SNE ENGINEERING CO LTD v. CHIM KEE MACHINERY CO LTD

HCA 2025/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2025 of 2012

__________________

BETWEEN
	SNE ENGINEERING CO LTD	Plaintiff
and
	CHIM KEE MACHINERY CO LTD	Defendant

__________________

Before: Deputy High Court Judge Burrell in Chambers

Date of Written Submissions: 13 May 2016

Date of Decision on Costs and Interest: 30 May 2016

__________________________________________

DECISION ON COSTS AND INTEREST

__________________________________________

1.  On 5 April 2016 the defendant issued a summons seeking a variation of the court’s nisi order for costs and interest contained in the judgment handed down on 24 March 2016 following a 6 day trial which concluded on 9 March 2016.

2.  By consent of the parties the matter has been dealt with “on paper” pursuant to the court’s direction.

3.  I have now read and considered (i) the said summons, (ii) the parties’ written submissions thereon, (iii) the relevant correspondence between the parties, (iv) Order 22 and Order 42 RHC and (v) (in part) the authorities submitted by both parties in support.

4.  The following are, inter alia, relevant:

(a)  the defendant made a sanctioned offer dated 30 October 2015 to accept HK$9 million from the plaintiff “in full and final settlement” in an attempt to avoid a trial.  The offer was not accepted.  After trial the defendant succeeded in being awarded HK$8,365,757 damages plus interest at 1% over HSBC base rate from 1 August 2012.  The result was that the defendant “did better” than the sactioned offer by over HK$1 million, once interest is included.  The plaintiff’s submission that the defendant failed to “do better” than the sanctioned offer is without merit (Order 22 rule 26);

(b)  I have given due weight to the matters set out in paragraph 6(a) – 6(j) of the defendant’s written submissions;

(c)  Order 22 rule 24(2), (3) and (4) applies;

(d)  Order 59 rule 13(1)(a) applies.  I decline the invitation to stay this matter pending appeal; and

(e)  save as specifically provided, matters of costs and interest are within the court’s discretion.

5.  I make the following orders:

(i)     the plaintiff do pay the defendant’s costs of this action including any costs reserved up to the 27 November 2015, on a party and party basis, with certificate for two counsel, to be taxed if not agreed;

(ii)    the plaintiff do pay the defendant’s costs of this action, including any costs reserved from 28 November 2015 up to the date of this Order, save and except the costs for the joinder application taken out by the plaintiff dated 20 January 2016, on an indemnity basis, with certificate for two counsel to be taxed if not agreed;

(iii)   the plaintiff do pay the defendant the sum of HK$8,365,757 plus interest at 1% over HSBC base rate from 1 August 2012 to 27 November 2015 on the sum of HK$8,115,757; interest at 1% over HSBC base rate from 1 November 2012 to 27 November 2015 on the sum of HK$250,000; and interest at 1% above the judgment rate on HK$8,365,757 from 28 November 2015 up to the date of payment;

(iv)   the plaintiff do pay the defendant interest on the defendant’s costs incurred from 28 November 2015 save and except the costs of the joinder application dated 20 January 2016 at 1% above judgment rate from judgment until payment; and

(v)    the cost of this application be to the defendant on a party and party basis to be taxed if not agreed.

	(M P Burrell)
	Deputy High Court Judge

Written submissions by Mr Billy K Y Kwan, instructed by Leung &   Associates, for the plaintiff

Written submissions by Tsui & Co, Solicitors, for the defendant

    

HCA 2025/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2025 of 2012

__________________

BETWEEN
	SNE ENGINEERING CO LTD	Plaintiff
	and
	CHIM KEE MACHINERY CO LTD	Defendant

__________________

Before: Deputy High Court Judge Burrell in Court

Date of Hearing: 1 – 4, 7 and 9 March 2016

Date of Handing Down Judgment:  24 March 2016

________________________

J U D G M E N T
________________________

 

1.  The background to this case concerns a construction contract for the removal of H‑piles and bored piles at site near the Nam Cheong MTR station which was essential preparatory work prior to the boring of an underground tunnel being part of the MTRC’s construction of the Express Rail Link from Kowloon to the Mainland border.

2.  The removal of such piles required special expertise and heavy machinery.

3.  The particular contract which sets the scene for this litigation is contract no 802.  “802” referred to a site where the MTRC had awarded the main contract to Hsin Chong Construction Company (“HC”).  HC had in turn sub‑contracted the plaintiff (“SNE”) to carry out the pile removals under sub‑contracts 8664/10 and 8800/11.  Both are dated 11 March 2011 but the work had commenced before that date.

4.  In order to carry out the works SNE needed to hire machinery and labour.  They engaged the defendant, Chim Kee Machinery Co Ltd (“Chim Kee”) for this purpose.  This contractual relationship commenced in September 2010.

5.  There is not one overall contract between SNE and Chim Kee for this purpose, rather it is represented by a series of dealings recorded by a number of rental quotations, followed up by invoices and oral agreements.  For the purpose of this litigation, they are referred to as the Machinery Hire Agreement (“MHA”), of which there are hundreds between 21 September 2010 and 25 May 2012.

6.  The relationship between these two parties under the MHA is the core issue in this case.  Other issues have arisen, largely after the purported termination of the MHA on 3 July 2012.  They can be summarized by reference to SNE’s claims in these proceedings which are:

(a) A declaration that Chim Kee was not entitled to terminate the MHA in July 2012 and a return of $3,815,330.58 being monies overpaid by SNE to Chim Kee under the MHA prior to its termination.

(b) After the termination, damages for deliberate slow operation of machinery and failure to remove equipment from the site by Chim Kee.  The total damages claimed under these two post‑termination heads is about $3 million.

(c) SNE also claims that Chim Kee’s wrongful acts, including the wrongful termination, led to SNE’s sub‑contracts (8664/10 and 8800/11) with HC also being terminated, on 11 and 20 September 2012 respectively.  Following the loss of their contracts with both Chim Kee and HC, SNE claims against Chim Kee for loss of profits and further liabilities to HC involving a total sum in excess of $100 million.

(d) A relatively small claim for wrongful detention of some of SNE’s plant and equipment after November 2012.

7.  Additionally, there is an allegation of a conspiracy between HC and Chim Kee to disadvantage SNE.  On 17 February 2016, less than two weeks prior to the commencement of this trial, SNE made an application to To J to join HC as a 2^nd defendant and serve a much amended statement of claim alleging the tort of conspiracy, with detailed particulars which had not hitherto been pleaded.  It was acknowledged that had the application been granted, it would have led to the inevitable adjournment of this trial with costs.  The application was refused but the claim remains albeit pleaded with sparse particulars.  Chim Kee relies both on inadequate pleading and on the facts in its strenuous denial of the conspiracy claim.

ISSUES

8.  Mr Billy K Y Kwan, counsel for SNE, and Mr Ian Pennicott SC with Joseph Wong, both counsel for Chim Kee, have helpfully provided a list of issues.  They are not identical but may be summarized as follows:

(1) What were the terms and conditions of the MHA?  Did they contain an implied term?  Had the payment terms been waived?  Had the payment terms been varied (by a tri‑partite “Rental Agreement” between HC, SNE and Chim Kee dated 23 May 2012)?

(2) Was Chim Kee’s termination of the MHA lawful, and if not, what are SNE’s damages?

(3) Had there been an overpayment of rental charges by SNE to Chim Kee under the MHA prior to termination?

(4) Was Chim Kee in breach of an implied term not to obstruct or cause delay to SNE’s works before and soon after the alleged wrongful determination of the MHA causing further damages to SNE?

(5) Later issues including wrongful detention of equipment, outstanding storage fees, replacement costs and repairs to damaged equipment.

(6) Is there a valid conspiracy claim between HC and Chim Kee culminating in HC’s later termination of SNE’s sub‑contracts with them in September 2012.

