ZEBRA INDUSRIES (OROGENESIS NOVA) LTD - [ZION] v. WAH TONG PAPER PRODUCTS GROUP LTD

CACV 218/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 218 OF 2014

(ON APPEAL FROM HCMP 436 OF 2013)

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J U D G M E N T

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

1.  This was an appeal by the plaintiff, Zebra Industries (Orogenesis Nova) Ltd against the decision of Mimmie Chan J dated 31 October 2014, refusing leave to the plaintiff to commence proceedings for committal for contempt of court against the defendant, Wah Tong Paper Products Group Ltd, and its solicitors. The plaintiff was represented before us, as it was in the court below, by its director Mr Elijah Saatori. Both the application below and this appeal were dealt with on an ex parte basis, with only the plaintiff appearing. At the conclusion of the appeal, we reserved our judgment, which we now give. The delay in handing down this judgment is regretted.

2.  The plaintiff and the defendant have been involved in protracted litigation since about 2004.  In the following paragraphs, we briefly summarise the history of those proceedings, events in the course of which have led the plaintiff to make this application.

3.  The plaintiff’s case in its claim against the defendant is that Mr Saatori invented a board game called Galaxion and a card game called Psilink, the rights to which were vested in the plaintiff.  On 31 March 2003, the parties entered into a contract for the development and manufacture of the games.  According to the plaintiff, the defendant soon afterwards breached the contract by failing or refusing to produce the initial production run of 2,000 sets of the two games, and refusing to proceed further with the project.  It was the plaintiff’s contention that the defendant had agreed to produce far more than 2,000 sets of the games, and that it had in fact been agreed between the parties that the defendant would produce as many sets as may be necessary during the lifetime of the games.

4.  The plaintiff sought to recover damages (which it said would run into tens of millions of United States dollars) for the defendant’s alleged breach of contract.  The parties initially approached a Mr Edwin Leung to act as arbitrator, and the plaintiff says that Mr Leung was in fact appointed.  However, this failed to produce any resolution of the dispute.  The appointment of Mr Leung forms one aspect of the complaints on the basis of which the plaintiff seeks leave to commit the defendant and its legal advisers for contempt, and will be considered further below.

5.  Thereafter, the plaintiff brought court proceedings against the defendant in HCA 1551/2004, alleging that the defendant had repudiated the arbitration agreement contained in the contract.  This was denied by the defendant, which took out an application for a stay in favour of arbitration. Following a contested hearing, Burrell J stayed the action and directed the defendant to take steps to have an arbitrator appointed within 14 days. However, no steps were taken by the defendant to comply with this direction for many years.

6.  Some four years later, in 2008, the plaintiff sought leave to appeal out of time against Burrell J’s order.  That application was refused by Rogers VP in November 2008 on the grounds of delay, although Rogers VP indicated that had the application been brought in time, it might have been granted (but he also observed that although arguable, an appeal was by no means certain to succeed).  The delay was apparently due to lack of funds on the part of the plaintiff.  A renewed application for leave to appeal out of time was refused by Tang VP and Sakhrani J in January 2009.

7.  There was then an arbitration in April 2010 before Mr Timothy Hill, a solicitor practising in Hong Kong.  In August 2010, after the hearing, but before the arbitrator delivered his award, the plaintiff put in a statutory declaration by which it increased part of its claim (for the proceeds of the first 2,000 pieces of each of the games) from HK$58,000 to HK$268,000.  The difference was that whereas HK$58,000 represented the profit that would have been derived from sales of that quantity of each of the games, HK$268,000 represented the total sales proceeds, to which the plaintiff claimed to be entitled.  The plaintiff was allowed by the arbitrator to rely on this statutory declaration.  The arbitrator delivered his final award on 24 September 2010, dealing with all issues except costs.  He awarded the plaintiff damages of HK$58,000, but rejected the claim that the defendant was contractually bound to produce more than 2,000 pieces of each game, and so did not award damages for loss of profits beyond the profit on the first 2,000 pieces of each game.

8.  The plaintiff then sought leave to appeal against the award of the arbitrator. This application was brought five days out of time.  The application failed at first instance, but was successful on appeal, on the basis that the arbitrator had failed to deal with the plaintiff’s amended claim as put forward in the statutory declaration mentioned in the previous paragraph.  An attempt by the plaintiff to deal with the question of costs in HCA 1551/2004 was, however, rejected by the Court of Appeal.  Armed with the leave granted by the Court of Appeal, the plaintiff commenced HCCT 46/2011 to appeal against the arbitrator’s decision.  The appeal was heard by Au J, who allowed the appeal and remitted the award to the arbitrator for reconsideration.  In essence, the appeal succeeded because, in Au J’s view, the arbitrator had erred in law by failing to deal with various aspects of the plaintiff’s claim.  However, Au J made it clear that when the matter was re-heard by the arbitrator, it would be open to the arbitrator to come to his own view as to the merits of the overlooked claims, and that the court in allowing the appeal was not expressing any view as to such merits.  Au J also rejected an attempt to revisit the stay of HCA 1551/2004 imposed by Burrell J.  Subsequently the plaintiff applied unsuccessfully to both Au J and the Court of Appeal for leave to appeal out of time against Au J’s decision.

