ERP FURNITURE LTD v. TOP PINE TIMBER PRODUCTS LTD AND ANOTHER

DCMP 526/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 526 OF 2007

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DECISION

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Background

1.  The Plaintiff ("ERP") claims for amounts due under a loan agreement made with the 1st Defendant ("Top Pine") as borrower, secured by a legal charge executed by the 2nd Defendant ("Lam"). Under the loan agreement, ERP agreed to provide a revolving working capital loan to Top Pine by settling invoices from Top Pine's suppliers on its part. In their  defence and counterclaim, Top Pine and Lam dispute the amounts claimed, and allege that Top Pine is entitled to set-off against the outstanding loan the price of goods ordered by ERP but which it had failed to take delivery. Top Pine also claims that ERP is in breach of the loan agreement when it failed to provide new working capital to Top Pine, and further, that ERP should not include in its claim the price of a machine which Top Pine had purchased it on ERP's behalf.

2.   The proceedings first began in February 2007 when ERP issued an Originating Summons to seek payment of the sums due and for an order for possession of the property charged by way of security under the legal charge. In May 2007, Master Lai ordered that the proceedings be continued as if they had been begun by Writ. Pleadings were filed in May 2007. Directions were agreed in July 2007, whereby the parties were to file their lists of documents by July 2007, exchange witness statements thereafter, and then ERP was to apply for a pre-trial review on or before 25 October 2007. The parties failed to take any action after discovery in July and August 2007.

3.  On 28 September 2009, Top Pine and Lam applied to dismiss ERP's action on the ground that it may prejudice, embarrass or delay the fair trial of the action, is an abuse of the process of the court, and/or for want of prosecution. On 27 January 2010, Master S. Lo struck out both ERP's action and the Counterclaim of Top Pine and Lam, both for want of prosecution. ERP appeals against the order for dismissal. Top Pine and Lam also appeal against the Master's order for costs that ERP do pay the costs of Top Pine and Lam from 5 October 2009 up to the date of the hearing. They claim that such costs should be ordered to be payable on an indemnity basis.

4.  Upon the anniversary of the Civil Justice Reform coming into effect on 1 April 2009, parties to litigation and practitioners should have come to accept the fact that the reforms come with a change in approach and culture. The courts have a duty to actively manage cases, and to take greater control of the proceedings at a much earlier stage, in order to further the underlying objectives of the Rules of the Court, which  objectives include increasing the cost-effectiveness of any practice and procedure, dealing with cases expeditiously, promoting a sense of reasonable proportion and procedural economy in the conduct of proceedings, facilitating settlement of disputes and ensuring fair distribution of court resources. Orders of the court are to be complied with, and procedural rules exist to ensure fair, speedy and efficient dispute resolution. The courts will not tolerate delaying tactics, nor interlocutory applications with no sense of proportion.

Issues

5.  At the commencement of the hearing, Counsel for ERP confirmed that it cannot be disputed that there has been inordinate delay in the progress of the action. At the heart of the dispute is whether Top Pine and Lam have any ground to argue that there is conduct on ERP's part which is capable of constituting an abuse of the process of the Court, so as to warrant a striking out or dismissal of the action. In particular, as the limitation period for ERP's claim in this action has not expired, the issue is whether it would be appropriate for the Court to exercise its power to dismiss ERP's action, either on the ground of inordinate delay, or on the ground of abuse of process.

Dismissing on the abuse of process ground

6.  Counsel for Top Pine and Lam rely on decisions of the Court of First Instance, whereby actions have been dismissed after the Civil Justice  Reform, on the ground of abuse, for inactivity for 2 years. What Reyes J said in his judgment in the case of Nanjing Iron & Steel Group International Trade Co Ltd. & Ors v. Stx Pan Ocean Co Ltd & Anr (unreported, HCA 177/2006, 7 September 2009) succinctly summarizes the approach of the Court in these cases:

" … the plaintiffs did not advance the proceedings for over 2 years. Under the present CJR regime, that would seem to me to be sufficient to strike out the claim. In the absence of some compelling reason, it is contrary to the underlying objective in Order 1A, Rule 1 (b) ("to ensure that the case is dealt with as expeditiously as is reasonably practicable") for a party to allow an action to languish for 2 years once the same has been commenced. I am unable to see any compelling reason in this case. There simply is no excuse for such a long delay.

It is suggested that the new CJR rules should not apply here, because the action was commenced long before CJR came into effect. But I disagree with that suggestion. The Court is bound to apply the rules as they are when the case is heard before it. There is no transitional provision in the rules mandate.

It seems to me that the plaintiffs have only themselves to blame if they have delayed progressing their case to an extent that the applicable procedural rules have changed in the interim."

