The Singapore Law Gazette

A New Framework for Counterclaims in Summary Judgment Cases

Until the case which is the subject of this article, the law was unclear regarding the Court’s approach towards counterclaims in summary judgment proceedings. In previous judgments of the Singapore High Court, reliance had been placed on an unreported judgment of the English Court of Appeal which had formulated principles substantially on the basis of a summary of the law in the Supreme Court Practice 1991. This formulation was defective in various respects. In Kim Seng Orchid Pte Ltd v Lim Kah Hin (trading as Yik Zhuan Orchid Garden) [2017] SGHC 4, we see a new approach that instils certainty in this area of law. This article examines the impact of this case.

Introduction

A variety of outcomes are possible when a Court is considering the effect of a counterclaim in response to an application for summary judgment. If it is clear that the counterclaim has no merit, it would be rejected. If the counterclaim is plausible, the question arises as to whether it should have a direct impact on the plaintiff’s application (by extinguishing or diminishing the plaintiff’s claim), or whether it should merely delay the execution of the summary judgment until the determination of the counterclaim at trial, or whether it should be the subject of separate proceedings. For some years, the judicial approach (“the former approach”) towards counterclaims made in response to applications for summary judgment has been controversial for lack of conceptual clarity and logical distinction between different categories of cross-claims that may arise. This problem was acknowledged by Chan Seng Onn J in Kim Seng Orchid Pte Ltd v Lim Kah Hin (trading as Yik Zhuan Orchid Garden) (Kim Seng).¹ [2017] SGHC 4. In a critically important judgment, Chan J substantially revised the former approach by introducing a coherent and just methodology in the form of a rational sequence of steps which the Court is to consider.

New Approach

Chan J’s approach in Kim Seng consists of four steps. The first step is to consider whether the counterclaim is plausible in the sense that it has a reasonable possibility for success at the trial. If it is implausible, the plaintiff would be entitled to summary judgment and the Court would not stay execution of the judgment until the trial of the counterclaim. If the counterclaim is plausible, the Court would take the second step of considering whether it constitutes a legal or equitable set-off. If it so concludes, the defendant would be entitled to unconditional leave to defend the claim on the basis that the defendant has shown a real defence.

If the counterclaim does not amount to a defence of set-off, all is not lost for the defendant because the Court would then take the third and fourth steps of considering whether the counterclaim is sufficiently connected to the claim and whether it would be just to stay the execution of the judgment until the trial of the counterclaim.² See Order 14 Rule 3(2) of the Rules of Court. For example, the connection test would not be satisfied if the counterclaim “arises out of quite a separate and distinct transaction or it is wholly foreign to the claim ….” In these circumstances, the Court “should generally grant summary judgment of the whole claim, without a stay pending the determination of the unconnected counterclaim”. If there is a sufficient connection between the counterclaim and the claim, the Court would determine whether there is a basis for staying the execution of the summary judgment (in respect of the entire claim or part of it) until the trial of the counterclaim.³ [2017] SGHC 4, at [98]. However, where the amount of the summary judgment exceeds the amount of the counterclaim, a stay would not be appropriate in respect of the sum above the amount of the counterclaim. Here the excess amount would be immediately payable by the defendant.

The question of whether or not a stay of the whole or a part of the judgment should be granted is ultimately a matter for the Court’s discretion, to be exercised according to established principles including “the degree of connection between the claim and counterclaim, the strength and quantum of the counterclaim and the ability of the plaintiff to satisfy any judgment on the counterclaim”:⁴ [2017] SGHC 4, at [98].

… whether or not a stay of the whole or a part of the judgment should be granted is ultimately a matter for the Court’s discretion, to be exercised according to established principles. The degree of connection between the claim and counterclaim, the strength and quantum of the counterclaim and the ability of the plaintiff to satisfy any judgment on the counterclaim are some of the considerations which the Court may take into account in the exercise of its discretion on whether to grant a stay…. The exercise of the discretion to grant or to refuse to grant a stay of execution of the whole or a portion of the judgment sum pending trial of a plausible and connected counterclaim will ultimately depend on whether the defendant is able to show that it would be fair and just in all the circumstances of the case to stay the immediate enforcement of the whole or a portion of the judgment sum due to the pending trial of the counterclaim. The burden lies on the defendant to prove that the stay is justifiable having regard to all the circumstances of the case.

