THE INCORPORATED OWNERS OF KODAK HOUSE II AND NO. 321 JAVA ROAD v. KAI SHING MANAGEMENT SERVICES LTD

HCA 711/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 711 OF 2011

BETWEEN

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REASONS FOR DECISION

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The application

1.  This is an application taken out by the plaintiff on 2 August 2012 for the following:

a. Leave to amend its statement of claim as attached to the summons;

b. Specific discovery of certain documents set out in the Schedule of Discovery[1]; and

c. An extension of time to comply with §6 of the order dated 28 June 2012.

2.  The parties have now agreed that 1.a and 1.c will not be hotly contested.  Directions will be given at the end of the hearing.  They will only contest 1.b.

The brief background

3.  For the purpose of the argument on 1.b, I shall adopt the plaintiff’s brief background as follows[2]:

a.   The plaintiff is the Incorporated Owners of Kodak House II and No.321 Java Road, previously known as Kodak House I.

b.   The defendant was the building manager of Kodak House I and Kodak House II common areas, as well as the common area of both Kodak House I and II, referred to as the Development Common Areas (DCA).

c.    At present, the defendant remains the manager of Kodak House II only.  Jones LangLaSalle Management Services Ltd. (JLL) is the manager of Kodak House I and the DCA.

d.   In essence, the issues of this Action relate to:

i.  The failure of the defendant to deliver to the Plaintiff the necessary documents and accounts relating to the DCA following its termination as manager;

ii.  The defendant’s refusal to hand over certain walls enclosing, as well as the ceiling of, certain driveways to JLL, including those installations and fittings thereon, despite having handed over the floor of the same;

iii.  The ownership of the external walls of Kodak House II and whether the defendant had wrongfully permitted their use by a related company.

4.  Counsel V. Lui acts for the plaintiff and Counsel K. Lam acts for the defendant.

Practice Direction 5.4

5.  Before discussion on the main issues, I wish to reiterate my request on the legal representatives to observe Practice Direction 5.4 whereby the applicant should lodge the written skeleton submissions at least 72 hours (excluding Saturday, Sunday and general holidays) before the hearing followed by the respondent within 48 hours before the hearing (excluding Saturday, Sunday and general holidays). I have, in my recent Reasons for Decision of another matter, asked the legal representative to appreciate the court’s busy schedules and that I had to read the materials before the hearing in order to reduce the time of hearing and be able to deliver the well-considered reasons for decision as soon as possible.[3]  Miss Lui’s written skeleton submission, which should be lodged at 10:00 a.m. on 4 October 2012 (Thursday), was only lodged at 5:34 p.m. the same day,7.5 hours late.  This was despite my persistent reminders through my clerk.  Mr. Lam’s written skeleton, however, was lodged within time and I am grateful for his assistance.  The court will not be assisted if there is not sufficient time for consideration of counsel’s skeleton submissions and the relevant documents and authorities. Only if the court has sufficient time to consider the skeleton submissions of counsel, will it be able to make the best use of the hearing to clarify issues and have useful discussions with them.  For this case, the pleadings take 68 pages as seen from Bundle A.  The affidavits take another 42 pages (without the exhibits).  Counsel’s skeleton submissions (exclusive of 8 authorities from Mr. Lam) take another 40 pages.  Under the CJR, the legal representatives have a duty to assist the court in furthering the principal themes of the CJR.[4]  There are costs sanctions as provided in Practice Direction 5.4:

(4) Consequences of Non-Compliance

30. Those not observing or complying with these directions may be called upon to explain such failure and, in the absence of a satisfactory explanation, may be penalized in costs irrespective of whether or not they are the parties who succeed on the application.  Parties are warned that to ensure observance of and compliance with these directions, a party who has breached any of such directions may, despite his success in the application or appeal, still be deprived of all or part of his costs of the application or appeal as a penalty.  Further, such costs penalty may be imposed irrespective of whether or not the breach has resulted in any adjournment of the hearing or any other forms of wastage of time or costs.

6.  I would further consider that for the party who is unsuccessful in the hearing, instead of imposing a sanction of, for example, indemnity costs, which will be unfair for the client, I would consider disallowing or reducing their costs from client.