7.  Mr. Man, Counsel for ERP, relies on the decision of the Court of Appeal in New China Hong Kong Group Ltd.  v. AIG Asian Infrastructure Fund LP [2005] 1 HKLRD 383 to argue that it is only in cases of an exceptional nature where the conduct of the party in default amounts to an affront of the court and its rules, that the court should exercise its power to strike out for abuse of process, as an alternative to striking out for inordinate and inexcusable delay.

8.  Mr. Man seeks to distinguish the decisions relied upon by Counsel for Top Pine and Lam, where the Court struck out the plaintiffs' claims on the ground of abuse (including Grovit v. Doctor [1997] 1 WLR 640, Advaita Enterprises & Eversmile (HK) Ltd. v. Seafast Marine Transport Inc, unreported, HCCL 241/1995 & 158/1996, 24 November 2001, Formative Way v. Lam Soon Warehouse Co. Ltd., unreported, HCA 5312/1991, 22 October 2001, Arbuthnot Letham Bank Ltd. v. Trafalgar Holdings Ltd. [1998] 1 WLR 1426 and Nanjing Iron & Steel Group International Trade Company Ltd. v. Stx Pan Ocean Company Ltd., unreported, HCAJ 177/2006) on the basis that the limitation period for the claims struck out had all expired by the time of the striking out.

9.  Mr. Man relies on the judgment of Woo VP in New China, supra, whereby in considering whether it was just in the circumstances to dismiss the plaintiffs' action, Woo VP highlighted the "very significant countervailing factor" based on the fact that the limitation period within which the plaintiffs in the case can bring a fresh action had not expired, which factor was considered to "militate heavily against the exercise of discretion to strike out the action, and renders it unjust or unfair". According to Woo VP, there is nothing in Grovit v. Doctor which relates to the diminution of the significance of the non-expiry of the limitation period, when dismissing an action for abuse of process. 

10.  To quote the words used by Woo VP at paragraph 52 of his judgment:

"I accept that where an action had been dismissed for abuse of process of court and the plaintiff brings a fresh action within the limitation period, in an application to strike out the fresh action, the courts will take into account the reason for the abuse of process in the first action when considering whether the second action should also be dismissed or stayed. However, there is a very significant countervailing factor based on the fact that a fresh action can be commenced within the limitation period, or otherwise the courts would be seen as giving greater preference to the reputation, expedition and efficiency of the system of administration of civil justice as against the right granted by the limitation statute, which is a right given by the legislature to litigants. I can see an argument that once an action is started, it is subject to the rules of the court, and therefore the simple process should not be abused to put pressure and anxiety on the defendant, without an intention of bringing the action to trial. However, short of this kind of conduct, any inordinate and inexcusable delay on the part of the plaintiff, without proof of his intention to abuse the court process, cannot be a ground to strike out, or otherwise the right to make claim within the limitation period, as accorded by statute, would be removed."

11.  Mr. Man points out that the Civil Justice Reform does not and cannot alter the application of the principles enunciated so clearly in New China.

12.  I do not regard the decision in New China to be that in every case where the limitation period has not expired, the claim cannot be struck out at all. Obviously, each case has to be considered on its own facts before the court exercises its discretion to dismiss or strike out an action, or to make such other order as it thinks just in the circumstances of the case. The Court of Appeal in New China simply warned against the danger of the Grovit v. Doctor line of argument being itself abused, with the Court being asked to infer in every case an intention on the part of a plaintiff not to prosecute the action any further. The emphasis is that mere delay, without more, would not amount to an abuse of process, and that in the exercise of the Court's discretion, weight should be given to the "significant" fact that the limitation period had not yet expired.

13.  In this case, ERP has failed to take any action at all since August 2007 when it filed its list of documents. In the light of the Civil Justice Reform cast over the history of the proceedings, 2 years of inactivity should be considered as inordinate and inexcusable delay, and it should be for ERP to explain such delay and its failure to apply for a Pre-trial Review in accordance with the Memorandum of Agreed Directions filed with the Court.

14.  Apart from saying that Top Pine and Lam are also guilty of delay, the only explanation offered by Mr. Lee, the director of ERP, is that "as a result of the opposition mounted by the 1st and 2nd Defendants, what started off as an ordinary mortgage action in these proceedings has developed into a full-blown litigation, with significant cost implications for the Plaintiff." ERP has therefore quite candidly admitted that the only reason why it has failed to pursue the present action is its concerns as to the cost effectiveness of these proceedings.

15.  Mr. Lee went on to explain ERP's inactivity since August 2007, as follows:

"On the other hand, the Plaintiff has the assurance that given the due registration of the said Legal Charge against the Property in the Land Registry, the 2nd Defendant would be unable to dispose of the Property without first obtaining a discharge of the Property."

16.  Counsel for ERP, in persuading the Court that ERP's delay does not amount to abuse of process, points out that even the Working Party on Civil Justice Reform had emphasized in their Report that parties should not be forced to fight litigation against their will or better judgment when they are not minded to continue the litigation.

