PAUL Y MANAGEMENT LTD V. ETERNAL UNITY DEVELOPMENT LTD AND OTHERS

HCA571/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 571 OF 2007

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R U L I N G

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1.  This is an application by the 1^st third party by Summons dated 6 July 2009 seeking an order for a split trial.

2.  The split trial asked for is that either :

(a)  the issue of liability alone be tried first; or

(b) the issue whether the oral Master Agreement existed, its terms and its parties be tried first.

The application by the 1^st third party is supported in its entirety by the plaintiff but opposed by the defendants.

The Litigation

(a) The main action

3.  The plaintiff claims in the main action against the defendants for repayment of a HK$10 million loan and also interests thereon based on a loan deed dated 25 October 2005 (“the Loan Deed”) made between the plaintiff as lender and the 1^st defendant as borrower.  The 2^nd and 3^rd defendants are sued as guarantors of the loan.

4.  There is no dispute by the defendants that a HK$10 million loan was made under the Loan Deed sued on, and that the same has not been repaid to the plaintiff.

5.  In a nutshell what is alleged by way of defence was that the Loan Deed was entered into pursuant to an oral Master Agreement made in June 2005 between the Paul Y. Engineering Group Ltd (“PYE”), a listed company of which the plaintiff is a subsidiary, and the 2^nd defendant whereby PYE agreed to advance loans up to RMB420 million as being funding arrangements for Eternal Real Estate Development Co. Ltd (“ERE”) within 14 months for the purpose of financing a property development project in Beijing known as Jiayu Yuan (“the Project”).

6.  In this respect, the relationship between the defendants and ERE is that the 2^nd defendant is the majority shareholder of the 1^st defendant who in turn is the majority shareholder of the 3^rd defendant and who in turn holds the majority interests in ERE, ERE being the developer of the Project.

7.  It is also alleged by the defendants that PYE was in breach of the Master Agreement in that the loans which it did advance to ERE in respect of the Project fell far short of the promised RMB420 million resulting in the fact that the Project could not be completed on time and thereby resulting in loss and damage.

8.  The defendants aver that the loan under the Loan Deed was part of the promised funding arrangement by PYE under the Master Agreement and that it was at the request of PYE that the defendants entered into the Loan Deed with the plaintiff, who was a subsidiary of the PYE group.  On that basis it is averred that the HK$10 million loan had not fallen due as yet notwithstanding that a time for repayment was stipulated in the Loan Deed.

(b) The third party proceedings

9.  On the same basis as the defence run in the main action, the defendants took out third party proceedings naming PYE as the 1^st third party.

10.  The claim against PYE was on the basis that PYE was in breach of the Master Agreement in that it failed to make the promised amount of RMB420 million loan as funding arrangement for the Project thereby resulting in the Project not being able to be completed on time thus causing loss and damage to the defendants.  The amount of the damage was pleaded to be RMB402.35 million.

11.  In its defence to the third party claim of the defendants, PYE, as its primary case denies the existence of the Master Agreement alleged by the defendants.  The alternative case of PYE as pleaded by way of counterclaim in the third party proceedings is that if the Master Agreement is found to exist by the court as alleged by the defendants, then PYE was not in breach of it, but that it was the 2^nd defendant who was in breach in that he failed to fulfill the conditions for payment, and that even if PYE was in breach of the Master Agreement, the loss suffered as a result of such breaches are not the loss of the defendants and none of them can make any claim against PYE.

12.  For the sake of completeness, it should also be noted that there is also third party claim by the defendants made against the 2^nd third party.  The basis of that claim is that it is alleged by the defendants that under an hotel extension agreement the 2^nd third party is liable to the defendants for RMB40 million but that agreement have been made with PYE to set off that liability against the monies advanced to the defendants pursuant to the Master Agreement including the HK$10 million under the Loan Deed.

13.  By an order of Cheung J dated 1 June 2009, it was directed that the third party proceedings against the 2^nd third party shall only be proceeded with after the outcome of the main action and the third party proceedings between the defendants and the 1^st third party is known.

Applicable principles

14.  There is no dispute between the parties that normal procedure requires the trial of liability and damages together but that the court may order separate trials of the issues of liability and damages where it is “just and convenient to do so”.