9.  During 2012, steps were taken by the defendant to have various costs orders in its favour, arising from the various legal proceedings that had by then taken place, taxed.  The plaintiff did not, at this stage, do the same with the costs orders that had been made in its favour.

10.  Also in 2012, despite an application by the plaintiff for the removal of Mr Hill as arbitrator (which does not seem to have been proceeded with), the arbitrator heard further submissions in August 2012, and produced an amended award on 7 September 2012.  It took some time before this award was collected by the parties, because of difficulties the plaintiff experienced in paying its share of the arbitrator’s fees, eventually doing so with the assistance of a loan from a third party.  The amended award increased the damages awarded to the plaintiff to HK$268,000, as the arbitrator accepted the plaintiff’s argument (by the statutory declaration previously referred to) that it would have been entitled to the total sale proceeds of the first 2,000 units of each game, had the defendant produced them in accordance with its contractual obligations. The costs of the arbitration were also awarded to the plaintiff.  However, the arbitrator rejected the plaintiff’s other claims, including the claim that there was a contractual obligation to produce more than the first 2,000 pieces of each game, and a claim based on alleged misrepresentation.

11.  The plaintiff thereupon asked for payment of slightly over HK$500,000 from the defendant, in respect of the net amount of the increased award (the original award having already been paid), interest and costs.  The defendant refused, on the basis that the arbitrator’s appointment was under challenge and also on the basis that the plaintiff owed it costs under various costs orders arising out of the legal proceedings which had taken place.

12.  The plaintiff then applied in November 2012 for leave to appeal (out of time) against the amended arbitration award, and to discontinue its application for removal of the arbitrator.  The plaintiff also took steps to tax the costs orders which had been made in its favour in the various legal proceedings.

13.  There was then correspondence between the parties seeking to reach an overall settlement of their dispute.  The plaintiff suggested that the parties’ respective costs orders should be treated as cancelling each other out, and that the defendant should pay it HK$500,000 in respect of all matters other than the intended appeal against the amended award, and HK$3,700,000 to settle that intended appeal.  The parties then made various counter offers, resulting in the defendant eventually offering HK$400,000 in full and final settlement of all matters.  Throughout this time, the defendant made no offer or attempt to pay such amount as was indisputably due to the plaintiff on the amended award, even after setting off costs orders in the defendant’s favour.  This offer was, in the end, accepted by the plaintiff, although Mr Saatori made it clear that he did not regard the plaintiff as having any real choice in the matter, given its parlous financial position.

14.  A settlement agreement was then entered into, and a consent summons was prepared by the solicitors for the defendant to dispose of the HCCT 46/2011 proceedings.  At a hearing before Au J on 11 December 2012, Mr Saatori confirmed that the plaintiff had signed the consent summons, saying that he had no choice, as he (or more accurately, the plaintiff) would not get paid if that had not been done.  Au J thereupon made an order giving leave to the plaintiff to discontinue its application for leave to appeal from the revised decision of the arbitrator.

15.  Shortly afterwards, on 20 December 2012, the plaintiff issued a summons seeking to set aside the consent order of 11 December 2012, on the grounds that it had been forced to enter into the settlement by reason of economic duress, and also on the grounds that there had been a breach of the settlement agreement.  This application was dismissed for procedural reasons, in that a summons in HCCT 46/2011 was not the correct procedure (those proceedings having been brought to an end by the settlement and consent summons) and that a fresh action should have been taken out to challenge the validity of the settlement. As a result, the plaintiff commenced HCMP 436/2013 by originating summons, seeking to set aside the compromise.

16.  Following a four-day trial in March 2015, Godfrey Lam J delivered a judgment dated 31 August 2015, upholding the plaintiff’s claim that it had been subjected to economic duress in that the defendant had exerted illegitimate pressure on it to accept the terms of settlement offered, knowing that the plaintiff was in a very poor financial position (although not every point advanced by the plaintiff was upheld).  In the course of that judgment, Godfrey Lam J rejected the defendant’s evidence to the effect that it was unaware of the plaintiff’s poor financial position.

17.  Meanwhile, after HCMP 436/2013 had been commenced, but before the trial, on 14 February 2014, the plaintiff applied for leave to commence proceedings for the defendant and its solicitors to be committed for contempt. The application was heard by Mimmie Chan J on 23 April 2014, and was dismissed by her Decision dated 31 October 2014.  That dismissal is the subject of the present appeal.

