TANG CHUNG WAH aka TANG CHUNG WAH, ALAN AND ANOTHER v. JONATHAN RUSSELL LEONG AND OTHERS

CACV 38/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 38 OF 2016

(ON APPEAL FROM HCA NO 1691 of 2011)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1. The parties were partners of an accountancy firm (which was formerly known as Grant Thornton) ["the Partnership"] which had been wound up pursuant to a Deed of Termination of 16 November 2010 ["the Termination Deed"]. The affairs of the Partnership included some outstanding litigation with third parties. There were disagreements between the partners on the handling of such litigation. The Termination Deed had provisions governing how the litigation could proceed. In the action, the Plaintiffs claimed that the 1st and 4th Defendants acted in breach of their duties as managing partners in entering into settlement with the opposing parties in the outstanding litigation. Amongst other things, they sought declaratory relief that the other partners had no authority to enter into the settlement on their behalf and that a Settlement Deed of 28 September 2011 was not binding on them. They sought injunction to restrain the Defendants from implementing the settlement. Alternatively, if the court were to find the settlement binding, they sought damages against the Defendants. In addition, apart from the issues on the settlement, they sought an order that they be provided with full and unrestricted access to the computer systems of the partnership pursuant to the terms of the Termination Deed.

2. The trial took place before Chow J in August 2015.  The learned judge handed down his judgment on 19 January 2016 dismissing the Plaintiffs' above-mentioned claims though he found in favour of the Plaintiffs on some other claims which are not subject to any appeal.

3. After hearing counsel on 25 August 2016, we dismissed the appeal.  We now give reasons for our decision.

4. The facts of this case have been fully set out in the comprehensive judgment of the court below.  For our purposes, since the resolution of the appeal involves some very narrow points, we shall only highlight some salient facts, all of those were taken from the judgment below.

5. The outstanding litigation was summarized by Chow J at [6] and [42] in his judgment as follows:

“ The third parties with whom the Partnership was then in litigation included:-

(1) six former partners (“the Ex-MR Partners”) of an accounting firm known as Moores Rowland Mazars or Moores Rowland (“the MR Group”) who joined GTHK as salaried partners in or about 2007 and left on various dates between 2009 and 2010;

(2) Grant Thornton International Limited (“GTIL”), the umbrella organization entity for the Grant Thornton international network of accounting firms (“GT Network”) of which GTHK was a member; and

(3) Grant Thornton LLP (“GTUS”), an Illinois limited liability partnership, a member firm of the GT Network in the USA.”

The Partnership was involved in litigations with a number of parties, including the following:-

(1) vis-à-vis the Ex-MR Partners/United Secretaries Ltd (“USL”):

(a) HCA 735/2010 and HCA 1126/2010 (consolidated): in those proceedings, the Ex-MR Partners and USL claimed against the Partnership for misrepresentation and breach of a merger agreement between GTHK and the MR Group, whereas the Partnership claimed against USL for arrears of operational expenses;

(b) HCA 1873/2010: in that action, the Partnership claimed against the Ex-MR Partners for damages in the estimated amount of no less than HK$640 million in respect of the Ex-MR Partners’ alleged breaches of duties and conspiracy to injure the Partnership;

(c) HCA 49/2011 (and on appeal CACV 169/2011) (“the Michael Sim Case”): in that action Mr Michael Sim (one of the Ex-MR Partners) sued the Partnership for injunctive relief in respect of certain information stored in a laptop computer.

(2) vis-à-vis GTIL:

(a) Arbitration No 111853 (“GTIL Arbitration”): GTIL commenced an arbitration in the London Court of International Arbitration against the Partnership, seeking a declaration that the expulsion of the Partnership was lawful and claiming damages of about HK$10 million in relation to the expulsion of the partnership from the GT Network;

(b) HCMP 1284/2011: that action related to a dispute between GTIL and the Partnership concerning the use of the name “Grant Thornton”.

(3) vis-à-vis GTUS: in Civil Action No 2011 L004775 (“GTUS Action”) commenced in the Circuit Court of Cook County, the State of Illinois, GTUS claimed against the Partnership for a sum of US$1.5 million allegedly due from the Partnership under a promissory note in respect of secondee costs signed by the 4^th defendant in London.”

6. The Termination Deed contained several provisions which are relevant in the handling of the outstanding litigation:

“ Clause 6.2:-

(1) unless otherwise agreed, they shall remain Partners of the Partnership until it is wound up or dissolved with continuing legal and fiduciary duties to all other Partners until such time and Clause 15(1)(b), (c) and (d) of the Partnership Deed shall no longer apply (sub-paragraph (a));

(2) the Partnership shall cease to undertake new business and shall, subject to the terms of the Termination Deed, become dormant from the Cessation Date, but shall remain a legal entity whilst it has outstanding receivables and undischarged liabilities (sub-paragraph (b));

(3) the Partnership shall maintain all client, staff, partnership and related data to periods up to the BDO Transfer Date and the RII & CF Transfer Date on a separate computer system, notwithstanding that such clients and staff shall have migrated to BDO or such entity to which the relevant Divisions of the Partnership shall have been transferred and each Partner shall have continuing and full access to all such data, including data relating to clients of Divisions of the Partnership other than the ones in which they are working in relation to periods up to the BDO Transfer Date and the RII & CF Transfer Date as applicable (sub-paragraph (d));

(4) A “Partnership Closure Committee”, which replaced the previous “Management Committee” of the Partnership, was also set up pursuant to clause 6.2(g) of the Termination Deed.”