WITNESSES

9.  Six factual witnesses, three for SNE and three for Chim Kee, were examined and cross‑examined.  SNE called a site engineer (Mr Ho Tik Sang), a construction supervisor (Mr Wong Chung Wai) and SNE’s general manager and associate (Mr Takuya Matsumoto).  Mr Matsumoto explained that SNE was a Hong Kong joint venture company with Japanese partners, incorporated on 7 June 2010 for the specific purpose of tendering for the Express Rail project.  The Japanese partners had the necessary expertise in pile extraction works.

10.  Chim Kee called HC’s project manager (Mr Frankie Lam), their own managing director (Mr James Tang) and a crane operator (Mr Chung Yui Tung).

11.  Collectively, their witness statements totalled approximately 160 pages without exhibits (of which Mr Matsumoto’s was 100 pages) and 816 pages with exhibits.  The witness statements stood as evidence‑in‑chief.

DISCUSSION

12.  Nine areas of dispute require a determination.  By dealing with them in a logical sequence the court’s decisions on the first two issues significantly impact on the resolution of some, but not all, of the later issues.

(1)  The terms of the MHA

13.  Following the evidence given in court, there was no longer a serious dispute as to whether or not the “General Conditions of Hire” formed part of the MHA.  Clearly they did.  The Rental Quotations expressly referred to them and stated that they were available “upon request”.  Moreover, they were attached to the Rental Agreements.  The terms which are at the heart of the dispute are those concerning “payment” and “termination”.

14.  The Rental Agreement payment is said to be “within 30 days against invoice date”.  Clauses 4 and 5 of the General Conditions state:

“4. PAYMENT

Invoices will be presented to the Hirer monthly in advance. All payment in settlement of invoices must be made within 10 days of the receipt of invoices without deduction, counterclaim or set‑off to the owner. In default of such payment, the Owner shall have the right of withdrawing the equipment from the service of the hirer without prejudice to any remedy, the Owner may have against the Hirer under this agreement and without prejudice to the Hirer’s claim for any balance repossessing the machine.

5. TERMINATION

(a) This agreement shall be terminated by either party to the other by giving SEVEN clear days’ written notice after the said minimum period.

(b) If the Hirer shall make default in payment of any of the sums payable hereunder or shall fail to observe or perform any of the other terms and conditions of this agreement whether expressed or implied, the Owner reserves the right to terminate the hire forthwith, and to take any steps necessary to recover possession of the equipment, without prejudice to their right to recover all amounts due for the hire, reconditioning to the equipment, if any, and the cost for transport to their stores.”

15.  It should be remembered at the outset that the contract between SNE and Chim Kee was a self contained contract for the hire of heavy plant and machinery on a construction site.  The parties’ respective liabilities under the contract did not depend on SNE’s performance under its sub‑contracts with HC or indeed with HC’s contract, as main contractor, with the MTRC.  Chim Kee supplied machinery and labour.  SNE agreed to pay the hire charges within 30 days of each invoice.  (Chim Kee does not rely on the “10 day” provision in Clause 4 above, as that was, as a matter of law, superseded by the “30 day” provision in the Rental Agreements.)

16.  In a nutshell, SNE submits that the 30 day term did not apply. SNE submit that it was both waived by conduct between the parties and varied by a tri‑partite Rental Arrangement involving SNE, Chim Kee and HC entered into on 26 May 2012.  These issues of “waiver” and “variation” require individual consideration.  If the payment terms had been waived and/or varied, then SNE submits that Chim Kee’s termination of the MHA contract on 3 July 2012 was unlawful.

17.  Whether or not it was unlawful largely turns on the court’s decision on the waiver and variation issues.

Waiver?

18.  The Rental Agreement commenced in September 2010.  SNE’s case is based on the fact that for the next 15 months, at least, Chim Kee did not insist on strict compliance with the 30 day term.  It is a fact that the 30 day term was never complied with.  SNE points out, and Chim Kee does not challenge, that the average delay in payment for the monthly payment requests was 78 days up to early 2012.  SNE even claims that there was an oral agreement (although it is not pleaded) that “2 – 3 months” was agreed.  Chim Kee denies this.  The question simply is whether or not the 2010 – 2011 acceptance by Chim Kee of late payments constitutes a waiver by conduct of the 30 days provision which estops Chim Kee from relying on it.

19.  There is substantial agreement between the parties as to the law on this issue.  They do not agree on its application to the facts.

20.  Chitty on Contracts (32^nd edition) states:

“Where one party voluntarily accedes to a request by the other that he should forbear to insist on the mode of performance fixed by the contract, the court may hold that he has waived his right to require that the contract be performed in this respect according to its original tenor. Waiver (in the sense of ‘waiver by estoppel’ rather than ‘waiver by election’) may also be held to have occurred if, without any request, one party represents to the other that he will forbear to enforce or rely on a term of the contract to be performed or observed by the other party, and the other party acts in reliance on that representation.”

21.  Mr Pennicott for Chim Kee places further reliance on a citation from Persimmon Homes (South Coast) Ltd v Hall Aggregates (South Coast) Ltd[2009] NPC 118 (UK Court of Appeal):

“A party to a contract (A) may waive the obligation of the other party to the contract (B) to perform a stipulation in the contract that is for the benefit of A. A may waive the obligation without any request by B that A do so. But A will only be taken to have waived the obligation of B to perform that stipulation of the contract if, (in the absence of a request to do so by B), A has made an unequivocal representation to B that A does waive the performance of the stipulation. That unequivocal representation can be by words or conduct, but does not have to be as blunt as ‘I hereby waive’ the other party’s obligation to perform the stipulation. For the waiver to be effective, B must either act on the unequivocal representation of A to his detriment; or he must conduct his affairs on the basis of the waiver.” (emphasis added)

22.  On the facts, Mr Kwan for SNE relies on the fact of late payments throughout 2011, the fact that the first written demand arising out of late payments was only made in December 2011, the fact of a flexible arrangement and the claim of an oral agreement to that effect.

23.  On the other hand, as evidence that there had clearly been no “unequivocal representation” by Chim Kee, Mr Pennicott relies on:

(i) The many written demands for prompt payment commencing with the 8 December 2011 letter which stated:

“Regarding to the hire of machinery for the above contract, the rental charge of September and October 2011 are still outstanding.

Please settle the payment on or before 10 December 2011. Otherwise, we are no alternative but to ask the Main Contractor for the payment.

We reserve the right to claim the interest and relevant costs for the outstanding payment.”

(ii) The tenor of this letter plainly suggests that this demand was not “out of the blue”.  It uses the expressions “still outstanding” and “otherwise we have no alternative …”.  This strongly supports Mr James Tang’s evidence that there had been several prior oral demands.

(iii) SNE had received monthly statements from the outset which recorded a slowly increasing “amount due”.

(iv) he situation worsened in 2012.  SNE’s sub‑contract with HC ran into difficulties.  It is not for this court to consider where the fault lay for those difficulties.  They are only of relevance because they caused the piling removal work to slow down which, in turn, caused SNE to receive reduced payments from HC (because they were being paid per pile) which meant that SNE had less money to pay for the hire charges to Chim Kee.

(v) n April 2012, SNE offered a “repayment schedule” to deal with the accumulating indebtedness.  However, the schedule still only offered to make payments up to three months late.  Twice Chim Kee informed them that the schedule was not acceptable and requested prompt payment in accordance with the contract.

(vi) When payments were later received, Chim Kee’s receipts reminded SNE that the payment received was only “partial”.

(vii) Such payments that were made during 2012 (up to termination on 3 July 2012) were still 2 – 3 months late.

24.  Considering all the evidence on this issue, of which the above is a mere summary, it cannot be said that Chim Kee had agreed to waive the 30 day provision in substitution for a more flexible ill‑defined alternative.  It is not open to SNE to translate Chim Kee’s patience as the basis of a change in the terms of the parties’ written agreement.  At its highest, it was an indulgence by Chim Kee during 2011 which falls far short of an “unequivocal representation”.

