GEORGE CHU v. TAN GIONG SENG JOHNSON AND ANOTHER

HCA 2213/2018

[2019] HKCFI 2594

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2213 OF 2018

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J U D G M E N T

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I.  Introduction

1.  There is before this court the Defendants’ summons dated 15 January 2019 (“Relief Summons”) for relief from the sanction contained in a Consent Order dated 18 December 2018 (“Unless Order”) pursuant to RHC O 2 r 5.  Paragraph 1 of the Unless Order provided that “Unless by 5:00 pm on 15^th January, 2019, the 1^st and 2^nd Defendants file and serve their Defence and Counterclaim, if any, the Plaintiff be at liberty to apply for default judgment against the Defendants with costs”.

II.  Background

2.  In this Action, the Plaintiff claims that on or about 21 February 2018 the Defendants[1] had executed an Irrevocable Undertaking (“Undertaking”)  (in the form of a Deed) which provided as follows:

“We hereby agree and undertake to repay to you on or before the 31^st day of March, 2018 (the ‘Due Date’), all moneys which are due to you under the Convertible Loan Agreements …”

3.  The Convertible Loan Agreements referred thereto were:

a.  A Convertible Loan Agreement dated 18 May 2013 whereby the Plaintiff agreed to lend to Labelle US$600,000 (“1^st Convertible Loan Agreement”) originally repayable on 18 May 2014 but subsequently extended to 31 August 2016.  It was expressly provided that the Defendants jointly and severally guaranteed payment of any outstanding indebtedness.

b.  A Convertible Loan Agreement dated 18 November 2014 whereby the Plaintiff agreed to lend Labelle US$1,000,000 (“2^nd Convertible Loan Agreement”) repayable on 18 May 2015 but subsequently extended also to 31 August 2016.  It was expressly provided that the Defendants jointly and severally guaranteed payment of any outstanding indebtedness.

4.  The Defendants failed to pay the amount due save that on 15 March 2018, they made an ex gratia payment to the Plaintiff of HK$1 million pursuant to the Undertaking. 

5.  On 20 September 2018, the Plaintiff issued a Writ of Summons claiming US$2,850,715.13, being the amount due as at 31 March 2018 together with interest.  On 19 October 2018, the Plaintiff filed his Statement of Claim and subsequently served it on the Defendants.

6.  The Defendants failed to serve a Defence in accordance with RHC O 18 r 2(1). 

7.  By a Consent Order dated 26 November 2018, time for the Defendants to file and serve their Defence and Counterclaim, if any, was extended to 11 December 2018.  The Defendants failed to do so by the extended deadline.

8.  On 18 December 2018, Master J Wong granted the Unless Order.  The Defendants still failed to meet the extended deadline in the Unless Order.  Instead they issued the Relief Summons on 15 January 2019.

9.  By way of further background, on 14 January 2019, the Defendants issued a summons to stay the present proceedings in favour of arbitration (“Arbitration Summons”) pursuant to an alleged arbitration agreement contained in the 2 Convertible Loan Agreements.

III.  Deliberation

10.  According to the Defendants, the background leading to the issue of the Relief Summons was set out in the 2^nd Affidavit of So Che Wing Rex (a partner of the Defendants’ solicitors) dated 15^th January 2019 (“So 2”)[2] and summarized in Mr Ng’s skeleton submissions as follows:

“ 9.1. After the hearing granting the Unless Order, parties engaged in further discussion as to settlement. However, through no fault of Ds, the relevant and necessary documentation from Singapore (the ‘Singapore Documents’)[sic] only arrived on 8^th January 2019;

9.2. Ds’ solicitors only managed to contact P’s solicitors on 7^th January 2019, likely due to intervening new year holidays, on which warnings as to the potentialities of non-compliance were given. On the same day, for the first time it was raised by the P’s solicitors that P would have to sign on those ‘Singapore Documents’ too;

9.3. On 9^th January 2019, it transpired that P’s solicitors needed more time to go through the ‘Singapore Documents’ and hence the risk of non-compliance was on the rise;

9.4. Thereafter, D2 had to leave Hong Kong for San Francisco due to the suicide (or attempted suicide) of her sister and could not make her way back to Hong Kong on 15^th January 2019. It appears that as early as on 11^th January 2019, short time extension was already contemplated and sought;

9.5. Having failed to contact P’s solicitors again in the morning of 14^th January 2019, Ds had no choice but to take out both the Arbitration Summons (in the afternoon) and the Relief Summons (on the following day).”

