HONG KONG PRODUCTIVITY COUNCIL v. ZI CORPORATION (H.K.) LTD.

DCCJ17643/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17643 OF 2001

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REASONS FOR RULING

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1. The plaintiff applied for summary judgment under Order 14 of the Rules of the District Court. On hearing the application I gave the defendant unconditional leave to defend. I now give reasons for that decision.

2. The plaintiff was the legal and beneficial owner of 9,999,999 shares in one Telecom Technology Centre Co. Ltd., and the remaining 1 share was held on trust for it. In the beginning of 2000, through the Innovation and Technology Commission, the plaintiff negotiated with the defendant for the sale to it, or an associated company, of all the shares. Agreement was reached and on 21 July 2000 a sale and purchase agreement for the shares was executed between the plaintiff and Zi (Bermuda) Corporation Ltd. ("Zi Bermuda"), and associated company of the defendant.

3. The plaintiff claims that one or two days before the agreement was executed, there was a verbal agreement between a Ms. Cheung on behalf of the plaintiff and a Mr. Lee on behalf of the defendant that the defendant would contribute $200,000 to the legal fees to be incurred by the plaintiff for the sale of the shares, but that the defendant has failed to pay.

4. The defendant has filed a defence denying that there was any such verbal agreement, and pleading in the alternative that if there was, it was entered into by the defendant not on its own account but as agent for Zi Bermuda; or by Mr. Lee on behalf of that company and not the defendant. The defendant also pleads that if there was a verbal agreement it was rendered void by the terms of the sale and purchase agreement. It further pleads that insofar as it is alleged that the agreement constituted consideration for the plaintiff executing the sale and purchase agreement, consideration is denied.

Evidence

5. It appears from the affirmation evidence that originally negotiations were between the plaintiff and the defendant and not Zi Bermuda; the latter was incorporated on 14 July 2000 to hold the shares. The sale price was $25,000,000.00. Some time before the sale and purchase agreement was executed, according to Mr. Lee about a week before, Miss Cheung asked Mr. Lee if the defendant would pay $200,000.00 towards the legal fees which would be payable to Messrs. Slaughter and May, solicitors, for preparation of the agreement. Mr. Lee said that he would refer the matter to the defendant's President, Mr. Blondeau. According to Miss Cheung, Mr. Lee came back to her on about 20 July 2000 and said that the defendant agreed to pay. According to Mr. Lee, Mr. Blondeau never came back to him on the matter, and he never told Miss Cheung that the defendant would pay.

6. Miss Cheung says further that when the time came for execution of the sale and purchase agreement, she asked Mr. Lee if he had brought the cheque for the $200,000.00. Mr. Lee told her that he had forgotten to bring it, but would send it to the plaintiff later. This exchange took place openly, in front of no less than 9 other persons, who were representatives of the parties and their respective solicitors.

7. It appears that Miss Cheung sent an e-mail to Miss Lai at Slaughter and May on 20 July to the effect that she had "successfully convinced Zi Corporation to pay $200.000 to cover part of the legal fees and evaluation study. But, they do not want to reflect this in the agreement. So, the agreement can go ahead as stated.....we should expect a total of $25.2 million from the entire sale".

8. The plaintiff sent the defendant an invoice dated 23 August 2000 for $200,000.00 being a share of the legal expenses. Nothing seems to have happened until mid-2001. On 3 August 2001 the defendant wrote to the plaintiff a letter which appears to deal inter alia with closure of the outstanding invoice. The plaintiff relies on this letter as an admission that the debt was outstanding. The defendant says that the letter must be regarded as a "without prejudice" communication, though it is not marked as such.

"Without prejudice" letter

9. The relevant parts of the letter read

Thank you for taking time to meet with us on the issue of coverage for part of your legal expense for the sale of Telecom Technology Center to Zi Corporation. We presented what we thought would be a beneficial settlement arrangement. Zi will commit to give HKPC $500,000 worth of services within 3 years......