Variation

25.  In support of their submission that there had been a variation of the payment terms, SNE primarily relies on the “Tri‑partite Rental Arrangement” dated 23 May 2012.

26.  The background to this “TRA” can be briefly stated.  Due to the difficulties being encountered by SNE in the pile extraction work, resulting in reduced payments from HC, it was agreed that SNE, HC and Chim Kee should consider the possibility of direct payments from HC to Chim Kee for the hire charges of machinery.

27.  An “Arrangement” was reached as follows:

“Rental Arrangement

Regarding to our rental service of equipment and operator to the above project, there is mutually agreed between the above three parties that the Main Contractor, Hsin Chong Construction Co., Ltd. would pay on behalf of SNE Engineering Co., Ltd. to Chim Kee Machinery Co., Ltd. for the service of equipment and operator to XRL802 job site for the amount to be certified by SNE; OR the reasonable amount to be assessed by Hsin Chong based on available information if SNE fails to duly certify within 21 days upon receipt of the payment application submitted by Chim Kee Machinery Co., Ltd. to SNE Engineering Co., Ltd. and copied to Hsin Chong Construction Co., Ltd., where adjustments (if necessary) shall be made in due course to the amounts that shall be agreed between SNE Engineering Co., Ltd. and Chim Kee Machinery Co., Ltd.”

28.  Mr Kwan submits that under this arrangement it was agreed that the payment obligation could be enforced against and discharged by either SNE or HC and that it contemplated settlement of invoices may take longer than 30 days.  In such circumstances, the terms of the MHA had been varied and substituted with new and different terms.

29.  However, in my judgment, SNE’s contention that the TRA constitutes a variation of contract must fail.  An alternative payment method or a “second string to the bow” or a “safety net” it may be, but a substitution of new terms for old it is not.

30.  The requirements for a contractual variation are the same as for a contractual formation.  In this instance I find lacking any consideration from SNE to Chim Kee.  Any consideration that there may be flows from HC, namely their contribution to the new alternative payment method.  More importantly, the primary obligation to pay Chim Kee remained on SNE.

31.  Post‑TRA events support this.  By a letter of 26 June 2012 SNE requested HC to pay it (SNE) the May 2012 invoices which it undertook to pay on to Chim Kee (which, in fact, it never did).  Thus, SNE did not regard itself as being relieved of its payment obligations under the MHA.

32.  The fact that the payment terms were neither waived nor varied does not provide the whole answer to the question whether or not the termination on 3 July 2012 was lawful or not.  A more detailed consideration of the events leading up to the termination is necessary, to which I now turn.

(2) Was the termination of the MHA lawful or unlawful?

33.  Chim Kee’s termination letter of 3 July 2012 is as follows:

“This is per our meeting with your Mr. Stephen Wai this afternoon at 1:00pm regarding to the outstanding issues and payment. As SNE fails to provide any commitment on repayment, compensation of damaged equipment and rental period of equipment, we have no choice but to terminate our service at MTRC 802 job site immediately.

This notice is served on 03 July 2012”

34.  This followed an earlier letter dated 26 June 2012 stating:

“Outstanding Issues & Payment

According to our record, you still own us

(1) certified invoices and payment of March & April 2012;

(2) signed quotation as listed on Section A;

(3) signed agreement on rental period starting from 01 June 2012.

Due to the past experience for pending issues, calling for payment and your misleading actions in the crane rental market. We have no choice but only to stop our service at MTRC 802 job site after 03 July 2012 if you do not settle all outstanding issues on or before this Friday (29 June 12).

This notice is served on 26 June 2012.”

35.  Between 8 December 2011 and termination, Chim Kee had written a total of eight letters (referred to, in part, at paragraph 23 above) concerning payment defaults, including a Statutory Demand for $10,399,066 on 3 April 2012.

36.  On 17 May 2012, SNE paid the January and February invoices.

37.  After the TRA at the end of May, a sum of $7.6 million was paid, understood to be for the March and April invoices.

38.  As at 3 July, $4,993,916 was outstanding for pre‑June invoices.  This plus the June invoices remains unpaid.  The total amount claimed under this heading in the Statement of Claim is $8,884,574.50.

39.  Obtaining payment from SNE had proved difficult.  It seems that SNE were taking for granted Chim Kee’s patience and indulgence throughout 2011.  However, no doubt Chim Kee’s anxieties about slow or non‑payment were heightened by the increasing complaints (rightly or wrongly) being made by HC (and MTRC) about SNE’s performance over the 1^st half of 2012.  SNE’s payment history strongly suggested that the worse the progress got the greater the risk of Chim Kee not getting paid.  Hence the 3 July 2012 termination letter refers not just to an outstanding amount but to the fact that SNE “fails to provide any commitment on payment …” and the 26 June letter referred to “due to the past experience for pending issues …”.

40.  The next day, on 27 June, SNE terminated, for reasons which were not made clear, its contract for labour with a company named Triangular Force.  With diminished labour, work on site further deteriorated with the natural consequence of more risk of non‑payment to Chim Kee.

41.  In my judgment, on the whole of the evidence, SNE has not been able to demonstrate, on a balance of probabilities, that Chim Kee’s termination was anything other than a valid exercise of their right to terminate the MHA pursuant to Clause 5(b) of the General Conditions of Hire.

42.  The invoices claimed by Chim Kee for May and June total $7,986,827.  The balance, ($8,884,574 − $7,986,827 = $897,747) relates to pre‑May outstanding amounts.  The amounts certified by SNE for May and June total $6,449,193.  I propose to take a median figure (($7,986,827 + $6,449,193) ÷ 2) namely, $7,218,010 and add the pre‑May figure of $897,747 = $8,115,757.

43.  On 11 July, SNE informed HC that they had accepted Chim Kee’s termination.  This was but one event in a period between 3 July and 26 July which Mr Pennicott described as a period of “chaos”. Regardless of the lawful termination, as found, three issues stemming from this period of chaos remain.  They are:

(i) Did the MHA include an implied term, and if so, did compliance with it survive the termination?

(ii) Was there a deliberate slow operation of its machinery by Chim Kee during this period ending on 26 July (the date on which HC took over the majority of the site in place of SNE) which entitles SNE to damages?

(iii) Is SNE entitled to further damages for Chim Kee’s failure to remove their machinery off the site in a reasonable and timely manner?

44.  SNE has quantified its damages under (ii) above in the sum of $1,575,934 and under (iii) $1,330,691.

(3)  Should the MHA include an implied term?

45.  SNE’s claim for the above sums depends on the incorporation of an implied term that Chim Kee shall not obstruct or cause delay to SNE’s works unreasonably during and after the termination on the MHA.  Two questions arise, first, should such a term be implied and secondly, if so, does it still operate after the termination of the contract?

46.  The express terms of the MHA are confined to terms relating to the machinery, not labour.  This implied term clearly is directed at the conduct of the workforce. The classic five point test is (in short) (i) reasonable and equitable?  (ii) necessary for business efficiency?  (iii) obvious? (iv) capable of clear expression?  and (v) does not contradict any express terms?  This test has been recently condensed by Lord Hoffman to a single question in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [21]:

“… in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean … [T]his question can be reformulated in various ways which a court may find helpful in providing an answer — the implied term must ‘go without saying’, it must be ‘necessary to give business efficacy to the contract’ and so on — but these are not … to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

47.  I am persuaded that such a term may be incorporated as contended for by Mr Kwan. More difficult however is the second question, namely, whether it can operate after the contract has been terminated.

48.  In my judgment, all contractual relations between SNE and Chim Kee were terminated on 3 July 2012.  Mutual rights and obligations ceased, including the implied term.  The implied term could have been relied on by SNE up to 3 July but not after.

