two summonses the defendant's costs applicable to Order 33 summons shall be limited to a maximum of 15% of the total costs of and arising out of the hearing of both summonses.

Representation:

Mr Jonathan Harris, instructed by Messrs Siao Wen & Leung,for the Plaintiff

Ms Po Wing Kay, instructed by Messrs Andrew Lam & Co.,for the Defendant

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3608 OF 1998

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REASONS FOR DECISION

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1. This is an application by the defendant for a stay of proceedings pending an appeal against the order and judgment of Mr Recorder Liao SC dated 29 September 2001 in which he lifted a stay of proceedings which had been imposed by Findlay J on 5 May 1998.

2. Findlay J's stay was a stay pending arbitration. The arbitration proceeded in the PRC where an award was made in the plaintiff's favour. When the matter came before Mr Recorder Liao SC it was argued, inter alia, by the defendant that the PRC award was invalid and so the stay should not be lifted. Much evidence on PRC law was considered. The learned recorder found against the defendant. The defendant's appeal against that decision is due to be heard in May 2002.

3. The defendant now asks this court to re-impose the stay pending that appeal.

4. The lodging of an appeal will not act as a stay of the court's judgment. The defendant must establish special circumstances when asking the court to depart from the norm. The burden is on the defendant either to show strong grounds of appeal or that the up coming appeal would be rendered nugatory if a stay were not granted.

5. For the following three reasons I have concluded that no grounds exist in this case for the stay to be re-imposed pending appeal.

(1) Strength of the appeal?

6. This court would not and should not try to predict the outcome of the appeal. However if there seem to be, on a preliminary investigation of the issues, obvious strengths or weaknesses they should be identified and weighed in the balance. Litton JA in World Trade Centre Group v. Resourceful River Ltd, CA70/1993 described the test as follows :

"If the appellant was able to demonstrate that he had very strong grounds of appeal, that something had grievously gone wrong with the process of law in the court below, the court would be inclined to make such order as to ensure that the appeal would not be rendered nugatory in the meanwhile."

7. The learned recorder carefully considered the respective experts' evidence and having analysed it at some length made the following finding of fact :

"On the basis of the expert evidence before me, there is thus nothing to question the present legal validity and effectiveness of the award."

8. Moreover, he stated that as the stay in question was a temporary rather than a permanent stay the proper test, which he applied, was to consider :

"The balance of convenience and fairness as between the parties and whether there are material changes in the circumstances as affecting the balance of convenience or the fairness between the parties."

9. In this context he noted a number of matters. He observed that the award had been made, the award had determined the defendant's liability, the defendant was refusing to be bound by the award, the defendant was resiling from its own stated basis for asking for the stay before Findlay J (see below) and that there was nothing to prevent these proceedings from continuing.

10. In short, the defendant has far from discharged the burden on it to show that something went seriously wrong in the judgment which it seeks to appeal. The judgment is based on a finding of fact (the foreign law finding) and the exercise of a discretion, the very things with which appellate courts are reluctant to interfere.

(2) Defendant's inconsistency

11. Sir Nicholas Browne-Wilkinson VC in Express Newspapers v. New Ltd [1990] 1 WLR at page 1329 said :

"There is a principle of law of general application that it is not possible to approbate and reprobate. That means you are not allowed to blow hot and cold in the attitude that you adopt. A man cannot adopt two inconsistent attitude towards another: he must elect between them and, having elected to adopt one stance, cannot thereafter be permitted to go back and adopt an inconsistent stance."

12. Before Findlay J, counsel who then appeared for the defendant, as a basis for asking for a stay relied heavily on the defendant's undertaking to pay whatever amount was determined in the arbitration and acknowledged that such a finding would determine the extent of the defendant's liability.

13. Now, the defendant's refusal to be bound by the award, reflects poorly on its bona fides. It has advanced a number of technical arguments in an attempt to avoid any liability both in the PRC courts and now in Hong Kong.

(3) Appeal rendered nugatory

14. The defendant submits that as the plaintiff is a company not incorporated in Hong Kong it may not recoup its costs if its appeal is successful. In my judgment this is the least persuasive of the submissions made by the defendant. The point being made is that the plaintiff is a shelf company and no more. There is no evidence however, challenging that it does substantial business in Hong Kong, that it has a significant share capital that it has assets in Hong Kong or that it is a sizable construction company.

