BEIJING TONG GANG DA SHENG TRADE CO LTD v. ALLEN & OVERY (a firm) AND ANOTHER

HCA 1491/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1491 OF 2011

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J U D G M E N T

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Introduction

1.  On 24 January 2014, only four days before the substantive hearing of the defendants’ applications to strike out the plaintiff’s claim in this action on the ground of champerty, the plaintiff Beijing Tong Gang Da Sheng Trade Co Ltd (“the plaintiff”) and Greater Beijing Region Expressways Limited (“GBRE”) (who ceased to be a party in August 2012,) issued the summons now before this court (“the joinder summons”), seeking leave to add GBRE as a plaintiff in this action. 

2.  At the outset of the striking out hearing, Mr Wong, counsel for the plaintiff, informed the court that the plaintiff would defer argument on the joinder summons until after judgment was available.

3.  At the conclusion of the hearing, the court announced its decision, holding the assignment champertous.  It ordered that the writ and statement of claim be struck out, with written reasons to be handed down. 

4.  Upon Mr Wong’s request for an opportunity to be heard on the joinder summons before the order was drawn up, directions were given for a hearing to be fixed after the Reasons for Decision had been handed down. 

5.  Those Reasons for Decision were handed down on 12 February 2014 (“the February Decision”) and the joinder summons was heard on 24 April 2014.  At its conclusion, judgment was reserved which I now give.

Background facts

6.  Given the circumstances in which the joinder summons arose, the background facts stated in the February Decision (to which reference should be made) are equally relevant to the present application.  The same nomenclature is adopted in this Decision.

7.  In outline, the relevant facts may be summarized as follows:

(1) GBRE issued a writ on 1 September 2011 against the defendants (respectively a firm of solicitors and counsel) for alleged negligent professional advice rendered in 2005/2006 (“the action”).

(2) On 18 January 2012, by a Deed of Assignment, GBRE assigned all its rights/claims against the defendants arising out of the action to the plaintiff.  The consideration was HK$100,000 and 10% of the net proceeds of the action, the plaintiff valuing the claim at US$400 million.

(3) Seven months later, in August 2012, the plaintiff gave notice of the assignment to the defendants.

(4) On the following day (17 August 2012), GBRE amended the writ pursuant to Order 20, rule 1, the effect of which was to substitute the plaintiff in its place and to remove GBRE from the action altogether.

(5) The amended writ was served on the defendants on 5 September 2012.

(6) The plaintiff filed its statement of claim on 14 November 2012.

(7) The issue of champerty was raised by the defendants as early as January 2013.

(8) The defendants made an application to strike out the plaintiff’s claim on 12 March 2013 after the plaintiff refused their request to provide documentary evidence to make good its reasons for maintaining that the assignment was not champertous.

(9) On 24 January 2014, the plaintiff took out the joinder summons.

(10) On 27 January 2014, the plaintiff and GBRE executed a Deed of Amendment, Confirmation and Ratification altering the division of the proceeds to be derived from the action from 90:10 to 50:50.

(11) On 28 January 2014, the court ordered the amended writ and statement of claim to be struck out.

The application

8.  The joinder summons is pursued on the basis of Order 20, rule 5 and/or the inherent jurisdiction of the court.  Although Order 15, rules 6 and 7 appear in the margin of the joinder summons, Mr Wong confirmed that no reliance was being placed on those provisions in this application.  In fact, the Order 15, rule 7 argument had already been raised and rejected at the striking out hearing: see §47 of the February Decision. 

Order 20, rule 5

9.  For present purposes,the pertinent parts of this rule read:

1) Subject to Order 15, rules 6, 7 and 8 and the following provisions of this rule, but Court may any stage of the proceedings allow the plaintiff to amend his writ, or any party to amend his pleadings, on such terms as to costs or otherwise as may be just and in such manner (if any) as it may direct.

2) Where an application to the Court for leave to make the amendment mentioned in paragraphs (3), (4) or (5) is made after any relevant period of limitation current at the date of issue of the writ has expired, the Court may nevertheless grant leave in the circumstances mentioned in that paragraph if it thinks it just to do so.

3) An amendment to correct the name of a party may be allowed under paragraph (2) notwithstanding that it is alleged that the effect of the amendment will be to substitute a new party if the Court is satisfied that the mistake sought to be corrected was a genuine mistake and was not misleading or such as to cause any reasonable doubt as to the identity of the person intending to sue or, as the case may be, intended to be sued."

