MAGENTA & CO LTD AND ANOTHER v. KOO YUNG SHOU

HCA2047/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2047 OF 2008

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JUDGMENT

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1. On 30 January 2009 Master Hui granted leave to the 1^st and 2^nd plaintiffs to serve the writ of summons in this action out of the jurisdiction in Taiwan on the defendant.

2. The defendant applied to set aside the service of the writ on him in Taiwan by his amended summons dated 24 March 2009.  On 10 July 2009 Master S Kwang dismissed the application.  He also made an order that 50% of the plaintiff’s costs of the application should be paid by the defendant.

3. This is the defendant’s appeal against the order of Master S. Kwang.

4. The 1^st plaintiff is a company incorporated in Hong Kong.  The 2^nd plaintiff is a Shenzen company.  Both the 1^st and 2^nd plaintiffs are in the garment business and are companies controlled by Percy Yung King Chung (“Yung”).

5. The defendant is a Taiwanese businessman with business operations in the Mainland.  He has a factory in Tongxiang near Hangzhou.  According to the defendant, Steve Yim was a sales representative of his factory called Great Pioneer Manufacture (Zhejang) Co. Ltd. (paragraph 4 of his 1^st affirmation).

6. The plaintiffs’ case is that in or about 2007 Yung created a new brand name for jeans called “Jeans Zeven” intended for their use in a new line of fashion.  Trademark applications in respect of logos and the mark “Jeans Zeven” were made in the Mainland by the 1^st plaintiff.

7. The plaintiffs’ claim against the defendant is based on an oral agreement made with the defendant which is pleaded at paragraph 6 of the amended statement of claim (“the Agreement”) as follows :

“ 6.   In or about September 2007, Mr. Yung, on behalf of the 1^st and 2^nd Plaintiffs (hereinafter collectively referred to as “Magenta Group”) reached an oral agreement with the Defendant (hereinafter referred to as “the Agreement”) to co-operate by the Magenta Group and the Defendant in the development, manufacture, promotion, marketing and retailing a new fashion line under the brand of Jeans Zeven (hereinafter referred to as “the Joint-Venture Project”).  By virtue of the Agreement, the followings were agreed by Mr. Yung, on behalf of the Magenta Group, and the Defendant:-..........”

8. Paragraphs 6.1 to 6.14 pleaded the terms of the oral Agreement.

9. As pleaded, it was agreed that the total investment of the Joint Venture Project was RMB¥  4 million of which RMB¥ 1 million would be used as share capital of a new company to be formed in the Mainland by the plaintiffs and the defendant for the Joint Venture Project and RMB¥  3 million would be used as the initial running capital of the Joint Venture Project (paragraph 6.1).

10. The plaintiffs would hold 35% of the shareholding of the Joint Venture Project and the defendant would hold 65% (paragraph 6.2).

11. The profit sharing ratio of the Joint Venture Project would be 43% to the plaintiffs i.e. 35% according to the shareholding plus 8% bonus share and 57% to the defendant (paragraph 6.3).

12. The expertise of the plaintiffs would be deemed as the plaintiffs’ share of initial investment in the Joint Venture Project (paragraph 6.4). 

13. The defendant would pay for the initial capital in respect of the launch of “Jeans Seven” which was preliminarily scheduled for December 2007 (paragraph 6.5).

14. The defendant’s share of the initial investment in the sum of RMB¥ 2.6 million should be paid before December 2007 to a newly formed Hong Kong headquarter under the Joint Venture Project or the 1^st plaintiff for the payment and reimbursements of all the running expenses and design and service fee incurred and paid by the plaintiffs for the Joint Venture Project (paragraph 6.6).

15. Yung should procure the 1^st plaintiff to allot 65% of its shares to the defendant or his designated person so as to transfer 65% ownership in the trademark “Jeans Zeven” to the defendant (paragraph 6.7).