Clause 7:-

7.1 The Partners shall (to the extent possible prior to the Cessation Date) agree upon a joint strategic approach to potential litigation relating to issues with GTIL and its other member firms including without limitation the GRA [Gabriel Ricardo Dias Azedo] related litigation, the ex-MR partners litigation, potential claims against GTIL and/or GTUS and/or Jingdu relating to GTI, GTUS, Jingdu, the former GT China platform (“together, the Potential Actions”) based on legal advice to be obtained by the Partnership. To the extent that some (albeit a minority), but not all, Partners wish to pursue or continue proceedings relating to the Potential Actions in the name of GTHK or the Partnership, the Partners agree to take all steps reasonably necessary to allow such Partners to do so including to permit the resignation or retirement of non-consenting Partners notwithstanding clause 6.2(a) of this Deed, but subject always to such Partners being solely responsible for all costs and liabilities relating to any such litigation (and sharing the rewards if any of the litigation), and such Partners indemnifying and holding harmless the other Partners on terms reasonably acceptable to the Indemnified Partners (acting at all times reasonably, with a view to permitting such litigation to occur, and so that such indemnity shall not extend beyond indemnification for the consequences of such litigation being undertaken had they agreed to such litigation or remained Partners of GTHK) prior to any such litigation being pursued or continued.

7.2 To assist in the determination of the Partners as to the potential litigation and resolution of other issues relating to the Potential Actions (and without accepting any wrong doing, negligence, error or omission in relation thereto) so far as is reasonably practicable and to the best of their recollection (based on contemporaneous meeting notes, exchanges of emails and written communication or otherwise):-

(a) Patrick Rozario [the 7^th defendant], Jonathan Leong [the 1^st defendant] and Gary James [the 4^th defendant] as Managing Partner and/or the members of the former interim leadership board of the Partnership shall produce to all Equity Partners on or before close of business on 31 December 2010 the Partnership minutes and minutes of the Management Committee/LB meetings from 1 April 2008 to date to the extent available;

(b) Jonathan Leong as Managing Partner or otherwise shall render on or before close of business on 31 January 2011 to all Equity Partners a full account of the matters outlined in Schedule 5.

7.3 Without any admission whatsoever of liability for wrong doing, negligence, or otherwise in relation to the discharge of his duties and actions undertaken whilst a Partner and the then Managing Partner and representative of the Partnership at GTIL in respect of, inter alia, those matters referred to in Clause 7.2, Jonathan Leong agrees that, in consideration of and subject to Clause 7.4, he shall transfer to Alan Tang [the plaintiff] the sum of HK$3M of his current account balance with effect from the Cessation Date.

7.4 In consideration of Jonathan Leong’s agreements in Clauses 7.2 and 7.3 of this Deed, each of the Other Partners in the Partnership (including Alan Tang) hereby irrevocably and unconditionally releases absolutely and discharges Jonathan Leong from any and all claims, actions, suits, causes of actions, demands, liabilities, damages and costs (whether at common law, in equity or, to the extent permitted, under any Ordinance) (‘Claims’) arising out of or in the course of, or in any way concerning or relating to the matters referred to in Clause 7.2, the discharge of his duties and actions undertaken whilst a Partner and/or the then Managing Partner of the Partnership, and/or his dealings with GTIL or any third parties on behalf of the Partnership …”

7. The Judge gave an account of the course of events leading to the settlement of the litigation at [51] to [70] of the judgment.  In short, there had been negotiations in London between the 2^nd and 7^th Defendants representing the Partnership and GTIL and lengthy mediation of 19 hours in Hong Kong before the Deed of Settlement was agreed upon on 28 September 2011.  The settlement was basically on a drop-hand basis though the Partnership had to pay a sum of $1.5 million to Jingdu (on account of money payable to GTIL for the Partnership’s continued use of Microsoft software licensed to GTIL, see [163] of the judgment below).   At that time, there were already disagreements between the Plaintiffs (and one other partner Paul Chow) on the one part and the Defendants on the other on the settlement.  There were separate legal representations in some of the proceedings.

8. The Deed of Settlement was conditional and the conditions were set out in its Clause 8.1, including these conditions:

(a) the execution and delivery by the Partnership of the Settlement Deed was approved by the requisite number of partners to constitute a binding decision of the Partnership; and

(b) the partner executing the Settlement Deed on behalf of the Partnership was given express authority to do so with the intention that the Partnership be bound by the terms of the deed.

9. On 27 October 2011, after abortive attempts by the Plaintiffs to prevent the approval of the Settlement Deed by injunction proceedings (withdrawn by the Plaintiffs with leave granted by Deputy High Court Judge Lok, as he then was), the Partnership resolved at a partners’ meeting (with the Plaintiffs and Mr Paul Chow being absent) on 27 October 2011 to approve the terms, execution and delivery of the Settlement Deed.

