THIESS MONGOLIA LLC v. MONGOLIA ENERGY CORPORATION LTD

HCA 31/2016 and HCA 34/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 31 OF 2016

(TRANSFERRED FROM HCCL 15 of 2013)

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ACTION NO. 34 OF 2016

(TRANSFERRED FROM HCCL 16 of 2013)

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(Consolidated pursuant to the Order of Master S. Lo dated 14 September 2016)

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DECISION

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Introduction

1.  This is an application of Thiess Mongolia LLC, the plaintiff in this consolidated action, (“the Company”) by summons dated 11 April 2017 (“the Summons”) for specific discovery against Mongolia Energy Corporation Limited (“the Corporation”), the defendant herein.

2.  The documents sought to be discovered are set out in an annexure to the Summons entitled “Schedule” (“the Schedule”). The Schedule, running into 12 pages, is divided into Part A and Part B. Each of the two parts is subdivided into a number of subsections specifying different classes of documents.  Mr Smith SC (leading Mr Kok), appearing for the Company, informs this court that the present dispute between the parties is only confined to those documents set out in Categories A, B and E of Part B (“the Disputed Documents”). Mr Smith further submits that the sole question before this court is whether the Disputed Documents are relevant to these proceedings.

3.  Mr Pennicott SC, appearing for the Corporation, accepts that there is no dispute as to the existence of the Disputed Documents and as to the Corporation’s possession, custody and/or power of the same. Apart from the issue of relevance, he also makes a brief submission on the issue of necessity.

Essential background facts

4.  This is a massive litigation involving complicated technical issues. Mr Smith in his skeleton submissions helpfully provides an excellent summary of the essential background facts, to which the Corporation does not object save one matter as indicated by Mr Pennicott in his skeleton submissions. I shall conveniently reproduce the summary excluding the controversial matter as follows.

5.  The Company is a mining contractor whereas the Corporation is a Hong Kong listed company. The Corporation is the parent company of MoEn Co LLC (“the Subsidiary”), which is the owner and holder of licences to mine coal at a coal mine in Khushuut, Mongolia (“the Mongolia Mine”).

6.  In 2009, the Company and the Corporation commenced discussions on an opportunity to cooperate in a mining project (“the Khushuut mining project”) and it was contemplated by the parties that the Subsidiary would engage the Company as the mining contractor at the Mongolia Mine.

7.  On 2 June 2010, the Company and the Subsidiary executed a mining agreement (“the Mining Agreement”) whereby the Subsidiary engaged the Company to carry out the Khushuut mining project. On the same day, the Company and the Corporation entered into a separate agreement whereby the Corporation would guarantee the Company as a primary obligation the due payment and performance of the Subsidiary of or its obligations and liabilities under an arising out of the Mining Agreement (“the Guarantee”).

8.  Pursuant to the Mining Agreement, the Company commenced mining works at the Mongolia Mine on 1 July 2010. From time to time, the Company issued progress claims to the Corporation.

9.  By around mid July 2012, a significant amount of progress claims issued by the Company pursuant to the terms of the Mining Agreement remained outstanding and accordingly the Company and the Subsidiary entered into discussions about the possibility of discontinuing the Khushuut mining project. As a result of the discussions, the Company issued a Notice of Suspension on 10 September 2012 to suspend the mining works at the Mongolia Mine.

10.  On 22 December 2014, the Company issued a notice to the Subsidiary to terminate the Mining Agreement.  Subsequently, the Company commenced the present proceedings against the Corporation to, among other things, recover the outstanding progress claims due and owing from the Subsidiary in sum of USD13,544,460.27 pursuant to the terms and provisions of the Guarantee.

11.  Apart from the foregoing matters, Mr Pennicott quite rightly draws to my attention the following facts prior to the execution of the Mining Agreement. It is apparent that certain preparation works had been undertaken on the instruction of the Subsidiary long before the Company entered into the Mining Agreement.

12.  First, it is brought to my attention that a mining project can be divided into two stages, namely the exploration/pre-feasibility and feasibility stage (“Stage 1”) and the operational stage (“Stage 2”). The Khushuut mining project is no exception.