With this commitment and an upfront payment of HK$200,000 to HKPC we could expect a discount of 40% from your normal service charges. With acceptance to the above proposal, HKPC will agree to close the outstanding invoice issued to Zi Corporation on your legal expenses.

10. Mr. Lee in his affirmation says that he and a Mr. Yang of the defendant entered into settlement negotiations with Mr. Yeow of the plaintiff, the purpose of which was "to avoid precisely the situation we are now in".

11. It is argued for the defendant that this letter is clearly written with the intention of compromising a dispute. Though it is not marked "without prejudice" it is not admissible and cannot be used to establish an admission; Rush & Tompkins Ltd. v Greater London Council [1989] 1 AC 1280.

12. It is argued for the plaintiff that the letter looks like a business offer rather than an offer for settlement. There is no evidence that the intention of the author of the letter at the time of writing was that it should be treated as "without prejudice"; there is only his retrospective view, after taking legal advice. Further there was no dispute. I do not quite understand this latter point but it seems to be based on the long delay since the presentation of the invoice.

13. It seems to me that the letter contains an offer to settle the dispute. There are other matters in it too, but that on the face of it is what the letter is about. Mr. Lee's affirmation confirms that intention. Following Rush & Tompkins Ltd. it must be regarded as inadmissible. I therefore disregard it for the purpose of this ruling.

Order 14 Principles

14. Order 14 places the threshold onus on the defendant to show that there is a triable issue. The Court will test the credibility of an affidavit asserting a triable issue against the conduct of the defendant and contemporary documents. See Murjani v. Bank of India [1990] 1 HKLR 586.

15. In Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 Godfrey J.A. said:

"...I would sound a note of caution about Murjani which has come to be cited in almost every case under O 14 or O 86 to justify the plaintiff in asking the court to embark on a mini trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?'. If so, he must have leave to defend, if not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed, it is whether those assertions are believable."

16. Godfrey J.A. again put the matter in a nutshell in Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225:

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine', Order 14 ought not to be applied": see Codd v Delap (1905) 92 LT 510 per Lord Lindley at 511.

17. This does not mean that the court must disregard the background. To the extent that it can look at the defendant's own conduct and the contemporaneous documents, without embarking on a mini-trial on affidavit evidence, Murjani is still good law. Or, as Bokhary JA put it in Re Safe Rich Industries Limited, Civil Appeal No.81 of 1994, unreported, 3rd November 1994 :-

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

18. As Yeung J put it more recently in Ng Siu Kei v Chong Mee Mee [1999] 1 HKC 693, the defence must not be "inherently impossible". I would expand that to say that if the defence is inherently impossible, when looked at in the context of so much of the background as either undisputed or beyond reasonable dispute then Order 14 must be granted. If it is not, then the defendant must have leave to defend.

Application of the principles

19. The first issue is whether or not there was any agreement at all. In effect, we have only the word of Miss Cheung against that of Mr. Lee. The e-mail to the solicitors suggests that Miss Cheung thought she had an agreement but it goes no further than that. There is nothing from any of the persons whom she names as having heard Mr. Lee's confirmation and I do not see that the defendant can be criticised for not putting any of these persons forward as a witness. Even if they had the court would still be asked to decide the matter on their affidavit evidence. It is said that the defence is a bare denial but I cannot accept that. There is here a straightforward question of fact which can only be resolved after trial.

20. The second issue, as to whether the agreement, if there was one, was between the plaintiff and the defendant as agent for Zi Bermuda, or the defendant and Zi Bermuda itself, also raises questions of fact. By 20 July 2000 the latter company had been incorporated. Miss Cheung must have known that and instructions must have been given to the solicitors to draft the agreement accordingly. Her e-mail of 20 July suggests on the face of it that the payment of the both the price and the contribution to legal fees was to come from the same source.

21. I do not think there is anything much in the argument about the terms of the sale and purchase agreement. They left open the possibility that there was a collateral agreement as to legal fees but that was presumably because of Miss Cheung's e-mail message to the solicitors.

22. For these reasons I considered that the defendant should have unconditional leave to defend.