GOLDLION PROPERTIES LTD AND ANOTHER v. REGENT NATIONAL ENTERPRISES LTD

HCMP 5273/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5273 OF 2003

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J U D G M E N T

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1.  The primary issue between the parties is whether or not the Defendant should be obliged to disclose, in the course of discovery, certain legal advice received by it.  The 1^st Plaintiff seeks also an order that it may cross-examine Mr Joseph Kin Ching Lo, the deponent of an affidavit made on behalf of the Defendant, in which reference is made to that legal advice.  Alternatively an order is sought that four particular paragraphs of the deponent’s affidavit should be struck out.

2.  On 23 July 2003, an agreement for sale and purchase (the ASP), was made between the Defendant as the vendors, and the 1^st  Plaintiff as purchaser in relation to the Kimberley Hotel in Kowloon.  For the purposes of this interlocutory application I am not concerned with the other plaintiffs, and will refer to the 1^st Plaintiff as “the Plaintiff”.

3.  The Kimberley Hotel (the Hotel), is the largest asset of the Defendant company which in turn is a wholly owned subsidiary of Kimberley Hotel Holdings Limited (In Liquidation), (KHHL).  The Hotel was charged as security for a loan facility to the Defendant, of up to US$200 million to the Bank of China (Hong Kong Branch) (BOC).  There were repeated defaults and the repayment of the loan facility by the Defendant and its parent company, KHHL, as a result of which BOC became entitled to enforce its security.  KHHL was placed in liquidation pursuant to an order of the Court in the British Virgin Islands.  The agreement for sale and purchase has been entered into as a result of BOC exercising its right to sell the Hotel under its debenture and mortgage.

4.  The current directors of the Defendant are partners of the international accounting firm Deloitte Touche Tohmatsu (DTT).  DTT is the liquidator of KHHL.  Contained in the ASP was the following clause 13.2:

“… should the (Defendant) become unable or fail to complete the sale and purchase of the Property on the completion date due to any matter (including and without limitation to third-party action) beyond the reasonable control of the (Defendant) and which in the reasonable opinion of the (Defendant) materially hinders, prevents or obstructs the completion of the sale and purchase of the Property, the (Defendant) shall, within 3 business days of the date fixed for completion, return all deposits and other monies paid by the (1^st Plaintiff) in connection with the purchase of the Property, together with all interests accrued thereon and the actual costs incurred by the (1^st Plaintiff) in connection with the purchase, as full and final settlement of the (1^st Plaintiff's) claim herein and (conditional upon the receipt of such deposits, interests and costs) the (1^st Plaintiff) shall not take any further action to claim for damages ought to enforce specific performance…”

5.  Such a clause is a usual clause were a property is being sold by a liquidator or receiver.  By way of protection to a purchaser whose purchase might be prevented by the operation of such a clause, it is usual to contain a pre-emption right in the event that the vendor later becomes in a position to re-offer the property for sale, after having invoked that clause.  There is such a pre-emption right in the ASP.

6.  The evidence is that two days before the due date for the completion of the sale of the Hotel, in the late afternoon of 19 November 2003, the Defendant was served with a petition for its winding up.  In addition, the Defendant’s solicitors were informed that an application had been made British Virgin Islands to appeal against the winding up order pursuant to which DTT were appointed liquidators of KHHL.  Upon receiving that  information and the petition, the Defendant sought legal advice.  As a result of that advice the Defendant invoked clause 13.2.

7.  Further, following the invoking of clause 13.2, the Defendant was served with an order of the High Court of Justice of the British Virgin Islands by way of Interim Injunction, restraining the Defendant from carrying out any acts in furtherance of the ASP.  There is no information before me as to the basis upon which that injunction was issued, nor as to the locus standi of the applicant, a private individual, to obtain the injunction.

8.  Having invoked clause 13.2, the Defendant gave notice to the Plaintiff that it was unable to proceed further with the ASP.  The Defendant then returned a deposit of HK$70 million that had been paid by the Plaintiff, and invited the Plaintiff to supply details of its costs so that they may be settled by the Defendant, once verified.  The Plaintiff rejected the cheque for the refund of the deposit, and returned it, and issued these proceedings.

9.  As the proceedings being by way of Originating Summons, there are no formal pleadings, in the traditional sense of he documents that follow a writ, and no formal statement of claim or defence has been filed.  The Plaintiff however, has filed an affidavit setting out the circumstances under which the ASP came into existence, and an affidavit in reply has been filed by the Defendant.  In essence, the Plaintiff’s affidavit constitutes the statement of claim, and the Defendant’s affidavit constitutes its statement of defence.  In that affidavit, made by one of the directors of the Defendant, who is also one of the liquidators of the parent company of the Defendant, the defence is set out in some detail.  In particular, in the paragraphs sought to be struck out, should discovery and cross examination not be permitted, the following assertions are made:

“15  Upon receiving the Petition, the Defendant sought legal advice and was advised that has a result of the presentation of the Petition, pursuant to section 182 of the Companies Ordinance, it would be necessary to obtain the sanction of the Court for the completion of the sale of the Hotel contemplated by the S & P Agreement, and that failure to obtain such sanction would render the sale void.  Alternatively, the Defendant was advised that it could apply to strike out the Petition on the grounds that (the Petitioner) lacked standing as a creditor of the Defendant.  The Defendant was further advised that neither application, even if successful, could be dealt with by the Court prior to the completion date on 21 November 2003.