15.  However, the White Book at marginal note 33/4/11 also emphasise that an order for separate trials of the issues of liability and damages, by way of exception to the general rule, was only to be made where there was a clear line of demarcation between the issues of liability and quantum and not where they interact upon each other.

16.  It is also not in dispute that the party who seeks such a departure has to demonstrate that it is just and convenient.

17.  In Coenen v Payne [1974] 1 WLR 984, at 988 Lord Denning said :

“I take it, therefore, as the guiding principle that I should not order the issues to be tried separately unless it is just and convenient to do so; by ‘just’ I mean fair to both sides, without one side or the other gaining an undue advantage by a separation, and by ‘convenient’ I mean convenient to both sides and advantageous from the point of view of costs…”

18.  Quite apart from separate trials of the issues of liability and damages, it should also be appreciated that there is a distinction between that and the order of a trial of preliminary issue.

19.  In the case of Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248, the Court of Appeal was concerned with an order for trial of a preliminary issue as opposed to an order for separate trials of liability and damages.

20.  From the judgment of Le Pichon JA in Mai Gou’s case, it can readily be seen that, if anything, a court should be even more cautious to order a trial of a preliminary issue, especially when such preliminary issue involves disputed facts.

Decision

21.  In coming to a decision in the present application, I will need to deal with both limbs of the application.

22.  Dealing first with the second limb, which appears to me to be by far the easier of the two upon which to decide, namely, the trial of the preliminary issue relating to the Master Agreement, as to whether such exists, if so what are its terms and who are the parties thereto, I have no hesitation in refusing that part of the application for the following reasons.

23.  Firstly, that is clearly a preliminary issue involving disputed facts.  As such it is clear from the authorities that there should not be a separate trial for such a preliminary issue, but that all disputed issues should be tried together at the same trial.

24.  Secondly, even if that preliminary issue was decided either way, it would not be a short end to the dispute between the parties since other outstanding issues relating to liability such as the defence of money-lender would still need to be resolved.

25.  For those reasons alone, it cannot be just and convenient to order trial of that preliminary issue alone.

26.  I now turn to the first and the more difficult limb of this application, namely, a split trial on the issue of liability and damages.

27.  As matters stand at present, the main claim and the third party proceedings relating to the 1^st third party are to be tried together.  Therefore the issue of liability would encompass :

(a)  The claim by the plaintiff under the Loan Deed (albeit that there appears to be no onus upon the plaintiff to prove anything on the claim itself by reason of the admissions made).

(b) The defence raised by the defendants to the claim under the Loan Agreement, namely, that the HK$10 million loan was part of the Master Agreement with PYE.

(c) The claim by the defendants against PYE in the third party proceedings for breach of the Master Agreement.

(d) The defence put forth by PYE against the defendants, and the counterclaim by PYE against the 2^nd defendant.  In so far as the counterclaim goes, it also includes the alternative case of PYE which is that any breach of the Master Agreement was that of the 2^nd defendant due to his failure to fulfill the conditions for payment.

28.  It is necessary here to elaborate slightly on the alternative case of PYE which is pleaded in sections C1 to C5 of the Defence and Counterclaim of the 1^st third party.

29.  The relevant part of that pleaded alternative case of PYE was that :

(a)  The Master Agreement was a general framework agreement setting out the broad terms of the agreement between the parties such that it was superseded by, or to be read together with later agreements which included the ‘Blocks A and B Framework Presale Agreement’, the ‘Block C Framework Presale Agreement’, the ‘Clubhouse and Carpark Leasing Agreement’ and the ‘Project Management Contract’.

(b) ERE had executed a Letter of Undertaking dated 22 June 2005 whereby ERE undertook to sell off the units in Block A and B first and that those proceeds from such sales would be paid into a designated bank account to be used first to discharge the construction costs of the Project but for no other purposes.

(c) Under the ‘Blocks A and B Framework Presale Agreement’, ERE was obliged to offer units in Blocks A and B to Galaxy Land before selling to others.

(d) ERE was in breach of both the ‘Blocks A and B Framework Presale Agreement’ as well as the Letter of Undertaking by failing to sell any of the units of Blocks A and B to Galaxy Land and also failing to deposit the proceeds of sales of such units into a designated account for meeting the construction costs.

(d) By reason of such breach, PYE had no obligation to make any payment (whether it be regarded as purchase prices or advances of loan) pursuant to the Blocks A and B Framework Presale Agreement.