10. After that, the relevant proceedings were concluded according to the terms of the Settlement Deed.

11. On the issues raised in the Agreed List of Issues placed before the Judge, the Judge concluded as follows.

12. The 1st, 4th and 7th Defendants had acted in breach of their duties (fiduciary duties as partners as well as duties under the Deed of Termination) in failing to disclose documents and information under Clause 7.2 of the Deed of Termination.  The relevant findings by the judge at [78] were as follows:

(a) the 1^st, 4^th or 7^th Defendants were in breach of clause 7.2 (a) of the Termination Deed in relation to the timing of disclosure, but not in relation to the completeness of the disclosure eventually made on 31 January 2012;

(b) the 1^st Defendant was in breach of clause 7.2 (b) of the Deed of Termination both in relation to the timing and completeness of disclosure.

13. The Judge then concluded that the other Defendants were not in breach because they were not under any obligation to pro-actively cause or procure the 1^st, 4^th and 7^th Defendants to comply with their respective disclosure obligations under clause 7.2 of the Termination Deed. 

14. On the question of damages, the Judge was of the view that the Plaintiffs had not proved that they had suffered any loss or damages arising from the 1^st, 4^th and 7^th Defendants’ breaches of clause 7.2 of the Termination Deed.  As the Plaintiffs had not applied for any order from the court for a split trial of liability and quantum, the judge refused to make any order for separate assessment of equitable compensation or damages.  Instead, he ordered the 1^st, 2^nd and 7^th Defendants each to pay nominal damages of HK$10 to the Plaintiffs for their breaches of clause 7.2 of the Termination Deed.  In addition, the judge ordered the 1^st Defendant to file and serve an affidavit to (i) confirm the disclosure previously made in the letter dated 31 January 2012, (ii) address the 1^st Plaintiff’s complaints at paragraph 32(d) and (e) of his first witness statement, and (iii) disclose such further information and documents (if any) for the purpose of fully complying with his obligation under clause 7.2(b) of the Termination Deed. 

15. Though the conduct of litigation before the settlement is not directly in issue in the present appeals, the findings by the Judge under Issue 2  as to the considerations which the Defendants were entitled to take account in accepting the settlement are relevant.  At [90] and [144] of the judgment below, the Judge found the defendants to have taken these matters into account:

(1) the dire financial situation of the Partnership and the escalating legal costs to pursue the litigation at the material time;

(2) the view taken that the loss suffered by the partners consequent upon the expulsion was much smaller than what was originally thought to be or might be the case;

(3) the legal advices received in respect of the merits, or lack of merits, of the respective cases of the parties;

(4) the failure or refusal of the plaintiffs to provide what the defendants regarded as a reasonable indemnity of their exposure in terms of liabilities and legal costs to pursue the litigation; and

(5) the outcome of the “Michael Sim Case”.

16. The Judge explained the dire financial situation facing the Partnership at [91] to [98] of the judgment below.  In a nutshell, there was simply no fund in the partnership account to pay its lawyers to maintain the litigation (estimated by the lawyers to be around $36 million), not to mention its potential exposure to the costs of the other parties (estimated to be $25 million odd).  At the same time, the Partnership was heavily in debt, owing banks in terms of millions which were falling due shortly.

17. For our purposes, it is not necessary to address the merits of the Partnership's claims at great length, except noting that there were conflicting views expressed by lawyers.  In respect of the quantum of claim, the Judge noted that by June 2011 the prospects were very different due to many partners having moved to other firms, taking the majority of their clients with them to the new firms. 

18. Before we examined the indemnity issue, which is a matter of central importance in this appeal, we shall briefly allude to the Michael Sim Case, discussed by the Judge at [132] to [138] in the judgment below.  The upshot was, as found by the Judge, that the defendants had reason to lose confidence in respect of the 1st Plaintiff's assessment of the merits and strategies in litigations with other parties due to his ill-conceived optimism in that case.

19. As the injunction in the Michael Sim Case was only granted by Recorder A Chow (as Chow J then was) in favour of Michael Sim on 24 June 2011, the loss of confidence occasioned by the grant of that injunction could not have been a matter that the partners had taken into account when they entered into the Termination Deed on 16 November 2010.  However, it was a relevant consideration at the time when the parties assessed the question of reasonable indemnity from July to September 2011.  

20. On the indemnity issue, the judge referred to the relevant correspondence between the parties from December 2010 to August 2011, including those between their respective lawyers.  The matter gained momentum after settlement negotiations in London with the defendants favouring settlement.  It appears from the correspondence that the stance adopted by the Plaintiffs at that stage, as set out in the email of the 2^nd Plaintiff of 25 April 2011 and the letter of 19 July 2011 from ONC Lawyers (who was then acting for the 1^st Plaintiff), was that the Plaintiffs could carry on with the litigation even if the other partners settled with the other parties in that litigation, and this could be achieved by the partners who settled retiring from the partnership.  If such course were adopted, they thought no question of indemnity could have arisen.  Notwithstanding a letter of 12 August 2011 from the solicitors for the Defendants explaining why that course was not viable and setting out the costs estimate in a demand for reasonable indemnity, the Plaintiffs at no stage offered any indemnity supported by any security to the defendants.

21. The Judge came to the conclusion that in light of the circumstances at the material time, the Defendants were entitled to have an indemnity supported by security under Clause 7.1 before the plaintiffs were permitted to carry on with the litigations.  The Judge further found that as the Plaintiffs were not willing to offer any secured indemnity, the Defendants were entitled to reject their requests for permitting them to carry on with the litigation.

