SOUND GRACE DEVELOPMENT LTD V. PEARL WISDOM LTD AND ANOTHER

HCA 1947/2013

[2020] HKCFI 943

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1947 OF 2013

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D E C I S I O N

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1.  This is the plaintiff’s appeal from the order of Master Benny Lo dated 17 December 2019 dismissing the plaintiff’s application for specific discovery. At the conclusion of the hearing, the decision was reserved which I now give.

BACKGROUND

2.  The underlying action arose in relation to a project launched by Pearl Wisdom Limited (“D1”) and Horizon Hotels & Suites Limited (“D2”) (collectively, “the defendants”) in February 2013 for the sale of units in The Apex Horizon (“the Hotel”) to the public. The defendants are wholly owned subsidiaries of the Cheung Kong Group (“CKG”).

3.  The plaintiff as purchaser and the defendants as vendor entered into a sale and purchase agreement (“the Sale”) for Hotel Room Unit No 8 on the 27^th floor of the Hotel (“the property”) for $3.525 million (“the SPA”). D2 was to be responsible for the management and operation of the Hotel under a Hotel Operation Agreement to be entered into by the parties. Completion was scheduled to take place on 19 June 2013.

4.  Following the launch of the project, the Securities and Futures Commission (“the SFC”) conducted an investigation and took the view that the Sale appeared to be an invitation to acquire an interest, or participate, in a collective investment scheme (“CIS”) in contravention of the Securities and Futures Ordinance (Cap 571) (“SFO”).

5.  The SFC indicated to the defendants that it would commence proceedings under section 213 of the SFO to unwind the Sale and for the deposit paid to the defendants returned to the purchaser.

6.  While the defendants did not agree that the Sale constituted a CIS, they agreed with the SFC not to complete the Sale to avoid legal proceedings being commenced by the SFC which would have been protracted and lead to uncertainty.

7.  By letter to the SFC dated 10 May 2013, D1 agreed with the SFC, inter alia, not to complete the Sale (“No Completion Agreement”) and not to execute the Hotel Operation Agreement. By letter to the SFC also dated 10 May 2013, D2 agreed, inter alia, not to execute the Hotel Operation Agreement.

8.  The SFC issued a press release on 13 May 2013 (“the SFC press release”) regarding the agreement reached that day with Cheung Kong (Holdings) Limited, Cheung Kong Property Development Limited and the defendants (collectively “the Cheung Kong parties”)

(a)  to unwind the sale of the hotel room units under the project, and

(b)  that D1 would on the same day issue to all purchasers a letter cancelling each contract and, in return, it would reimburse every purchaser the deposit/part payment made together with interest at 2% above prime from the date each amount was paid until 30 May 2013 and an amount of $10,000 as reimbursement of any reasonable legal and other expenses to be paid by 30 May 2013.

9.  The SFC press release also recorded the matters stated in §§4 to 6 above.

10.  D1 duly sent cancellation letters to the purchasers of the 360 units offered for sale mentioned in the SFC press release. The plaintiff refused to accept the offer.

11.  The completion date under the SPA was 19 June 2013. Completion did not take place.

12.  On 11 October 2013, the plaintiff commenced this action against the defendants for breach of the SPA in failing and refusing to complete the Sale. §5A of the Re-amended Statement of Claim (“RASOC”) pleaded an implied term of the SPA that the defendants “shall do nothing of their own motion to put an end to the state of circumstances under which alone the [SPA] can be operative” (“the implied term”) and it was asserted (at §7A) that the defendants were in breach of the implied term for voluntarily entering into an agreement with the SFC to unwind the Sale.

13.  The plaintiff seeks specific performance and/or damages in lieu; alternatively, damages by reference to the value of the property as at the date of the judgment less the purchase price, alternatively, its value on the completion date less the purchase price; further or alternatively, loss of rental from the completion date.

14.  The defendants deny the implication of the implied term and breach of the implied term and do not admit breach of the SPA.

15.  They further deny that the plaintiff is entitled to specific performance or damages in lieu and that such remedies should not be granted by the court in the exercise of its discretion. Specific performance if ordered would be contrary to the No Completion Agreement the defendants made pursuant to the SFC’s demand as a matter of public policy and would give rise to the risk of the defendants being prosecuted.

THE ISSUES ARISING IN THE ACTION

16.  The issues that arise from the pleadings are (i) liability; (ii) specific performance; (iii) loss; and (iv) mitigation.

THE DISCOVERY REQUESTS

17.  The summons for specific discovery was taken out on 10 September 2019. It sought two classes of documents. The court is concerned only with the following:

“Class 2 - Records of Investigation by the [SFC]

2.  All documents including reports, memoranda, minutes, records of interviews or notes relating to the investigation conducted by the [SFC] in relation to the[defendants] resulting in the [SFC press release].

3.  All related correspondence exchanged between the SFC and the [defendants] in relation to the investigation by the SFC resulting the [SFC press release].”