49.  As a matter of common sense, if Chim Kee had caused loss to SNE after 3 July by deliberate obstruction, there would be a cause of action, possibly trespass, under which they could be compensated for Chim Kee’s wrongful acts.  However, I cannot agree that the cause of action would be the breach of a term in a contract for hire of machinery which had come to an end.

50.  As will be seen below, the issue becomes academic as result of my evaluation and assessment of the evidence relating to this “chaotic” three week period.

(4)  Damages for deliberate slow operation of machinery from 3 July 2012?  and

(5)  Damages for Chim Kee’s failure to remove its machinery after 11 July 2012?

51.  These two issues may be considered together and resolved on the facts.  During the relevant period, little or no pile extraction work was done, meetings between SNE, Chim Kee and HC were held to discuss matters and propose solutions, many letters were exchanged, there was a short labour strike on 5 July and on 25 July SNE was granted an ex parte injunction ordering Chim Kee to remove machinery (which turned out to be an unwise move as it was later, at an inter parties hearing, discharged with costs against SNE).

52.  Having heard the witnesses, I find the following facts to have been proved.

53.  By a letter dated 3 July 2012, HC took over SNE’s sub‑contracts works saying:

“As such we have no choice but to take control of you sub contract work immediately on your behalf.”

54.  That this occurred on the same day as the termination of the MHA is not a sinister co‑incidence, rather it was commercial common sense by HC.  It was the culmination of repeated complaints about poor performance (again, rightly or wrongly) coupled with the fact that, as of 3 July, SNE was without a hiring agreement for plant and machinery.

55.  A period of uncertainty followed.  For the next two days, HC gave the instructions on site.  On 6 July, a meeting took place between representatives of SNE, Chim Kee and HC and lawyers for SNE.  SNE later claimed an agreement had been reached that Chim Kee would hire the machinery to them for a further three months.  This was immediately denied by Mr James Tang in an email. Mr Kwan submits that the email is “equivocal”.  I do not agree.  It states:

“As your telephone call at 19:00 yesterday, you and your company had served my company a lawyer letter. I believe that you have misinterpreted the meeting at 12:00 pm yesterday. We had not reach any agreement. The meeting was only a chance for expressing your point of view.

I would ask for formal meeting in the coming Monday to discuss our misunderstandings.  Pls arrange place of meeting at 16:30 9TH JULY 2012.  Meantime, my staffs will stand‑by on site mtrc 802 to assist you so nothing get disturbance.”

56.  Chim Kee’s agreement was to “stand by”.  This they did under SNE’s instructions until 11 July, the day on which SNE “accepted” that the MHA had been terminated.

57.  Thereafter, between 11 and 26 July, the main dispute concerned the responsibility for and correct procedure for the demobilization of the site. By this time, any remnants of good‑will between the parties had evaporated. There were two bones of contention.  Chim Kee’s position was that by the very nature of the very large and heavy machinery involved, it was SNE’s responsibility to provide a demobilization schedule or plan.  Demobilization was not a straightforward task of driving away all the plant in a day or so to another place.  Secondly, it was Chim Kee’s position that any such removal plan required the consent and approval of HC and the MTRC engineer.

58.  SNE disagrees with both of the above.  Comparisons were drawn between the site in question (“802”) and another MTR site at “820”.  At 820, it was said, earlier in the year the site was demobilized without such requirements.  I agree with Mr Tang for Chim Kee that such comparisons do not assist.  The evidence revealed that 820 was a significantly smaller site, the main contractor was different and the demobilization was the simple consequence of the works there having been finished.  All in all, it was a significantly different situation.

59.  As for the issue of “consent”, Chim Kee points to Clause 91.6 of the main contract between MTRC and HC which states:

“Subject to Clause 105.2 no Contractor’s Equipment or Plant and Materials or any part thereof shall be removed from the Site without the written consent of the Engineer which consent shall not be unreasonably withheld where the same are no longer immediately required for the purposes of the completion of the Works.”

60.  SNE’s answer is that this clause does not bind Chim Kee and moreover the “contractor’s equipment” does not include Chim Kee’s equipment.  “Contractor’s equipment” being defined in the main contract as:

“ ‘Contractor’s Equipment’ means all apparatus, machinery, vehicles and other things required for the Execution of the Works and the remedying of any defect. Contractor’s Equipment excludes Temporary Works, Employer’s equipment (if any), Plant and Material and all things intended to form or forming part of the Permanent Work.”

61.  SNE submits that Chim Kee’s equipment cannot fall within the definition of “contractor’s equipment” under the main contract.

62.  Shelving for a moment the niceties of this argument, MTRC’s and HC’s actual stated position at the material time should not be overlooked.

63.  By a letter of 17 July 2012 of SNE, HC stated:

“ … We would also like to repeat that the arrangement of Chim Kee off site shall be made by SNE but not Hsin Chong where your proposed demobilization schedule of Chim Kee’s plant is still outstanding.

SNE’s letter ref. 802/HC/10306 dated 13 July 2012

We acknowledge your report on the performance of your subcontractor Chim Kee.  As mentioned before, the arrangement of Chim Kee off site shall be made SNE but not Hsin Chong where your proposed demobilization schedule of Chim Kee’s plaint is still outstanding ...”

and on 20 July:

“Nonetheless, please be reminded again that pursuant to the Clause 91.6 of General Condition of Main Contract removal of major equipment or plant from the Site shall seek written consent from the Engineer. In this regards, you shall provide the necessary information to us for our onward submission to the Engineer and we would assist you to obtain such consent from the Engineer as earliest as possible in order not to affect your plant and machinery arrangement.”

64.  That SNE’s position bears the hallmarks of an afterthought is supported by their own letter of 3 July when, at the beginning of the three week chaos, they stated:

“… Hence, without your consent we were prevented and unable to remove this plant and carry out the repair works. Therefore, the plant and equipment on Site can only be removed from the Site with your consent, approval and knowledge.” (emphasis added)

65.  Following the ex parte injunction on 25 July, the MTRC made its own position clear by letter to HC on 27 July:

“SNE have somehow gained a High Court injunction to remove cranes from MTR’s site. This is MTR’s work site and under the Contract no equipment, plant or materials or any part thereof shall removed from the site without the written consent of the Engineer. Did Hsin Chong advised the High Court that this is not a SNE site?”

66.  To sum up, whilst it is difficult to be certain about issues in this period when uncertainty prevailed, I have come to the conclusion that, on the balance of probabilities, it was reasonable of Chim Kee to require a demobilization plan and it was reasonable to require the consent of HC and the MTRC engineer. SNE have not satisfied me that any damages suffered (whatever the cause of action may be) arising from the events of 4 – 26 July are Chim Kee’s liability.

67.  There are two final matters to be noted under these headings.

68.  First, it is difficult to understand the evidential basis of the quantum of SNE’s two claims in this regard ($1,575,934 and $1,330,691).  No evidence has been advanced, written or, for example, from an in‑house quantity surveyor explaining them.  The figures appear on a piece of paper annexed to Mr Matsumoto’s witness statement but it is doubtful that he is truly able to “prove” them.

69.  Secondly, part of Chim Kee’s counterclaim includes a claim for rental payments for machinery actually used by SNE during this period, namely up to 27 July 2012 being the date when HC entered into an agreement with Chim Kee to take over the rentals and use them themselves in carrying out the works it had taken over from SNE the same day.  The amount of this claim is $3,309,306 (the July 2012 invoices).

70.  In his final submission, Mr Pennicott made a conditional concession.  He conceded that in view of the chaotic nature of the events and the uncertainties prevailing at the time, it might be considered difficult to pursue this claim with any enthusiasm.  He also proposed that the quid pro quo of this concession should be that SNE should take a similar stance in respect of its claims during the same period.