7.  This morning Miss Lui explains that she only obtained the documents late from her solicitors.  That is why she was unable to lodge her skeleton submissions on time.  Although I have sympathy for Miss Lui, I cannot accept the reason since it is purely the arrangement between solicitors and counsel and they have to ensure that the Practice Direction is complied with. This court will demand strict compliance with the Practice Direction and I will have no hesitation of strictly enforcing the sanctions.  I shall return to this issue at the end of this hearing.

Legal principles

8.  I shall precede the discussion on legal principles with the approach recommended in the Final Report of the Civil Justice Reform.  By Recommendation 80, the Working Party recommended adoption of proposal 29 as the starting point for case management[5]:

Proposal 29

The court should be expected to exercise its case management powers with a view to tailoring an appropriate discovery regime for the case at hand. It should have a residual discretion both to direct what discovery is required – to narrow or widen the scope of discovery required, to include, if necessary and proportionate, full Peruvian Guano style discovery – and in what way discovery is to be given.

9.  The legal principles are trite. In a recent decision by Deputy Judge Sakhrani in Joyce T.Ongsip trading as L.T. Enterprise Co. v. Primatronic Limited HCA611/2010 delivered on 20 September 2012, the learned Deputy Judge has set out the relevant principles, which are apt for the present discussion:

“14. A party seeking an order for discovery must make out a prima facie case that:

(1) the specified document or class of documents exist;

(2) the party against whom discovery is sought has or had the documents in his possession, custody or power;

(3) the documents relate to a matter in question in the action; and

(4) discovery is necessary either for disposing fairly of the cause or matter or for saving costs.

(per To J at paragraph 11 of his judgment in Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & Ors HCA 2197 of 2009, 9 June 2011)

15. As was held in Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd & Ors [1981] HKC 78, even if existence, possession etc. and relevancy were established, discovery would only still be granted if it was necessary for fairly disposing of the cause or matter.

16. It is also useful to bear in mind what Burrell J said in his Decision dated 18 January 2002 in Mariner International Hotels Ltd v Atlas Ltd & another (HCA 10714, 10752 and 10821 of 1998). At paragraph 11, Burrell J said:

“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”.

17. The pleadings in an action define the issues to be tried.

18. I would also refer to what Cheung JA said in Paul’s Model Art Gmbh & Co KG v U.T. Limited & Ors (CACV 139 of 2005; 14 December 2005) at paragraph 25 of his judgment:

“25  The real issue that has been focused at this hearing is whether the documents sought to be disclosed are relevant to the issues in this case between the plaintiff and the 4^th defendant.  In this context the issue must be one identified in the pleadings.  Sun Yuet Tai Ltd v British American Tobacco Co (HK) Ltd (CACV No 95 of 1999).  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action: Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139.”

19. I would also agree with the observations of Deputy Judge Mimmie Chan (as she then was) in Sunny Tadjudin v Bank of America, National Association (HCA 322 of 2008; 22 December 2011) when she said at paragraph 7 of her judgment:

“7. It is also clear that 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. 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 either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.””

10.  I would like to further elaborate the importance of defining the live issues in the action.  Mr.Justice Ma CJHC (as he then was) said in Wing Hang Bank Limited v Crystal Jet International Limited [2005] 2 HKLRD 795, at 799A-F:

“(1) The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues. The passage at paragraph 18/12/1 of Hong Kong Civil Procedure 2004 Volume I sets out the rationale for proper pleadings.

(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues. …”

11.  Also, the plaintiff’s application is under Order 24 rule 7 in respect of certain classes of documents.  The question of what is a class of documents was discussed in Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd & Ors [1981] HKC 78 where the Court of Appeal said:

“What is meant by 'a class of document"? There is no definition in the Rules. It was argued on behalf of the Appellants that the word 'class' is used to enable the Court to order discovery of a group of documents which go to a particular issue. We disagree. In our judgment 'a class of documents' must be classified by its nature. Thus, for example, in Seabrook v. British Transport Commission (7), it was held that the description of the documents of which discovery was required as "correspondence between and reports made by the Defendant's officers and servants relating to the accident" was a sufficient identification so as to form a class. … [6]

These items are all tainted with the same vice. They do not form a class. They merely bear on an issue. Therefore they do not fall within Order 24 rule 7, and we accordingly decline to order discovery in respect of them…[7]