APPLICABLE LEGAL PRINCIPLES - SPECIFIC DISCOVERY

18.  It is common ground that a convenient summary of the applicable principles may be found in the judgment of Ng J in Jade’s Realm Limited v Director of Lands, unrep., HCA 1509/2012, 9 January 2015 at §20[1].

19.  While the Peruvian Guano remains the test for relevance, “fishing” is not allowed.

20.  As regards the latter, Rogers VP explained in C v C, unrep., CACV 410/2005, 28 July 2006 at §8,

“fishing expeditions … arise where what is sought is not evidence but information which may lead to a line of inquiry which would disclose evidence. It is the search for material in the hope of being able to raise allegations of fact, as opposed to the solicitation of evidence to support allegations of fact, which have been raised bona fide with adequate particularisation”.

21.  It should be borne in mind that the documents sought to be disclosed must be relevant to issues identified in the pleadings. The fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter. Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action: see the Court of Appeal’s judgment in Paul’s Model Art GmbH & Co KG v UT Limited [2006] 1 HKC 238 at §25.

THE PLAINTIFF’S CASE ON RELEVANCE

22.  The focus of the plaintiff’s written submissions was on frustration which it considered to be the defendants’ defence. The documents were sought on the basis that they would be relevant to show that frustration was “self-induced”.

23.  The defendants’ written submissions disabused the plaintiff of its erroneous assumption: frustration is not pleaded and it is not the defendants’ defence.

24.  At the hearing, Mr Martin Lee SC, leading counsel for the plaintiff confined his address to a subsidiary point made in his written submissions (at §24) that a wider agreement exists.

25.  The plaintiff submitted that

“24. It is obvious that the [two letters of 10 May 2013] and the SFC press release do not constitute a full and complete agreement; or consensus; or arrangement reached between the [CKG] and the SFC … and that they were clearly made to implement a prior agreement reached between the top echelon of [CKG] and the SFC”.

26.  In oral argument, it relied on a number of matters in support of there being a wider agreement.  

(i)  Parties to the SFC press release

27.  The plaintiff invited attention to the fact that the parties to the agreement with the SFC (the subject matter of the SFC press release) were “the Cheung Kong parties” comprising not only the 2 defendants but also Cheung Kong (Holdings) Ltd, Cheung Kong Property Development Limited.

28.  The agreement pleaded in §9 of the defence was an agreement between the SFC and the defendants, constituted by the 10 May letters and the SFC press release which Mr Lee referred to as “the narrow agreement”. He submitted that because the parties to the agreement named in the press release are different, there must be a wider unpleaded agreement and the discovery sought is relevant in that context.

29.  But the fact that CKG joined in the agreement is unremarkable: it is hardly surprising since they are the ultimate owners of the defendants. It simply does not follow that from that fact that a wider agreement must exist.

30.  It was said that the documents requested are important to the plaintiff because it may weaken the defendants’ case as pleaded in §9 of the defence.

31.  It is an undisputed fact that completion did not occur.

32.  The defendants do not admit that there has been a breach of contract and in §9 of the defence, D1 stated why it did not complete the sale.

33.  The plaintiff appeared to suggest that because the defendants have denied reliance on illegality[2] and frustration, and have denied breach of the implied term under RASOC §5A, somehow the requested discovery will shed light on the nature of the defence and thus the case the plaintiff will have to meet at trial.

34.  By traversing the plaintiff’s allegation of breaches of contract/breach of the implied term, the defendants are simply putting the plaintiff to strict proof. The burden of proof has not changed and remains with the plaintiff who bears the burden of making good its case.

35.  The defendants rely on the matters pleaded in §9 of their defence. I express no views as to the merits or otherwise of §9: whether it amounts to a good defence is a matter for the judge at trial.

36.  If, (contrary to my view,) a wider agreement exists (as appears to be the plaintiff’s surmise), it is difficult to see how that can have any bearing on whether or not what has been pleaded in §9 amounts to a good defence. It is simply not relevant to any issue arising in the proceedings. 

(ii)  Absence of the word “demand” in the SFC press release

37.  In response to the plaintiff’s claim to specific performance by way of relief, §16 (2) of the defence stated that the agreement with the SFC was made pursuant to the “demand” of the SFC. The plaintiff drew attention to the fact that the word “demand” is nowhere to be found in the SFC press release and submitted that the use of the word “demand” suggests/connotes the existence of a wider agreement.

38.  I do not agree. The SFC agreement came about because of the threat of section 213 proceedings. It cannot be disputed that as recorded in the SFC press release, the Cheung Kong parties did not agree with the SFC that the project contravened the SFO. At the same time, the reality facing the Cheung Kong parties was that absent agreement to unwind the project,section 213 proceedings would follow.

39.  Plainly, the SFC agreement was made in order to stave off the threatened proceedings. In those circumstances, it is not a mischaracterization to describe the Cheung Kong parties as acceding to a “demand” by the SFC when they entered into the agreement stated in the SFC press release. In my view, no exception can be taken to the use of the word “demand” in the pleading. It bears no connotation of the existence of any wider agreement.