16. The plaintiffs would be responsible for all work in relation to product designs and developments, product sampling, merchandising, manufacturing, shop and brand image and promotion planning of the Joint Venture Project, and the defendant would to be responsible for sales, inventory control and distribution, accounting, budgeting and general administration (paragraphs 6.8 and 6.10).

17. Two new companies would be formed under the Joint Venture Project, one in Hong Kong as the headquarter of the Joint Venture Project and the other in the Mainland and the defendant would be responsible for all matters in relation to the incorporation of these two companies (paragraph 6.11).

18. The Hong Kong headquarter of the Joint Venture Project would be the main vehicle of the Joint Venture Project and would hold and control all the capitals and funds of the Joint Venture Project (paragraph 6.12).

19. The 1^st plaintiff would transfer the “Jeans Zeven” trademarks to the Hong Kong headquarter company of the Joint Venture Project (paragraph 6.13).

20. The Joint Venture Project and the Agreement should be governed by Hong Kong laws and therefore the headquarter company must be set up in Hong Kong (paragraph 6.14).

21. On the plaintiffs’ case, pursuant to the Agreement the plaintiffs and the defendant took the steps pleaded at paragraphs 8 to 8.7 of the amended statement of claim.

22. The evidence also shows that on 1 November 2007 the 1^st plaintiff issued and allotted 65% of its total shares to the defendant’s nominee Ju Tu Lin Feng.  The remaining 35% shareholding in the 1^st plaintiff was in the name of Yung’s wife.

23. Also, on or about 20 December 2007 a new company by the name of Jeans Seven International Ltd was incorporated in Hong Kong with 35% shareholding in the name of Yung and 65% in the name of the defendant.  The plaintiffs’ case is that the 35% shareholding in the name of Yung was subscribed by him as the nominee of the plaintiffs.

24. The plaintiffs’ case is that wrongfully and in breach of contract the defendant failed and/or refused to pay the 1^st plaintiff or Jeans Seven International Ltd his initial share of investment in the sum of RMB¥ 2.6 million or at all by December 2007 or at any time.

25. The plaintiffs claim damages for breach of contract.

26. Master S Kwang dismissed the defendant’s application to set aside the order of Master Hui granting leave to the plaintiffs to serve the writ out of the jurisdiction.

27. At the hearing of the appeal, Mr Ng, for the defendant, relied on two grounds for setting aside the order granting leave to serve the writ out of the jurisdiction:

(1) that the plaintiffs failed to establish a good arguable case against the defendant under O.11, r.1(d)(iii) and (iv) and r. 1(1)(e) RHC; and

(2) that the plaintiffs were guilty of material non-disclosure in their ex parte application before Master Hui for leave to serve the writ out of the jurisdiction.

28. On (1), the main ground relied on was that the plaintiffs failed to establish a good arguable case that it was the plaintiffs and the defendant who were the contracting parties to the oral Agreement relied on.

29. Even though there are disputed issues of fact on affidavit evidence, the plaintiffs must still show that a good arguable case as alleged exists.  A good arguable case is a case with a good prospect of success.

30. Deputy Judge McCoy SC in Continental Mark Ltd v Verkehrs-Club de Schweiz (HCA 7999 of 2000; 31 October 2001) helpfully analysed the relevant authorities on the question of good arguable case.  I respectfully agree with his observations.  At paragraphs 25 and 26 of his judgment he said :

“ 25. The question whether or not the case meets the conditions prescribed for service out of the jurisdiction under Order 11, rule 1 does not involve an exercise of discretion, but a judgment of fact.  The Court must conclude that the plaintiff has a good arguable case, not just a case that could be argued.  It need not be shown that the plaintiff is right beyond all reasonable doubt.  The Court does not try the case upon the affidavits, but must necessarily reach a provisional or tentative conclusion that the plaintiff is probably right, before allowing service outside the jurisdiction to stand; Attock Cement Co. Ltd v. Romanian Bank for Foreign Trade [1989] 1 WLR 1147 (CA) followed in Yee Sang Metal and Building Supplies Co. Ltd v. Taiyo Marine SA [1991] 2 HKC 291 (CA).