This, as item 3, is unlimited as to time and is in our judgment a fishing request…[8]

In any event, we are of the view that it would be oppressive to order such discovery. [9]”

12.  It can be seen from the decisions of the Court of Appeal that a class of documents must be clearly identified specific class of documents classified by not merely bearing on an issue, but also by its nature and it must not be oppressive. There is also another caution against forcing the deponent to make false affidavit if the document or class of documents are vague. (See Paul’s Model Art GMBH & Co. KGVUT Ltd. & Others – [2006] 1 HKC238)

13.  On the same issue of class documents, Mr. Justice Barma had, in his judgment for Moulin Global Eyecare Holdings Limited (in liquidation) (formerly known as Moulin International Holdings Limited) & Ors. v. KPMG (a firm) HCA118/2007 delivered on 8 June 2010, discussed the proper approach to determine relevance for class documents.  At §15 of his judgment, he said:

‘15. Both parties accepted the approach of Colman J in O Company v M Company [1996] 2 Lloyds LR 347 as the correct approach to adopt. In that case, which concerned a cargo claim for losses arising as a result of an explosion and fire (the cause of which was not known) on board a ship which caused damage to cargo on board the vessel. In that case, Colman J said (at page 350):

“Whether a class of documents as a whole is relevant for discovery purposes must depend upon what information it is reasonable to suppose the documents of the class contain and whether such information may enable the plaintiffs to advance their own case or damage that of the shipowners.  The “case” of the plaintiffs or the defendants respectively can be defined only by looking at the pleadings.  It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and the defence to it in the broadest sense and not to the detailed particulars of either claim or defence.  A document in a defendant’s possession, custody or power which provides information as to a ground not hitherto pleaded in a cargo claim upon which it can be said that they failed to exercise due care of the cargo is just as relevant for discovery purposes as one which contains information as to a ground of want of due care which has already been pleaded.”

16.  Colman J went on to consider the level of likelihood that a document would provide such information that should be required as the threshold for requiring further discovery to be provided, concluding (at page 351) that:

“… the document of class of documents must be shown by the applicant to offer a real probability of evidential materiality in the sense that it must be a document or class of documents which in the ordinary way can be expected to yield information of substantial evidential materiality to the pleaded claim and the defence to it in the broad sense which I have explained. If the document or class cannot be demonstrated to be clearly connected to issues which have already been raised on the pleadings or which would in the ordinary way be expected to be raised in the course of the proceedings, if sufficient information were available, the application should be dismissed.” (the emphasis is Colman J’s)’

Discussion

14.  Bearing in mind the above legal principles, I shall now examine the items in the Schedule of Discovery.

15.  Paragraph 1 of the Schedule of Discovery asks for:

“Books, records and accounts kept by Kai Shing [the Defendant] (as referred to in paragraph 38 of the Witness Statement of Leung Ka Yuk Shirley dated 10 May 2012[10], “Shirley Leung 1”) Documents sought for item 1 shall include, without limitation (emphasis added): (1) the source or underlying records of documents, such as bills, invoices, vouchers, receipts and other documents that relate to the income or expenses items/transactions recorded in such ‘books, records and accounts kept by Kai Shing [the Defendant] (insofar as the same relate to, wholly or in part, the Development Common Areas, the “DCA”) and (2) the DCA Fee Note Documents pleaded in paragraph 8(a) of the ASOC.

16.  Paragraph 2 of the Schedule of Discovery asks for:

“Monthly or periodic or statements of account prepared by the Defendant, showing the management fees (on account of, inter alia or partly, the DCA) (1) billed/demanded; (2) paid and (3) outstanding, overdue as of the date of each of such reports or statements, plus the name of each of the Owners/Units (as defined in the DMC) involved since the Defendant was appointed 1993.

17.  In her skeleton submissions, Miss Lui explains the reasons for §§ 1 and 2 of the Schedule of Discovery.  She sets out the examples of the defendant having failed to keep its accounts and records separately; how it had used common funds to pay for items unrelated to the DCA [43] and that the defendant might have applied a different unit rate for Splendid Sharp, its related company, vis-à-vis the other owners of the Development [54].  At paragraph 58, she says:

“The examples above merely seek to highlight the difficulties faced by the plaintiff and JLL. Without the relevant documents as requested under paragraphs 1 and 2 of the Schedule, the Plaintiff cannot ascertain whether the Defendant had performed its duties as manager of the DCA property.”