71.  Albeit an admirable proposal, SNE were not inclined to agree.  The court, however, has reached the same outcome as that proposed by Mr Pennicott, albeit by a somewhat longer route.  There will be no damages awarded to either party arising out of the events between 4 and 26 July 2012.

(6)  Had SNE overpaid Chim Kee for rental charges under the MHA prior to 3 July?

72.  Chim Kee’s receipts for the hire of machinery was calculated by reference to its “work bills”.  No complaint was made about this method during the contract.

73.  Since the termination of the contract, SNE has done its own alternative calculation as a result of which it claims to have overpaid Chim Kee a total sum of $3,815,330.  The data relied on for this claim are the “palm print records”. These record when a worker enters and leaves the site.

74.  The work bills were a record of the start time and the finishing time that a particular machine was in operation.  Each day they were signed and countersigned by Chim Kee and SNE representatives.

75.  The “palm prints” recorded the time a labourer was on site.

76.  Thus, the key difference between the two methods was that the work bills recorded the machine’s time of work, the palm prints recorded the labourer’s time at work.

77.  In my judgment, SNE’s claim cannot succeed for the following combined reasons:

(i) Chim Kee’s hire charges were for the use of its machinery.  The work bills were designed to record just this.  The palm prints however did not.  The palm print is a modern version of a worker “clocking on” and “clocking off”.  It does not record whether or not a machine is in operation.

(ii) The work bills were never challenged, either as to their methodology or their accuracy at the time.

(iii) If an operator operated two different machines on any given day or left the site temporarily or if a palm print machine was not in operation or missing for some reason or ignored by a labourer, then in all such instances the palm print record would not be a reliable source of information to calculate what payments Chim Kee was entitled to as hire charges.  The work bills, on the other hand, recorded nothing but that which Chim Kee needed to know in order to get accurately paid.

(iv) At trial a closer examination of the Documentary exhibits was undertaken by Mr Pennicott which demonstrated the flaws in the palm print method.  It is unnecessary to recite such examples of exact times of machines and labour on particular days save to note that they supported (i) – (iii) above.

(v) The only possible flaw in the works bill method was if they were filled in inaccurately or dishonestly.  No reliable evidence of either has been advanced.  They were all countersigned on site (albeit, as conceded by Chim Kee, not necessarily on a daily basis).

78.  The palm print claim seems clearly to be another post‑termination afterthought, fuelled by a sense of grievance and designed to make inroads into the outstanding hire charges which were unquestionably due in excess of $8 million.

(7)  Detention of SNE’s property at the Fanling Workshop

79.  This is a discrete item unaffected by other issues.

80.  SNE and Chim Kee had a “storage agreement” for keeping some of SNE’s heavy equipment at a workshop in Fanling.  It is agreed that the agreement was terminated on 1 March 2012.

81.  SNE’s first request to collect their equipment was on 9 July 2012, shortly after the termination of the MHA.  The general lack of good‑will contributed to the fact that an impasse developed.  It was not until three months later that two joint inspections took place on 12 and 19 October 2012.  That did not resolve the matter either.  Chim Kee said they would empty the workshop on payment of $50,000 “lifting” fees.  SNE said this was excessive and proposed a charge of $4,800 being the hire charge of one crane for one day.  Chim Kee’s alternative offer was that SNE arranged its own collection, conditional upon the provision of an indemnity against injury or loss.  SNE considered this to be unreasonable.

82.  As for the “lifting” fee of $50,000, such evidence as there was tends to support the contention that it was not unreasonable.  SNE’s counter‑offer took no account of labour.  Also, on a previous occasion a fee of $37,500 had been paid without demur for a similar exercise over three days.  This particular task at Fanling, according to Mr Tang, would have taken more than three days.  Moreover, there was written evidence that a Mr Lee, of SNE, had agreed the $50,000 fee.

83.  However, insisting on an indemnity was unduly obstructive.  After all, it would have been SNE’s own staff collecting their own equipment.  The risk of loss and damage to Chim Kee was negligible.  It was an unnecessary restriction on progress being made.  The matter remained unresolved.  In 2013 Mr Tang increased the “lifting” fee to $100,000 because, he explained, he was “fed up and angry”.  Whether or not the anger was justified it serves to demonstrate the continuing lack of good‑will and co‑operation.

84.  In short, I disallow Chim Kee’s counterclaim, for charges since October 2012 (assessed at $820,000, a high sum due to the fact that many of these abandoned items are still at Fanling) but I am not satisfied either that SNE have made out a claim for loss arising out of their inability to use this equipment in storage.

85.  SNE’s claim under this heading is $660,250.  This is said to be the cost of renting alternative equipment from its Japanese suppliers.  However, Mr Matsumoto agreed that SNE had not paid any of the invoices which made up the substantial part of the $666,280 claim.  In the absence of any other evidence as to quantum their claim is dismissed.

86.  Chim Kee is entitled to storage charges from March to October 2012.  $70,000 a month was charged under the original storage agreement terminated in March.  The exact figure claimed has been reduced to $387,900.  The nature of their claim is such that the court feels entitled to take a broad brush approach to take account of the fact that it was unclear exactly what equipment remained and for how long.  I regard $250,000 as a fair and equitable sum of the period up to October 2012.

(8)  Lost or damaged items belonging to Chim Kee but not returned to them by SNE

87.  This is part of Chim Kee’s counterclaim and concerns two sets of casings, two guard houses and one soil tank.  Chim Kee’s case is that after termination of the MHA, one set of casings was returned but damaged beyond repair, the other set was not returned.  The guard houses were not returned.  The soil tank was returned but badly damaged.

88.  SNE’s site manager, Mr Ho Tik Sang, gave evidence about these items. He said that the inventory record dated 30 September 2012 included two guard houses which had been on site 802 both before and after 3 July 2012.  SNE’s workers had no opportunity to physically return them after 3 July.  The evidence on the guard houses is unclear and Chim Kee has failed to establish its claim on a balance of probabilities.

89.  The soil tank was returned.  Chim Kee claims it was damaged beyond repair. Mr Ho said its condition was as a result of fair wear and tear.  In the absence of further particulars, it is not possible to assess its true condition.  The claim is not made out.

90.  One of the two sets of casings was, according to Mr James Tang, recovered from site 802 in December 2013.  Again, he said it was damaged beyond repair.  Again, I regard this as insufficient evidence of its condition without further particulars.  It had presumably been on site 802 ever since July 2012, a place to which SNE had had no access since then.  What happened to it between July 2012 and December 2013 is not known.  Chim Kee’s claim for its replacement value in excess of $2 million, in these circumstances, cannot succeed.

91.  As for the second set of casings, which Chim Kee says has not been returned, SNE relies on Mr Ho’s evidence which was that both sets of casings were on site at the time of the joint inspection on 30 July 2012.  Given that all plant, machinery and equipment, the property of Chim Kee, was brought onto site for use by SNE, and given that they left the site in July 2012, I do not regard it as “more likely than not” that they either deliberately or inadvertently took the casings with them.  It is not reasonable in all the circumstances to lay at SNE’s door the fact that it may have gone missing.

(9)  The conspiracy claim

92.  This issue has been left to the last for good reason, namely that in view of the court’s findings hitherto it can be dealt with fairly briefly.

93.  Even if the court had found that the termination of the MHA on 3 July 2012 had been unlawful, the followings findings remain valid.

94.  SNE’s two sub‑contracts with HC were terminated by HC in September 2012 — over two months after the termination of the MHA.  SNE’s pleaded particulars of loss under this heading are:

“(iv) Liability to pay to Hsin Chong for costs incurred by Hsin Chong in completing the Sub‑Contracts after terminating the Plaintiff in the sum of HK$84,237,390.61 under Sub‑Contracts 8800/11 and HK$3,923,131.52 under Sub‑Contract 8664/10.”

95.  However, no such costs have been paid by SNE to HC.  On the contrary, SNE would claim (and may do so in other proceedings) compensation against HC for breach of the two sub‑contracts.