(e)  Under the Project Management Contract, ERE refused or failed to award any tenders according to the recommendations made by the Project Manager of Paul Y China, one Liu Peng, and had failed to pay any project management fees to Paul Y China, thereby being in breach thereof which resulted in the construction work not being completed within the stipulated time.

30.  The basis upon which this application for split trial on the issue of liability from that of damages is made by PYE is that the trial on liability alone would only involve factual witnesses from both parties but that the issue of damages would also involve experts on PRC law, accounting experts as well as experts in the field of quantity surveying.  If the issue of liability is found in favour of PYE, then there will be no need for these experts to be involved at all.

31.  Moreover, the estimate length of trial put forward by PYE is a 10-12 days trial only on the issue of liability, but a full trial including the issue of damages will be 20-22 days.  The solicitors for PYE estimate that the legal costs to PYE for a trial only on the issue of liability to be just over HK$2 million whereas a full trial will cost just over HK$6.5 million.

32.  It is on this basis that PYE says it is just and convenient to order a split trial on the issue of liability from the issue of quantum.

33.  Pausing here, I make the observation that such savings both as to costs and time is premised only on the basis that PYE will succeed on the issue of liability as against the defendants.  These savings as to legal costs and time will not materialize if liability is decided against PYE.

34.  There are, however, other considerations which has to be taken into account as well.

35.  Firstly, the alternative case pleaded by PYE in the third party proceedings and upon which its counterclaim is mounted, one aspect of it relates to the causation of damages and loss.  In that respect the demarcation between liability and damages becomes blurred since evidence of such damages and loss will need to be adduced before the court is in a position to determine its causation.  In that sense therefore there is no clear demarcation between the issue of liability and damages, but that those two issue overlap and interact upon each other.

36.  Once it is realized that there can be no clear demarcation over the issue of liability and damages, but rather where those two issues are likely to interact upon each other, then to make the order for split trial on liability and damages may be to invite arguments, difficulties and problems arising in respect of discovery and further interlocutory applications such as whether certain documents or evidence fall within the categorization of “liability” or “damages” and will only generate needless arguments which is of no advantage to anyone.

37.  Moreover, it is likely that the alternative case of PYE will take centre stage as opposed to its primary case when it comes to trial.  There has already been an initial skirmish between the parties when this matter went before the Court of Appeal in CACV16 of 2008 in which the defendants successfully appealed against an order for summary judgment made against them.  When deciding that matter, Cheung JA, giving the judgment of the court, indicated in paragraph 37 of the judgment that there is “almost overwhelming evidence that the parties had indeed entered into a Master Agreement concerning PYE’s promise to advance money to the ER Estate” (i.e. ERE).  Given that indication by the Court of Appeal, it is likely that the major battle at trial between the parties will be over the alternative case of PYE rather than on its primary case.

38.  Secondly, in the earlier part of this Ruling, I have already referred to the fact that there is an order of Cheng J made on 1 June 2009 to the effect that the claim against the 2^nd third party in the third party proceedings after the outcome of the main action as well as the claim against the 1^st third party by the defendants in the third party proceedings is known.

39.  By “outcome” must effectively mean both liability as well as damages since the basis for that order (as can be seen in the written Judgment of Cheung J herein given on 1 June 2009) was the alleged agreement between the defendants and the 1^st third party (i.e. PYE) to set off the RMB40 million liability of the 2^nd third party against the monies advanced to the defendants pursuant to the Master Agreement including the HK$10 million under the Loan Deed.

40.  Given that position, to further order a split trial as now sought by PYE, could in theory mean that there is every possibility that this matter may be separated into three different trials or hearings; one on the liability issue involving mainly the defendants and PYE, the second being the issue of damages if the defendants were to succeed on the liability issue and the third to deal with the claim against the 2^nd third party.

41.  Should that scenario come about, it would be an excessively long time before all the disputed matters between all the parties involved could reach a final conclusion, given the possibility of appeals from each of the three trials or hearings referred to above.

42.  Given all the above considerations, I have come to the conclusion that looking at the entire picture of this litigation, it cannot be just and convenient to make the order for split trial in the manner suggested by PYE.

43.  Accordingly, the application is dismissed.

Costs

44.  There will be a costs order nisi that :

(a)  the 1^st third party pays the costs of this application and the hearing to the defendants in any event; and

(b) the plaintiff is to bear its own costs.