MATHNASIUM CENTER LICENSING, LLC v. CHANG CHI HUNG (also known as ALEX CHANG)

CACV 180/2019 & CACV 406/2019
(Heard together)

[2020] HKCA 1016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 180 OF 2019 AND 406 OF 2019

(ON APPEAL FROM HCMP NO 1550 OF 2017)

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(Heard together)

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REASONS FOR JUDGMENT

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

1.  On 18 March 2019, Wilson Chan J handed down his judgment (“the Judgment”)^[1] in these proceedings for contempt (HCMP 1550/2017) after a five-day trial at the end of 2018. The judge found the defendant Chang Chi Hung, also known as Alex Chang, guilty of contempt of court for making a false admission in a defence and counterclaim and in an amended defence and counterclaim verified by statements of truth. On 8 August 2019, the judge sentenced the defendant to three months’ imprisonment (“the Sentencing Judgment”)^[2]. The defendant brought these appeals against the finding of contempt and the sentence. The judge had stayed the order of committal pending appeal. At the conclusion of the hearing, we allowed the appeals and set aside the judge’s orders on 18 March and 8 August 2019. These are the reasons of the court.

Background

(1)     The parties and the learning centres

2.  The plaintiff, Mathnasium Center Licencing, LLC, is a company incorporated in the State of California, USA and is engaged in the business of operating Mathematics learning centres. It is the registered owner of the “Mathnasium” trademarks and “Mathnasium” branded teaching materials, know-how and techniques.

3.  Mathnasium Hong Kong Limited, formerly known as Math Concept (H.K.) Limited (“MHK”)^[3], was incorporated in Hong Kong.  The defendant was its sole shareholder and from 23 October 2009 to 2 May 2016 he was the sole director of MHK.

4.  On 20 November 2009, the plaintiff entered into a Regional Franchise Agreement (“RFA”) with MHK, by which the latter was granted a licence to use the “Mathnasium” trademarks and system as the Regional Franchisor and was allowed to establish and operate “Mathnasium” branded learning centres in Hong Kong.  The Mathnasium centres under the RFA were of two kinds: those owned or operated by the Regional Franchisor (“Regional Franchisor Centres” or “RFCs”), and those established and operated by franchisees licensed by the Regional Franchisor pursuant to franchise agreements as per Exhibit D to the RFA (“Franchised Centres” or “FCs”).  In relation to payments to the plaintiff under the RFA, MHK was required to pay the plaintiff every month a royalty fee equal to 11% of MHK’s gross receipts from RFCs at no less than US$7 per month per student, and 30% of the monthly royalty fee received by MHK from its franchisees according to the franchise agreements at no less than US$5 per month per student.

5.  In July 2014, the plaintiff served notice on MHK to terminate the RFA on the ground of MHK’s failure to pay the monthly royalty payments.  By a letter dated 12 September 2014 from the plaintiff’s solicitors to MHK, the plaintiff demanded payment of the amount owing and in compliance with the post-termination obligations as provided in the RFA.  The letter mentioned that the solicitors had visited 12 learning centres as per schedule 1 attached and pointed out that MHK had fully exploited the plaintiff’s intellectual property rights, and was doing so beyond the termination date without the plaintiff’s consent.  As regards the 12 learning centres listed in the schedule, the solicitors did not differentiate between RFC and FC.

(2)     The action against MHK in HCA 1012/2015 

6.  On 8 May 2015, the plaintiff issued a writ against MHK in HCA 1012/2015 endorsed with a statement of claim.  The reliefs sought in the prayer were an order that MHK do provide all financial reports and royalty reports on all “the HK Centres”, an order that MHK do comply with all the post-termination obligations, and damages. “The HK Centres” as collectively defined in §5b of the statement of claim are the same 12 learning centres referred to in the letter of 12 September 2014.  I will come back to the allegations concerning these learning centres as pleaded in the statement of claim.

