SEGA DESIGN & CONSULTANCY LTD v. LAM LUN KEE DECORATION CO (A FIRM)

HCA131/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 131 OF 2005

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BETWEEN

	SEGA DESIGN & CONSULTANCY LIMITED	Plaintiff
	and
	LAM LUN KEE DECORATION CO. (A FIRM)	Defendant

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Before : Hon Waung J in Chambers (Open to Public)

Date of Hearing : 27 September 2007

Date of Judgment : 27 September 2007

 

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J U D G M E N T

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1. This is an appeal from the decision of the master given on 2 May 2006 (the reasons for the decision was handed down on 27 May 2006) whereby the master granted leave to the defendant to set aside the default judgment entered against the defendant on condition the defendant pay into court the sum of $580,000.  Appeal has now been brought before this court to set aside that decision of the master and for an order to allow the defendant to defend its action without condition. 

2. This matter has come about in this way.  The plaintiff is suing the defendant for a sum of $1 million odd in relation to a sub-contract entered into between the plaintiff and the defendant.  The sub-contact was entered into as a result of the defendant entering into what I will call a main contract with Profit Link International Limited (“Profit Link”) in relation to certain works to be done at the Hip Shing Hong Centre, 23^rd to 28^th floors.  What had happened was although the contractual work agreed under the main contract and sub-contract had been done and had been paid for, there were disputes as to what is loosely called variation work, that is to say additional work not covered by the contract or the sub-contract, which had been requested by what I will call the employer Profit Link.  The variation orders were directly placed by Profit Link with the plaintiff, the sub-contractor, that is Sega Design & Consultancy Limited (“Sega”).  It is not in dispute that such variation work claim was made by the plaintiff against the defendant which is the subject matter of the action and the defendant in turn has made its claim against Profit Link but which has not yet come before the court, so to speak. 

3. The amount of the claim made by the plaintiff against the defendant for variation order work was in fact grossly exaggerated, according to both the defendant as well as Profit Link.  A settlement agreement was reached however between the plaintiff as the sub-contractor with the employer Profit Link by Profit Link agreeing to pay directly to the plaintiff the sum of $580,000 and that is, of course, for the variation order work that was alleged to have been done. 

4. The matter was somewhat complicated by the suggestion both by the employer Profit Link as well as by the defendant that the quality of the work done by the plaintiff under the contract and the sub-contract were defective, rendering remedial work to be done which of course had to be taken into account.  So that is a complication. 

5. Before me today there appeared Mr Yiu Man Kam, for the plaintiff, of the firm of Messrs Chak & Associates.  Mr Yiu informed me that there is an application by the solicitors pending before the master next month for leave to cease to act, as the solicitors have been unable to obtain instructions for some time.  So Mr Yiu, although he was present today, did not take any active part during the hearing and I heard basically submissions from Mr Frederick Chan, counsel for the defendant, as well as having studied his long and elaborate skeleton argument. 

6. In my view the case can be decided fairly easily on the following basis.  There are really two points, one is whether I should grant leave to appeal out of time, the other being whether there has been shown arguable merits of defence. 

7. So far as the first point is concerned, there is no doubt in my mind that the time had been incurred by the defendant in seeking legal aid and, eventually after a protracted process, the defendant has been given legal aid to enable it to bring this hearing before me.  So it is clear to me that there are good reasons for the delay and I therefore grant leave to bring this appeal out of time. 

8. So far as the merits is concerned, it seems to me that having regard to the Decision dated 27 May 2006, although I found Master Wong’s decision to be very helpful, at the end of the day I have come to a different conclusion.  It seems to me that since it is not in dispute that the subject of the claim by the plaintiff against the defendant is all based on the variation orders that therefore this is not a claim or at least is arguable that this is not claim which is brought under the sub-contract.  The Statement of Claim has made it very clear that it is a claim brought under the sub-contract, and it seems to me therefore that it is at the least arguable and I suspect it is more than arguable, that in fact and in law it is not a claim brought under the sub-contract because the contractual claim has been satisfied, and it is the non-contractual claim, that is to say the variation order claim which is being brought.  The reason why the claim now brought is non-contractual is the sub-contract itself says — anything that is to be varied, added, so on and so forth, have to be agreed by the parties.  There was no new agreement and therefore the claim is outside the sub-contract.  It seems to me that it is the first ground on which I can come to the view that there is more than arguable merit in the defence. 