15. More importantly however is the fact that since the writ was issued, nearly four years ago, there has never been any application for security for costs. If the plaintiff is a foreign plaintiff and if the defendant is concerned that it may suffer loss for which it could not be compensated in damages and if the defendant believes the plaintiff would be unable to pay security into court, then the proper course is to apply for security which, if unpaid, would result in a stay of proceedings.

16. It is hard to conclude that the defendant would be seriously prejudiced by a refusal to stay, when it has not made the proper application. A successful security for costs application could only have two outcomes, either a payment into court in the defendant's favour or a stay.

17. For all the above reasons I consider the defendant's application to be without merit. It is dismissed. Counsel have also addressed the court on the question of costs. I make a costs order in the plaintiff's favour to be taxed and paid forthwith.

1998, No. A3608

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Coram: The Hon Mr Justice Findlay, in Chambers

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JUDGMENT

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The Application

1. I have before me an application by the defendant for a stay of these proceedings pending the award under an arbitration under which the liability, if any, of the defendant's subsidiary under a building contract will be determined.

The Background

2. The defendant's subsidiary company is Guangzhou Dong-Jun Real Estate Interest Company Limited (the subsidiary). The subsidiary employed the plaintiff to do some mechanical and electrical work on a building in Guangzhou. The subsidiary also entered into another contract with the plaintiff in relation to some consultancy services. The plaintiff alleges that the subsidiary owes it $114.792 million under the building contract and $14,131,085 under the consultancy contract. In this action, the plaintiff is claiming these sums from the defendant on the basis of an undertaking to pay given by the defendant to the plaintiff.

3. The defendant says that the plaintiff rendered no services under the consultancy contract and nothing is due in this respect.

4. Under the building contract, the parties agreed to refer any disputes to arbitration. There is no such agreement in relation to disputes under the consultancy contract. The disputes under the building contract have been referred to arbitration.

5. The plaintiff relies on two letters in alleging the "guarantee" by the defendant. They are dated 6 May 1997 and 22 May 1997. They both refer to a letter written by the plaintiff to the subsidiary dated 29 April 1997. This letter of 29 April 1997 said -

"With reference to our auditor's request to confirm the balance due to us by your company in the sum of HK$151,307,899.00, we confirm that this is our assessment of the value of work-in-progress for Dong-Jun Plaza and the value does not represent any agreement nor commitment by your company as the sum for settlement."

6. On 6 May, 1997, the defendant wrote to the plaintiff saying -

"I refer to your letter dated 29 April 1997 in relation to the balance due from [the subsidiary] to your company under two original contracts to perform M&E works and to provide project management service to Dong-Jun Plaza. We advise you that the balance due from our [subsidiary] to your company as at 31 December 1996 was HK$151,307,699 representing an aggregate sum of work-in-progress and outstanding payable due to your company. We confirm that we will do our best endeavour to pay off the aforementioned balance at Hong Kong Dollar Prime Rate plus 2%."

7. On 16 May 1997, the plaintiff faxed a draft of another letter that it wanted the defendant to sign. This draft mentioned both contracts and concluded -

"The company hereby give you an irrevocable guarantee that we will honour all the obligation of [the subsidiary] under the above mentioned contracts if [the subsidiary] were unable to meet its commitments."

8. On 22 May 1997, the defendant wrote to the plaintiff saying -

"I refer to your letter dated 29 April 1997 in relation to the balance due from [the subsidiary] to your company under two original contracts dated 31 December 1993 to perform M&E works and a contract dated 20 May 1994 to provide project management service to Dong-Jun Plaza. We hereby confirm our agreement that we will assume and honour all the obligation of [the subsidiary] under the above mentioned contracts if [the subsidiary] were unable to meet its commitments."

The Defendant's Case for a Stay

9. The crucial argument in the defendant's case for a stay is the effect of the undertaking by the defendant. If it is the case that, assuming the undertaking to mean what it says, the defendant is bound to pay to the plaintiff what the arbitrator finds is due by the subsidiary to the plaintiff, and if the plaintiff can demand from the defendant no more than this, there is obviously a good case for a stay. If neither party, or only one party, is bound by the arbitrator's award, a stay would not be justified.

10. The undertaking, to paraphrase it, and to ignore the condition "if [the subsidiary] were unable to meet its commitment", which has no relevance for present purposes, is to pay to the plaintiff what the subsidiary is obliged to pay under the contracts

11. Mr Dennis Chang, SC, on behalf of the defendant, argues that the defendant's undertaking is to pay what the arbitral award finds that the subsidiary was liable to pay because this is the subsidiary's obligation under the building contract. And the plaintiff can obtain from the defendant no more than this. Until that award is published, it cannot be known what the subsidiary is obliged to pay, and, therefore, it cannot be known what the defendant is obliged to pay.

