DRACCO NETHERLANDS B.V. v. SIMBA TOYS GMBH & CO. KG

CACV 175/2017

[2018] HKCA 75

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 175 OF 2017

(ON APPEAL FROM HCA NO. 304 OF 2014)

________________________

________________________

________________________

J U D G M E N T

________________________

Hon Cheung JA (giving the Judgment of the Court) :

I. Security for costs

1.1.   The plaintiff is a non-resident, being incorporated under the laws of the Netherlands.  It commenced the present action in Hong Kong against the defendant who is also a non-resident, being a limited partnership with limited liabilities incorporated under the laws of Germany.  

1.2.   The defendant applied for security for costs against the plaintiff and the master ordered security to be provided by the plaintiff in the sum of HK$500,000.  On appeal by the plaintiff to Bebe Chu J, the order for security was set aside.  The defendant now appeals to this Court.  

II.  The Judge’s decision

2.1.   The Judge summarised the parties’ case, namely, the plaintiff claims against the defendant for breach of a licensing agreement and the defendant counterclaims against the plaintiff for breach of quiet enjoyment of the licensing agreement.  The plaintiff confined its case to the defendant’s breach of Clauses 11(a) and (d) of the licensing agreement.  She held that :

‘ 47. At this stage, having considered the material before this court and on a broad brush basis, I am of the view that P does have a bona fide or genuine claim against D, and on the present available evidence, I am unable to say that P’s case in so far as the D’s alleged breach of Clauses 11(a) and/or (d) does not have a good prospect of success.’ (emphasis added)

2.2.   The Judge then considered the defendant’s counterclaim and held that :

‘ 50. Having considered D’s counterclaim, the main issue would still be whether P was entitled to give notice for the Extraordinary Termination and whether D was entitled to sell after the Extraordinary Termination. I am of the view that there is overlap between P’s claim and D’s counterclaim, and the hearing of the counterclaim would mean that substantially all of the matters raised in P’s RASOC [Re-Amended Statement of Claim] would have to be fully investigated and litigated.’

2.3.   Dealing with the exercise of discretion, the Judge specifically referred to the following :

‘ 51. It has been said that the court should be slow to exercise its discretion to order security against a plaintiff where to do so would effectively be tantamount to providing security to the defendant for the prosecution of its counterclaim.

52. It has also been said that where both the plaintiff and the counterclaiming defendant reside out of the jurisdiction, and the counterclaim arises out of the same transaction and raises the same basic issues as the claim, both parties should be treated alike in relation to security for costs, since it would be mere chance which party would be plaintiff and which defendant, and therefore the court should order the plaintiff to give security for costs in respect of the claim, and also order the counterclaiming defendant to give security for costs in a similar amount in respect of the counterclaim.

53. Mr Grossman submitted that although P could also seek security from D, there was not much point in both parties providing security, and that the more appropriate approach in the circumstances of the present case would be neither has to provide security for costs.’ 

2.4.   The Judge also referred to the reciprocal enforcement procedure entered between the Kingdom of Netherlands and Hong Kong under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319) (‘FJREO’).  She held that :

‘ 61. Even though the Netherlands does not have a common law system, in light of s 3 of FJREO, I cannot assume that there are going to be difficulties for enforcement in the Netherlands that are particular to that country. There has been no sufficient evidence in any event to this effect.

62. The burden rests with D to show that it is just to require P to provide security.’

2.5.   The Judge concluded that :

‘ 65. Having considered all the above, and all the circumstances of this case, with respect to the Master, I have come to a different view, and I am not satisfied that it is just to require P to provide security in the present case. I am therefore prepared to allow P’s appeal.’

III.  Our view

1)  Appeal on exercise of discretion

3.1.   This being an appeal against the Judge’s exercise of discretion, the well-established principle is that this Court will not exercise the discretion afresh unless the discretion was wrongly exercised in the first place due to, for example, the judge had erred on principle, or had ignored relevant considerations or took into account irrelevant ones or where the conclusion was plainly wrong.

3.2.   In this case we would respectfully say that the discretion was wrongly exercised by the learned Judge. 

3.3.   First, the Judge had erred on principle when she said that the plaintiff has a bona fide or genuine claim against the defendant and that on the present available evidence she was ‘unable to say that the plaintiff’s case ..... does not have a good prospect of success’.  The starting point for an application for security for costs against a non-resident plaintiff is that security is usually ordered because if the plaintiff eventually fails in its claim, the defendant may have difficulties in enforcing the costs order in his favour against the unsuccessful plaintiff.  The situation where the Court will not exercise the discretion against the plaintiff is where the plaintiff can demonstrate that he has a high prospect of success in its claim.  The fact that a plaintiff has a bona fide or genuine claim does not mean the plaintiff has a high prospect of success.  Further the Judge did not find the plaintiff has a high prospect of success, rather she put the matter in a negative way by saying that she was unable to say that the plaintiff does not have a good prospect of success.  This does not accord with the established principle and if the position is as found by the Judge, then this is not a relevant consideration for not ordering security.