26.   A good arguable case is one with a good prospect of success: R. Leslie Deak v. Deak Perera Far East Ltd [1991] 1 HKLR 551 (CA); and see per Godfrey J in United Links International Ltd v. The Price Co. [1994] 2 HKC 617 at 620 F.  But the presence of disputed issues of fact (while being relevant to questions of forum conveniens) shows only the need for a trial, and does not necessarily detract from the conclusion that the plaintiff has shown a good arguable case : Wo Fung Paper Making Factory Ltd v. Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346 (CA).  In showing a good arguable case the plaintiff is not required to meet the standard of proof applicable at trial : disputed facts are not to be tried on affidavit, and the question whether the plaintiff has shown a good arguable case (something better than a prima facie case) is to be decided primarily with reference to the plaintiff’s evidence : Tay Choo Wah v. Singapore-Johore Express (Pte) Ltd [1991] 2 HKC 180 (CA).  Clough JA at 196B emphasised that the jurisdiction of the Court under Order 11, rule 1 (to allow service out of the jurisdiction) is however, not to be lightly exercised.  The plaintiff must satisfy the Court that it has a good arguable case, not merely a case that can be argued.  In essence the Court must reach a provisional conclusion that the Plaintiff is probably right : Yee Sang Metal and Building Supplies Co. Ltd. v. Taiyo Maritime SA [1991] 2 HKC 291 (CA).  There will be issues that the Court cannot obviously or properly resolve on the papers before it.  But the Court must reach a provisional conclusion which necessarily involves some analysis of the weight of the evidence based on the inherent probabilities of the claim, the detail and precision of the claim, the consistency of the claimand the evidence in relation to it and whether it is a bare claim or one plainly supported by independent evidence.  The Court must take into account all the circumstances, all the realities and all the commercial instincts.”

31. It is, in my view, incumbent on the plaintiffs to establish a good arguable case that the Agreement was entered into as alleged between the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand.  That is the case of the plaintiffs on the amended statement of claim and the evidence in support of the ex parte application.

32. In Yee Sang Metal and Building Supplies Co.Ltd v Taiyo Maritime SA [1991] 2 HKC it was held that where there was a disputed question of fact which was essential to the application of O.11, r.1 the judge must reach a provisional or tentative conclusion that the plaintiff was probably right upon it before he allows service to stand on the basis of a good arguable case.

33. Is there a good arguable case that there was the Agreement between the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand?  Are the plaintiffs probably right as to this?

34. Mr Wong, for the defendant, relied on admissions made in a letter from the defendant’s Taiwan lawyer (exhibit YKC-4 to the 1^st affirmation of Yung) when replying to a letter of demand YKC-5.  He relied on admissions contained there that the defendant agreed that 65% of the 1^st plaintiff was to be transferred to him, that Jean Seven International Ltd was to be incorporated in Hong Kong and that after the capital injection, investment was to be made in the new company to be established in Tongxiang.  There was also an admission that Yung had transferred 65% shareholding in the 1^st plaintiff to the defendant’s nominee on 1 November 2007 and that on 20 December 2007 Jeans Seven International Ltd was incorporated in Hong Kong.  There was also an admission that there was an “original agreement” in respect of which the defendant through his lawyer said that Yung was in breach.

35. I would observe that nowhere in YKC-4 is there any admission that there was ever any agreement between the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand.

36. I would also observe that exhibit YKC-4 was in reply to the letter of demand from Henry Chiu & Partners, solicitors dated 13 March 2008 to the defendant (exhibit YKC-5 to the 1^st affirmation of Yung) where the solicitors said that their instructions were that “our clients” had entered into an agreement with the defendant.  “Our clients” was a reference to Yung and the 1^st plaintiff as they stated at the outset of the letter.  It was never asserted that the 1^st and 2^nd plaintiffs on the one hand had entered into an agreement with the defendant on the other hand.