At paragraph 64 she says:

“It is simply due to the fact that all latest documents revealed by the Defendant suggest that the latter must possess further records regarding the DCA, that the Plaintiff presses for specific discovery over the books, records and accounts kept by the Defendant.”

18.  I have raised the question why should the discovery be made upon a paragraph of a witness statement instead of the issues as pleaded in the pleadings. Miss Lui explains that since the plaintiff does not have all the account documents, the plaintiff will not be able to plead its case on damages in the pleadings.

19.  I agree with Mr. Lam that the documents under paragraph 1 (1) are not relevant for the trial and it is too wide for a class of documents, amounting to fishing as referred to in Burrell J’s judgment in Mariner International on scatter-gun approach, which is not permissible. Even if we adopt the broader approach as defined in Moulin case, the request cannot be approved because those documents, as I see them here, are not relevant.

20.  At the trial, the issue is not whether the defendant had performed its duties as manager of the DCA property, but whether the defendant was in breach of its fiduciary duty as the agent.

21.  As to paragraph 1 (2), they are the documents referred to in the proposed amendments to §8(a) of the statement of claim and form part of the supporting documents of the books and accounts for the management/administration of the DCA under the prayer (1) of the statement of claim.  Mr. Lam has, in his skeleton[11], raised objections to this request on 3 grounds viz. (a) they are not relevant; (b) they are privileged documents and (c) the plaintiff is not entitled to them.  As explained below, these documents cannot be said to be “expected to yield information of substantial evidential materiality to the pleaded claim” as mentioned in Moulin case, which will require separate proceedings on account enquiry or assessment of damages.  As such, as decided in Moulin case, the request should not be acceded to.

22.  The plaintiff’s claims against the defendant is based upon breach of fiduciary duty for the reason that the defendant, as the agent of the plaintiff, has failed, upon termination as the manager, to deliver up the books or records of account, and other financial records for the management of the DCA for the period when it was the manager.  This is prayer (1) of the plaintiff’s claim.  The defendant has never pleaded that the plaintiff is not entitled to those records.  It only pleaded that it had given the books and records and some of those records as demanded by the plaintiff were simply not in existence[12].  Now with the proposed amendment to §8(a) of the statement of claim, the defendant may plead privilege as one of the defences. This is a matter of fact to be determined by the court at the trial.  Those documents as requested by the plaintiff may be relevant for the assessment of damages only if the plaintiff succeeds in proving the defendant was in breach of trust and had caused damage to it.  Prayer (3) of the statement of claim is for an order for all due account inquiry and an order to pay on taking such account and prayer (12) of the statement of claim asks for an order for damages to be assessed.  If the trial court accedes to the plaintiff’s claims, there will be a separate proceeding under Order 43 of the RHC for taking accounts and those documents are not relevant for the trial.  The statement of claim has not set out the facts in support of the damages to be assessed.  As Miss Lui said in her skeleton argument, those examples were the examples only.This means that at trial, the court will not be able to do the assessment of damages.  This morning, Miss Lui has been able to confirm that this is the reason the plaintiff has also asked for an order for damages to be assessed.  Furthermore, the plaintiff has no factual basisin the pleadings to say that there should be investigation into all the accounts over the whole period during which the defendant was the manager – since 1993 until 2004. The present request is a massive discovery of all the account documents and the supporting documents over the whole period of about 11 years, which cannot be justified and will be wasting costs and time; again, should not be permitted as decided in Deak, Mariner International Hotels Ltdand Paul’s Model Art cases.

23.  The explanations given by Miss Lui this morning clearly show that those issues are not for the trial.  They may be relevant for the account enquiry under Order 43 of RHC or for assessment of damages under Order 37 of RHC only after the Court has made the orders after trial.

24.  The same reasons apply to paragraph 2 of the Schedule of Discovery.  As such it should be disallowed.

25.  Paragraph 3 of the Schedule of Discovery refers to:

Documents evidencing / relating to (1) the payment of the premia payable in respect of each of the insurance policies that the Defendant disclosed and sent to the Plaintiff under the cover of a letter from the Defendant’s solicitors dated 9 June 2012, insofar as such policies covered, inter alia, the Pier (as defined in the DMC) and (2) the Defendant’s recovery/receipt of such premia from the Owners involved.