The primary argument: no limitation issues

10.  Mr Wong’s primary argument is that the court has power under sub‑rule (1) to add GBRE as a party because the restrictions in that sub-rule only concern additions or substitutions that involve a new cause of action which gives rise to limitation issues.  He submitted that in the present case, adding back GBRE as a party would not give rise to any limitation issue because the action was commenced by GBRE within the limitation period and the assignment by GBRE did not create a new cause of action. 

11.  Turning to the relevant case law, in Massai Aviation Services & Aerostar Limited v AG & Bahamasair Holding Ltd [2007] UKPC 12, Baroness Hale observed (at §1) that where an action was properly commenced within time, and the subsequent assignment was declared void, “the assignor could simply continue the action, which had already begun before the assignment took place”. 

12.  But, in the event, that was not a question the Privy Council had to decide because it upheld the validity of the assignment in question, overturning the decisions of the lower courts.  Further, as appears from §9 of the judgment, when the writ was amended several months after the assignment, the assignee was added as the second plaintiff.

13.  As Mr Dawes (who appeared for the defendants) pointed out, that is not the case here.  When the writ was amended, GBRE ceased to be a party altogether.  Further, in the present case, as a result of the holding of champerty, the assignment was void and had no effect.  It did not operate to transfer anything to the plaintiff who had neither title nor locus to be a party to the action.  At the same time, as from the date of the amendment, GBRE also became a stranger to the action. 

14.  Mr Dawes submitted that the events that occurred in the present case caused a hiatus or gap to arise in the action, with no one with the requisite locus maintaining in the interim period. In my view, what GBRE had done was no different from abandoning the action.

15.  Next, I turn to consider Asia-Pac Infrastructure Development Ltd v Shearman & Sterling (a firm) [2012] 3 HKLRD 321 which was cited in support of the proposition that, in the context of procedural amendments, limitation issues would only arise where a new cause of action is created.  This was a pillar (if not the main pillar) of Mr Wong’s primary submission.

16.  In that case the 1^st to 4^th plaintiff issued a writ within time.  Nine years later, the 2^nd to 4^th plaintiff assigned their causes of action to the 1^st plaintiff who sought leave to re‑amend the amended statement of claim to plead and rely on the assignments.  The issue was whether the assignments gave the 1^st plaintiff a new cause of action against the defendants.  The Court of Appeal held that the causes of action, while newly acquired, were the same causes of action that the 2^nd to 4^th plaintiff sued on when the writ was issued.  Those assignments did not give the 1^st plaintiff a new cause of action. 

17.  The correctness of Asia‑Pac is not doubted.  When analysed, in substance, it was a ‘succession’ case, with the 1^st plaintiff in that case succeeding to the rights of the 2^nd to 4^th plaintiff. It did not involve an assignment that was void for champerty.  On the facts, it is distinguishable because, as in Massai, there was no abandonment.  In Asia‑Pac, no new party was sought to be introduced, the assignee being already a party to the existing proceedings. 

18.  At §12 of Asia‑Pac it is stated that “[n]o question of limitation arises because no new cause of action is created in an assignment, transmission or devolution …”.  It would appear that that statement stemmed from Lord Walker’s observations in Roberts v Gill [2011] 1 AC 240, §104 to the effect that:

“In the ordinary case of a simple assignment or transmission of a cause of action after proceedings have been commenced, no question of limitation arises.”

19.  Lord Walker’s observation, in turn, was founded on Industrie Chimce Italia Centrale v Alexander G Tsavliris & Sons Maritime Co (The Choko) [1996] 1 WLR 774 and Yorkshire Regional Health Authority v Fairclough Building Ltd [1996] 1 WLR 210, both of which were decisions under Order 15, rule 7, concerned with the substitution of a party who had succeeded to a claim or liability already represented in existing proceedings.  Again, they did not involve any assignment that was held void for champerty and an abandonment of the action by the party in whom the cause of action was vested.

20.  Finally there is Simpson v Norfolk and Norwich University Hospital NHS Trust [2012] QB 640 a case where an assignment of the relevant cause of action was declared void for champerty.  The lower courts had given leave to the assignor to apply to substitute the assignee as the sole plaintiff.  But contrary to the suggestion that the leave aspect was ‘approved’ by the Court of Appeal, it was not mentioned in the Court of Appeal’s judgment which simply dismissed the appeal.

21.  It will be seen that none of the decided cases relied on is directly on point. 

22.  In the present case, the question to be considered is the effect of the assignor (GBRE) dropping out of the action.  Do proceedings validly commenced continue to subsist when the only party entitled to maintain those proceedings ceases to be a party?  Mr Dawes submitted that as a matter of logic it is no different from that party having discontinued the proceedings.  I can see the force of his argument.