11.  The so-called “Singapore Documents” was in fact a draft prepared by a Singapore lawyer (“draft Singapore Document”).  The relevance of the draft Singapore Document was explained in So 2 as follows:

“13. After the Court hearing, I telephoned Vivian to thank her for the further extension and confirmed with her earlier discussions with my colleague, Billy, outside Court that she would prepare the draft settlement agreement (the ‘Settlement Agreement’) for our comments whilst we would arrange for a draft document (to be executed pursuant to the settlement agreement by the Third Party who resides in Singapore) (the ‘Singapore Document’) to be prepared by a Singapore lawyer for her comments. We both acknowledged during our telephone conversation that the settlement documentation would have to be signed by 15^th January, 2019.

14. Thereafter, contacts were immediately made with the Singapore lawyer (who was already instructed on a related issue during the negotiation process) to prepare the Singapore document which we understood would be in an approved form and could be prepared very quickly. Unfortunately, however, the Singapore lawyer had to go on leave during the Christmas and New Year holidays and it was after much chasing after her return that eventually, we received a draft of the Singapore Document in the evening of 8^th January, 2019 which I immediately forwarded to Vivian for her comments.”

12.  In a nutshell, the reason put forward by the Defendants for their failure to comply with the Unless Order was the on-going settlement negotiations, their expectation that a settlement would be reached on or before 15 January 2019, which eventually did not materialize, and the delay in the preparation of the requisite document by the Singapore lawyer owing to inter alia the intervening Christmas and New Year holidays.

13.  In response, Mr Cooney SC submits that the fundamental flaw in the argument is that the Defendants have conflated the settlement negotiations with their obligation under the Unless Order to file a Defence on or before 15 January 2019.  The failure to reach a settlement, whether unexpected or not, is irrelevant to the Defendants’ clear obligation under the Unless Order, failing which the consequences have been expressly spelt out.  The Defendants consented to the Unless Order.  The 1^st Defendant, in addition, is a solicitor himself who should well understand the serious consequences of non-compliance.  As submitted by Mr Cooney SC, the Defendants should have ensured that they would be in a position to file a Defence by 15 January 2019 in the event a settlement was not reached.  There is no explanation as to why they did not or could not do so. 

14.  It seems to this court Mr Cooney SC’s submission is unanswerable.  At the hearing, this court inquired of Mr Ng who replied that his clients’ defence to the Plaintiff’s claim was estoppel by representation, based on the matters stated in the 1^st Affidavit of the 2^nd Defendant dated 12 August 2019 (“Wong 1”).  If so, it should not be that difficult for the Defendants’ legal team to prepare a Defence for filing on time, in compliance with the extended deadline in the Unless Order—the Defendants just chose not to do it.

15.  But first, this court should remind itself of the law.

16.  RHC Order 2 rr 4-5 provide: 

“4. Sanctions have effect unless defaulting party obtains relief (O. 2, r. 4)

Where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or court order has effect unless the party in default applies to the Court for and obtains relief from the sanction within 14 days of the failure.

5. Relief from sanctions (O. 2, r. 5)

(1)  On an application for relief from any sanction imposed for a failure to comply with any rule or court order, the Court shall consider all the circumstances including—

(a)  the interests of the administration of justice;

(b)  whether the application for relief has been made promptly;

(c)  whether the failure to comply was intentional;

(d)  whether there is a good explanation for the failure to comply;

(e)  the extent to which the party in default has complied with other rules and court orders;

(f)  whether the failure to comply was caused by the party in default or his legal representative;

(g)  in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h)  whether the trial date or the likely trial date can still be met if relief is granted;

(i)  the effect which the failure to comply had on each party; and

(j)  the effect which the granting of relief would have on each party.”

