JOLLYMEX N.V. v. JOLLYBABY INTERNATIONAL LTD

HCA828/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 828 OF 2006

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JUDGMENT

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1. On 9 February 2007 Master Kwan ordered :

“1.   The Plaintiff do give security in the sum of HK$600,000.00 for the Defendant’s costs by way of bank guarantee within 28 days from the date of the Order i.e. on or before 9^th March 2007 with liberty to apply;

2.    in the meantime all further proceedings be stayed;

3.    in default of such security being given, the Statement of Claim be struck out and judgment entered for the Defendant with costs;

4.    liberty to the Defendant to apply for further security; and

5.    the Plaintiff do pay the Defendant’s costs of this application with Certificate for Counsel.”

The plaintiff now appeals that order.

Background

2. The plaintiff (Jollymex N.V.) and the defendant (Jollybaby International Limited) are both companies respectively registered in Belgium and Hong Kong and are involved in the children’s toy industry.  They have had dealings since as early as 1992 and it would appear that for a number of years the plaintiff was a distributor of the defendant’s products primarily in Europe.  In December 2004, they entered into a licence agreement in Hong Kong which gave to the plaintiff the exclusive right to distribute the defendant’s products in various European countries for a period which was to conclude on 31 December 2007 (“the licence agreement”). 

3. In consideration of the licence agreement a sum of US$840,000 was to be paid to the defendant by way of :

(i)      a set-off of US$300,000 against an outstanding debt owing by the defendant to the plaintiff; and

(ii)     three payments of US$180,000.  The first payable on the signing of the licence agreement and the second and third on 31 December 2005 and 31 December 2006 respectively.  The second and third payments were to be secured by way of a bank guarantee.

The licence agreement provided inter alia that it could be terminated by either party upon there being a material breach of its terms and that any amount unpaid upon termination would become due and payable.

4. Other than the matters referred to in paragraphs 2 and 3 above, it is not necessary for me to go into any detail of the terms and conditions of the licence agreement.  It suffices for the purposes of this judgment to observe that in 2005 the defendant became aware that several major retailers in France were selling goods which it alleged infringed its intellectual property rights.  The defendant commenced proceedings in France against those retailers who in turn joined the plaintiff as a third party to those proceedings. 

5. On 31 July 2006, the defendant purported to terminate the licence agreement on the basis, that the plaintiff had provided the allegedly infringing items to the French retail outlets and had done so in direct contravention of the defendant’s copyright and/or intellectual property rights.  As a consequence the plaintiff commenced proceedings in Hong Kong seeking, inter alia, specific performance of the licence agreement and alternatively damages for breach of the licence agreement together with the repayment of the amounts paid pursuant to the licence agreement.  The defendant counterclaimed seeking a declaration that its termination of the licence agreement was valid and for the payment of the balance of amounts due under the licence agreement.

6. As it transpires by the time these proceedings came before me and by reason of the terms of the licence agreement which required that the second and third payments of US$180,000 each be secured by way of bank guarantee, the defendant has been paid all amounts due under the licence agreement. 

This appeal

7. Order 23, rules 1(1) and (3) of the Rules of High Court provide that the plaintiff who is ordinarily resident out of the jurisdiction may be ordered to give security for costs. 

8. It is common ground that an order for security for costs is in the unfettered discretion of the court.  It is equally common ground that the matters which can properly be taken into account when exercising that discretion will vary from case to case.  It is accepted that when a plaintiff is ordinarily resident out of the jurisdiction and has no fixed assets in the jurisdiction the court would be inclined towards making an order to provide for the security for the costs of the defendant.

9. In the instant case, the security for costs awarded by the Master were limited to a period in time up to and including discovery.  The reason for this is directly referable to the fact that the outcome of the proceedings in France will have a significant bearing on the plaintiff’s case in Hong Kong.  Very sensibly the parties have agreed to suspend the proceedings in this court until such time as the outcome of the proceedings in France are known.  Mr Registrar Chan made an order to give effect to that suspension on 29 September 2006 and gave his reasons for so doing.  Nevertheless the defendant says, and the Master agreed, that it was appropriate to order the plaintiff to provide security for costs incurred up to and inclusive of the completion of discovery. 