17  As explained in paragraph 2 above, the current management of the Defendant was appointed by the Liquidators, through KHHL’s ownership of the Defendant’s 100% parent company, High Pressure.  According to legal advice, if the sale of the Hotel was proceeded with, in the event that the Appeal is successful, the Liquidators’ capacity to appoint the current management to the Defendant, and thus the current management’s capacity to enter into the sale of the Hotel, is likely to be called into question.  This could have implications on the validity of the sale of the Hotel, and could also result in liabilities for the Defendant and the Liquidators.

18.  Clause 25 of the S & P Agreement provides that “Time shall in every respect be of the essence of this Agreement.”  In the light of the matters described in paragraphs 14 to 17 above and on the basis of legal advice that it has obtained, the Defendant considered that the Petition and the Appeal were matters beyond the reasonable control of the Defendant which materially hindered, prevented or obstructed the completion of the sale of the Hotel, accordingly, it was not in a position to complete the sale of the Hotel on 21 November 2003.

22.  On the basis of legal advice which I have obtained, I verily believed that at the time the Defendant gave notice to the 1^st Plaintiff under Clause 13 .2 of the S & P Agreement, the Petition and the Appeal were matters beyond the reasonable control of the Defendant which materially hindered, prevented or obstructed the completion of the sale of the Hotel by the Defendant.  The potential implications for the Defendant and the Liquidators, and the sale of the Hotel being proceeded with regardless of the Petition and the Appeal, are described in paragraphs 15 and 17 above.  I therefore believe that these events gave rise to a situation under Clause 13.2 of the S & P Agreement, giving the Defendant of the right to invoke the provision.  The Interim Injunction Order reinforced the Defendant’s belief that it was materially hindered, prevented or obstructed from completing the sale of the Hotel. ”

10.  It will be seen in clause 13.2 that the opinion that certain specific matters would materially hinder prevent or obstruct the sale of the Hotel is an opinion that must be reasonably held.  For the Plaintiff, it is argued that this central issue has two aspects: first, did the Defendant in truth hold that opinion, and second, if so, was it a reasonable opinion for the Defendant to hold.  As I have noted no formal pleadings in the nature of claim and defence are filed but the Defendant’s affidavit sets out its possession.  That position of the Defendant, as demonstrated by the affidavit, is that the state of mind of the Liquidators, in reaching their decision in their capacity as directors of the Defendant, was influenced by the legal advice that they had received.  In the affidavit Mr Lo goes into some detail as to the particular issues of concern and the advice that was received.

11.  Any application for the discovery of legal advice must start with the proposition that communications made to and from a legal adviser for the purpose of obtaining legal advice and assistance are protected from disclosure in the course of legal proceedings, both during discovery and that the trial: see Halsbury’s Laws of Hong Kong Vol. 5 90.0582.  The right to protect such communications from disclosure is commonly known as legal professional privilege.

12.  Privilege however can, in certain circumstances, be waived.  A collateral waiver may occur when material which would otherwise be privileged is deployed in court.  The classic statement on collateral waiver appears in the judgment of Mustill J in Nea Karteria Maritime Co. v Atlantic & Great Lakes Steamship Co [1981] Com LR 138, in the following terms:

“When a party is deploying in court material which would otherwise be privileged the opposite party and the Court must have an opportunity of satisfying themselves what the party has chosen to release from that privilege represents the whole of the material relevant to the issue in question.  To allow an individual item to be plucked out of context would be to risk injustice through its real weight or meaning being misunderstood.”

The contention of the Plaintiff in the present case is that by the terms of the affidavit that I have set out above the Defendant has deployed the legal advice had received in its defence and so must disclose the contents of the advice.

13.  There appears to have been a divergence in judicial views between England and Australia as to just how this principle is to be applied.  Mr Fung took me at length through a number of Australian decisions and cautioned me that the approach adopted in Australia was not the approach that should be adopted in Hong Kong.  With the greatest respect to him, I do not find it necessary to review those divergences or to come to any conclusion on them, because throughout Mr Huggins, although citing one Australian decision, was content to rely upon the law as it has been declared in England.

