PAU HAY CHEUNG v. GONG BING QUAN AND OTHERS

HCA 2508/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2508 OF 1999

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J U D G M E N T

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1. This is an appeal against a decision of the Master on an application to strike out a Statement of Claim.

2. The Plaintiff asserts that its claims against the Defendants arise out of two oral agreements entered into in December 1993 and June 1997 ("the First Agreement" and "the Second Agreement").

3. The circumstances giving rise to the First Agreement were that the Plaintiff, the 2nd Defendant and a company called Shen Gang Property and Industrial Co. Ltd ("Shen Gang") agreed to form a company ("East Earth") to engage in the leather business. The parties would contribute to the capital of the new company as to 45% from the Plaintiff, 20% from the 2nd Defendant and 35% from Shen Gang.

4. The contribution of the 2nd Defendant and Shen Gang would be by cash. The contribution of the Plaintiff would be in part the transfer of its business called The Royal Trading Corporation ("Royal Trading") whose value was assumed to be US$900,000.00 with the balance to be by cash.

5. The Plaintiff asserts that the circumstances giving rise to the Second Agreement were these. Royal Trading owned real properties which were mortgaged to the 3rd Defendant. By the terms of the Second Agreement, a mainland company in which the parties had interests would be sold and the proceeds utilized to redeem the said mortgage. Presumably this exercise would enable the Plaintiff to provide Royal Trading under the First Agreement at the value of US$900,000.00.

6. The 3rd Defendant, however, exercised its rights under the mortgage and caused Royal Trading's properties to be sold ("the 969 Action"). The Plaintiff says that this constituted a breach of the Second Agreement.

7. East Earth, perhaps not surprisingly, then declined to accept the injection of Royal Trading. The Plaintiff says that this constitutes a breach of the First Agreement.

8. By its Statement of Claim, the Plaintiff pleaded loss and damage arising out of the breach of the First and Second Agreements which was particularized as the cost of Royal Trading at US$900,000.00. The Plaintiff claims that sum and that the Defendants should indemnify the Plaintiff in respect of its liability in the 969 Action.

9. The Defendants applied before the Master to strike out the Statement of Claim and for the action to be dismissed. The Master ordered that paragraphs 18-23 of the Statement of Claim be struck out and gave leave to amend paragraph (a) of the prayer. That leave was given in the absence of any such application by the Plaintiff and without any material before him in relation to any such amendment.

10. The Plaintiff now appeals against the Master's decision and the Defendants cross-appeal. It is common ground that the matter should now be considered de novo.

11. The Plaintiff seeks to rely upon an affirmation of Kwok Sik Yuen filed on 12th April 2000, some three months after the hearing before the Master. Although this is a hearing de novo, as an appeal against a decision given on 13th January 2000, I do not consider it appropriate to take that affirmation into consideration. The matter should be dealt with de novo on the basis of the material available before the Master.

12. The Defendants cross-appeal seeking the striking out of the whole Statement of Claim.

13. The Defendants' arguments are encapsulated under three basic heads. First, that the claim for damages is not substantiated by the Statement of Claim. Secondly, that no damages have been claimed in respect of the breach of the Second Agreement. Thirdly, the claim arising out of the Plaintiff's liability in the 969 Action is res judicata.

14. The claim for damages is founded upon alleged breaches of the First and Second Agreements. The breach of the First Agreement is pleaded in paragraph 16 of the Statement of Claim to be the Defendants' failure to cause East Earth to purchase Royal Trading, and in paragraph 17 of the Statement of Claim to be the 1st Defendant's failure to procure a loan of US$2 million.

15. The purchase of Royal Trading is pleaded in paragraph 7(b) of the Statement of Claim to be "at a price of US900,000.00 and to be assessed". The Defendants argue that the plea is defective and cannot be sustained as a matter of law since the purchase could only logically be either US$900,000.00 or a price to be assessed, but could not be both. The Defendants say that the damages could only in fact be the difference between the contract price and the value of the business. The Plaintiff accepts that the claim has not been properly pleaded but submits that this is curable by amendment and that striking out is inappropriate since the error is not within the scope of being inarguable or almost incontestably bad (Yue Xiu Finance Co. Ltd v. Agnew 1996 2 HKC 122).

16. The Plaintiff's claim is for damages for breach of contract, not for specific performance. The measure of the purchase price is therefore only relevant as an element in the calculation of the damages. Where the Plaintiff pleads substantial damages but omits any causal connection between the breach and the damages claim, the claim should be struck out (Wharf Properties v. Eric Cumine Associates 1989 1 HKLR 556).

17. The Master, of his own volition, declined to strike out the defective pleading and gave leave to amend, presumably in the hope that the Plaintiff might be able to cure the defect. At no stage, below or before me, has the Plaintiff sought to do so.

18. The Second Agreement and breaches of it are pleaded by the Plaintiff and at paragraph 23 loss and damage arising out of the First and Second Agreements are pleaded. The Defendants submit that no material facts are pleaded to support the claim for damages arising from any breach of the Second Agreement. The Plaintiff does not deny this but argues that a failure to plead damages for breach of the Second Agreement is not a basis for striking out since the Plaintiff claims generally for an indemnity in respect of the 969 Action.

19. The absence of any specific claim for damages for a breach, in my view, renders the claim so defective that it should be struck out. The Plaintiff is obliged to plead its case clearly and fully. The Defendants cannot be left to defend a case which has not even been adequately articulated. Indeed, for reasons which follow later in this judgment, it is difficult to see what place the Second Agreement has as a founding element of the claims under the Statement of Claim.

20. The third leg of the Defendants' argument in support of striking out is that the Second Agreement and the claim for indemnification under the 969 Action are res judicata, the matter having already been covered by the ambit of the 969 Action.

21. The 969 Action involved the 3rd Defendant's enforcement of its mortgagee rights against the Plaintiff as mortgagor. Any argument as to an agreement not to enforce that mortgage (in effect the essence of the Second Agreement) could and should have been raised in the 969 Action where it would have been a central issue. The Plaintiff's assertion that, since the merits of its claim were not placed before the Court in the 969 Action, it is not an abuse of process, is a self-serving argument. It could and should have been a valid defence for the Plaintiff to raise in the 969 Action. The Plaintiff's failure to do so cannot create a right for it to be raised afresh here as a separate cause of action.

22. Both sides referred to and relied upon Yat Tung v. Dao Heng Bank (1975 AC 581). It is clear from that case that, save in exceptional circumstances (none of which are apparent here), it is an abuse of process for a party to seek to argue or rely upon a matter which properly belongs in earlier litigation and which could and should have been litigated and adjudicated upon in that earlier action.

23. Here, the Plaintiff's attempt to re-introduce the whole argument over the mortgage and to claim indemnification against a judgment already rendered on the same issue is clearly an abuse of process. The issue is res judicata and has been dealt with in the 969 Action.

24. The Plaintiff submits that because the parties here and in the 969 Action are not identical, issue estoppel cannot arise unless there is privity of issue between the parties. But, in my view, it is irrelevant that the parties here and in the 969 Action are not the same. Indeed, as the Defendants point out, that was no impediment to the strike out in the Yat Tung case. There exist mechanisms by which the other Defendants could have been brought into the 969 Action.

25. In all the circumstances, I am satisfied, having heard the matter de novo, that the Statement of Claim should be struck out in its entirety and I so order. It follows that the Plaintiff's appeal is dismissed and the Defendants' cross-appeal is allowed.

26. There will be costs to the Defendants on the appeal and cross-appeal and before the Master below.