96.  As against Chim Kee, the claim depends on there being a causal link between the MHA termination in July and the sub‑contracts termination in September and conspiracy.

97.  It is convenient to deal with this issue on the following analysis of the conspiracy claim.  It is pleaded as follows:

“Further or alternatively, the Plaintiff avers that, on or before 3 July 2012, the Defendant together with Hsin Chong had wrongfully conspired or combined to injure the Plaintiff by lawful means with the sole or predominant intention of injuring the Plaintiff and/or causing loss to the Plaintiff (or alternatively, by unlawful means with the intention to injure the Plaintiff). Pursuant to and in furtherance of the said conspiracy, the Defendant and/or Hsin Chong committed the acts and/or omissions pleaded in paragraphs 12 to 15 and 24 to 37 hereinabove, and thereby causing loss and damage to the Plaintiff.”

98.  Allegations of conspiracy must be carefully and specifically pleaded.  Ma CJHC in Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537 stated a pleading must contain the following:

“(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the Plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the Plaintiff.”

99.  It is plain that the single paragraph pleaded does not comply with these requirements.  With this in mind, it is not surprising that SNE applied to amend its pleadings (two weeks before the trial as earlier referred to) but without success (also not surprisingly).

100.  However, the conspiracy allegation fails not only on the pleading deficiency but also on the facts.

101.  A number of matters have coalesced in the mind of SNE based on a sense of grievance and resulting in a conspiracy theory.  Those matters include:

(i) the fact that in November 2011 a major variation was agreed between MTRC and HC which more than doubled the contract price from which SNE claim they benefitted nothing;

(ii) the fact that both Chim Kee and HC sent letters to SNE threatening termination on the same day and a week later HC notified its intention to take over SNE’s sub‑contract works on the same day that Chim Kee terminated the MHA; and

(iii) SNE’s version of the events in July concerning slow progress, obstruction and the demobilization issues.

102.  Mr Kwan, in his helpful final written submissions under the heading of the conspiracy issues, in a two‑page paragraph asks, inter alia, about 20 questions for the court to consider.  I assume he would describe them as rhetorical questions in the sense that they should answer themselves.

103.  It is a common feature of a conspiracy theory that it throws up more questions than answers.  In my judgment, his questions do not answer themselves, rather they highlight the questions to which there are opposing answers, which have largely been the subject of the disputes in this action.  Twenty questions, rhetorically posed or otherwise, do not convert a conspiracy theory into a conspiracy reality.

104.  The following matters, which I find to be facts having considered the evidence, serve to illustrate not that a conspiracy was being hatched but rather a serious problem requiring urgent resolution was developing:

(i) SNE’s sub‑contract with HC had encountered difficulties. This court makes no judgment on that issue.  The consequences of those difficulties, as earlier referred to, are however highly relevant.  SNE could not afford to pay Chim Kee promptly.

(ii) Thus HC was concerned about progress and SNE was concerned about money.

(iii) MTRC was also most concerned about progress for the same reasons.  It is not surprising that matters came to a head at the same time.

(iv) SNE’s sense of grievance arising out of the variation of the main contract between MTRC and HC (the SA‑1) from which SNE say they, unfairly, derived no benefit, is misplaced.  The extra payments to HC (from MTRC) included the extra costs submitted by SNE to HC for the revised “rotation and wedge” method of extracting deformed piles.

(iv) HC had supported SNE financially throughout the early part of the sub‑contracts.  Even before the TRA there were instances of HC paying Chim Kee directly.

105.  For the above reasons, SNE’s conspiracy claim cannot succeed, whether or not the termination of the MHA was lawful.

106.  Finally, the court also notes under the general heading of “even if …” that SNE’s evidence of losses actually suffered, and in what amounts, was deficient.  Even if liability had been established for unlawful termination, overpayments, conspiracy etc, SNE did not, on its own evidence, discharge the burden of proof on it to properly establish that it had actually suffered a loss or the amount of any such loss.  It is acknowledged that this is a very generalized criticism.  However, in view of the court’s findings it need be no more.

ORDER

107.  On the plaintiff’s claim, there will be judgment for the defendants with a costs order nisi against the plaintiff, to be taxed if not agreed.

108.  On Chim Kee’s counterclaim, there will be judgment for the defendant in the sum of $8,365,757 plus interest at 1% over HSBC base rate from 1 August 2012 on the sum of $8,115,757 (paragraph 42 above) and from 1 November 2012 on the sum of $250,000 (paragraph 86 above) to the date of judgment, and thereafter at judgment rate until payment, together with a costs order nisi in the defendant’s favour, to be taxed if not agreed.  If necessary, I grant a certificate for two counsel.

	(M P Burrell)
	Deputy High Court Judge

Mr Billy K Y Kwan, instructed by Leung & Associates, for the plaintiff

Mr Ian Pennicott SC, leading Mr Joseph Wong, instructed by Tsui & Co, for the defendant

    

HCA 2025/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2025 OF 2012

_________________________

BETWEEN

	SNE ENGINEERING CO. LTD	Plaintiff
	and
	CHIM KEE MACHINERY CO. LTD	Defendant

________________________

Before: Mr Registrar K.W. Lung in Chambers (Open to the public)

Date of Hearing: 28 February 2014

Date of Decision: 28 February 2014

_____________

D E C I S I O N

_____________

 

1.  This is the defendant’s application under Order 26 rule 3(2) asking the plaintiff to withdraw its interrogatories, which it has served on the defendant under Order 26 rule 3(1).  The plaintiff refuses to do so.  Hence this hearing today.

2.  Mr. Tsui, solicitor acts for the defendant and Mr. Ho, solicitor acts for the plaintiff.

3.  This hearing was set down for 15 minutes only.  However, both parties assured me this morning that the argument will take no more than 15 minutes for each side.  The parties have also confirmed that there will not be affidavit evidence and that they are ready for argument this morning.  So the argument between the parties appears to be short and brief.

4.  It is on this basis, I consider that the Court should hear the argument this morning.  I agree to set aside 30 minutes for hearing the argument despite that the appointment is only for 15 minutes.

5.  Mr. Tsui refers me to the White Book 2014 para. 26/4/3, which states that the normal practice for interrogatories to be taken out is after the exchange of the witness statements unless there are unusual circumstances.

6.  Mr. Ho refers to Wenden Engineering Service Co Ltd v Technic Construction Co Ltd & Another HCCT120/1997 (unrep. Burrell J, 14 June 2001). At paragraph 7, the learned judge said:

“…from time to time, construction case in Hong Kong will give rise to unusual circumstances which warrant a departure from the usual rules, in the court’s discretion.”

7.  Mr. Tsui has no argument over the above case except to say that this not a construction case.  I do not consider that flexibility should only apply to construction cases.  It applies to other general civil litigation cases as well. It will therefore be for the plaintiff to state the unusual circumstances, which justify the plaintiff to take out the interrogatories before exchange of the witness statements.

8.  I do not propose to set out the facts of this matter as I had already done so in my Decision dated 27 September 2013 dealing with the defendant’s application for security for costs. I shall simply deal with this application based upon the facts as set out in my previous Decision.

9.  Mr. Ho produces a set of company search, which reveals that there have been some sorts of charge against the property of Hsin Chong Construction Co Ltd, the principal contractor in favour of the defendant.  Mr. Ho submits that this is a recent discovery and the plaintiff suspects that there had been arrangement of payments of the defendant’s charges directly between the principal contractor and the defendant, the sub-sub-contractor.  If this is the position, the defendant cannot claim against the plaintiff in the counterclaim.

10.  Mr. Tsui challenges the admissibility of the above evidence because the plaintiff has never made known of those documents to the defendant or its solicitors.  The plaintiff admits that this is the position.  In the circumstances, it will be unfair for the plaintiff to rely upon the evidence without giving an opportunity to the defendant to consider and argue against it.  The Court should not give weight to the evidence.