The construction of Clause 7.1

22. In support of the appeal by the Plaintiffs, Mr Siu submitted that as a matter of construction, the obligation to provide reasonable indemnity did not arise until the obligation in Clause 7.2 had been fulfilled.  By reason of the breaches of Clause 7.2, Mr Siu submitted the Judge erred in holding that the Plaintiffs were bound by the decision of the majority in settling the litigation on account of the their failure to offer any reasonable indemnity.

23. Mr Chang submitted on behalf of the Defendants that this construction point was not taken below and this court should not entertain the same in this appeal.  He said the construction point taken before the Judge was that it was adequate for the Plaintiffs to offer an indemnity without any security.  That was rejected by the Judge at [125] to [127] and [155] in the judgment below.

24. Though the Plaintiffs pleaded at para 56 of the Statement of Claim that the combined effect of Clauses 7.1 and 7.2 was that the option of continuing with the litigation was to be exercised after the discharge of the obligations under Clause 7.2, it went on to plead the effect of breach of Clause 7.2 in terms of the preclusion of the Defendants from denying, frustrating or otherwise thwarting the Plaintiffs’ exercise of the option under Clause 7.1.  As submitted by Mr Chang, reinforced by reference to the Agreed List of Issues before the Judge, the point was run at the trial as an argument based on the prevention principle instead of a matter of construction.  The only construction issue raised by the Plaintiffs at the trial in the Agreed List of Issues was whether a bare undertaking to indemnify was adequate.

25. Mr Siu invited us to his closing submissions at the court below [“the Closing Submissions”], in particular paragraphs 93 and 97-98 and submitted that the construction point now taken by him was argued at the court below.

26. We have read with care the relevant section in the Closing Submissions at paragraphs 73 to 94.  That must obviously be read together with the Agreed List of Issues.  With respect, we agreed with Mr Chang that the point was argued on behalf of the Plaintiffs as an application of the prevention principle instead of a pure construction point.  After referring to the need to assess reasonableness of indemnity by reference to the circumstances, Mr Siu at paragraphs 82 to 85 of the Closing Submissions referred to clause 7.2 and its avowed purpose of assisting the partners to determine the litigation.  At paragraph 88, Mr Siu submitted that the lack of disclosure under clause 7.2 affected the 1^st Plaintiff’s assessment of the litigation.  In the subsequent paragraphs, the gist of the argument was that without disclosure under clause 7.2, the Plaintiffs could not possibly assess the probability of success and thus in no position to decide whether to continue with the litigation and what form of indemnity was to be offered. It concluded at paragraph 94 as follows:

“ This brings the ‘prevention principle’ into operation (see Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at §§91-99), i.e. Ds are prevented from taking advantage of their own wrong to deny, frustrate or thwart Ps’ right to exercise the option under clasue 7.1”

27. Though there was a reference to the interpretation of clauses 7.1 and 7.2, read in the context of these paragraphs in the Closing Submissions, the interpretation referred therein was the purpose of clause 7.2 as a step in the argument based on the prevention principle rather than the construction point now taken before us.

28. That was also the understanding of the Judge and he dealt with the argument based on the prevention principle at [157] and [158] of the judgment below.  He said at [158]:

“ It has not been shown by the plaintiffs how their right to rely on clause 7.1 of the Termination Deed was denied, frustrated or otherwise thwarted by the 1^st, 4^th and 7^th defendants’ breaches of their disclosure obligations under clause 7.2 of the Termination Deed. In particular, there is no evidence or proof that the plaintiffs’ failure or unwillingness to give a reasonable indemnity to the defendants under clause 7.1 of the Termination Deed was caused by the 1^st, 4^th and 7^th defendants’ breaches of their disclosure obligations.”

29. Thus the Judge did not address the construction point now taken by Mr Siu.  A crucial difference between the construction point now taken and the argument based on the prevention principle is that it is not necessary for the Plaintiffs to show that their rights under Clause 7.1 were denied, frustrated or otherwise thwarted (an issue which the Judge found against them) if as a matter of construction the obligation to provide reasonable indemnity did not arise until the obligation of disclosure under Clause 7.2 has been fully complied with. 

30. The principles governing fresh points being taken on appeal are set out in Flywin Co Ltd v Strong Associates Ltd (2002) 5 HKCFAR 356 at [38].  After referring to the dicta of Lord Herschell in The TasmaniaHKC  (1890) LR 15 App Cas 223 at 225, and submissions of counsel, Bokhary PJ said:

“ … What is involved is a general principle. Where a point is taken at the trial, the facts pertaining to it are open to full investigation at the evidence-taking stage of the litigation. That is as it should be. Therefore where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, the position is as follows. He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.”

31. His Lordship further explained at [39] that the foundational imperative for this bar is fairness.  On the facts of that case, notwithstanding the point sought to be taken was a construction point and the submission of counsel that it was in substance the same as the waiver argument raised at the courts below, the Court of Final Appeal refused to entertain it. It is of interest for present purposes to note what Bokhary PJ said at [44]:

“ The waiver and estoppels points did, it is true, lead to some investigation at the trial of what the Purchaser knew or ought to have known of the unauthorized extensions. But there is, in my view, at least a reasonable possibility that such knowledge would have been investigated more fully if the ‘subject-matter of sale’ point had been taken at the trial. And there is, in my view, at least a reasonable possibility that such fuller investigation would have resulted in the relevant evidence being materially more favourable to the Purchaser. In my view, therefore, the ‘state of the evidence’ bar operates to preclude the Vendor from now raising the ‘subject-matter of sale’ point.”