9. The second way of looking at the defence is that the variation orders were given by Profit Link directly to the plaintiff and not by the defendant to the plaintiff.  Therefore work was done by the plaintiff in relation to the variation orders work at the request of Profit Link and the plaintiff should look to any quantum meruit claim to the person who gave that instruction and who received the benefit of such variation orders work.  Therefore there is an arguable case, at the least, that on these facts (which are not in dispute) the defendant should not be liable to the plaintiff for that variation orders given by Profit Link directly to the plaintiff.

10. The third basis that the court should set aside the default judgment is that the quantum of the variation work was agreed by the plaintiff and Profit Link at $580,000 under the settlement.  The master quite rightly said, that figure could be said to be the proper reasonable basis of the value of such variation work.  If that is the case, then really the plaintiff’s claim against the defendant for the variation work, quantified at a sum of $580,000 as being reasonable, has been satisfied because the plaintiff has received the whole of the $580,000 from Profit Link and the defendant therefore should not be liable for any other additional sum for such work or at least it is arguable that the defendant should not be liable for any additional sum.  So that would be another basis to consider that there is a bona fide defence. 

11. The fourth way to look at this matter is to have regard to the curious way (if I may so put it) the condition of $580,000 was imposed by the master.  If the master considered that bona fide defence has been shown, then it is really curious that the condition of $580,000 was imposed.  I think in fairness to the master I should read paragraph 9 at page 476 of the bundle (at page 7 of the Decision itself) where he says this :

“	… To ensure the proper future conduct on their part, I am of the view that payment into court of $580,000.00 is appropriate in the circumstances. …”

I do not know whether the $580,000 was considered as a security for costs or on some other basis or how that figure of $580,000 arrived at.  It seems to me that if bona fide defence have been shown earlier by the three grounds referred to earlier then there is really no basis to order security for costs.  The sum of $580,000 is really a figure out of the air and I do not know how it was arrived at, or how it has been assessed as to insure proper future conduct of the trial by the defendant.  In my view, either bona fide defence has been shown and therefore unconditional leave to defend should be given and default judgment be set aside without condition, or bona fide defence has not been shown.  For me it is a curious way of imposing the $580,000 term into a condition of allowing the setting aside of the default judgment.  It seems to me that this is wrong and I myself, having looked at the material and having regard to the three previous reasons that I have outlined earlier of why default judgment should be set aside because bona fide defence has been shown, I would not impose $580,000 term on the order to set aside the default judgment. 

12. Lastly I have also the benefit of additional evidence in the form of the 3^rd affirmation of Lam Kwok Wah, which goes into great detail as to the financial position of the defendant.  It is quite clear that, as set out in paragraph 17 of the skeleton argument of Mr Chan, the defendant has many outstanding liabilities, and that it cannot turn to anyone for help, the business has ceased on 31 March 2005 and the defendant is on legal aid.  There is no way the defendant can raise the $580,000 and that to impose such a condition in fact would amount to stifling its defence.  It seems to me that having regarded to these additional new material that there is the fifth reason for allowing the defendant to come in to set aside the default judgment without condition. 

13. In the circumstances I therefore order that the appeal be allowed, the defendant be given leave to defend the action without condition and that the costs of today’s appeal be to the defendant.  So far as the costs of the application before the master is concern, that stands.  I also order that the defendant’s own costs be taxed in accordance with Legal Aid Regulations. 