11.  Mr. Ho also agrees that paragraph 2 of the interrogatories are for documents, which should be made under Order 24 instead.

12.  Mr. Tsui relies upon the authority of Kao Lee & Yip v Koo Hoi Yan & Others HCA8847/1993 [2002] HKEC 585 by Ma J. (as he then was).  At paragraph 7(5) of the judgment, the learned Judge set out the relevant legal principles for considering the interrogatories, quoting the authority of Det Danske Hedeselskabet v KDM International plc [1994] 2 Lloyds 534, the relevant parts of which are that the interrogatories should not be used for the purpose of cross-examination or for deposition-taking exercise unless it is really necessary for the purposes under Order 26 rule 1(1), viz. disposing of the matter fairly or for saving costs.

13.  Mr. Ho has raised no argument on the legal principles.

14.  Mr. Tsui then goes through the interrogatories.  Without going into each of the items (altogether 11, with some sub-items), one can see that they are either for discovery of the documents or for cross-examination or they are irrelevant because it is not the plaintiff’s pleaded case that the defendant’s counter-claims had been settled by Hsin Chong.  The plaintiff has not been able to show that those interrogatories are for the purpose of disposing of the disputes fairly or for saving costs.

15.  The defendant has succeeded in its application and the plaintiff should withdraw the interrogatories forthwith.

16.  As to the costs of this application, including the costs for today, Mr. Ho argues that the costs should be in the cause.  This is inconsistent with the normal rule that costs should follow the event.  Mr. Ho has raised objections to the defendant’s costs, which amount to $22,400.  The Court has made reference to the plaintiff’s schedule of costs for this assessment, an approach endorsed by the Final Report of the Civil Justice Reform.  At paragraph 539 ( c) on page 285, the Working Committee said:

“In any particular case, the court should have to hand the costs statements of each of the parties to the application. While they may be instances where one side will justifiably have spent a great deal more that the other in preparing for and arguing the supplication, what the paying has itself spent on costs will often be a helpful indicator of the reasonableness of the costs claimed by the receiving party.”

17.  The costs are assessed at $20,000  to be paid by the plaintiff to the defendant within 14 days from the date hereof.

(K.W. Lung) Registrar, High Court

Mr. Gary Ho, of  Robert Lee Law Offices, for the plaintiff

Mr. Sam Tsui, of  Tsui & Co., for the defendant

HCA 2025/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2025 OF 2012

BETWEEN

	SNE ENGINEERING CO. LTD	Plaintiff
	and
	CHIM KEE MACHINERY CO. LTD	Defendant

Before: Mr Registrar K.W. Lung in Chambers (Open to the public)

Date of Hearing: 27 September 2013

Date of Decision: 27 September 2013

_______________________________

DECISION

_______________________________

The application

1. This is the defendant’s application under section 357 of the Companies Ordinance, Cap.32 for security for costs against the plaintiff for the sum of $1,850,000 as the estimated costs, which will be incurred up to trial, anticipated to take four days as according to the plaintiff.[1]

2. The plaintiff opposes this application.

3. Mr. Jose d’Almada Remedios, counsel acts for the defendant and Mr. Jose Maurellet, counsel acts for the plaintiff.

The factual background

4. The disputes between the parties concern the Machinery Rental Agreements entered into by the parties whereby the defendant provided machines, tools and other facilities for the pile-removal works, which the plaintiff had undertaken to perform for another contractor called Hsin Cheong Construction Co. Ltd.[2]  The parties had arguments over the payments under the Machinery Rental Agreements, as a result of which, the plaintiff claimed that it had suffered loss and damage.[3]  The defendant admitted having terminated the Machinery Rental Agreements alleging that it was the plaintiff, who had breached the Machinery Rental Agreements for failing to settle the defendant’s invoices and it further counterclaimed against the plaintiff for the outstanding rentals and storage fees.[4]

The legal principles

5. Mr. Remedios heavily relies upon the authorities cited in 23/3/14 of the Hong Kong Civil Procedure 2013, Vol. 1 and the judgment of To J. in E Global Ltd v. Trenda Ltd & Another, [2012] 2 HKLRD 1211 at §9.  Mr. Maurellet has no argument on these authorities.  Relevant to this application are the following legal principles:

a. An application for security for costs has to show that the company would not (as opposed to may not) be able to meet its debts when an order for costs was made against it.  This question has to be answered at the time of the application (see Brand Farrar Buxbaum LLP v Samuel – Rozenbaum Diamond LtdNo. 2[2003] 1 HKLRD 600), though the court could take into account evidence of what was to be expected in the future before an order would be made (Re Unisoft Group (No.2) [1993] BCLC532).

b. The application must not be for the purpose of oppression on the plaintiff’s reasonable claim and the amount for sufficient security should also not be oppressive.

c. It is sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence.

d. The court shall decide whether a reasonable person with ordinary experience of daily life would consider that the plaintiff will be unable to pay such costs.  The threshold is just one of adducing credible evidence for the belief of lack of means to pay.

e. It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.  (Hutchison Telephone (UK) Ltdv Ultimate Response Ltd. [1993] BCLC 307, per Dillon LJ).

f. When both the plaintiff and the defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.  (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371, cited with approval by Ma J (as he then was)in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd No. 2[2003] 1 HKLRD 600.)

g. The jurisdiction under section 357 of the Companies Ordinance is discretionary and the court has a wide and unfettered power, having taken into consideration of all the relevant circumstances.  In so doing, the Court must carry out a balancing exercise.  On the one hand, it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

The grounds of opposition

6. The plaintiff has raised three grounds in opposition to this application, viz.:

“(1) S.357 of the Companies Ordinance is not triggered. What the Court considers is not what the financial position was yesterday or even today but at the time when the trial will be finished and judgment handed down. On that basis, there is much room for optimism and certainly no basis for saying the Company will not be able to pay as opposed to may not be able to pay.

(2) The bill of costs is fundamentally flawed and ought to be rejected. It obviously includes the costs of prosecuting D's own very significant counterclaim for which it is simply not entitled to security. At most D would be entitled to $506,000 to defend its claim (as opposed to prosecute its own claim).

(3) This figure is eclipsed by the costs of a winding up petition which was pursued at great expense and dismissed by Recorder Ho, SC with indemnity costs. This amounts to in excess of $2,500,000.[5]”

The first ground

7. The plaintiff relies upon Mr. Takuya Matsumoto’s affirmation filed on 15 August 2013, in which Mr. Takuya Matsumoto affirmed that in various bank accounts the plaintiff had altogether 4 million HK dollars and 57 million Japanese Yen cash to pay the defendant’s costs if it succeeds in this action[6]; that it had recently entered into a new contract with Chun Wo and the affirmant is confident that the plaintiff can generate income from its business operations.[7]

8. Mr. Maurellet therefore submits that it simply cannot be demonstrated by the defendant that the company will not be able to pay (as opposed to 'may not') and the defendant’s unhealthy obsession with the company's financial position as snapshot in the past is neither here nor there.^[8]

9. The defendant relies upon the plaintiff’s reports and financial statements for the period from 7 June 2010 to 30 June 2011 (exhibited at “TKS-7”). In the one year from 7 June 2010 (being the date of incorporation of the plaintiff) to 30 June 2011 the plaintiff incurred a loss of HK$96,386,623 with its total liabilities exceeding its total assets by HK$96,376,623.  From 30 June 2011 to June 2012, the plaintiff incurred a further loss in that period of HK$45,739,321.12.  The opinion of the plaintiff’s own certified and appointed auditors in the 2011 financial statements exhibited at “TKS-7” stated at page 4 of the 2011 financial statements that the existence of a material uncertainty which might cast significant doubt about the company’s ability to continue as a going concern.