18.  The plaintiff relied on five alleged instances of perjury on the part of the defendant and its solicitor, and one allegedly contumelious breach of a court order as the basis for its application for committal.  These were as follows:

(1)   The defendant’s directors and its solicitor had falsely claimed in affirmations filed in HCA 1551/2004 that Mr Edwin Leung had not been appointed as an arbitrator in respect of the dispute under the contract, in order to obtain a stay of that dispute to arbitration.

(2)   The defendant’s director falsely denied the existence of a spreadsheet which had in fact been annexed to the contract.

(3)   The defendant’s director and its solicitor falsely claimed that it had not contracted to manufacture all orders received for the products during the entirety of the products’ lifetime.  This and the previous alleged perjuries were said to have been committed on more than one occasion, between April 2010 and August 2012.

(4)   The defendant falsely claimed that it was only obliged to pay the plaintiff the profits from the first production run of 2,000 pieces of the Galaxion game, whereas the contract in fact obliged it to pay over the entire sale proceeds of the first production run.

(5)   The defendant had falsely claimed (in the course of HCMP 436/2013) that it had no knowledge of the true financial position of the plaintiff, when it was clear that it did.

(6)   The defendant had deliberately and contumeliously refused to comply (for some four years) with the part of the order of Burrell J dated 17 December 2004, by which HCA 1551/2004 had been stayed to arbitration, requiring it to make arrangements for the appointment of an arbitrator.

19.  In dismissing the plaintiff’s application, the judge set out the applicable legal principles in paragraphs 4 and 5 of her judgment.  In paragraph 4, she considered the approach to applications for contempt based on the giving of false evidence, by reference to the English Court of Appeal decision in KJM Superbikes Ltd v Hinton [2009] 1 WLR 2406, where it was stressed that the court should exercise great caution before giving leave to bring contempt proceedings in such cases, and should only do so if there was a strong case that the statement complained of was untrue and was known at the time to be so.  Even then, all relevant factors had to be taken into account in deciding whether or not to grant leave to apply for committal, such as the circumstances in which the allegedly untrue statement was made, its significance having regard to the nature of the proceedings, the maker’s understanding of the likely effect of the statement, and the use to which it was actually put. These factors would go to the gravity of the alleged contempt, and would provide guidance as to whether or not it would be in the public interest for the matter to be pursued.  Questions of proportionality would also arise, and the court should consider whether or not the proceedings would justify the resources that would have to be devoted to them.  Clearly, a false statement that has had a material impact on the proceedings, to the real and serious detriment of the party seeking to complain about it, would be more likely to justify the bringing of proceedings for contempt than one which did not, even if untrue and known by its maker to be untrue. 

20.  The judge also had regard to the delay factor, and observed that although there was no time limit for the bringing of proceedings for contempt, applications should generally be made promptly.  In the present case, she regarded the delay in making the application (of some years, and in the case of the first alleged contempt, of many years) as a factor against the giving of leave.

21.  At the end of the day, the judge refused the application, both on the basis of the delay, and also on the basis that most (if not all) of the alleged false evidence had either not been the subject of findings by the courts, or had had no seriously adverse effects for the plaintiff.

22.  Although Mr Saatori sought to persuade us that the judge was clearly wrong, we are not persuaded that she was.  In coming to this conclusion, we have had regard to the positive outcome of the plaintiff’s application to set aside the settlement, and the findings of Godfrey Lam J in relation to the evidence of the defendants in that application.  We explain below, in relation to each of the complaints made by the plaintiff, why we have come to this view.

23.  As far as the first complaint, regarding the statement that Mr Leung had not been appointed as arbitrator, is concerned, the judge reviewed the relevant documents and statements, and concluded that the question of whether or not there had been an arbitration was considered and determined by Burrell J when he granted the stay to arbitration which the defendant had applied for.  Mr Saatori contended that the relevant perjury was not as to whether or not there had been an arbitration, but as to whether or not Mr Leung had been appointed as arbitrator.  However, we do not consider that the judge made any material error, and more importantly, we are, like the judge, of the view that this complaint would not justify the bringing of proceedings for contempt.

24.  This is for a number of reasons.  First, Burrell J had before him all the relevant documentation from which he was in a position to consider whether or not there had been an earlier arbitration (or a breach by the defendant of the arbitration clause) so as to justify the plaintiff in seeking to proceed by way of legal proceedings rather than an arbitration.  The question of whether or not Mr Leung had been appointed as an arbitrator by the parties was only one element to be considered in coming to a decision as to this.  It was apparent from the correspondence that Mr Leung regarded himself (rightly or wrongly) as having been appointed as an arbitrator and having made some sort of decision (although it is difficult to see what that decision might have been, other than to defer to the defendant’s refusal to have a hearing at which the plaintiff was present).  Taking all the material before him into account, Burrell J came to the view that there had been no effective arbitration, and that it was not clear that the defendant had been in breach of the arbitration clause in such a manner as to repudiate it.  He therefore concluded that it would be appropriate to stay HCA 1551/2004 to arbitration.

