SINOCARD TECHNOLOGY LTD v. LEE CHI KEUNG AND OTHERS

HCA 2022/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2022 OF 2005

----------------------

----------------------

----------------------

R U L I N G

----------------------

1.  This is an appeal by rehearing against the decision of a Master to order discovery of particular documents on applications made by the plaintiff.  The defence challenged the applications upon the grounds of relevance and maintains that stance on appeal.

History

2.  The plaintiff (Sinocard) and 3^rd defendant (OPT) are Hong Kong registered and based companies.  Up to about 1 December 2003 (the material date) both companies were engaged in the manufacture of the product known as “smart card” and products related, in competition with each other and others operating in the same field.  With a view to improving market share and minimising the adverse effects of competing with each other, those in control of the two companies explored the prospects of a joint enterprise; the result was a merger of their respective businesses as from the material date.

3.  But this did not last.  Some 17 months later, on 19 July 2005, the companies ceased to operate together.  What led to the dispute that is the basis of this action is that neither can agree on the nature of the commercial relationship that lasted for the 17 months they worked together. 

4.  Sinocard claims that what had been achieved in the lead up to the material date was an agreement made partly in writing and partly orally and evidenced by conduct that there be a joint enterprise, which it refers to as the Joint Venture. 

5.  From the material date Sinocard ceased to operate in its own right and transferred its business, including orders, staff and plant to OPT, in consideration for a substantial interest in the shareholding of OPT.  It claims that OPT failed to perform this agreement, and on 19 July 2005 brought the relationship to an end when it sacked the staff formerly working for Sinocard and joined forces with another company altogether.

6.  Following the parting of the ways, Sinocard claimed a breach of the Joint Venture agreement and by this action sues for specific performance, a declaration that it owns beneficially one third of the shareholding of OPT, damages in addition or in lieu and consequential orders.

7.  Particularly pertinent to this appeal is that if Sinocard is not successful in establishing there was a Joint Venture agreement, in the alternative it claims that OPT is a constructive trustee of Sinocard’s assets transferred to OPT, and sues for compensation for OPT’s unjust enrichment.

8.  To complete the picture Sinocard joined OPT’s parent company as second defendant (E-Pilot) and those who owned and controlled E-Pilot and thus OPT, being the 1^st, 4^th and 5^th defendants (Messrs Chris Lee, K L Kwan and Stanley Cheung).

9.  The defence as pleaded by all five defendants is that the parties had not at or before the material date or thereafter advanced to the stage where there was a Joint Venture agreement or other form of agreement binding the parties to a joint enterprise.  There were discussions, during which merger prospects were considered, but they did not lead to a positive outcome.  What happened from the material date was that by agreement OPT took on staff and equipment and fulfilled orders of Sinocard, for appropriate consideration.  They referred to this as the Interim Arrangement, which persisted until 19 July 2005.  They deny any liability owed Sinocard.

The Discovery Applications

10.  In the post-pleading period those representing Sinocard filed two summonses under O.24 rr. 3 and 7 RHC in December 2006 and June 2007, for further and better lists of documents as set out in attached schedules with verifying affidavits. 

11.  These are the applications the subject of the appeal.

12.  By the time they came before the Master many of the queries had been resolved or withdrawn.  Those that remained dealt with six sets of documents.  As the Master granted the application in respect of all six, and as this appeal concerns all six, it is convenient to reproduce his order which he made on 4 January 2008, and I now do so:

“IT IS ORDERED THAT :-

1.  the Defendants do within 14 days from the date hereof file and serve a further and better list of documents as follows and to be verified by affidavit :-

(a)   Sales ledgers of Oriental Power Technology Limited (‘OPT’) for the period from June 2002 to 30 November 2003; sales ledgers of Power Oriental Engineering Limited (‘POE’) and 銳凱科技 (深圳) 有限公司 (‘POE Shenzhen’) for the period from June 2002 to 31 December 2005;

(b)   Sales ledgers or records of OPT’s Shenzhen Factory for the period from June 2002 to 30 November 2003;

(c)   Annual examination record (including audit report and accounts) of OPT’s Shenzhen Factory covering the period from June 2002 to December 2002;

(d)   Sales ledgers of Pioneer Oriental International Limited (‘POI’) for the period from 1 June 2002 to 31 December 2005; and

(e)   Purchase orders and purchase ledgers of POI for the period from 1 June 2002 to 31 December 2005.

(f)    Audited financial statements for POI for the years ended 31 December 2002, 31 December 2003, 31 December 2004, and 31 December 2005”

13.  By way of explanation; it is not in issue that POE is, in effect, a sister company of OPT, with the same founders including the defendants in person.  It makes the machinery that is capable of recognizing and reading smart cards.