10. Mr. Maurellet has no argument on the information above.

11. The Court has to take the evidence available to it at the hearing and answer the question whether an order for security for costs should be provided by the plaintiff at the end of the hearing as per Brand Farrar Buxbaum LLP. As far as the cash in the banks is concerned, Mr. Tang Yiu Chi James has filed an affirmation on 23 September 2013, in which he said that the plaintiff had already incurred substantial loss of about $136 million and the cash will have to be expended on the substantial outgoings for the plaintiff.  It will be quite apparent that the plaintiff will not be able to pay the defendant’s costs if it were ordered to do so.  Mr. Maurellet, however, argues that the $136 million was the past loss and the plaintiff is still a going concern today.  When asked whether the $136 million loss is in form of debts or other form of indebtedness, Mr. Maurellet says that he is unable to offer assistance on those areas.  This question relates to the financial capability of the plaintiff.  Mr. Takuya Matsumoto’s confidence in the plaintiff’s future income simply cannot expel the evidence adduced by the defendant.  The balance must be tipped towards the fact that plaintiff will be unable to pay the defendant’s costs if the court makes an order for the plaintiff to do so.  This jurisdiction threshold is overcome by the defendant.

The second ground

12. Mr. Maurellet complains that the defendant’s draft bill of costs has been inflated.  The plaintiff’s law costs draftsman has reduced the total amount of about $1.8 million to about $500,000.  He argues that the defendant’s costs for its counterclaim should not be included in the costs for security.  Rightly so, if the defendant’s counterclaim is an attack rather than a defence as per Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371 cited above.  This will be dealt with in the quantum of the security if an order is granted.

13. Mr. Remedios accepts that the draft bill has included the costs for the Counterclaim, which should not have been included. He agrees that the draft bill of costs should be reduced accordingly. It is agreed by the parties that the trial will take 4 days altogether. The amounts claimed by the defendant in the Counterclaim are greater than the amounts claimed by the plaintiff in the main action. In fact, Mr. Remedios even admits that in the Counterclaimthe defendant is claiming expenses in relation to other construction sites, which are not included in the main action.  There is simply no reason for the defendant to claim security for costs for those expenses relating to those construction sites from the plaintiff.  Mr. Maurellet agrees that the Court should not go into detail of the claims and counterclaims for the apportionment of the costs for the present application.  On a broad-brush basis, I will simply divide half of the costs for the main action, and half for the Counterclaim.  This will reduce the defendant’s security to $925,000.

14. Mr. Maurellet also refers to Hero Rich International Ltd. v Benefun International Holdings Ltd and Others HCA1433/2009 (unrep. Recorder Jat SC) 11 November 2009 and submits that the application can be dismissed on the ground that the defendant has failed to provide a proper bill of costs. I hold the view that this proposal should be considered with caution as it is an exercise of the Court’s discretion in the most robust manner, such exercise of discretion has to be done by the Court judiciously as guided by the established authorities in order to maintain consistency in the administration of justice.  See §22 of my Decision in Lim Man Yuan (林满园) v Kin Ming Holdings International Ltd (建明集團國際有限公司) & Another HCA216/2008 delivered on 16 September 2013.[9]

15. At paragraphs 38 and 39 of the judgment of Hero Rich International Ltd. v Benefun International Holdings Ltd and Others HCA1433/2009, the learned Recorder was discussing that if the skeleton bill for security for costs application was unhelpful, the applicant could not blame the court for ordering an amount for security on the low side as commented by Rogers VP  in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at §11 and he further said this at §39:

“I would go further. In my judgment, the court when faced with an unhelpful — and especially overly ambitious — skeleton bill is entitled in an appropriate case to dismiss the application on this ground alone. I have not done so in this case because Mr Fang for the plaintiff expressly declined to invite me to do so, and also because of Mr Tsui’s offer to provide more realistic figures to which Mr Fang did not object. I therefore allowed Mr Tsui an adjournment to obtain more accurate estimates.”

At paragraph 40 of the judgment, he asked the legal representatives to take notice of their duties to assist the court.

16. The suggested approach is only appropriate where the skeleton bill is such that the court will not be able to come to any reasonable amount for the security and those appearing before him/her cannot assist.  This is the last resort that the court has to adopt as it has to make the order at the end of the hearing, trying its best to come to a solution one way or the other.  If the applicant is unable to assist him/her to come to an amount for the security, the last resort must be that the applicant has failed in the application and his application should be dismissed.  In that case, the learned Recorder had awarded $300,000 for the security for costs.

17. The plaintiff has already employed the law costs draftsman to give assistance to the Court for the amount of security.  I do not consider that I am unable to make the assessment if an order is to be made.  Today, with the assistance of counsel, I am able to apportion the costs for the Counterclaim.  I refuse to dismiss the defendant’s application on this ground alone.

The third ground

18. The final ground of opposition is that in another proceeding of a winding-up petition of the plaintiff by the defendant, the Court had dismissed the defendant’s petition and awarded costs on an indemnity basis, which, according to the plaintiff, exceeds $2.5 million, subject to taxation. Mr. Maurellet agrees that of the costs claimed, the costs for the validation orders should be taken out, leaving a balance of about $1.7 million.  He submits that for this reason alone, no security should be ordered.

19. Mr. Maurellet has raised two issues for this Court.  The first issue is whether the costs for the petition should be taken into consideration for this application.  The second issue is that given the costs has not been taxed, how should the Court treat them?

20. Mr. Remedios submits that the Court should not take such costs into account and should simply consider the factors relating to this action only.  However, he agrees that the present application is for security for the defendant’s costs if the Court makes an order against the plaintiff.  If the defendant has to pay costs to the plaintiff for the petition proceedings, why is it that the plaintiff cannot set off such costs from the costs due to the defendant in this action?  It seems that Mr. Remedios is unable to give me a reasonable explanation for this question.

21. I consider that it is only fair for the debts owed by the defendant to the plaintiff to be taken into consideration for the Court to decide whether an order should be made today, and if so, how much this Court should order the plaintiff to provide security for the defendant’s costs.

22. The next question is how much the costs for the petition proceedings should be taken into account.  I understand that the costs are still subject to taxation.  However, if $1.7 million costs are to be taxed on an indemnity basis, which compares to the defendant’s claimed security for $925,000, it is difficult to imagine that the costs for the petition proceedings after taxation will not be able to cover the costs for the security of $925,000, bearing in mind that the assessment on security for costs has to take into consideration of the possibility of settlement without a trial and it is to be assessed on a broad-brush approach.  See Daimler Chrysler Services China Ltd. v. Harbour Union Investments Ltd., HCCL 34/2002, (7 May 2004) at § 32, adopted by Deputy High Court Judge Pow in Wingames Investments Limited & Others v Masgot Land Limited & Others HCA907/2011, 17 July 2012 at §26.

Conclusion

23. Having considered the circumstances, I consider that this Court should not make an order for security for costs.  I dismiss the defendant’s application.

24. On the question of costs, there is no submission that the defendant should not pay the costs for this application.  The defendant should therefore pay the plaintiff’s costs (with counsel’s certificate) to be assessed under Order 62 rule 9A of RHC.  The plaintiff’s bill asks for $124,000 as costs for this application.  The defendant argues that it is excessive because the matter is not complicated and it is not justifiable to instruct counsel of Mr. Maurellet’s seniority.  On a broad-brush approach, the costs for the preparation of the affirmation in opposition and counsel’s fee will be reduced. The total costs for the application, including the costs reserved are assessed at $85,000  to be paid by the defendant to the plaintiff within 28 days from the date hereof.

25. I shall make an order in terms as follows:

a. The defendant’s application is dismissed;

b. Costs be to the plaintiff as per paragraph 24.

	(K.W. Lung)
	Registrar, High Court

Mr. Jose Maurellet, instructed by Robert Lee Law Offices, for the plaintiff

Mr. Jose d’Almada Remedios, instructed by Tsui & Co., for the defendant