7.  On 4 September 2015, MHK filed a defence and counterclaim between 2 to 3 pm, and managed to meet the deadline for filing of 4 pm that day pursuant to an unless order. The defence is a document of 16 pages with 69 paragraphs.  It bore the name of Arthur Yip Chi Ho of counsel (“Mr Yip”) and was signed by MHK’s solicitors, Hoosenally & Neo.  It was verified by a statement of truth signed by the defendant on behalf of MHK, stating as follows: “We, Mathnasium Hong Kong Limited (formerly known as Math Concept (H.K.) Limited), the Defendant believe that the facts stated in this Defence are true.”  I will return to this pleading.

8.  On 5 November 2015, MHK filed an amended defence and counterclaim.  The amendments were for the purpose of deleting an averment that the action should be brought in the courts of California.  It was verified by a statement of truth signed by the defendant on behalf of MHK in the same terms as before.

9.  On 27 May 2016, the plaintiff issued a summons for summary judgment in terms of the reliefs sought in the prayer of the statement of claim, alternatively for interim payment.  The application was supported by an affidavit of Whitney Novak, who referred to the letter of 12 September 2014 and deposed for the plaintiff that MHK “defiantly continues to use the Plaintiff’s proprietary system and operate 13 “Mathnasium Centres” in Hong Kong, albeit trading under an alternative name.” MHK did not file evidence in opposition to the summons.

10.  That summons was heard by Master Lai on 20 June 2016.  Ben Chan Siu Pan (“Mr Chan”) of Hoosenally & Neo appeared for MHK^[4]. The plaintiff’s counsel informed the master that the parties had in principle agreed to an order for final judgment against MHK as sought in the summons.  Master Lai raised the concern whether it would be appropriate for final judgment to be entered in such form and suggested a Tomlin order for the proceedings to be stayed for the purpose of carrying out the agreed terms in a schedule to the order.  The parties agreed to enter into a Tomlin order and this was made on 22 June 2016.

11.  The schedule to the Tomlin order provided that (1) within 21 days from the date of the order, MHK was to disclose to the plaintiff for inspection and to take copies of all financial reports and royalty reports of “all the learning centres operated by the Defendant [i.e. MHK] in Hong Kong from May 2012 to date”; (2) within 21 days, MHK was to comply with various post-termination obligations as stated including the payment of “all sums owing under the terms of the RFA”; and (3) damages to be assessed.  The schedule did not specify the number and particulars of the learning centres “operated by the Defendant”.

12.  On 11 July 2016, Hoosenally & Neo sent to the plaintiff’s solicitors the monthly reports of MHK from June 2010 to September 2014. The plaintiff’s solicitors wrote in reply on 12 July 2016 stating that the information provided did not comply with the Tomlin order and that the plaintiff’s officer would attend each of 17 learning centres for on-site inspection and take copies of all financial reports and royalty reports at each centre.

13.  On 15 July 2016, the plaintiff issued a summons to enforce the terms in the schedule to the Tomlin order.  It sought judgment in the sum of US$1,142,569.17 being the minimum amount of royalties payable; unrestricted access to all the learning centres “operated by the Defendant [i.e. MHK] in Hong Kong from May 2012 to date, including but not limited to those listed in Annexure 1”, to verify MHK’s compliance with post‑termination obligations; and unrestricted access to inspect all books and records of “the Defendant’s learning centres” aforesaid.  A total of 19 learning centres in Hong Kong and Macau were listed in Annexure 1.

14.  The enforcement summons came before Master K Lo on 18 July 2016.  MHK again appeared by Mr Chan.  He informed the master that he had confirmed with MHK that the learning centres in Annexure 1 “are not operated by the defendant’s company or owned by the defendant”^[5]. The plaintiff’s counsel submitted that 12 learning centres were pleaded in the statement of claim and it was admitted in the defence that MHK operated the 12 learning centres and that Annexure 1 contained seven more which the plaintiff found on MHK’s website^[6]. After a brief adjournment for Mr Chan to search the website of MHK, the plaintiff’s counsel informed the master without any dissent from Mr Chan that of the 19 learning centres, the first 13 were not disputed but there was a question whether the remaining six were operated by MHK^[7].  The master entered judgment for the plaintiff in the sum of US$1,142,569.17 and allowed reasonable access to the plaintiff to “all the learning centres operated by the Defendant [i.e. MHK] in Hong Kong from May 2012 to date, limited to those listed from 1 to 13 in Annexure 1”, for the purposes as sought by the plaintiff.