10. In the instant proceedings, there are no assets in Hong Kong upon which the defendant could claim in the event that an order for costs in its favour were made.  It is accepted by both counsel that the principles enunciated in Porzelack KG v. Porzelack (UK) Ltd [1987] 1 WLR 420 and Keary Development Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 are applicable.  In Porzelack, at page 422H, the Vice Chancellor said :

“The purpose of ordering security for costs against a plaintiff ordinarily resident outside the jurisdiction is to ensure that a successful defendant will have a fund available within the jurisdiction of this court against which it can enforce the judgment for costs.  It is not, in the ordinary case, in any sense designed to provide a defendant with security for costs against a plaintiff who lacks funds. …”

He went on to say at page 423B :

“… it seems to me that I have an entirely general discretion either to award or refuse security, having regard to all the circumstances of the case.  However, it is clear on the authorities that, if other matters are equal, it is normally just to exercise that discretion by ordering security against a non-resident plaintiff. …”

11. In giving the judgment of the court in Keary, Peter Gibson LJ said at 540D :

“In considering all the circumstances, the court will have regard to the plaintiff company’s prospects of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure (see Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074 at 1077, [1987] 1 WLR 420 at 423 per Browne-Wilkinson V-C). …”

12. In Giuseppina Tagliani v. Lee Wai Yin, Elvis, HCPI 878/2003 (unreported), Muttrie DJ said :

“5.   The principles governing the ordering of security for costs against a non-resident plaintiff were usefully summarised, by reference to the English and Hong Kong authorities, by Deputy Judge Carlson in Elecvision Inc. v. Achiever Industries Ltd [2003] HKLRD 60, at paragraphs 9 and 10.  Put briefly, it is prima facie unjust that a foreign plaintiff, who is more or less immune against costs if he is unsuccessful, should be allowed to proceed without making funds available within the jurisdiction, against which any costs order against him may be executed.  However, the court has a general discretion to award or refuse security having regard to all the circumstances of the case.

6.    The principles by which the court should exercise that discretion were summarised in Keary Developments Ltd v. Tarmac Construction Ltd[1995] 3 All ER 535, by Peter Gibson J at pp.539h-540j and adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461, at 464A-F.  They are :

‘(1)    The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.

(2)     The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

(3)     The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

(4)     In considering all the circumstances, the court will have regard to the plaintiff company’s prospects of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

(5)     The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

(6)     Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.’”

13. Mr Thomas Lee, counsel for the plaintiff, initially sought in his written submissions to argue that the claim for the repayment of the final instatement of US$180,000 came within the observations of the Vice Chancellor in Porzelack when he said at page 423E :

“Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then, that is a matter that can properly be weighed in the balance.  Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed…”

14. However in his oral submissions Mr Lee no longer advances that position.  Given the authorities that concession was, I believe, in all of the circumstances entirely appropriate.

15. Having resiled from the “strength of the plaintiff’s” case argument, Mr Lee submits that the security ought not to be ordered when the issues to be fully litigated in the counterclaim are the same as those in the plaintiff’s case.  I am referred to B J Crabtree (Insulation) Ltd v. GPT Communication Systems Ltd (1990) 59 BLR 43 wherein it is said :

“…. Where the defendant who is counterclaiming seeks security for costs which he will incur in connection not only with the defence of the claim but also in connection with the prosecution of the counterclaim the effect of an order for security is not to protect that defendant from incurring those costs without an unacceptable risk of not recovering them since he will incur such costs with no certainty of recovering them.  In these circumstances the purposes of the statute are not met by an order for security for costs.  The principal point is the further step: that the plaintiff’s claim were to be stayed, it might nevertheless turn out on the investigation of the counterclaim that it was a good one.”

In response to this Mr Beresford points out that the defendant has already terminated the licence agreement and has been paid all sums due including the 3^rd payment of US$180,000 in which case the counterclaim is rendered substantially academic.  He observes that if the plaintiff does not provide security for the defendant’s costs then it is likely that this will be the end of the matter insofar as the counterclaim is concerned.  I accept that this is so.  

16. In support of this submission, the plaintiff relies on Nasser v. United Bank of Kuwait [2002] 1 WLR 1868.  As Mr Beresford rightly points out that the assistance to be obtained from Nasser is significantly limited by reason of the fact that the primary issue there was the impecuniosity of the plaintiff and the attendant complications that might arise from discriminating against a plaintiff because of that.  In the instant case, it is not suggested for one moment that the plaintiff’s claim will be stifled by any order for security for costs. 