32. In Lehmanbrown Ltd v Union Trade Holdings Inc HCMP 977 of 2015, 17 June 2015, this Court (Lam VP and Barma JA) further explained at [10] the concept of fairness in assessing whether a new point should be permitted to be taken:

“ Whilst the Court of Appeal obviously has power to entertain new points in an appeal, it is also clearly and firmly established that new points which are fact sensitive or otherwise affect the course of evidence or conduct of the case at the hearing below should not be allowed. Though this principle is usually applied in situations where the new points necessitated further evidence to be adduced, it is not confined to such scenarios. Very often, the raising of new point by one party may lead to the other party raising counter argument and the consideration of such counter argument may involve factual assessment in a different light from that undertaken by the court below. Sometimes, it may involve a different weighing of factors in the exercise of discretion. Alternatively, the other party may embark on a different course of forensic conduct if the new point were taken earlier. The appellate court, in considering whether the new point would be entertained, is entitled to take these into account in order to avoid unfairness to the other party.”

33. Mr Siu referred us to the principles on construction of contractual provision discussed by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913, and they are not disputed by Mr Chang.  Mr Chang submitted that had the construction point now advanced been taken at the trial there might be further relevant evidence in relation to the context for these clauses being explored at the trial.

34. Because of the way in which the case was argued at the court below, we do not have the evidence on the extent to which a breach of the obligation (no matter how minor it is) to give disclosure under Clause 7.2 would affect the ability of the Plaintiffs or other minority partners from proferring a reasonable indemnity under Clause 7.1.  In this connection, Mr Siu simply relied on a broad proposition that a failure in compliance with the obligation of disclosure under Clause 7.2 would affect the Plaintiffs’ assessment of the merits of the litigation.  With respect, though we accept some of the information to be disclosed under Clause 7.2 had to be relevant for the assessment of the merits of the litigation, it is by no means clear that a reasonable man having the knowledge of the parties at the time of the Termination Deed must have understood that the right to have reasonable indemnity under Clause 7.1 was conditional upon full compliance with Clause 7.2. As found by the Judge, Clause 7.2 only imposed obligations on the 1^st, 4^th and 7^th Defendants but not the other defendants who were entitled to the benefit of Clause 7.1.  Further, there is insufficient evidential basis for suggesting that no reasonable indemnity could have been offered until there was full and absolute compliance with Clause 7.2.  The wordings of these clauses did not suggest that one could not settle the litigations until Clause 7.2 had been fully complied with.

35. We note that the 1^st Defendant did not give evidence at the trial, see [77] of the judgment below.  If the construction point now taken were taken at the trial, there is at least a reasonable possibility that he might adopt a different course.  Further, it is at least reasonably possible that the extent of information possessed by the respective parties regarding this litigation at the time when the Termination Deed was executed and without full compliance with Clause 7.2 the extent to which a partner could assess whether he or she should go ahead with the litigation when the majority declined to do so, would be explored at greater length (and the Judge might make relevant findings on the same) if the construction point had been so taken.

36. Actually, the finding of the Judge at [158] suggested that there was no evidence on the causal link between the failure to comply with the duty of disclosure under Clause 7.2 and the refusal to offer reasonable security under Clause 7.1.  In this connection, it is pertinent to note that at the time of the event, the Plaintiffs did not link the obligation to give indemnity under Clause 7.1 with non-compliance with Clause 7.2.  We have read the correspondence identified at paragraph 30 of Mr Siu’s written submissions filed in this appeal.  Whilst there were demands for disclosure pursuant to Clause 7.2 in the correspondence, none of them discussed the matter in the context of reasonable indemnity under Clause 7.1.

37. In so saying, we should not be taken as using post-contract correspondence as evidence for construction.  What we have tried to illustrate is that the evidential focus of an argument based on the prevention principle is different from the evidential focus of the pure construction point now advanced for the first time. 

38. We are therefore satisfied that we should not permit the Plaintiffs to rely on the construction point which they had not relied upon at the court below.  In light of this conclusion, we refrain from expressing any further views on the construction argument, although we have already set out some of its difficulties above.

Prevention principle not applicable 

39. As mentioned, the Judge held that the prevention principle was not applicable because he found that the Plaintiffs’ failure or unwillingness to give a reasonable indemnity to the Defendants under clause 7.1 of the Termination Deed was not caused by the 1^st, 4^th and 7^th Defendants’ breaches of their disclosure obligations.

40. Mr Siu relied on the judgment of the Court of Final Appeal in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 where the prevention principle was discussed at [91] to [99].  It is not necessary for us to reiterate the prevention principle at length.  For present purposes, we can focus on the second limitation of the principle discussed at [95] which was summarised by Ribeiro PJ as follows:

“ The second limitation on the operation of the principle is a causation requirement. It is necessary to show that the contractual rights or benefits which the party in question is seeking to assert or claim arise as a direct consequence of that party’s prior breach. …”

41. On the Judge’s finding, there was no causal connection between the breach of Clause 7.2 and the Plaintiffs’ refusal to give a reasonable indemnity under Clause 7.1.