14.  POE Shenzhen is a mirror company of POE, founded in the PRC for the purpose of trading in the PRC.  OPT’s Shenzhen Factory is a separate entity, trading separately, maintaining its own ledgers and records. 

15.  At the material time POI was a subsidiary of POE.  POE Shenzhen was a subsidiary of POI.

16.  The first three sets of documents are those outstanding from Sinocard’s first summons in time; the remaining three are those from the second.

17.  On 23 January 2008 on application by the defence, a Master stayed execution pending the determination of this the appeal.

The Legal Principles

18.  These are I believe not in issue, but it is as well briefly to summarize what a court in a contest such as this must pay heed to when faced with an application for specific discovery.

19.  In this respect I begin by quoting from the judgment of Chu J in the unreported case in Re the Estate of Ng Chan Wah, Deceased HCAP 5/2003at para.8:

“8.   The relevant principles underlying an Order 24, rule 7 application are set out by Mustill LJ in Berkeley Administration Inc. & Others v. McCelland & Others [1990] FSR 381 at 382-3.  The relevant part of the judgment reads:

‘    (1)   There is no jurisdiction to make an order under R.S.C., Order 24, rule 7, for the production of documents unless (a) there is sufficient evidence that the documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party.

(2)   When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure.

(3)   The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(4)   It has been suggested that the court should approach the appeal on the basis that this is a matter of discretion, and that the appellate court should not ordinarily interfere with that discretion in the absence of misdirection or some other factor which, according to familiar principles, would justify it in taking such a course.  This is right as regards the exercise of that discretion which arises once the conditions for the existence of jurisdiction have been satisfied.  But on the question whether they have been satisfied and whether the order is in the appropriate form, we are not concerned with discretion at all, and they are reviewable without inhibition by the appellate court.

(5)   It is not an answer to an assertion that documents falling within a particular category are disclosable that no such documents are in the other party’s possession or power, although if this information has already been conveyed on oath in the course of the proceedings this would furnish a reason why, in the exercise of the court’s discretion, it might well not make an empty order.”

And she went on to say at para.16:

“… It is not the purpose of discovery to give the plaintiffs an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the defendants’ part or will provide information for them to pursue more enquiries.”

20.  Documents sought to be disclosed are relevant to an issue of the case if the issue is raised in the pleadings; see Paul’s Model Art Gmbh & Co. KG v UT Ltd & Ors [2006] 1 HKC 238, CA; per Cheung JA at p.247.

21.  I quote also from Burrell J’s judgment in Mariner International Hotels Ltd v Atlas Ltd (unreported)HCA 10714/1998 from para.8:

“8.   This court shares the views expressed by Stone J in Vashdev Essardas Mahbubani t/a Vashi’s Export Co. v. Motis Exports Ltd and others (unreported) in 1997:

‘As no doubt will become known by commercial practitioners, my attitude, as Judge presently in charge of the Commercial List, is that in general discovery is a good thing, and that in cases of doubt I am more likely to lean in favour of discovery than against it.  In this connection I am reminded of one of the broad principles of the common law as expressed by Lord Justice Bingham (as he then was) in the case of Ventouris v. Mountain [1991] 1 WLR 607 at 611H, where the learned Lord Justice observed as follows:

‘Our system of civil procedure is founded on the rule that the interests of justice are best served if parties to litigation are obliged to disclose and produce for the other party’s inspection all documents in their possession, custody or power relating to the issues in the action.  This is not of course a necessary rule but it is firmly established here.  It is not however an absolute rule, as exceptions such as legal professional privilege and public interest immunity demonstrate.  Nonetheless, disclosure being generally regarded as beneficial, any exception has to be justified as serving the public interest which gives rise to the exception …’’

9.    It should not be thought however that this represents a charter for opening the flood gates on discovery.  If doing justice is an onerous task then so be it.  The task of the court will often be to determine when ‘doing justice to the claim’ stops and ‘fishing’ or, to use another analogy ‘the scatter gun approach’ starts.  At that point the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible.

10.  With the above general principles in mind the rules require that in respect of each item sought :

(a)  there must be sufficient evidence that the document exists;

(b) the document must relate to matters in issue; and

(c)  there is sufficient evidence that the document is in the possession, custody or power of the other party.

If these conditions are satisfied the court retains a discretion whether or not to order disclosure.”