23.  In any case, whether such proceedings technically subsist until withdrawn or discontinued or struck out, they can be said to have been abandoned.  The question is whether they can be resuscitated at the whim of GBRE (being the party in whom the cause of action was vested) without time constraints. 

24.  On balance, I am inclined to the view that time constraints do apply and the proceedings can only be resuscitated if the application is made within the original limitation period because the reality is that the proceedings had been abandoned by the only party with locus to sue.  As the limitation period expired in 2011/2012, it is now too late.

25.  For the reasons stated, it is my view that the primary submission of Mr Wong falls to be rejected. 

26.  If I am wrong and no time constraints apply to GBRE’s resuscitation of the abandoned proceedings, the question which then arises is whether, and if so how, the powers conferred by Order 20, rule 5(1) should be exercised. 

27.  But what are those powers?  They are “to allow the plaintiff to amend his writ, or any party to amend his pleadings”.

28.  As earlier stated, the court having held the assignment champertous, the plaintiff so‑called has no locus and never had any locus in these proceedings.  It is neither a “party” nor “the plaintiff” for the purposes of rule 5(1).  The drawing up and sealing of the order made on 12 February 2014 is a formality and cannot artificially vest the plaintiff with locus which it has been decided the plaintiff does not possess as a matter of law.

29.  As to GBRE, it ceased to be a party in these proceedings when the writ was amended.  It follows that it, also, is not a “party” under the rule.  It is a stranger.

30.  While from one perspective, this analysis might be considered ‘technical’, I do not consider that the rule requires the court to apply a meaning that is at odds with the true legal position. 

31.  Again, assuming I am wrong and the court does retain a discretion to add GBRE as a party, should the discretion be exercised?  As regards the considerations to be taken into account, rule 5(2) provides some guidance—if the court “thinks it just to do so”.

32.  Applying that criterion, I have no hesitation in concluding that it would not be just to do so in the present case. 

33.  In this regard, I consider it relevant to take into consideration the conduct of GBRE and the plaintiff considered in detail in the February Decision to which reference should be made.  (I need only to highlight the unsatisfactory features of both the funding agreement and the assignment, the plaintiff’s reluctance in providing documentary evidence to substantiate their reasons for maintaining that the assignment was not champertous, the absence of any pre‑existing commercial relationship between the plaintiff and GBRE leading to the ineluctable conclusion stated in §31 of the February Decision.)

34.  Not only did GBRE see fit to engage in champertous conduct, it made decisions in litigation strategy that (in the absence of evidence to the contrary) could not but have been deliberate and intentional.  Then, on the eve of the substantive hearing, when the possibility of the assignment being found to be champertous somehow struck home, surprisingly, it was able to successfully ‘re‑negotiate’ the division of the spoils with the plaintiff (improving its share dramatically from 10% to 50% of the proceeds) to give the assignment as amended a veneer of reasonableness.

35.  In reality, it could only have been a last‑ditch attempt to salvage the assignment and that the plaintiff and GBRE must have appreciated was champertous.  Putting it mildly, it would take some convincing that the Deed of Amendment was a genuine commercial transaction negotiated by parties at arm’s length.  The whiff of collusion cannot easily be dispelled particularly in the absence of any evidence as regards the reasons for the Deed of Amendment.  All that goes to show that GBRE’s conduct was nothing but deliberate and considered.

36.  A claim for professional negligence made against professionals whose professional reputation and, possibly, livelihood are at stake is a serious matter.  It should be made as promptly as possible and prosecuted with diligence and despatch.  It is neither a game to be played nor an exercise in litigation strategy to be indulged in for the purpose of extracting a settlement offer.  It is entirely unsatisfactory for professionals to have the shadow of such proceedings cast over them for a long period of time. 

37.  That GBRE and the plaintiff have been dilatory in the prosecution of these proceedings is undeniable: the writ was issued on the eve of the expiration of the six‑year limitation period and even then it not served until a year later.  When challenged, it was resisted with vigour.  As is apparent from the February Decision the transactions/conduct in which they have engaged are at best questionable.

38.  GBRE now seeks an indulgence from this court.  If the discretion were exercised in its favour, the trial would still be a few years off.  It would mean that the defendants would have to face very stale claims.  As of the present, the claims already concern events that occurred some nine years or more ago.  By the time of a trial, the claims would be staler.  That would hardly be conducive to a fair trial or in the interests of justice.  In so far as it is said that the defendants would benefit from a windfall if the court were to refuse to exercise its discretion, it is a result that GBRE itself could have avoided or prevented.  It is not deserving of this court’s sympathy.