13.  In the present case, Stage 1 of the Khushuut mining project was carried out in three sub-stages. First, the Corporation engaged Team 129 of the China Coal and Geology Bureau to carry out an initial coal exploration program to provide the base data of the coal geology for the purpose of an estimate of the coal resource. Such exploration work involved core drilling, collecting and testing of sample across the Mongolia Mine area. In the summer of 2007, Team 129 carried out the drilling program consisting of 157 drill holes and 24 core holes to obtain coal quality data. In the summer of 2008, Team 129 carried out the exploration program and a total of 39 coal quality and 3 geotechnical holes were completed. Lastly, in the summer of 2009, Team 129 undertook the drilling campaign to improve defined structure between block boundaries. A total of 35 open holes and 14 core holes were completed and analysed by Team 129.

14.  The second sub-stage was that John T Boyd Company (“JT Boyd”) was engaged as a technical advisor. Team 129 provided JT Boyd with the data obtained in the course of the exploration work. Based on such data, JT Boyd carried out an independent coal resource assessment which included the development of a geological model and estimated coal resource, i.e. a resource model.

15.  On or about 16 October 2009, JT Boyd issued an independent technical review (“IRT 2009”) in reliance on the drilling and coal quality data as reported by Team 129.

16.  Then the Khushuut mining project proceeded to the third sub-stage. It got off the ground by the engagement of the Company by the Subsidiary by way of a consultancy agreement dated 11 November 2009 (“the Consultancy Agreement”) to carry out the services specified therein. Such services included the preparation of, among other things, a “Life of Mine Plan and Cost Estimate Proposal for the Khushuut Coal Project” (“the Plan and Proposal”).

17.  To this end, the Company was supplied with the geological data, analysis and report including the IRT 2009 prepared by JT Boyd. On the basis of such materials, the Company prepared the Plan and Proposal before the execution of the Mining Agreement.

Documents sought to be specifically discovered

18.  The Disputed Documents are as follows:

1.  All documents showing sampling results at the exploration stage for the Khushuut mining project (Category A).

2.  All documents relating to the results from the laboratories commissioned to test coal samples for the Khushuut mining project, including samples taken during the exploration stage (Category B).

3.  All documents and reports in relation to the excavation and sampling methodologies adopted by Team 129 in its exploration exercises, including those conducted for the 2007, 2008 and 2009 drilling campaigns (Category C).

4.  All documents and reports in relation to the testing procedures adopted by the laboratory or laboratories commissioned to test samples taken by Team 129, including measures taken to verify the accuracy of its test and/or analyses (Category C).

19.  All of the Disputed Documents relate to the exploration work undertaken by Team 129 and other professionals commissioned by JT Boyd at Stage 1.

Applicable legal principles

20.  The legal principles relating to specific discovery applications are trite. Mr Smith cites to this court a number of authorities. Since the controversy is centred on the relevance issue, I should focus on the material authorities shedding light on the relevant test.

21.  First, Mr Smith highlights that the Company only has to show a prima facie case for relevance. The Court of Appeal found it sufficient even if the contents of the purportedly relevant document can only be said to be “at the most of marginal relevance”: Pacific Link Communications Ltd v. Wong Man Him Melvyn [1996] 1 HKC 474 (CA) per Power VP at p.479A-B.

22.  The Peruvian Guano test remains applicable and the definition of “relevance” is framed in the widest possible terms: Mariner International Hotels Ltd v Altas Ltd & Anor., unreported, HCA10714,10752 & 10821/1988, 18.1.2002 at §5 citing with approval the dictum of Sir Thomas Bingham MR (as he then was) in Taylor v Anderton [1995] 1 WLR 447 at p.460C.

23.  It is common ground that relevance must be determined by reference to the pleadings. Mr Smith refers to this court the following passage in Hong Kong Civil Procedure 2018 Vol.1 §24/7/2:

“the obligation to provide discovery … does not necessarily mean a matter on which issue has joined in the pleadings, but the documents must be matters to which an inference can properly be drawn that they are subject to controversy between the parties.”

24.  Lastly, this specific discovery application should be considered in light of the CJR and Mimmie Chan J in Patriarch Partners Media Holdings LLC v. Wong Siu Wa Sammy and Anor., unreported, HCA865/2013, 12.12.2014 had this to say at §4,

“Post CJR, the court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24. Accordingly, in deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary, the court should bear in mind the underlying objectives of cost-effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties. The court must take a proportionate approach, balancing the interests of the fair disposal of the cause or matter in accordance with the parties’ substantive rights against these objectives.”