17.  In Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKLRD 606, Fok J (as he then was) set out the relevant legal principles as follows:

“35. Ribeiro J [in Chan Chun Lung Allen & Anor v Ryland Limited & Ors, unrep, HCA 4904/1996, 26 August 1999] declined to lower the threshold, a trend which he noted was detectable in some of the English authorities, in particular Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 where, at p.1677, Auld LJ said:

‘In my judgment, there is no need to confine the test to that of an intentional disregard of a court’s peremptory order, whether or not it is characterised as flouting, contumelious, contumacious, perverse, obstinate or otherwise. Such an intent may be the most usual circumstance giving rise to the exercise of this jurisdiction. But failure to comply with one or a number of orders through negligence, incompetence or sheer indolence could equally qualify for its exercise. It all depends on the individual circumstances and the existence and degree of fault found by the court after hearing representations to the contrary by the party whose pleading it is sought to strike out.’

…

38. … It is noteworthy that, in Chan v Ryland, Ribeiro J simply said that the Hytec approach did not ‘yet’ represent the law in this jurisdiction. Since his decision in that case, in August 1999, the CJR has since come into effect. There is now a trend towards the greater use of orders to specify automatic consequences of non-compliance and for placing the onus on a party guilty of non-compliance to seek relief from those consequences. The rules themselves reflect this trend: see, for example, RHC O.25 r.1C (failure to appear at case management conference or pre-trial review).

39. To this end RHC O.2 r.4 now specifies that where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or order has effect unless the party in default applies to court for relief from the sanction within 14 days of the failure. Relief is not automatic and RHC O.2 r.5 specifies the circumstances which the court shall consider on an application for such relief.

…

41. In my view, the passage quoted above from Hytec is entirely consistent with the more pro-active case-management approach encouraged by the CJR and, in my view, the CJR has had the effect that the Hytec approach now reflects the approach that should be applied in this jurisdiction. That is to say, although intentional and contumelious disregard of a court’s peremptory order may be the most usual circumstance leading to the refusal of an extension of time to comply with a peremptory order, the exercise of the discretion to refuse an extension or to relieve a party from sanctions is not limited to cases of intentional and contumelious default. As directed by RHC O.2 r.5, the court should consider all the individual circumstances including those listed in r.5(1) at sub-paragraphs (a) to (j). Depending on the circumstances, failure to comply with one or a number of orders through negligence, incompetence or sheer indolence may be such as to lead the court to conclude there is an existence and degree of fault which warrants a refusal of an extension of time, so that relief from a sanction for non-compliance specified in a peremptory order (including an order striking out a pleading) should not be granted. Any other conclusion would, in my opinion, be to ignore the positive duty placed on parties to assist the court to further the underlying objectives of CJR (RHC O.1A r.3) and on the court to do so by actively managing cases (RHC O.1A r.4(1)).” (emphasis added)

18.  This court respectfully agrees and adopts the principles set out by Fok J above.

19.  In Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 at 1674H-1675C, Ward LJ explained the philosophy behind the “trend” referred to in para 35 of Fok J’s judgment as follows:

“(1) An unless order is an order of last resort. It is not made unless there is a history of failure to comply with other orders. It is the party’s last chance to put his case in order. (2) Because that was his last chance, a failure to comply will ordinarily result in the sanction being imposed. (3) This sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling reason is advanced to exempt his failure. (4) It seems axiomatic that if a party intentionally or deliberately (if the synonym is preferred) flouts the order then he can expect no mercy. (5) A sufficient exoneration will almost inevitably require that he satisfies the court that something beyond his control has caused his failure to comply with the order. (6) The judge exercises his judicial discretion in deciding whether or not to excuse. A discretion judicially exercised on the facts and circumstances of each case on its own merits depends on the circumstances of that case; at the core is service to justice. (7) The interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused by the twin scourges of delay and wasted costs. The public interest in the administration of justice to contain those two blights upon it also weighs very heavily. Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two.” (emphasis added)

20.  Going through the list of circumstances in RHC O 2 r 5(1), this court’s view is as follows. 

21.  As for (a),the interests of the administration of justice require that orders of the court must be complied with and that the parties are held to their obligation to assist the court in furthering the underlying objectives of the RHC.  It is not in the interests of the administration of justice to relieve a party from his obligation under an unless order in circumstances in which he has consciously decided not to comply with it.  Every litigant (or his lawyer) knows or should know that settlement negotiations may or may not result in a settlement.  A party’s expectation of the outcome of the negotiations, reasonable or otherwise, has no bearing on whether an unless order should be complied with. 