 

 

(William Waung) Judge of the Court of First Instance, High Court

 

Mr Yiu Man Kam Roy, instructed by  Messrs Chak & Associates, for the Plaintiff

Mr Frederick H.F. Chan, instructed by  Messrs Wong Fung & Co., for the Defendant

 

HCA 131/2005

 

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 131 OF 2005

______________________

BETWEEN

	SEGA DESIGN & CONSULTANCY LIMITED	Plaintiff
	and
	LAM LUN KEE DECORATION CO. (A FIRM)	Defendant

______________________

Coram : Before Master J. Wong  in Chambers

Date of Hearing :  2 May 2006

Date of Decision :   27 May 2006

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D E C I S I O N

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Application

1. This is an application for setting aside of default judgment by the Defendant against the Plaintiff.

Background

2. Profit Link International Limited (“Profit Link”) was the main contractor of the renovation works of the premises known as 23^rd to 28^th Floors, Hip Shing Hong Centre, No.55 Des Voeux Road Central (“the Premises”).  The renovation works were sub-contracted to the Defendant who further sub-contracted the same to the Plaintiff.  On 21 January 2005, the Plaintiff commenced the present proceedings against the Defendant for balance of outstanding payment in the sum of $1,438,865.

3. Although the Defendant did file their acknowledgment of service on 15 February 2005 indicating that they would contest the proceedings, no defence and counterclaim was filed and served within the time limit.  As such, default judgment was entered for the Plaintiff on 22 March 2005.  The Defendant took out the present application on 2 December 2005.  They conceded that it was a regular judgment and sought to invoke the discretion of this Court to set it aside.

4. The substantive argument was fixed to be heard by me on 2 May 2006.  Mr. P.K. Chan of Counsel acted for the Defendant while Mr. Bernard Yuen of Counsel represented the Plaintiff.  Upon consideration of all the evidence, authorities and submissions from the parties, I have come to the conclusion that the judgment is only to be set aside upon payment into Court of $580,000 by the Defendant.  My reasons appear as follows.

The Law

5. The applicable principles relating to setting aside of regular judgment can be found at pages 157 to 160 HKCP 2006 paragraphs 13/9/12 to 13/9/25.  In summary, the court’s power is discretionary and unconditional.  All relevant circumstances should be considered, including whether the defendant has shown “a real prospect of success”; why the default occurred; the defendant’s conduct after he had notice of the proceedings and the default judgment; prejudice caused to the Plaintiff or third party; and so forth.

The Defences: meritorious?

6. The Defence raised by Defendant may be summarized as that:

“ (a)  the costs of variation orders as claimed by the Plaintiff were grossly inflated and/or miscalculated;

  (b) the costs of variation orders ought to be discounted for the quality problems; and

  (c)  the Defendant should be entitled to set off against the Plaintiff’s claims herein so much of its costs for undertaking the remedial works.”

  (para. 6 of Mr. Chan’s skeleton)

7. In relation to these 3 lines of defences, I have the following observations:

(a) (i) The Plaintiff conceded that the sum of $60,000 design costs should not have been part of its claims herein.

(ii) It is not disputed that there were variation orders.  It is also not disputed that they were made directly by the main contractor with the Plaintiff.

(iii) According to the contract between the Plaintiff and the Defendant, the costs of variation orders are to be determined by further agreement of the parties.  The agreement dated 15 November2005 made reference to the subject quotation which stated that:

“現附上以上工程之單價明細表供參考之用，而其單價不能作此工程日後更改或後加的項目及數目之用。若有更改須另行商議價目。”

(iv) Upon the contemporaneous documents put before me, I do not consider that further agreement has been reached.  Factually, the Defendant simply relayed the costs of variation orders prepared by the Plaintiff to Profit Link for approval.  On 29 December 2003, the Plaintiff said that they amounted $1,791,708.00. Profit Link replied to the figure in November 2004.  It said that it worthed only $353,699.90.  Further, on 9 December 2004, during a labour dispute between the workers of the Plaintiff and the parties, Profit Link paid $580,000.00 to the workers in the following circumstances:

“ ……

雖然「添勝國際有限公司（‘添勝’）」與「世嘉」並無合約關係，但基於顧及世嘉及其外判的工人生計，「添勝」通融地同意付予「世嘉」HK$580,000.00（港幣伍拾捌萬元正）作為支付此裝修項目所有工人欠薪以及最終及全盤解決金額（Full and Final Payment），並將從「林倫記」剩餘工程款項扣回。

3.        ……

6.    此付款手續辦好以後，「世嘉」可自行繼續向大判「林倫記」追討其餘欠款（如確有）。但再與「添勝及集團其他成員」無關，而「添勝及集團其他成員」也不能再牽涉在內。”

(v) Putting myself into the position of the trial judge, the costs of variation orders are to be determined on the basis of “quantum merit” in the circumstances.  It can only be determined upon hearing of all evidence from the parties as to the reasonableness of such costs.  For the time being, the sum of $580,000 should be a figure that might be relied upon because it was something agreed by Profit Link as aforesaid.