3.4.   Second, when the Judge said that there is an overlap between the plaintiff’s claim and the defendant’s counterclaim and the hearing of the counterclaim would mean that substantially all the matters raised in the plaintiff’s claim would have to be fully investigated and litigated, she did not have the benefit which we now have, on the analysis of the vast difference between the plaintiff’s claim and the counterclaim.  As summarised by Mr Cooney SC for the defendant, the plaintiff has raised and the defendant will be obliged to defend five separate and different claims, for a vast number of alleged breaches dating back to 2011, particularized in the Annexures of the plaintiff’s Re-Amended Statement of Claim, for a total claim of EUR 24,832,970 plus general damages.  Of this, the plaintiff’s claims regarding alleged breaches by the defendant relating to sale of products after termination amounts to EUR 16,879,895 plus general damages.  On the other hand, the defendant’s counterclaim is confined to breach of an implied term of quiet enjoyment causing loss in the last quarter of 2013 in the sum of EUR 2,613,511.  The overlapping between the parties’ respective claims and counterclaims is not to the extent as mentioned by the Judge but rather substantially less.  Had this point been properly taken into account again, it will not be a relevant factor in favour of the plaintiff.

3.5.   As to the question whether security should be ordered when both parties are non-residents claiming against each other and by chance that one of them managed to commence the action first, Lawton LJ in The Silver Fir [1980] 1 Lloyd’s Rep. 371, held that in such a situation and where both had applied for security for costs against each other, both should be treated alike.  The result being in that case each party was ordered to pay security for their respective claim and counterclaim.  It does not mean that the Court will not order security against one party or against each other. Further the present case is different in that the plaintiff had not applied for security against the defendant who has put forward a counterclaim.

3.6.   Third, the Judge had wrongly taken into account the reciprocal enforcement provisions under the FJREO.  The reliance of this provision was only made at the hearing before the Judge.  Clearly, in order for the defendant to meet this point, he was entitled to adduce evidence in the nature of Netherlands law on how a Hong Kong judgment is to be enforced in the Netherlands against the plaintiff.  While the burden rests with the defendant to show that it is just to require the plaintiff to provide security, plainly the defendant must be given an opportunity to adduce evidence on the operation of reciprocal enforcement of judgments in a foreign country.  It was premature for the Judge to say that :

‘ 61. Even though the Netherlands does not have a common law system, in light of s 3 of FJREO, I cannot assume that there are going to be difficulties for enforcement in the Netherlands that are particular to that country. There has been no sufficient evidence in any event to this effect.’

3.7.   Mr Grossman SC together with Mr Chung for the plaintiff argued that the Judge had properly exercised her discretion having referred to all the relevant principles and considered all the circumstances of the case. In our view this is not good enough because it oversimplifies how the discretion should be properly exercised in the first place.

2)  Discretion exercised afresh

3.8.   This entitles us to exercise the discretion afresh.  In so doing, the starting point is, of course, the plaintiff is a non-resident and the usual order is to impose security against a non-resident plaintiff.  Apart from what is discussed earlier, the Judge had not made any finding on the plaintiff’s prospect of success of this action.  In our view this is not a case where an assessment of the merits of the parties’ claim and counterclaim can easily be made at this stage.  It is well established that the threshold of demonstrating the probability of success is very high indeed.  The Courts have repeatedly said the practice of going into the merits of the case in an application of this kind is to be deplored, unless it can be clearly demonstrated one way or other there is high probability of success or failure.

3.9.   We have already pointed out that this is not a case where there is a complete overlapping of the claim and counterclaim and the fact that the defendant is also a non-resident will not be relevant in the plaintiff’s favour in deciding whether security should be ordered or not. 

3.10.   In the circumstances, the plaintiff should be ordered to provide security.  The sum of HK$500,000 as ordered by the master was not challenged below.  The amount is for the defendant’s costs up to the exchange of the first list of documents.  However, as there is some overlapping of the claim and counterclaim, we are of the view that this amount should be reduced by one fifth, hence the amount to be ordered will be HK$400,000.

3)  The orders

3.11.   Accordingly, we will allow the appeal, set aside the judgment below and order :

(1)   the plaintiff to pay into Court HK$400,000 as security for costs within 21 days;

(2)   pending payment, the plaintiff’s claim will be stayed; and

(3)   in default of payment, the plaintiff’s claim will be dismissed with costs to the defendant.

IV.  Costs

4.  There will be an order nisi that the defendant is to have the costs of this appeal and below.