37. I accept that, on the evidence, 65% of the shares of the 1^st plaintiff was issued and allotted to the defendant on 1 November 2007.  I accept also that, on the evidence, 65% of the shares in the new Hong Kong company Jeans Seven International Ltd was issued to the defendant.  It is highly likely that there must have been an agreement made before these steps were taken and it would be unrealistic to suggest otherwise.  However, the contemporaneous documentary evidence shows that the parties to an agreement were more likely to be either Yung and the defendant or Yung’s corporate entities and the defendant’s corporate entities rather than the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand.  This is amply borne out by the exhibits referred to by Mr Ng namely :

(1) exhibit KYS-3 to the 1^st affirmation of the defendant where the participants are said to be “Great Pioneer” and “Magenta”;

(2) exhibit KYS-5, where in one email the participants are said to be “Koo’s party” and “Percy’s party”, and in another email the participants are said to be “Pioneer” and “Magenta”;

(3) exhibit KYS-7, where there is a reference to “Great Pioneer representative” and “Magenta representative”;

(4) exhibit YKC-7 to the 3^rd affirmation of Yung where the participants are said to be “Magenta” and “Great Pioneer International (HK)”;

(5) exhibit YKC-8 where Yung in his email to Steve Yim said :

“To my memory, your first approach was

1)    Magenta can be the majority shareholder,

2)    Your co. will finance the whole project, including suppliers’ payable.”

In another email in exhibit YKC-8 the participants are said to be “Magenta” and “GP”.

38. In my view, the documentary evidence does not show that the plaintiff is probably right in its case that the oral Agreement was made between the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand.  In my judgment the plaintiffs have failed to establish a good arguable case as to this.

39. As a separate and independent ground the defendant relies on the ground that the plaintiffs have been guilty of material non-disclosure in obtaining the ex parte order from Master Hui.

40. The principles governing material non-disclosure in ex parte applications are well known and are not disputed.

41. It is trite that on an ex parte application the court must be informed of all facts which are relevant to the weighing operation which the court has to make in deciding whether or not to grant the order.  All matters which are relevant to the weighing operation must be disclosed (Thermax Ltd v. Schott Industrial Glass Ltd [1981] FSR 289 at 298).

42. The material facts are those which it is relevant for the judge to know in dealing with the application.  Materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers (Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356; Mattel Inc v Tonka Corp [1991] 2 HKC 411).

43. In Mattel Li CJ (as he now is) said at page 430 :

“ But the correct test is not whether the Court would still have decided the same way.  The test is whether these are material facts relevant for the Court to know in dealing with the exercise of its discretion under Order 11.”

44. It is plain that the emails in the exhibits referred to at paragraph 37 above were not disclosed or brought to the court’s attention when making the ex parte application.

45. No explanation has been proffered as to why the emails were not disclosed.

46. Mr Wong, however, submitted that the emails that I have referred to were not material to the application.  I disagree.  It was incumbent on the plaintiffs to satisfy the court on the ex parte application that it had a good arguable case that there was an oral Agreement between the 1^st and 2^nd plaintiffs on the one hand and the defendant on the other hand as that was the case of the plaintiffs.  The emails were, in my view, plainly relevant for the master to know in dealing with the ex parte application and in deciding whether or not to grant the order in the exercise of his discretion. 

47. In my judgment, the court should discharge the ex parte order of Master Hui as there was a failure to disclose all material facts on the ex parte application.  The court’s power to discharge where this has not been done is salutary and necessary for the court’s protection (Mattell at page 430).

48. I allow the appeal and set aside the order of Master S. Kwang.  I discharge the ex parte order of Master Hui.

49. I also make an order nisi that the costs of the application before Master S. Kwang by the defendant’s amended summons filed on 7 July 2009 and the costs of the appeal be costs to the defendant to be taxed and paid by the plaintiffs.