42. Apart from the construction point (which we have dealt with above) Mr Siu attempted to overcome that difficulty by submitting that the Judge erred in making such finding.  He referred to the emails and other matters set out in paragraph 30 of his written submissions and argued that it defied logic to rule that the Plaintiffs should provide reasonable indemnity when reasonableness of indemnity must depend on all circumstances, including the probability of success.

43. With respect, we do not accept this argument.  As we said, it is correct that the Plaintiffs had been asking for disclosure pursuant to Clause 7.2.  However, there was no suggestion in the emails and the other matters identified at paragraph 30 that such disclosure was essential to the formulation of a reasonable indemnity.  There was no suggestion from the Plaintiffs that the Partnership should not consider the settlement offer pending full compliance with Clause 7.2.  The Plaintiffs did not identify any particular item the belated disclosure of which had hampered them from putting forward a reasonable indemnity.  If the real concern of the Plaintiffs was on surprises being sprung on them by disclosure given later, it could have been addressed by an appropriate proviso in the indemnity offered.

44. The Judge had examined the relevant correspondence at some length at [109] to [124] of the judgment below.  It is quite plain from this course of correspondence that, as found by the Judge at [128], the Plaintiffs simply refused to give any reasonable indemnity at that stage.

45. We do not see any ground for us to disturb the Judge’s finding in this regard.  For this reason, the Plaintiffs’ reliance on the prevention principle must fail.

No proof of damages

46. For the breach of Clause 7.2, the Judge only awarded nominal damages to the Plaintiffs.  There is no appeal against that part of the judgment.  Ground 2 in the Notice of Appeal of the Plaintiffs referred to the Judge’s decision at [168] of the judgment below directed towards the lack of evidence for damages in respect of the alleged breach by implementing the settlement in accordance with the Deed of Settlement.  The Judge prefaced that by saying in [167] that the issue did not arise in view of his conclusion that the Defendants were not in breach in that regard.

47. We have come to the same conclusion as the Judge, viz the Plaintiffs had no valid claim in regards to the settlement of the litigation.  Thus the question of damages does not arise in this appeal.

48. In such circumstances, we do not propose to deal with Mr Siu’s submissions based on the principles in Kitchen v Royal Air Force Association [1958] 1 WLR 563, Mount v Barker Austin (a firm) [1998] PNLR 493 and Hong Jing Co Ltd v Zhuhai Kwok Yuen Investment Co Ltd [2013] 1 HKLRD 441 at length.  We should not be taken as accepting that these principles are applicable in the present case.  We have considerable reservation on the extent to which these cases could avail the Plaintiffs when there is clear evidence that the Partnership was in a dire financial situation and there was no partner willing to come forward with funds to continue with the litigation.

Access to the Computer Systems

49. At trial, one of the claims of the Plaintiffs was that the 7^th Defendant (who was responsible for IT-matters of the Partnership) did not give them full access to all emails within the Partnership’s email system and the source code and database of its Practice Management System.  The Plaintiffs therefore sought an order that they be given full and unrestricted access to all computer systems and data within the Partnership’s IT systems.

50. The Judge dismissed this claim as he accepted the evidence of the 7^th Defendant given under cross-examination.  This was set out at [174] of the judgment below:  

“ It is not in dispute that the plaintiffs had, as a matter of fact, possession of the computer hardware, including the servers, containing the PMS at the Sunning Plaza premises. The crux of their complaint relates to the failure or refusal of the 7^th defendant to provide the administrative password. When this matter was put to the 7^th defendant in cross examination, he explained that in fact he had provided the administrative password to the 1^st plaintiff and the administrative password had never been changed. Apparently, around May/June 2011, after the Partnership terminated the services of Shinewing (who were originally retained to manage the litigations with third parties and wind down the business of JBPB), the Partnership attempted to take back possession of the computers but found that the Partnership’s IT system had broken down which the 7^th defendant suspected was damaged by the 1^st plaintiff (or his staff). For this reason, the defendants (including the 7^th defendant) also did not have full access to the email system or the PMS. The 7^th defendant offered to provide his IT personnel to fix the problem but insisted that once the system had been fixed, either he should get back control of the system or should be allowed to obtain a complete copy of the information contained in the system. However, no agreement could eventually be reached.”

51. The Judge also took the view that the evidence of the 1^st Plaintiff on this issue was vague and non-specific.  He had no difficulty in preferring the evidence of the 7^th Defendant to that of the 1^st Plaintiff.

52. In this appeal, Mr Siu submitted that the Judge should not have accepted the evidence of the 7^th Defendant on the ground that the Defendants did not put forward any positive case in the pleadings.  Counsel relied on the proposition that a party should not be allowed to put forward evidence to contradict the other party’s case in the absence of any positive plea by himself, citing Hong Kong Civil Procedure 2016 §18/13/9 and Samlane Development Ltd v Fung Chi Fai HCA 318 of 2006, 22 April 2013 at [14].

53. Mr Siu also submitted in his written submissions that the evidence of the 7^th Defendant was contradicted by documentary evidence and the evidence of the 1^st Plaintiff was corroborated by the evidence of Mr Paul Chow.  We have examined the documentary evidence alluded to by Mr Siu and with respect none of it directly contradicted the evidence of the 7^th Defendant. At the highest, it only shows that the 7^th Defendant did not then refer to the system being damaged.