(b) (i) The Defendant said that the works of the Plaintiff were defective.  The Plaintiff replied that it had taken steps to rectify the same.  In this respect, the Plaintiff is able to produce some contemporaneous documents to support its case, including a time chart dated 3 February 2004 showing details of remedial works being carried out and the letter of  7 February 2004:

“關於本司於30th January, 2004發出的信件檔案號碼HSHC/LLK/L-1225/SF就BDM發出的Defect List項目，特此通知貴司有關進度：—

有關23，25及26樓的執Defect項目，本司已於16-Feb-2004完成所有執Defect項目。如貴司對已完成的執Defect項目有意見請於此信件的發出日期起計三日內通知本司。”

(ii) On the contrary, as a matter of documentation, the Defendant cannot produce any reply to the above letter.  By way of affidavit evidence, the Plaintiff attempted only to dispute the same by reference to the complaints made by Profit Link.

(iii) I do not think I have to resolve such dispute at the present juncture.  It suffices to say that I am not optimistic about the Defendant’s case on this point.  Further, when Profit Link paid the said $580,000, probably, defects (if any) or costs of rectifying the same, should be one of the factors having been taken into account.

(c) The Defendant told this Court that they had incurred costs of $415,000.00 of rectifying the defective work of the Plaintiff.  The Plaintiff disputed the same.  For the time being, I agree with the Plaintiff.  The burden of showing “a real prospect of success” lies on the Defendant.  However, they have chosen only to show some very rough calculations.  This Court is left with no particulars of when, where, what and how these remedial works were carried out.

Other factors?

8. I also notice the followings:

(a) Mr. Lam of the Defendant told this Court that he was taking care of her mother, who having been hospitalized for in January and February 2005, and as such missed the deadline for filing the Defence.  I accepted that.

(b) Nonetheless, upon knowing the default judgment, he apparently did not take steps to rectify the same for some 9 months.  Further, he only kept negotiating with Profit Link about the matter, but regrettably failed to achieve anything.

(c) As far as the Plaintiff is concerned, there is no evidence adduced before this Court showing that either it or some other third party might be prejudiced if I would set aside the subject default judgment.

(d) 5 demand letters were issued by the Plaintiff to the Defendant from April 2004 to December 2004, but the Defendant did not make any formal reply or at all.

Conclusion

9. To sum up the position, in order to determine the real liability of the Defendant to the Plaintiff, a trial of all available evidence is necessary in order to determine the true costs of variation orders, defects of the work of the Defendant, if any, and so forth.  Upon the evidence before this Court so far, the sum of $580,000 appears to have been acceptable to the Plaintiff and Profit Link. Contemporaneous documentation is no good for the Defendant’s case.  There is further delay on the part of the Defendant in bringing up the present setting aside application.  To ensure the proper future conduct on their part, I am of the view that payment into court of $580,000.00 is appropriate in the circumstances.  I further allow the Defendant to do so within 21 days from today.

Costs

10. I do not have the benefit of having argument from both Counsel on the question of costs.  However, there appear no reason why costs should follow the event.  I therefore make an order nisi that, costs of the application, including costs reserved on 9 December 2005, together with Certificate for Counsel on the hearing on 2 May 2005 before me, be borne by the Defendant to the Plaintiff, to be taxed if not agreed, on party-and-party basis.

(Jack Wong) Master

Mr. B. Yuen of Counsel, instructed by Messrs. Yu & Associates for the Plaintiff

Mr. P. K. Chan of Counsel, instructed by Messrs. Ong & Chung for the Defendant