25.  With these principles in mind, I turn to the pleadings and the parties’ respective cases on relevance and necessity.

Material issues defined in the pleadings

26.  The pleadings are exceedingly lengthy and contain a number of technical terms. However, for present purposes, the positions of the parties can be simply outlined as follows.

27.  The relevance of the Disputed Documents allegedly arises from the accusations of the Corporation amounting to a set- off in the Amended Defence. The Corporation alleges that the Company had failed to carry out the mining works with reasonable skill and care, thereby causing the coal excavated and processed to be worthless. As a result, substantial loss and damage has been inflicted on the Subsidiary. Such loss and damage includes the loss of profits owing to the rejection of the coal by the customers of the Subsidiary.

28.  Its specific allegations include the failure of the Company to properly carry out the mining works at the stage of in-pit sampling and excavation. The Corporation contends that the purpose of proper in-pit sampling including trenching, drilling and rotary air blast samples is to determine the quality, quantity and location of economic and mineable coal by sampling before actual excavation. Inaccurate in-pit sampling will have an adverse knock-on effect on the subsequent stages in the mining process.

29.  The response of the Company in its Reply, broadly speaking, is that the mining works were carried out pursuant to the mining plans that were developed on the basis of the data in the resource plans prepared by JT Boyd and provided to the Company by the Subsidiary and such plans ought to have shown the expected coal quality at various locations on the mine site.

30.  However, it was subsequently discovered that the coal quality of the excavated coal varied significantly to that mapped out in the geological/resource models. Hence, the Company did not breach any duties in carrying out the mining works, and cannot be held responsible for any loss and damage as claimed by the Corporation.

31.  In a nutshell, the Company’s case is that the geological model/resource plans provided to the Company were flawed and deficient, to the extent that the Company was not in a position to assess the grade of the coal being excavated.

32.  On the other hand, the Company contends that any loss and damage suffered by the Subsidiary was caused by the inaccurate data in the resource plans and improper instructions from a number of experts engaged by the Subsidiary. It further complains about the deficiencies of the tests carried out in the laboratories engaged by the Subsidiary.

33.  In regard to the allegation concerning in-pit sampling, the Company accepts its purpose and importance in coal quality management but primarily denies that it was its duty under the Mining Agreement. In any event, it says that it has discharged such duty.

34.  The Corporation, understandably, is unable to deal with these allegations of the Company by way of pleadings subsequent to the Reply. In the 6^th Affirmation of Frankie Choi filed on behalf of the Corporation, it is averred that the geological data was very limited at the exploration stage and the Company was expected to conduct on-going and repeated reviews of the geological database to refine the geological models and in-pit sampling should be one of such steps that the Company should have done to refine the geological models including the resource plans of JT Boyd. In other words, the Company should not have exclusively relied on those resource plans and it had its own duty to refine the same.     

Prima facie case of relevance shown?

35.  There is no dispute that the Company was not involved at the early exploration stage and it relied on the resource plans prepared by JT Boyd. Such plans were based on the data obtained by the Subsidiary through the experts commissioned including Team 129. The Company plainly attributes the mining problems to the deficiencies of the geological models and resource plans supplied by the Subsidiary. The issue is whether the Company should be allowed to go beyond such materials such as the JT Boyd plans and examine all the primary data.

36.  Mr Pennicott makes a short point. The pleaded issues concern the alleged inaccuracies in the JT Boyd plans only and not the underlying exploration data documents. The fact that the Company can now identify with certainty the deficiencies of such materials of JT Boyd means that such primary data is not relevant.

37.  I cannot accept this submission. Applying the Peruvian Guano test, I have no difficulty in coming to the conclusion that the Disputed Documents are, at the very least, prima facie relevant. Such documents may assist the Company to discharge its onus of proof relating to the alleged inaccuracies and unreliability of the JT Boyd plans if they could tell what actually went wrong with the primary data. They may explain why the JT Boyd plans were fundamentally flawed and hence strengthen the pleaded case of the Company. It may be argued that the Company is able to prove the alleged deficiencies without the primary data but it does not follow that such data is not relevant.

38.  Mr Pennicott argues that it is sufficient for the Company to prove the deficiencies of the geological models and the resource plans and it is not necessary for the Company to prove why they existed.