12. This is the argument advanced in Alfred McAlpine v Unex Corporation (1994) 70 BLR 26. In that case, the undertaking by Unex was that it would not be "under any greater liability to McApline than [the builder] would have been liable in contract pursuant to the express terms of the contract". Glidewell LJ found that this provision meant that "the maximum liability of Unex to McAlpine is the amount which, if there is a reference to arbitration, is determined by the arbitrator to be due by [the builder] to McAlpine." Although Evans LJ did not follow the same approach, and Waite LJ remained neutral, I find the reasoning and conclusion of Glidwell LJ attractive, and I adopt it.

13. In that case, Unex failed in its application for a stay because, although the maximum liability of Unex was limited to the amount of the arbitral award, it was not bound, and was not willing to be bound, to accept the arbitrator's award as the measure of its liability. Glidwell LJ and Evans LJ found that there would have been a very strong case for a stay if that were the case.

14. In the case before me, the terms of the defendant's undertaking, which was negotiated with, and agreed to, by the plaintiff, is such that both parties to this action will be bound by the arbitrator's award as far as the defendant's liability to the plaintiff is concerned. The defendant's obligation is to pay to the plaintiff what the arbitrator finds is due by the subsidiary, and the plaintiff cannot impose on the defendant any greater obligation than that.

15. It being so, on my finding, that the defendant's obligation is to pay what the arbitrator finds is due by the subsidiary to the plaintiff, no more and no less, the undesirability of not granting a stay can be demonstrated by considering what might happen if a stay is not granted. If this litigation proceeds before an award is made, it may be that this court will find that the subsidiary's liability to the plaintiff is, say, $5 million, and gives judgment for the plaintiff is this sum. A week later, the arbitrator's award may be published, and the liability of the subsidiary to the plaintiff is found to be $2 million. Clearly, this is a situation that is most undesirable. It would be equally undesirable if this court found that the amount due by the subsidiary was less than that found by the arbitrator.

16. So, it seems to me, that it would be right that the action be stayed so far as it concerns the claim of $114,792,000 under the building contract.

17. But, Mr Graham says, even if I were to come to this conclusion, it would not be right to stay the action in respect of the claim for $14,131,085 under the consultancy contract.

18. The problem with that approach is that, while the plaintiff says that the sum of $32,928,915 was paid to it under the consultancy contract, the defendant says that these payments were made in respect of the building contract. In deciding what amount is due by the subsidiary to the plaintiff under the building contract, this is one of the issues that the arbitrator must resolve. Whatever the arbitrator finds on this issue will influence what he awards as the liability of the subsidiary, and, consequently, what is the liability of the defendant under the building contract in this action. For example, if the arbitrator finds that the amount of $32,928,915 was paid to the plaintiff under the building contract, this will reduce the liability of the subsidiary in the arbitration and the defendant in this action under the building contract. If he finds otherwise, the same situation will prevail but in reverse. Whatever he finds, it seems to me that if this action is permitted to continue on the claim under the consultancy contract, there is a risk of this court coming to a different conclusion, with the attendant undesirable consequences.

19. To spell out a possible scenario, this court might find that the payments concerned were in respect of the consultancy contract and give judgment for the plaintiff in the sum presently claimed under this head, but the arbitrator might find that the money was paid under the building contract. The plaintiff would then have suffered an injustice. In the event that the arbitrator finds that the money was paid under the building contract, the plaintiff may well wish to amend its claim under this head to withdraw the credit given for these payments. On a balance of convenience, for these reasons, I think it better that the whole action be stayed until the arbitrator's award is known.

The Result

20. For these reasons, I order that this action be stayed until the publication of the arbitrator's award, or further order.

The Costs

21. This is not a permanent stay so there is no call to deal with the costs of the action. As to the costs of this application, there does not seem an obvious reason why costs should not follow the event. I make an order nisi that the plaintiff pay the costs of the application.

JK FINDLAY

Judge of the High Court
Court of First Instance

Representation:

Mr Peter Graham, instructed by Messrs Kwok & Chiu, for the plaintiff.

Mr Dennis Chang, SC, and Mr James Lee, instructed by Messrs Gilbert Tang & Co, for the defendant.