25.  Although (some four years later) Rogers VP indicated that an appeal against this ruling might be arguable, he did not grant leave to appeal due to the delay in seeking leave.  He also made it clear, we think, that such an appeal was by no means certain to succeed.

26.  In these circumstances, we do not think that it can be said that the impact of this alleged perjury was such as to justify the bringing of proceedings for contempt.  Even if (which is not at all clear) it influenced the decision of Burrell J, the upshot was that the dispute between the parties would still be heard, albeit by an arbitrator rather than the courts.  There is no reason to think that this would prejudice the plaintiff.

27.  Further, this complaint was, by the time the application for leave to commit for contempt was brought, a very old one.  It related to matters that had happened many years previously.  While we accept that the plaintiff had no legal representation, and have noted the other matters that Mr Saatori was dealing with at the time, we do not think that they are sufficient to overcome the very substantial delay that had taken place.

28.  Turning to the second and third complaints, these can be considered together, as they both go to the issue of whether or not the contract required the defendant to manufacture whatever quantity of the games might be ordered throughout the lifetime of the games.  The judge rejected these complaints on the basis of delay, the lack of evidence of any statement in an affirmation or witness statement as to these matters, and on the basis that so far as the solicitor was concerned, the court would be slow to permit contempt proceedings to be brought against legal representatives as this would tend to inhibit them in presenting their client’s case as they saw fit.

29.  While we would accept Mr Saatori’s contention that it was indeed the submission of the defendant that the terms of the contract were not as Mr Saatori and the plaintiff contended, we do not think that these complaints can justify the bringing of contempt proceedings either.  The terms of the contract (in respect of which the Excel spreadsheet was an item of evidence) were a matter for consideration by the arbitrator (and by a court that might have occasion to review the arbitrator’s decision on an appeal brought against it).  The arbitrator (Mr Hill) did consider this point, but both on the original and re-opened arbitration, he came to the conclusion that the contract, properly construed, did not impose on the defendant an open-ended obligation to manufacture whatever amount of the games might be required by the plaintiff throughout the lifetime of the games.  As the plaintiff has now been successful in setting aside the settlement of its application for leave to appeal against the arbitral award, it remains possible for the plaintiff to pursue this point for the purpose of obtaining such leave to appeal, and (in the event that leave is granted, as to the likelihood of which we express no view) to argue the point on appeal.  In those circumstances, we do not think that this point is one of such import as to justify the granting of leave to bring committal proceedings.

30.  Further, it seems to us that given that the issue here is one of the proper construction or interpretation of the contract, it would be difficult to establish that the view held by the defendant was clearly one which was not honestly held.  This too, militates against the granting of leave to bring committal proceedings.

31.  Turning to the fourth complaint, relating to the defendant’s putting forward the argument that it was only obliged to pay the plaintiff the profits (rather than the gross sale proceeds) of the first 2,000 pieces of the Galaxion game produced, even if it were the case that this was a deliberate untruth put forward by the defendant (as opposed to a genuinely held belief as to what the contract provided for), it does not seem to us that it would justify the bringing of contempt proceedings when, as is apparent from the outcome of the re-opened arbitration, the plaintiff’s contention was in fact accepted by the arbitrator, so that the plaintiff succeeded on this point.

32.  The same point can be made in relation to the fifth complaint, relating to the defendant’s claim that it did not have knowledge of the plaintiff’s financial position.  This was an issue in the proceedings to set aside the settlement, and on this issue the plaintiff actually succeeded.  Any falsehood told by the defendant was therefore ineffectual, and did not result in any prejudice to the plaintiff at the end of the day.  That being so, we see little reason for contempt proceedings now to be permitted to be pursued.

33.  Finally, in relation to the alleged contumelious failure on the defendant’s part to comply with the order of Burrell J that it take steps to appoint an arbitrator, it seems to us that even if such failure could be regarded as contumelious when neither side took steps to proceed to arbitration, the fact is that this is a matter which occurred many years previously, and the delay in raising it is fatal to an attempt to now charge the defendant with contempt in relation to it.

34.  While we have some sympathy for the difficulties that the plaintiff and Mr Saatori have faced over the long history of the litigation with the defendant, it does seem to us that whether viewed individually or cumulatively, the matters complained of do not justify the bringing of proceedings for contempt. 

35.  For the foregoing reasons, we dismiss the appeal.  As the matter was dealt with on an ex parte basis, we will not make any order as to costs.