22.  As for (b), the Relief Summons was issued within time.

23.  As for (c), the failure to comply with the Unless Order was clearly intentional—the Defendants have made a conscious decision not to comply with it, there being no suggestion of any extraneous circumstances beyond their control that a Defence was not prepared and filed by 15 January 2019.

24.  As for (d), the Defendants’ explanation for their failure to comply is clearly not good enough.  As stated earlier, the Defendants have not explained why they did not or could not prepare a Defence ready for filing in the event a settlement was not reached by 15 January 2019.  According to So 2, as early as 7 January 2019, Mr So already sounded out to the Plaintiff’s solicitor his concern that the parties might not be able to sign the settlement documentation by 15 January 2019.  On 9 January 2019, Mr So was so concerned that it would be impossible for the settlement documentation to be signed in time by 15 January 2019 that he stressed and repeated his concerns to the Plaintiff’s solicitor.  On 11 January 2019, Mr So expressly told the Plaintiff’s solicitor that “it would not be possible” to have the settlement documentation executed before 15 January 2019.  In these circumstances, one cannot help wonder why the Defendants did not take the trouble of preparing their Defence of estoppel by representation for filing by the extended deadline.

25.  As for (e), the Defendants have failed to (i) file their Defence in accordance with RHC O 18 r 2(1), (ii) comply with the Consent Order dated 26 November 2018, and (iii) comply with the Consent Order of G Lam J dated 22 March 2019 to file and serve their affidavit in reply to the Relief Summons and Arbitration Summons by the prescribed time which eventually led to another unless order by Master Lai dated 7 August 2019.  As described by Mr Cooney SC, there is simply no “clean record as to compliance” on the part of the Defendants.

26.  As for (f), this court has inquired of Mr Ng who was unable to confirm that the failure to comply with the Unless Order was purely the fault of the Defendants’ lawyers, rather than the Defendants themselves.  There is also no suggestion that the Defendants themselves were unaware of the existence or the terms of the Unless Order.

27.  Lastly, regarding (h), (i) and (j), it is correct that no trial date has been fixed and the Action is still at an early stage.  But this is not a factor of significant weight—the Unless Order was made in the course of a history of “sloppy” behavior on the part of the Defendants.  Such behaviour resulted in a series of extension of time applications and the unless order of Master Lai dated 7 August 2019 which gave them until 28 August 2019 to file their affidavit in reply. While Wong 1 was dated and signed in Hong Kong on 12 August 2019, for reasons unknown to this court, it was not filed until 26 August 2019 ie 2 days before the deadline imposed in Master Lai’s unless order. 

28.  As for the effect of the grant of relief, it would enable the Defendants to pursue their Arbitration Summons, there being no suggestion of any intention on their part to file a Defence in this Action, and to defend the Plaintiff’s claim in arbitration if they succeed in the Arbitration Summons.  This however would inevitably cause further delay to the adjudication of the Plaintiff’s claim for repayment of close to US$3 million which, according to the Undertaking signed by the Defendants, should have been made by them as early as 31 March 2018.  Suffice it for this court to note that any prejudice to the Defendants in refusing the relief sought is entirely self-induced while the prejudice to the Plaintiff, if relief is granted, is not.  In the words of Ward LJ in Hytec Information Systems Ltd v Coventry City Council quoted above:

“(7) The interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused by the twin scourges of delay and wasted costs. The public interest in the administration of justice to contain those two blights upon it also weighs very heavily. Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two.”

29.  For the reasons set out above, and looking at the matter in the round, this court is of the firm view that, in the exercise of its discretion, no relief should be granted to the Defendants under RHC O 2 r 5 and shall so rule.

IV.  Disposition and costs order nisi

30.  The Relief Summons is hereby dismissed.  There shall be an Order nisi that costs of and occasioned by the Relief Summons be to the Plaintiff, to be taxed if not agreed, and paid by the Defendants forthwith, certificate for counsel.