22.  Finally, a famous quote from the Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co. [1882] 11 QBD 55CA:

“… the documents to be produced are not confined to those, which would be evidence either to prove or to disprove any matter in question in the action … It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary … a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences …”

The Opposition

23.  The resistance mounted by the defence to discovery is based on relevance.  The documents sought do not relate to matters in issue in the action.  Thus the discretion of the court is not engaged.

24.  What are relevant are the financial and commercial activities of OPT during the 17 months or so that the parties were working together.  If it is found that OPT must compensate for unjust enrichment then its records and accounts for this period will necessarily provide the means whereby this can be calculated.  This much has been conceded, and OPT’s accounts, records, sales ledgers and so on have been disclosed.

25.  What is not relevant are those records for any period of time that precedes the material date or post-dates the date in July 2005 when the relationship came to an end.

26.  What also is not relevant are the records of the associated companies POE, POE Shenzhen and POI.  There are no claims against any of these entities.  They are not parties.  There is no connection established in the evidence binding them to OPT and Sinocard’s claim.

The Case for Discovery

27.  Those accounts so far disclosed reveal that there are connections between OPT and the associated companies referred to in the orders the Master made.  For example, POE Shenzhen was used to sell in the PRC, the OPT Shenzhen Factory having no licence to sell there.  And POI also played a role in purchasing OPT’s products.

28.  Support for the need for the accounts and other records to be examined comes from a report by Horace Man Kit Ho, a chartered accountant commissioned by Sinocard for the purpose of calculating what financial advantage was achieved for OPT as a result of the contribution of machinery, workforce and orders made by Sinocard.  With benefit of access to the audited financial statements of OPT and the Shenzhen Factory for the year ending December 2005, he noted that sales approaching $2 million and in excess of $10 million were made “to a related company” and to the “ultimate holding company”.  The related company he surmised was either POE or POI, and the holding company E-Pilot.  OPT, he reported, might well have benefited from onward sales with profits generated by the related companies.  For this reason, those companies’ records bear examination.

29.  As for the need for disclosure of accounts and records pre-dating the material date and post-dating the termination date by a number of months; Mr Ho’s report reveals that his view is that to assess the quantum of profit enhancement during the period the warring parties were operating together, a comparison has to be made with figures achieved before and after that time.  For that comparison to be meaningful, he believes that would require inspection of records and accounts for the period June 2002 to December 2005.

Discussion

30.  The resistance to this course is to repeat the assertion that the so-called related companies’ records would not assist.  It was averred:

OPT did make sales to POI (not POE), but this was after Sinocard ceased being involved with OPT.  They were not made with Sinocard machines, they were not sold to Sinocard’s customers and there was no Sinocard input into their making;

POE Shenzhen has not and does not profit from the sale of OPT products in the PRC.  Its profits are derived from business not connected with OPT;

The transaction that excited Mr Ho in OPT’s accounts to December 2005 had nothing to do with POE.  POE’s link with OPT concerns the sharing of management fees, which are transparently evident from OPT’s accounts.  There was one transaction with POE back in 2003, but that was well before the so-called “period of co-operation”.

31.  In putting forward the proposition that accounting records pre the material date must be inspected for comparison to be made, Mr Ho does not explain how the comparison process would work.  There are too many variables for the approach to be meaningful, such as sales to one of OPT’s existing customers increasing during the period of co-operation.

32.  Mr Hudson representing all the defendants before the Master and then me submitted that the so-called related companies are not litigants and that no claim has been made against them.  Further, that evidence adduced by the defence has demonstrated that those transactions targeted as prospectively involving one or other of the related companies turned out to be red herrings and not relevant to the dispute.

Determination

33.  In my view Sinocard has done enough to show that the records of these companies may have a bearing on the accounting calculations necessarily to be made to determine compensation for unjust enrichment, if liability comes to be established under this head.

34.  The fact that they are associated companies carries its own implications.  That there are transactions with them following the material date and prior to cessation of the period of co-operation strengthens these implications.

35.  There has been evidence to refute relevance, that the transactions identified are unconnected.  Perhaps so, but these are assertions, and in my view Sinocard should have the opportunity to test the truth and adequacy of these assertions. 

36.  Further, there is a logic in the proposition that comparisons with pre-and post-activity will or may be useful.  Of course there will be variables but these are capable of analysis and allowance being made for them.

37.  For these reasons I am satisfied that the documents sought may (not must) either directly or indirectly enable Sinocard to advance its own case or to damage the case of the defendants, and that they are thus related for the purpose of satisfying the jurisdictional requirement of rule 7 of order 24. 

38.  In exercise of my discretion I order their discovery.

The Result

39.  The appeal is dismissed.  Costs of the appeal, nisi, are to Sinocard in any event.