(iii)  Background material

40.  The plaintiff also relied on Toeca National Resources BV v Baron Capital Limited and anor, unrep., HCA 1913/2009, 31 May 2011 to justify the discovery request. In that case, McWalters J (as he then was) remarked (at §24) on just how all-encompassing[3] the Peruvian Guano test has the potential to be. It includes background material and certainly extends well beyond those materials that relate only to the narrow issues that might need to be resolved at trial. However, the judge cautioned that the concept of relevancy is just the starting point, not the finishing point. 

41.  “Background material” has to be relevant to the relationship between the parties in litigation who are the plaintiff and the defendants. But the documents sought relates to the “investigation” carried out by the SFC, a non-party in this litigation. The discovery request cannot be justified as “background material” because it does not go to the background in the relationship between the parties to this action and decidedly, the SFC is not a party.

42.  In terms of relevance, it is clear from Lord Woolf’s description that “the relevant documents” means documents that are relevant to the issues in the proceedings. The background material which relates to the SFC investigation is irrelevant because it does not relate to the issues in these proceedings. They are not “relevant documents” for the purposes of the Peruvian Guano test. 

(iv)  Pre-launch enquiries

43.  The court was also referred to the letter dated 5 April 2016 from the Department of Justice (“DOJ”) responding to the letter of 9 March 2016 from the plaintiff’s solicitors (“HTW”) seeking an explanation as to why no action was taken for contraventions of the SFO.

44.  §10 of the DOJ’s letter referred to there being no evidence of fraud or dishonesty and stated that in fact the Cheung Kong parties had obtained expert legal advice from leading UK Queen’s Counsel as well as making “enquiries with the SFC” before launching the project as some of the matters taken into account in its consideration of whether proceedings should be brought.

45.  The plaintiff seized upon the fact that there had been pre-launch enquiries made with the SFC and submitted that the documents sought will shed light on the nature of the enquiries.

46.  But that is entirely beside the point: at the hearing, despite questions from the Bench in that regard, the plaintiff failed/was unable to identify the allegation(s) in the pleadings to which such enquiries and/or the wider agreement would be relevant, much less ‘relevant allegations’ as explained in the Paul’s Model Art case[4].

CONCLUSION

47.  For those reasons, I am of the view that the plaintiff has failed to make out a basis for there being a wider agreement. Its existence is pure surmise.

48.  I agree with Mr Benjamin Yu, SC, leading counsel for the defendants, that even on the assumption that such a wider agreement does exist, it is of no avail as the plaintiff has not shown that those documents are relevant to an issue in the action. They are not “relevant documents” that satisfy the Peruvian Guano test.

49.  The ineluctable conclusion is that the plaintiff has not made out a case for specific discovery of the Class 2 documents.

ADDITIONAL OBJECTIONS TO DISCOVERY

50.  The defendants’ written skeleton advanced additional reasons for not granting discovery. It is unnecessary to consider all of them except the following which is worth highlighting.

REQUESTS FOR DOCUMENTS RELATING TO THE SFC INVESTIGATION ARE FISHING REQUESTS

51.  The defendants submitted that the reason appears to be that the plaintiff is seeking to fish for materials, hoping that they will reveal some improprieties on the part of the defendants and/or the SFC in relation to the SFC’s decision not to prosecute or pursue claims of civil liability against the defendants, or to commence proceedings against the defendants under the SFO.

52.  The defendants relied on correspondence between HTW and the SFC/DOJ relating to the project exhibited to the plaintiff’s affirmations filed in support of this application.

53.  The following matters appear from a perusal of that correspondence:

(a)  for a period of 2 ½ years prior to March 2016, HTW had repeatedly written to the SFC to seek a decision as to whether the launching of the project by CKG constituted a violation of certain provisions under the SFO[5];

(b)  those letters to the SFC expressed their clients’ view that “the SFC has failed its statutory duties in investigating into the suspected offences and bring the responsible parties to justice by taking prosecutorial action”[6]; and

(c)  HTW’s letter of 9 March 2016 was a formal written request for the DOJ’s decision “with regard to the enforcement of the SFO against [CKG] relating to the illegal promotion of the Scheme[7]”.

54.  The present application is irrelevant to the issues engaged in the action but seemingly highly relevant to the matters discerned from the correspondence above.

55.  In those circumstances, in my view, the request for the Class 2 documents pertaining to the SFC investigation has the trappings, and is a classic example, of a “fishing expedition”. That is a further reason for refusing specific discovery.

ORDER

56.  For the reasons set out above, the plaintiff’s appeal is dismissed.

57.  There is to be an order nisi of costs in favour of the defendants with certificate for 2 counsel, such costs to be summarily assessed and payable forthwith.

58.  Directions for summary assessment will be dealt with  separately.