17. I also note Mr Lee’s observations in addressing the matter before me that the essence of the plaintiff’s claim against the defendant must of necessity now be amended to focus almost entirely on the issue of damages said to arise from the improper termination of the licence agreement by the defendant.  This, he accepts, is so given that the licence agreement is due to expire at the end of this year and the plaintiff have been precluded from exercising its rights since the termination by the defendant. 

18. Mr Lee then invites me to consider the following.  He says that based on the material before me, which includes an opinion from a firm of solicitors in Belgium where the plaintiff is resident, that an order from this court against the plaintiff can be readily registered and enforced in that jurisdiction.  He goes further to say that I should conclude that any costs to be incurred by the defendant in the registration and enforcement of such an order, were it made, would in all of the circumstances be modest when compared with the onerous obligation to be placed upon the plaintiff by requiring it to provide security for costs in Hong Kong.  That is to say that I should not make an order for security for costs because the defendant can readily register such an order were it to be made and have it enforced in Belgium.  The difficulty with this argument, as I perceive it, is that it requires me to assume that the registration and enforcement of the proceedings in Belgium could proceed expeditiously and with relatively little cost to the defendant.  I am unable to conclude this on the basis of any material before me.  What is the more significant, in my opinion, is that the obligation imposed on a plaintiff by an order for security for costs is specifically designed and intended to bring funds within the jurisdiction where an order can be enforced.  Whilst the authorities acknowledge that ease of registration and enforcement are matters that can properly be taken into account they are not decisive, see Porzelack,page 426D.  

19. In support of the argument that the ease of enforcement of a costs order in Belgium is a relevant matter to consider in the exercise of my discretion.  Mr Lee refers me to, amongst other cases, Thune and Another v. London Properties Ltd [1990] 1 WLR 562.

20. In Thune, the Court of Appeal accepted that a judge in the exercise of his discretion, whether to make an order for security for costs, is properly entitled to take into account the ease of enforcement of such an order in the jurisdiction where the plaintiff is ordinarily resident.  They did, however, qualify their observations by adding the proviso that this alone would not be decisive and a judge should not ignore other matters which were material. 

21. Mr Lee submits that an important factor considered in Tagliani was the relative ease of enforcing an order for costs in the jurisdiction where the plaintiff was resident and that the circumstance of the instant case are comparable with Tagliani.  I do not agree.  

22. In Tagliani reference was made to the fact that there was a reciprocal enforcement arrangement between Singapore which was the residence of the plaintiff and Hong Kong.  The Deputy Judge rightly acknowledged that this was a matter that could be taken into account in the balancing exercise.  It is to be noted that the fact that there was a reciprocal agreement was not argued as a ground for refusing security.  In Aeronave S.p.A. v. Westland Charters Ltd [1971] 1 WLR 1445, Lord Denning MR held that the existence of a reciprocal agreement would not of itself be a justifiable ground for refusing security. 

23. In the final analysis, the most significant issue for the Deputy Judge in Tagliani was the fact that the plaintiff’s personal circumstances were such that to provide security in the amount claimed by the defendant would have stifled her claim. 

24. One of the other matters relied upon by Mr Lee in support of the above submission is the fact that handed to me, and to counsel for the defendant, is an undertaking given by the plaintiff to this court that they would not seek to disturb or challenge in the Belgian courts any order for costs made at the conclusion of these proceedings.  I do not consider that this advances the matter.  The defendant would still have to go to a foreign system of law, to use a foreign language to obtain redress and incur costs in so doing.  There is no material upon which I can assess the merits of the undertaking even if I were to consider it relevant.  

25. The plaintiff invites me to conclude, on the basis of the material before me, that the plaintiff has more than sufficient assets in Belgium to comply with any order for costs which may be made by this course in the fullness of time.  I am afraid I cannot on the basis of the material at hand come to that conclusion.  Whilst it is true to say that there are fixed assets appearing in the balance sheet of the plaintiff’s company for the financial year 2005 which on the basis of a conversion would amount to figures in the vicinity of HK$1 million.  That figure does not, in my opinion, enable me to come to the conclusion that Mr Lee urges.  I accept that whether or not the plaintiff has assets outside of the jurisdiction upon which a claim could be made is relevant but is to my mind, one factor only in the balancing exercise.  What is the more important issue is the obligation to bring the security for costs “within the jurisdiction”.