Chan J pointed out that “where there is no real defence to the claim and therefore summary judgment ought, according to the usual principles, to be granted, the appropriate effect of a connected and plausible counterclaim not amounting to a defence should only be that of a stay of execution pending determination of the counterclaim, rather than that of unconditional leave to defend’.”⁵ [2017] SGHC 4, at [99]. Emphasis by the Court. Here, “summary judgment ought to be granted in respect of the whole of the claim, rather than merely the part of the claim exceeding that of the counterclaim (with unconditional leave to defend the balance of the claim), in situations where the size of the claim exceeds that of the counterclaim”.⁶ [2017] SGHC 4, at [99]. Emphasis by the Court. The learned Judge explained:⁷ [2017] SGHC 4, at [99].

The reason is that the grant of summary judgment in respect of the part of the claim exceeding that of the counterclaim would lead to no reduction in the trouble and expense that the plaintiff would be put to at trial. In order to pursue the remaining part of the claim for which the defendant has been granted unconditional leave to defend, the plaintiff would still have to head to trial and lead – in all likelihood – thevery same type and amount of evidence that he would have needed to lead if his application for summary judgment had utterly failed in the first place and he therefore had to prove the entirety of his claim. The only benefit he obtains from his success in the summary judgment application is immediate entitlement to the quantum of the claim exceeding that of the counterclaim. The problem is made even more evident when the size of the counterclaim exceeds that of the claim. In such a situation, it would be perverse for unconditional leave to be granted to defend the whole of the claim, even in the absence of any triable issues in the claim; the correct response when there is really no real defence — as pointed out in Sheppards — is surely that of summary judgment subject only to a stay at the Court’s discretion. Any other approach would lead to a wastage of costs and the time of the Court, the litigants and the witnesses.

Impact of Kim Seng on pre-existing law

Kim Seng is particularly significant for clarifying the approach of the Court towards counterclaims in summary judgment proceedings, which had previously been plagued by unnecessary confusion and conceptual uncertainty. This unhappy state of affairs had stemmed from the judgment of Bingham LJ in United Overseas Ltd v Peter Robinson (trading as Top Shop)⁸ Unreported decision of the Court of Appeal (Civil Division, 26 March 1991). (Peter Robinson), in which the learned Judge introduced a four-fold classification of outcomes where the applicant for summary judgment is faced with a counterclaim. First, where the defendant is able to show an arguable set-off, he would obtain unconditional leave to defend. Secondly, where the defendant could set up “a bona fide counterclaim arising out of the same subject-matter as the action and connected with the grounds of defence”, he would also be entitled to unconditional leave to defend. Thirdly, where the defendant is unable to mount a defence to the claim but puts forward “a plausible counterclaim” for an amount not less than the claim, judgment is to be given against him subject to a stay of execution. Fourthly, in the absence of any connection between the counterclaim and claim, no stay would be granted against the execution of summary judgment. This classification has been applied or acknowledged by the Singapore Courts in a series of cases⁹ See Hawley and Hazel Chemical Co (S) Pte Ltd v Szu Ming Trading Pte Ltd [2008] SGHC 13; Nanyang Law LLC v Alphomega Research Group Ltd [2010] 3 SLR 914; and United Overseas Bank Pte Ltd v Tru-line Beauty Consultants Pte Ltd and others [2010] 2 SLR 590. These cases are considered in Kim Seng, at [81]–[89]. decided prior to Kim Seng.

Bingham LJ’s classification was substantially based on the commentary in the English Supreme Court Practice 1991 (‘the commentary”),¹⁰Supreme Court Practice 1991 (Sweet and Maxwell, 1990), at para 14/3–4/13. which appears to have only intended to summarise the state of the pre-existing case law and not to offer a definitive legal approach. For example, Lord Bingham’s separation of first and second categories did not accurately represent English law. Indeed, the wording of the commentary itself (and the cases cited therein) clearly indicated that Bingham LJ’s second category was an elaboration of the preceding paragraphs in the commentary concerning counterclaims which constitute set-offs. Bingham LJ’s second category was essentially concerned with the equitable set-off which came within the first category rather than pursuant to any separate or additional principle.¹¹ See Pinsler J, “The Court’s Response to Counterclaims in Proceedings for Summary Judgment” (2011) 23 SAcLJ 517, at [5] and [10]–[14]. The error of the second category was remedied by Chan J in Kim Seng. The learned Judge stated that if the counterclaim does not amount to a defence of set-off, the Court would take the step of determining whether there is a sufficient connection between the counterclaim and claim for the purpose for staying the execution of the summary judgment until the trial of the counterclaim.¹² See above. Quite rightly, there is no mention of Bingham LJ’s second category in Chan J’s framework.¹³ See Kim Seng, at [98] and [100]–[101].