The alternative argument: Order 20, rule 5(3)

39.  The court has power under this rule to ‘correct’ the name of a party if is shown that (i) there was a genuine mistake; (ii) the mistake was not misleading; (iii) the mistake was not such as to cause reasonable doubt as to the identity of the person intending to sue; and (iv) that it would be just to allow the amendment: The “Sardinia Sulcis” [1991] 1 Lloyd’s Rep 201 at 205‑6.

40.  Examples of a ‘genuine mistake’ where Order 20, rule 5(3) was held to apply include Evans Constructions Co Ltd v Charrington & Co Ltd [1983] 1 QB 810 (solicitor’s error in overlooking an assignment of the reversion from the landlord to another company within the group during the currency of the lease and suing the original landlord) and Thistle Hotels Limited v Sir Robert Mcalpine & Sons and Sir Robert Mcalpine & Sons (North Eastern) Limited [1989] CA Transcript, 328 (solicitor’s mistake not in the identity of the party intending to sue—the solicitor having always intended to bring proceedings on behalf of the proprietors of the hotel and the employer of the contract—but a mistake that related to the name of that party who intended to sue).

41.  In International Bulk Shipping and Services Ltd v Minerals and Metals Trading Corp of India [1996] 1 All ER 1017 (“IBS”), the English Court of Appeal held (at 1026 b‑c) that cases such as Evans Constructions and Thistle Hotels establish the distinction between the ‘identity of the person intending to sue’ and the name of that party.  A mistake as to the latter can be corrected, but as to the former not. 

42.  Further, as Evans LJ explained (at 1026e) it was established in The Ailos [1983] 2 Lloyd’s Rep 201, that

“… where there is no mistake as to the name of the plaintiff or as to the identity of the party intending to sue but only an error as to the rights of the correctly identified party the rule does not apply.”

43.  Mr Dawes submitted that the present case falls squarely within that principle.  The mistake or error involved here was a mistake as to the rights of the plaintiff (that the assignment was valid) and not its identity.  Here, there was no mistake as to who should be substituted as plaintiff.  It was a clear and conscious decision.  Tellingly, in the present case, there is no evidence of the relevant circumstances giving rise to the error or causing the error to arise: contrast Evans Constructions and Thistle Hotel.

44.  While it is true that the new approach under CPR 19.5 is more liberal, the IBS principle remains valid where the old rules  still apply: see Insight Group Ltd v Kingston Smith [2013] 3 All ER 518.  Since there is no Hong Kong counterpart to CPR 19.5, the new approach (under CPR 19.5) is not relevant for present purposes.  Thus, decisions such as that in Morgan Est (Scotland) Ltd v Hanson Concrete Products Ltd [2005] 1 WLR 2557 (CA) do not assist.

45.  As I am of the view that the IBS principle applies, it must follow that the present case does not fall within Order 20, rule 5(3).

46.  In any event, I do not consider it ‘just’ to allow the amendment in the circumstances of the present case.  The conduct of GBRE unjustifiably incurring a debt as a means of converting the plaintiff into GBRE’s creditor for the purpose of the assignment is not conduct that should be encouraged.  It was said (relying on a dicta of Ribeiro PJ in Unruh v Seeberger (2007) 10 HKCFAR 31 at §95) that the court’s finding that the funding agreement was also champertous is irrelevant because it is not a defence to an action or ground to stay to show that the plaintiff has been supported by a third person in an arrangement which constitutes maintenance or champerty. However, it is a defence for a defendant to show that the plaintiff has obtained a cause of action from a champertous assignment.

Inherent jurisdiction

47.  As a fall back position, Mr Wong submitted that justice requires this court to exercise its inherent jurisdiction to reinstate GBRE as the plaintiff.

48.  If I am correct on there being an issue of limitation, there is no question of the court exercising its inherent jurisdiction because its exercise necessarily would contravene the statutory provisions on limitation and that is not permissible: Re Hawkins Development Ltd [2010] 1 HKC 131 at §17.

49.  Further, as I am of the view that the court’s discretion under Order 20, rule 5(1), (assuming, contrary to my view, that such discretion exists,) should not be exercised to reinstate GBRE as plaintiff for the reasons already given, the same answer must apply to the exercise of its inherent jurisdiction.

Conclusion

50.  Accordingly, the joinder application falls to be dismissed.  There is to be an order nisi of costs in favour of the 1^st and 2^nd defendants.