54. When he gave evidence in the witness box, the gist of his explanation was that the system was previously maintained by Shinewing and the 1^st Plaintiff re-took possession of the system in May or June 2011 after terminating the service of Shinewing.  The 1^st Plaintiff or his IT personnel tried to extract information from the system without success and the 7^th Defendant suspected they might have broken the system in so doing.   The 7^th Defendant offered his own IT people to fix it on condition that he would get back control of the system but the parties did not reach agreement on that.  He said actually it was he who did not have access and he had not changed the password.  Hence, the problem was not due to the password.

55. Nothing in the correspondence referred to by Mr Siu demonstrated that the 7^th Defendant instead of the Plaintiffs had physical possession of the system after getting back the same from Shinewing.  There is also nothing in such correspondence to demonstrate that the 7^th Defendant had the opportunity to change the password after the system had been returned to the Plaintiffs.

56. Further, Mr Siu did not cross-examine the 7^th Defendant with reference to the correspondence when faced with such evidence of the 7^th Defendant.

57. This Court has said repeatedly that it is not the function to the Court of Appeal to re-assess the evidence as if it is sitting at the trial.  In the absence of any palpable error in the Judge’s weighing of the evidence and without showing that the Judge was plainly wrong in that regard, we have no ground to disturb his finding of fact.

58. In his oral submissions, Mr Siu realistically accepted the real point in this ground of appeal was not about the weight attached to the evidence.  Rather counsel focused on the admissibility of the evidence of the 7^th Defendant.

59. Based on the limited information before us (and the Plaintiffs had to accept the consequence of the haphazard manner in which the transcript of the relevant evidence was placed before us), counsel for the Plaintiffs did not object to such evidence of the 7^th Defendant being admitted after it emerged in the course of cross-examination.  No application had been made for expunging such evidence before the close of evidence.

60. Though the Plaintiffs did not include the closing submissions in the bundle, we accept Mr Siu’s contention that he did raise the question of admissibility of the evidence of the 7^th Defendant in his closing submissions.  However, counsel also accepted that there was no separate application for expunging the evidence.

61. We do not find the authorities cited by Mr Siu to be determinative of the admissibility of the evidence of the 7^th Defendant in the present case.  Whilst we wholeheartedly endorse Mr Siu’s submission that litigation by ambush has no place in the current litigation ethos, ultimately it is a matter of case management discretion of the trial judge in deciding whether evidence not anticipated by pleadings or witness statements should be admitted at the trial taking all the circumstances of the case into account.

62. Mr Siu said it was not for the Plaintiffs to object to such evidence when it should not have been admitted in the first place.  With respect, we do not agree.  As we said, the trial judge has discretion to admit evidence even if it is not anticipated.  Provided that the discretion is exercised judicially and having proper regard to the fair conduct of the proceedings, the Court of Appeal would not interfere unless the exercise of discretion is plainly wrong.  When the party who could have objected to the evidence (as evidence outside his anticipation) did not actually object, the trial judge could properly proceed on the basis that though the evidence was not anticipated there is no real objection to its admissibility.

63. The judge would not know if the opposite party was really prejudiced by the unanticipated evidence and what other evidence would have been adduced if there is forewarning of the evidence.  In the present context, for all we know, it seems that the Plaintiffs accepted that the system had been in their possession after the system was returned from Shinewing and they had no evidence to rebut the evidence of the 7^th Defendant that he had no opportunity to change the password or source code when the system was in their possession.  If objection was made before the close of evidence and if the Plaintiffs intended to reply to such evidence, the Judge would have to take this into account.  But up to now, Mr Siu did not advance such a position.

64. Further, it could be a matter of fine judgment whether an answer given under cross-examination should be regarded as setting up a positive case as opposed to the elaboration of a denial of the other party’s case.  In the present context, the case of the 7^th Defendant remained that he did not change the password or source code though he elaborated on the reason why the Plaintiffs encountered difficulties with the system, to some extent based on speculation rather than direct knowledge.

65. The only issue before the Judge in this aspect of the case was whether the 7^th Defendant changed the password and source code.  Even with a bare denial, he was entitled to give evidence he did not change the password and the source code.  The Judge was entitled to accept his evidence in that respect.

66. On the whole, we do not see any valid ground for holding that the Judge erred in taking into account the evidence of the 7^th Defendant notwithstanding the objection taken by Mr Siu in his final submissions.  We are not satisfied that such exercise of discretion was plainly wrong.

Disposition

67. For these reasons, we dismissed the appeal.

68. Mr Chang sought costs on indemnity basis.  After giving the matter some anxious considerations, we do not think this is a case which warrants us to depart from the usual rule of costs of the appeal being taxed on a party to party basis.  We shall order the Plaintiffs to pay the Defendants the costs of this appeal accordingly.

69. We expressed concerns at the hearing over how the appeal bundles were compiled.  There were 6 appeal bundles apart from a core bundle.  Many of the documents in the bundles were not referred to in the written or oral submissions of counsel.