Other difficulties with Bingham LJ’s pronouncement concern the terminology used. The use of the phrases “bona fide counterclaim” and “plausible counterclaim” in Bingham LJ’s 2^nd and 3^rd classes respectively begs the questions of whether good faith is the paramount consideration for the 2^nd class and a reasonably arguable case is the paramount consideration for the 3^rd class. Shouldn’t it be a condition for any counterclaim to be reasonably arguable before the Court even considers what the outcome of the proceedings should be? In Kim Seng, Chan J quite correctly regarded the plausibility of the counterclaim to be the very first consideration to be taken into account by the Court.¹⁴ See above. In an earlier article,¹⁵ Pinsler J, “The Court’s Response to Counterclaims in Proceedings for Summary Judgment” (2011) 23 SAcLJ 517 (which was cited by the High Court in Kim Seng, at [100]–[101]). the author had offered the following analysis of Bingham LJ’s 2^nd and 3^rd categories:

… The second class refers to “bona fide” (which emphasises the intentions of the defendant), while the third class engages the term “plausible” (which is solely concerned with the merits of the counterclaim). One of the weaknesses of Bingham LJ’s classification is that it is quite possible for an unmeritorious counterclaim to be put forward in good faith (as when the defendant wrongly but honestly believes that he has a valid case). Literally interpreted, the second class would encompass such a counterclaim (because it is bona fide). As it would be unjust to give unconditional leave to defend on the basis of a meritless counterclaim, the terminology of the second class should be modified to include a threshold standard (such as “arguable” or “plausible”) in the second and third classes respectively. …

Chan J endorsed this view in Kim Seng and added: “I agree … that it is insufficient for the defendant to seek unconditional leave to defend on the back of a counterclaim that he has brought in good faith but which is devoid of merit. I observe that the argument that a counterclaim must have a requisite degree of substance may draw support from [judicial precedent].¹⁶ Chan J referred to Thean J’s judgment in P H Grace Pte Ltd and others v American Express International Banking Corp [1985–1986] SLR(R) 979, at [6]. … I therefore consider that the essence of the inquiry in this regard is the plausibility of the counterclaim.”¹⁷Kim Seng at [101]. Emphasis by the Court.

Another instance of the unsatisfactory state of the terminology in Peter Robinson is that the requirement for a connection between the counterclaim and claim (for stay of execution of the judgment pending the trial of the counterclaim) is not mentioned in Bingham LJ’s third class of counterclaims. This requirement of a sufficient connection is specifically addressed and emphasised by Chan J in the third and fourth steps of the learned Judge’s new approach in Kim Seng.¹⁸ See above, under “New approach” and Kim Seng, at [98].

In the interest of a complete understanding of this area of law, it is important to distinguish between the nature of the connection between the counterclaim and claim for the purpose of equitable set-off (which was not in issue in Kim Seng) and for stay of execution of the judgment pending the trial of the counterclaim. An equitable set-off may arise if the Court believes that it would be “manifestly unjust” if the counterclaim (whether it arises from the same transaction as the plaintiff’s claim or a separate transaction involving the plaintiff and defendant)¹⁹ This is explained in article at [7] and [23]–[29]. is not set off against the plaintiff’s claim. As Sundaresh Menon JC (as he then was) put it in Abdul Salam Asanaru Pillai v Nomanbhoy(trading as South Kerala Cashew Exporters) & Sons Pte Ltd²⁰ [2007] 2 SLR(R) 856. (Asanaru): “In each case, the question turns on whether the respective claims are so closely connected that it would offend one’s sense of fairness or justice to allow one claim to be enforced without regard to the other.”²¹ [2007] 2 SLR(R) 856, at [28]. Also see [30]–[34] of the judgment. In Asanaru, it was held that although the parties had a long standing commercial relationship, and that the claims and cross-claims (in the counterclaim) concerned the same product shipped on the same vessel, an equitable set-off did not arise because the various contracts which gave rise to the claims and cross-claims were insufficiently proximate.²² [2007] 2 SLR(R) 856, at [34]. The claims and cross-claims did not constitute “a close and inseparable relationship” such that it would be manifestly unjust to ignore the counterclaim.²³ [2007] 2 SLR(R) 856, at [34]. The authorities governing the development of this test for equitable set-off are considered in article (see note 14), at [24]–[27]. Consequently, the plaintiff obtained summary judgment. However, as there was some connection between the contracts (even though they were distinct), the Court granted a stay of the execution of summary judgment.