39.  He is quite right. However, if the Company can identify the root problem as to why the primary data was unreliable, its case of the deficiencies of the resultant resource plans can, to a certain degree, be reinforced.  In my view, the Company will suffer an unfair disadvantage if it is denied the disclosure of such documents.

40.  At the hearing, Mr Smith gives an additional reason why the Disputed Documents are both relevant and necessary. To cope with the allegation in the evidence of the Corporation that the Company had to refine the resource models, Mr Smith submits that the core-drilling process at the exploration stage is of key importance to show that the resource models were not amenable to refinement at all. He submits that the Disputed Documents could throw light on the adequacy of the core-drilling process at Stage 1. If, due to the inaccurate assessment or record of the original core-drilling process, a wrong mining location was identified, no in-pit sampling could remedy the situation. Put bluntly, if the location was not appropriate for mining in the first place, no refinement could be made subsequently.

41.  Hence, locations of coal as identified by JT Boyd are relevant to the issue as to whether the Company could refine the resource plans assuming that indeed it had a duty to do so.

42.  Mr Pennicott submits that the location issue was only raised by Mr Smith in his oral submissions and it does not feature in the pleadings at all.

43.  However, I accept the submission of Mr Smith that location should feature in the resource plans of JT Boyd based on the underlying data obtained at the exploration stage. If the Reply is to be understood in its broadest sense, I see no reason why it cannot cover the allegation of the erroneous identification of mine locations. It can, at least, be inferred from the pleadings that the location issue would be prime facie one of the controversies between the parties.

44.  Furthermore, the Company has been given leave to file its Amended Reply. It may opt to make a specific plea in respect of its inability to refine the resource plans of JT Boyd in light of the allegation made in the 6^th Affirmation of Frankie Choi.

45.  In passing, Mr Pennicott complains about the lack of particulars of the alleged inaccuracies, flaws or deficiencies of the resource plans of JT Boyd in the Reply. There may be substance in this complaint but it has no bearing on the present application. It may be dealt with by way of a request for further and better particulars or the imminent filing of the Amended Reply.

46.  Lastly, Mr Pennicott points out that the subject matter of these proceedings is the Mining Agreement rather than the Consultancy Agreement. If I understand him correctly, his argument is that the production of the Plan and Proposal by the Company was done pursuant to the Consultancy Agreement only and therefore the resource plans and/or other materials of JT Boyd provided by the Corporation should not be relevant.

47.  I cannot accept this submission. The accuracy of the resource plans and/or other materials of JT Boyd is plainly a key issue in these proceedings and the Company will strive to show their deficiencies in order to refute the allegation that it was negligent in its execution of the mining works under the Mining Agreement.

48.  For the reasons given, I am convinced that the underlying data should be made available to the Company to afford it a better chance to make good its plea that the resource plans and/or other materials provided to the Company were inaccurate, flawed or deficient.

Necessity?

49.  Given my conclusion on the question of relevance, the Corporation has to discharge its burden to show that discovery is necessary for disposing fairly of the cause or for saving costs.

50.  Basically, on this issue, Mr Pennicott relies on the same arguments in respect of relevance. I have dealt with the same and need not repeat myself.

51.  Additionally, Mr Pennicott submits that upon the receipt of the resource plans and other materials originated from JT Boyd, the Company must be aware of the primary documents containing the underlying data at the exploration stage but it failed to make any request for the same. His submission is that the inaction of the Company shows the lack of necessity of such primary documents.

52.  I cannot accept this submission.  Such primary documents might not be necessary for the purpose of the execution of the mining works. But this court is considering the necessity of such primary documents in the context of these proceedings. It is an altogether different question.

53.  In the premises, this court is convinced that the production of the Disputed Documents is necessary for disposing fairly of the course and for saving costs.

Conclusion and order

54.  For the foregoing reasons, I conclude that a prima facie case of relevance in respect of the Disputed Documents is made out and their production is necessary. Thus, I accede to the application of the Company and exercise my discretion to order the discovery and production of the Disputed Documents.

55.  In my judgement, the objection of this application is unmeritorious and should not have been raised.

56.  I make an order nisi that the Corporation should pay the Company its costs of and incidental to the Summons, to be taxed if not agreed. I also allow certificate for two counsel given the volume and complexity of the relevant facts.

57.  Lastly, I thank all counsel for their succinct and helpful submissions.