70. At the court below, the Judge had these comments at the end of his judgment:

“ There is one final matter that I wish to mention. For the purpose of the trial, a total of 22 trial bundles were produced (excluding the core bundle of documents which I specifically requested the parties to prepare). However, only a small number of documents in the 22 bundles were referred to at the trial. This is particularly true in respect of bundles 8 to 22. I was told by Mr Chang that those bundles were prepared by the plaintiffs’ solicitors without consultation with the defendants’ solicitors. Had the parties taken care to include only those documents which were strictly essential to resolve their disputes or which could reasonably be expected would be referred to in the course of the trial, I would have thought the trial bundles could have been shrunk to no more than 3 to 4 lever arch files in total. …”

71. In Gotland Enterprises v Kwok Chi Yau CACV 260 of 2014, 19 Jan 2016, this Court (Lam VP, Kwan JA and Harris J) reminded practitioners that proper judgment should be exercised in the preparation of appeal bundles.  In that case, the Court found that the appeal bundles were prepared without regard to the guidance in PD 4.1 and a large quantity of documents in the bundles were not remotely relevant to the issues raised in the appeal.  Solicitors responsible for the wasteful exercise eventually had to bear some of the costs.

72. Solicitors for the Plaintiffs filed written submissions on 1 September 2016 explaining the manner in which they prepared these bundles.  They explained that they had made an effort in following the guidance in Gotland Enterprises v Kwok Chi Yau, supra and had involved counsel in the preparation of the appeal at any early stage, including the preparation of the appeal bundles.  It was accepted that there were documents in the bundles which were not referred to in the appeal.  However, the solicitor explained that there should be some allowance in that regard since the bundles were prepared without the benefit of the skeleton submissions.  Further, documents relevant to a question in issue may include some documents which the Court or counsel for either party may (but not must) refer to.  This was particularly so in an appeal on facts.

73. Solicitors for the Plaintiffs also informed this Court that they had sought comments from solicitors for the Defendants on the draft indices but the response of the latter was not helpful.

74. They also asked us to bear in mind that they had made some efforts in cutting down the volume of the documents included in the appeal bundles from the 22 trial bundles.

75. They said it would be disproportionate and placing too onerous a burden on solicitors to impose any wasted costs order in the circumstances.

76. We wish to take this opportunity to reiterate the guidance in Gotland Enterprises v Kwok Chi Yau, supra, at [67] to [81].  At the same time, we should add that there is a positive duty to collaborate on the part of the solicitors for the respondents in an appeal.  This flows from Order 1A Rule 3.  As the solicitors for the Defendants did not have an opportunity to respond to the submissions of 1 September 2016, we do not express any view in this judgment on their response in the present case.

77. We also accept that there are differences in the documents included in the core bundle and those in the appeal bundles generally. There should be some allowance for documents which may potentially be referred to in the general appeal bundles.  Even so, the documents must have some potential relevance before they are included in the general appeal bundles.

78. We also accept that there should be some allowance for the solicitors as they have to prepare the bundles without the benefit of the skeleton submissions.  They have to prepare the bundles in light of the grounds of appeal in the notice of appeal (and respondent’s notice, if any).  It would not be right to impose on them a judgment on relevance of the documents which the court reaches with the benefit of hindsight.

79. In the present appeal, reading the notice of appeal and comparing the grounds in it with the arguments run before us, it is fair to say that there had been a shift of focus in the grounds for challenging the Judge’s conclusion on clause 7.2.  Likewise, the approach to the question of damages was also different.

80. Even with such considerations in mind, we are of the view that there was scope for cutting down documents to be included in the appeal bundles.  Solicitors for the Plaintiffs explained that as it is an appeal involving an appeal against finding of facts, they included all the documents on such factual issues to give the Court a full picture.  But there are many documents in the bundles which do not fall into the categories of documents which the Plaintiffs said the Judge failed to take account.  Apparently, the solicitors worked on the assumption that this Court would conduct a re-trial of these issues by itself.  As explained in many cases, this is not appropriate given the institutional limitation of our Court of Appeal.  Unless it is a very clear case where the evidence only points in one direction, our appellate process is not geared towards this Court hearing and re-examining all the evidence afresh. If this Court is satisfied that a trial judge had made palpable errors in the weighing of evidence, and the evidence is not conclusively in favour of the case of one party, the proper course is to order a re-trial.  Thus, whilst it is necessary for an appellant to include documentary or transcript of oral evidence which were said to be overlooked by the trial judge in the appeal bundles, the inclusion of other documents on the same issue may not be necessary.

81. We have to say that in the present instance, many documents included in the appeal bundles are unnecessary for the appeal.

82. At the same time, we accept that solicitors for the Plaintiffs had made some efforts in trying to comply with the guidance in Gotland Enterprises v Kwok Chi Yau, supra.  For future guidance, we need to state clearly that though the court will take account of the fact that a solicitor consulted counsel in the preparation of appeal bundles, such fact alone could not completely exonerate a solicitor from liabilities for blatant waste in preparation of appeal bundles, see (albeit in another context) Davy-Chiesman v Davy-Chiesman [1984] 1 All ER 311; General Mediterranean Holdings SA v Patel [2000] 1 WLR 272.

83. We agree that the court should exercise costs sanctions against solicitors only in serious case.  In the exercise of its case management power, the court should not adopt a micro-management approach.  Moreover, it would be more helpful for the problem to be spotted at the preparation stage rather than imposing a penalty after the event.  For that reason, the Registrar of Civil Appeals will take a more pro-active case management approach and when he becomes aware of any potential difficulties with appeal bundles, directions would be given and if necessary direction hearings will be held to address the problem. 

84. Having given careful and anxious consideration in the present case, we decide that we should not make any order for costs against the solicitors, except we shall order that the solicitors should not charge their clients for the submissions of 1 September 2016.