In Asanaru, a stay was granted because of the sufficiency of the connection between the claims and counterclaims. It was mentioned earlier that a stay of execution would not be granted in respect of a counterclaim which “arises out of quite a separate and distinct transaction or it is wholly foreign to the claim …”.²⁴ See the above text at footnotes 2 to 3. In Cheng Poh Building Construction Pte Ltd v First City Builders Pte Ltd²⁵ [2003] 2 SLR(R) 170. (which involved a construction dispute), the Court of Appeal observed²⁶ [2003] 2 SLR(R) 170, at [18]. that a stay must be justified by “special circumstances”: “The mere fact that a defendant has a bona fide counterclaim arising out of another contract with the plaintiff, unconnected with the contract which forms the subject matter of the action, will not of itself constitute a ‘special circumstance’ justifying a stay of execution.” Therefore, the main contractor’s counterclaim for sums due from the sub-contractor in respect of separate construction projects did not justify stay of execution of the summary judgment obtained by the sub-contractor.²⁷ The Court of Appeal indicated that the decision might have been different if there had been a “running account” between the parties. See [2003] 2 SLR(R) 170, at [25]. The phrase “special circumstances” may be interpreted as importing the requirement that the defendant cannot simply rely on the existence of his own claim (the counterclaim) against the plaintiff; he must be able to establish that there are specific circumstances showing a sufficient link between the counterclaim and the plaintiff’s claim.²⁸ Also see Invar Realty Pte Ltd v Kenzo Tange Urtec Inc and Anor [1990] 3 MLJ 388 (stay of execution justifiable); PH Grace v American Express International Banking [1985-1986] SLR(R) 979 (stay of execution was justifiable but not granted because the first defendant had been wound up); and Koshida Trading (S) v Limco Products Manufacturing [1990] 1 SLR(R) (stay of execution not justified). Other principal considerations include the strength and quantum of the counterclaim and the plaintiff’s potential ability to satisfy a judgment given on the counterclaim.²⁹ See the above text at footnotes 4 to 5. Special circumstances would also include the terms of the contract between the parties, as when provision is made for a stay. For example, see International Factors Leasing v The Personal Representative of Tan Hock Kee, deceased [2003] 2 SLR(R) 1; PH Grace v American Express International Banking [1985–1986] SLR(R) 979. It is for the defendant to establish that a stay of execution is justified on the basis of all the circumstances.³⁰ See the above text at footnotes 4 to 5. He must not assume that a stay would be granted as a matter of course. As pointed out in Hua Khian Ceramics Tiles Supplies v Torie Construction,³¹ [1991] 2 SLR(R) 901, at [24]. “[i]t is axiomatic that a defendant who invites the Court to exercise the discretionary power must produce sufficient relevant material to justify a decision in his favour.”

Decision in Kim Seng

In Kim Seng, the counterclaim was rejected for lacking a reasonable possibility for success at the trial (see step 1 of Chan J’s formulation).³² See above under the heading, “New approach”. The case concerned a dispute over a sub-lease of part of the plaintiff’s premises to the defendant. The plaintiff sought recovery of the sub-leased premises and monetary loss arising from the alleged wrongful occupation. The defendant, who had not engaged the provisions in the lease for extending or renewing the lease on its expiry, denied that he was in wrongful occupation and counterclaimed for continued occupation of the premises. The various arguments presented by the defendant to justify continued occupation were rejected by the assistant registrar and by the High Court on appeal. In the absence of a reasonably arguable case, the defendant had failed to show that he had a plausible counterclaim. It appears from the facts that the defendant may not have needed to pursue a counterclaim as he was essentially denying that he was in wrongful occupation. The question arises as to whether the counterclaim needed to be pleaded or whether the defendant ought to have simply defended the application for summary judgment by raising a triable issue as to his right to remain in occupation. Given the Court’s outright dismissal of his arguments, the result would have been the same.