14.  The dictum of Mustill J in Nea Karteria was referred to by Mathews & Malek on Disclosure 2000, at para 10.17 in the following terms:

“The key word here is ‘deploying’.  A mere reference to a privileged document in an affidavit does not of itself amount to a waiver of privilege, and this is so even if the document referred to is being relied on for some purpose, for reliance in itself is said not to be the test.  Instead, the test is whether the contents of the document are being relied on, rather than its effect.  The problem is acute in cases where the maker of an affidavit or witness statement has to give details of the source of his information and belief, in order to comply with the rules of admissibility of such affidavit or witness statement.  Provided that the maker does not quote the contents, or summarise them, but simply refers to the document’s effect, there is apparently no waiver of privilege.”

15.  Mr Huggins contended that if the deponent of the affidavit had simply said that:

“the Defendant was advised by its lawyers that it was entitled to rely on Clause 13.2 of the S& P Agreement”,

that would clearly have been reference merely to the effect of any such advice given.  It is argued that by choosing to descend to particulars of the advice given, identifying the precise factual circumstances allegedly relied on, (the winding up Petition and the Appeal), and the alleged application of s 182 of the Companies Ordinance, amounts to disclosure of part of the contents of the advice.  Mr Huggins contends that having disclosed part, the Defendant must disclose the whole to avoid the suspicion of cherry-picking and misleading partiality.  The Defendant has, Mr Huggins argues, deployed the advice in its defence.

16.  In determining whether or not, by the terms of the affidavit, the Defendant has waived privilege I bear in mind that waiver of privilege will not be lightly inferred: see Kershaw v Whelan [1996] 1 WLR 358 at 370.

17.  A number of authorities were cited by each side in which privilege was held either to have been waived or not waived.  The conclusion in each case turned upon the particular facts and circumstances in which the legal advice was referred to.  I do not find those authorities of particular assistance in applying the principles that I have set out above.  In particular none of the cases cited by Mr Fung on the distinction between the mere reference to the effect of a document as distinct from the contents of the legal advice were cases which were concerned with the issue of imputed or implied waiver when a party refers to having received legal advice as the basis for an alleged state of mind or opinion which he formed in the case in which that state of mind or opinion is central to the proceedings and crucial to its outcome.

18.   That the Defendant is, in effect saying, by the terms of the affidavit it has filed disclosing the basis of its defence, and its position in refusing to disclose the legal advice received is that it was entitled to exercise the rights it had under clause 13.2 of the ASP, upon certain specific legal advice, detailed in the affidavit, which influenced its opinion, but at the same time the plaintiff should not see the precise terms of that legal advice even if it would support what the defendant now says, or, more importantly, show that less than the true nature of the advice was disclosed.  The Defendant’s position is a clear example of “cherry picking” by taking a portion of the advice out of context, precisely the injustice against which Mustill LJ cautioned in Nea Karteria.  By exposing portions of the advice it has received in order to justify the position it has taken the Defendant has deployed the advice in its defence.

19.  For these reasons I am satisfied that there should be an order in terms of paragraph 2 of the Plaintiffs’ summons dated 1 June 2004, requiring the Defendant to discover the legal advice referred to therein.

20.  That conclusion alone is sufficient to dispose of the application for cross-examination of Mr Lo.  It follows that he must be cross-examined.  However there are other sound reasons why there ought to be an order for cross-examination.  It is right that the ASP provides that time shall be of the essence of the contract.  The position taken by the Defendant was that there was insufficient time to obtain the orders sought to resolve the difficulties raised.  The Defendant also relied upon the “ time of the essence” provision in the contract.  I bear in mind the admonition of Litton PJ in Mexon Holdings Ltd v Silver bay International Ltd [2000] 1 HKC 1 at 8, albeit given in relation to an issue of title, but in my view equally applicable to issues of the enforcement of a contract namely:

(they) “must be approached from the stand-point of a willing purchaser and a willing vendor, both possessed of reasonably robust commonsense, both intending to see the transaction through to completion in terms of their own bargain.”

I put it to Mr Fung that the purchaser, being a willing purchaser, would undoubtedly agree to an extension of time to enable the necessary orders to be obtained from the court to clear the way to complete the purchase and for any other matters to be resolved.  There is no evidence that the vendor Defendant sought any such extension of time and it ought to explain why.  Further, when pressed to make any suggestion as to why, in the present circumstances, the Court might not sanction the ASP, on an application under s 182 Companies Ordinance, Mr Fung was quite unable to offer any reason.  Again, the Defendant ought to explain why in those circumstances it found the need for sanction a barrier to the ASP.

21.  For these reasons there will be an order in terms of paragraph 1 of the Plaintiff’s summons dated 1 June 2004, that the Plaintiff may at trial cross-examine Mr Lo on his affirmation of 27 January 2004.

22.  Having made those orders, the alternative orders sought that paragraphs 15, 17, 18 and 22 of the affidavit of Mr Lo fall away.

23.  The Plaintiff has succeeded.  There will be in order nisi the costs of the application be Plaintiff’s costs in the cause.