26. In the course of his submissions, Mr Lee seeks to persuade me that all of the matters in issue between the plaintiff and the defendant could more properly be resolved in the proceedings in France.  I am afraid I fail to see the relevance of this.  It is to be noted that defendant did not commence proceedings in Hong Kong against the plaintiff.  It did not need to.  It did that which it was entitled to, namely terminate the licence agreement.  Conversely there was no basis upon which the plaintiff could take proceedings in France to enforce the licence agreement.  It had no choice but to commence the proceedings in Hong Kong and, upon doing so, it assumes an obligation on the issue of costs.

27. There were a number of other matters addressed in the course of argument before me.  These can be dealt with briefly.

28. It is said by Mr Lee that there is no basis for drawing an adverse inference that the fact that the directors of the plaintiff company in Belgium are themselves companies.  I do not draw such an inference.  Mr Lee urges upon me that I could and should properly conclude that any costs or inconvenience incurred by the defendant in enforcing an order for costs in Belgium would be significantly less than the $600,000 sought by way of security in this jurisdiction.  I am unable to say on the basis of any material before me what costs would be required to enforce a judgment from this court in Belgium.

Quantum

29. Mr Lee has invited me to conclude that the estimate of costs is grossly inflated and therefore I should, if I were minded to make an order, to take that into account.  Whilst I have considered the matters to which he refers, I am satisfied that the amount claimed is reasonable. 

30. I am told by Mr Beresford that at the hearing before the Master certain concessions were made which confirmed that the original draft bill of costs was inaccurate and that by the time that the matter was heard and determined by the Master there was a clearer picture as to the number of hours actually claimed.  The original claim for 100 hours’ work with respective to the preparation of the affidavit of document had by that time being reduced to some 54 hours.  Likewise, the claim for translation expenses had not been incurred and was not included.  The Master, having concluded that the proper amount for security was $800,000 then in the exercise of her discretion reduced that to $600,000.

31. Both counsel accept that I am entitled to bear in mind the experience of the Master in dealing with these matters and to take this into account.  This I do.  I am satisfied that the amount ordered by the Master was in all of the circumstances entirely appropriate and I do not intend to interfere with it.

32. Mr Lee further takes issue with the form of the order made by the Master to the effect that which is paragraph 3 :

“in default of such security being given, the Statement of Claim be struck out and judgment entered for the Defendant with costs”

33. Mr Beresford quite properly refers me to the unreported decision of the Appeal Committee of the Court of Final Appeal in FAMV No. 21 of 2004.  Mr Justice Ribeiro in that case indicated that the form of the order as made by the Master in the instant case is the more appropriate.  He observed that it is for the court to specify the time within which security had to be given, staying the proceedings in the meanwhile and providing for the action to be dismissed if security was not given within the time stipulated.  When pressed as to why it would be an order should be made otherwise Mr Lee suggested that it would appropriate for us to send a message to his client to the effect that he was not being shut out.  I fail to appreciate how this could possibly be relevant or indeed appropriate.  There has to be a conclusion to proceedings and the orders made by the Master in all of the circumstances are entirely appropriate.

34. The cases to which I have been referred state clearly and unambiguously that it is for me to exercise my discretion after the the threshold test has been satisfied.  In the instant case it is not disputed by counsel for the plaintiff that :

(a)      the plaintiff is ordinarily resident out of the jurisdiction;

(b)     the plaintiff has no assets in the jurisdiction; and

(c)     an order for security for costs is usually granted against the non-resident plaintiff if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.

I have considered all of the matters advanced by both counsel and am satisfied that security should be ordered.  

35. For the reasons given, the appeal is dismissed. 

(1)     I order that the Order of Master Kwan made on 9 February 2007 which I suspended on 7 March of this year stand save that the words “within 28 days of the Order i.e. on or before 9^th March 2007” be deleted and the words “on or before 4 April 2007” be inserted. 

(2)     The plaintiff do pay the defendant costs of this appeal. 

(3)     Liberty to apply.