17.  Parties are never forced to fight or continue litigation against their will. The courts encourage them to settle their differences, and under the Civil Justice Reform, a plaintiff is given more options than before to settle the dispute: for example, by making a sanctioned offer. When the parties come to a stage when they realize that it is no longer cost effective or in their interests to continue the litigation, then they must make a decision whether to proceed nevertheless, and if not, then to settle or withdraw the claims made, or otherwise risk all the consequences of permitting the action to languish.

18.  From ERP's own evidence, it is obvious that it has lost its interest to pursue what has become an unforeseeably expensive process. The allegedly unforeseen costs and opposition, even if true, cannot constitute an acceptable excuse for permitting the action to lie dormant for 2 years. To have commenced the action, and then consciously to decide not to pursue the action for costs reasons, and to wait instead for Lam to sell the mortgaged property and to secure the discharge of the Legal Charge in the event of a sale, comes extremely close in my opinion to an abuse of the process of the Court, if it is not tantamount to the same.

19.  In view of the express provisions of Order 34 r.2 (as it applied to the parties prior to 1 April 2009), and the new Order 25 which came into effect on 1 April 2009, I cannot accept that ERP, legally advised throughout, can be said to have been unaware of the consequences of its failure to apply for a pre-trial review in accordance with the Memorandum of Agreed Directions, or with the rules of the Court which expressly confer on the Defendants the right to apply for the action to be dismissed in the event of non-compliance.

20.  However, even after being satisfied that ERP's conduct can amount to an abuse, the court still has to consider whether it is fair to strike out the action (New China, supra), and particularly in the light of the Civil Justice Reform, whether the dismissal of ERP's claim in the circumstances of this case can properly achieve the objectives of the Rules of the Court.

21.  Tempted as I am to dismiss ERP's claim for what I regard to be abuse of process, I have to bear in mind that its causes of action are not yet time-barred and that it is always open to ERP to commence fresh proceedings against Top Pine and Lam. ERP also has a Legal Charge registered against Lam's property, and even after dismissal of the present action, Lam will still have to commence proceedings for the Legal Charge to be discharged and for the issues in dispute between ERP, Top Pine and Lam to be properly determined. As the Court of Appeal highlighted in New China, the commencement of fresh proceedings by ERP after a striking out or dismissal in this case can only result in further delay and costs for both ERP and Top Pine and Lam, and that cannot be said to be in the interests of any party in terms of obtaining a fair trial and having the case dealt with expeditiously and cost effectively.

22.  In the spirit of the Civil Justice Reform, the objectives of the Court will be better served in this case by making preemptive orders for further case management and to ensure that the parties focus on bringing the case to an early trial, or otherwise settling their disputes if such be their intention at this stage.

Dismissing on the inordinate and inexcusable delay ground

23.  I am satisfied that there are live issues of fact in dispute which require oral testimony from witnesses, and that there will be prejudice suffered by Top Pine as a result of delay, as all of Top Pine's employees have left and their input is bound to be required on the issues in dispute in addition to what Mr. Lee can depose to by his own knowledge. Even if they can be located, there will inevitably be impairment in the recollection of the witnesses as a result of the delay.

24.  However, the issue of the non-expiry of the limitation period applies equally to the consideration of whether the Court should dismiss ERP's claims in this action for inordinate and inexcusable delay and consequential prejudice. Mr. Nip appearing for Top Pine and Lam does not seriously dispute that the non-expiry of the limitation period is a relevant consideration when striking out on the Birkett v. James principles. I have concluded that the interests of the parties and the fair and speedy determination of the case are not served by a dismissal of ERP's claims in this case.

Conclusion

25.  I will make the following orders to ensure that these proceedings are pursued without any further unnecessary and protracted delay and costs :

(1)  Unless ERP file and serve by 4 pm on 28 May 2010 signed witness statements of fact, ERP's Statement of Claim be struck out and ERP's action against the Defendants be dismissed with costs to the Defendants;

(2)  Unless the Defendants file and serve by 4 pm on 28 May 2010 signed witness statements of fact, the Defence and Counterclaim be struck out and ERP be at liberty to enter judgment against the Defendants with costs to ERP;

(3) Unless ERP do apply on or before 16 April 2010 for a case management conference to take place pursuant to Order 25 r.2 no later than 30 June 2010, ERP's action against the Defendants be dismissed with costs to the Defendants.

Costs

26.  ERP has effectively succeeded on its appeal. However, I am entitled to take into consideration, on the question of costs, its conduct in the progress of the action. ERP has been guilty of inordinate and inexcusable delay in the conduct of the proceedings, and I consider that it is appropriate that ERP should be deprived of the costs to which it would normally be entitled. It is obviously insufficient for ERP to attempt to apportion blame to Top Pine and Lam, although it had always been open to them to apply for a pre-trial review upon ERP's default. In all the circumstances, I consider that an appropriate order would be for each party to bear its own costs of the striking out application and the appeal.