26.  Mr. Lam submits in his skeleton that the matters are not in issue in this Action.[13]  I agree.  As admitted by Miss Lui, the matters were not pleaded in the statement of claim.  Therefore, they are not relevant for the trial. It is disallowed.

27.  Paragraph 4 of the Schedule of Discovery refers to:

Books, records and accounts, including bills, invoices, vouchers, receipts, “debit notes” and other documents, that relate to the fees/sums (1) demanded and (2) collected and “monthly charges”, “management charges” and electricity charges (3) demanded and (4) collected in respect of “advertising signs” (as referred to in paragraphs 151 and 153 of Shirley Leung 1)

28.  Paragraph 5 of the Schedule of Discovery refers to:

All correspondence (including emails) relating to (1) the topic/matters canvassed in the Defendant’s email dated 18 March 2008 (disclosed in/as item 11 of the Defendant’s List of Documents); and (2) Licence Agreement/letter agreement dated 15 June 2008 (disclosed in/as item 10 of the Defendant’s List of Documents).

29.  Miss Lui has submitted in her skeleton that the documents under these paragraphs cover documents relating to the advertising signs affixed to the external walls of Kodak House II.  She submits that one of the issues is over the ownership of those external walls and whether the defendant has wrongfully permitted the use of the same.  The issue for the trial is therefore the ownership of the external walls. See §§15 & 16 of the statement of claim.  The plaintiff relies upon the Building Management Ordinance (BMO), in particular, the definition of “common parts” to say that the external walls are the common part of the DCA.  The plaintiff further says that the defendant was therefore under a duty to manage the external walls for the benefits of all the owners and as such it should account to the owners all the incomes that it had collected from the advertisements on them.  It claims for an order for the defendant to render to it the true and full account of the dealings with the external walls, with an order for all due account and inquiry and an order to pay the sums due to the plaintiff after the inquiry.[14]

30.  The defendant has disputed that the external walls form part of the DCA by virtue of the application of the BMO.  See §31 of the Defence.

31.  It is clear that the live issue for the court at trial is whether the external walls form part of the DCA by proper construction or interpretation of the BMO.  As such the documents in paragraphs 4 and 5 of the Schedule of Discovery are irrelevant.  They are disallowed.

32.  For the reasons given above, I dismiss all the items under the Schedule of Discovery.

Other directions

33.  On the question of other directions for the amendment of the statement of claim and the extension of time as provided for in the summons, the parties have agreed the following directions:

a.  The plaintiff be granted leave to amend the statement of claim as per the draft attached to the summons with further amendments as per pages 143 to 145 of Bundle B;

b.  The plaintiff is to file and serve the Amended statement of claim within 5 days from the date hereof;

c.  The defendant is to file and serve an Amended Defence within 28 days thereafter;

d.  The plaintiff is to file and serve the Amended Reply, if any, within 28 days thereafter;

e.  The plaintiff shall pay the defendant’s costs incurred and occasioned by the Amended statement of claim in any event;

f.  Automatic discovery of documents shall take place within 14 days after the close of the amended pleadings;

g.  The parties shall obtain Counsel's advice within 28 days thereafter;

h.  All interlocutory applications as may be advised shall be taken out within 14 days thereafter.;

i.  Any party being unable to comply with any of the directions herein shall take out an application for time extension within 7 days after the due date for compliance.

Costs

34.  On the question of costs for this hearing between the parties, Miss Lui submits that the costs should be in the cause as the plaintiff is in a passive position.  I consider that since I have dismissed the plaintiff’s Schedule of Discovery on the reason of they being irrelevant for the trial, the costs should be given to the defendant with a counsel’s certificate, to be summarily assessed at $140,000.00 to be paid by the plaintiff to the defendant within 14 days from the date hereof.  As to the costs between the plaintiff’s legal representatives and the plaintiff, for the reasons I have said that the skeleton submission together with bundles documents for this hearing from the plaintiff is late for 7.5 hours, I decide it is only fair that such costs should be reduced by 25%.

Order

35.  I shall now make an order in terms of paragraphs 33 and 34 respectively.