15.  MHK lodged an appeal against the order and judgment of Master K Lo. By letters to the plaintiff’s solicitors dated 26 July, 29 July 2016 and 11 August 2016, Hoosenally & Neo asserted that the learning centres listed in Annexure 1 were neither owned nor operated by MHK but by third party entities and that MHK was not in a position to arrange access or inspection under the order of Master K Lo.  In support of the appeal of MHK, the defendant made two affirmations on 24 October 2016 (“Chang’s 1^st Affirmation”) and 9 November 2016 (“Chang’s 2^nd Affirmation”).

16.  In Chang’s 1^st Affirmation, the defendant stated that MHK “neither owns nor operates” the learning centres, that except for the first centre in Olympian City (which had since been sold) they were not opened by MHK, and what MHK did was to orally license the Mathnasium programme to those centres when they were opened.  He contended that the admission in the amended defence “is not entirely accurate” or “could not be said to be wholly inaccurate”.  As for the 12 “HK Centres” pleaded in §5(b) of the statement of claim, he set out the names of the 12 companies that operated those centres and asserted that except for one of them he owned shares in those companies ranging from 1 to 28%. MHK did not have any interest in any of those companies.

17.  In Chang’s 2^nd affirmation, the defendant alleged that the plaintiff should have known that the admission in the amended defence was merely a mistake.

18.  On 10 November 2016, Master K Lo’s order and judgment was set aside by consent and directions were given for the enforcement summons to be heard before a judge.

(3)     The present proceedings for contempt against the defendant in HCMP 1550/2017

19.  On 11 January 2017, the plaintiff applied for leave to bring proceedings for contempt against the defendant on an admission in the pleadings of MHK in HCA 1012/2015 verified by the statements of truth of the defendant.  Pursuant to leave granted on 22 June 2017, the plaintiff issued an originating summons in these proceedings for a committal order on 4 July 2017.  The grounds on which it was sought to commit the defendant for contempt were set out in the schedule to the originating summons (“the Grounds”).

20.  The Grounds set out the relevant paragraphs in the statement of claim and the defence in HCA 1012/2015.  It is pertinent to note that §§5 and 6(a) in the statement of claim are the relevant paragraphs to which crucial admission in the defence was said to be made.  As for the relevant paragraphs in the defence containing the “Subject Admission”, the Grounds stated as follows:

“10. Paragraph 7 of the Defence pleaded that “Paragraph 5 is admitted”. Paragraph 40 of the Defence further pleaded that “subject to the above paragraph 8 of this Defence, Paragraph 6(a) is admitted”.”

“15. In the premises, [the defendant] caused [MHK] to admit its opening and operation of the HK Centres at paragraphs 7 and 40 of its Defence and Counterclaim dated 4 September 2015, and at paragraphs 7 and 40 of its Amended Defence and Counterclaim dated 5 November 2015 (the “Subject Admission”). The Subject Admission was verified by the Statements of Truth dated 4 September 2015 and 5 November 2015, both signed by [the defendant] (“Statements of Truth”).”

21.  The Grounds further stated that relying on the Subject Admission as defined, namely on the basis that MHK operated the HK Centres, the plaintiff entered into the Tomlin order with the agreed terms in the schedule thereto and did not pursue its application for summary judgment and/or interim payment.  The Subject Admission was shown to be false as confirmed and admitted by the defendant in Chang’s 1^st Affirmation and Chang’s 2^nd Affirmation, and by the statements of MHK’s solicitors in their letters to the plaintiff dated 26 July, 29 July 2016 and 11 August 2016.  It was alleged that the defendant knew of the falsity of the Subject Admission before or when he caused the admission to be verified by the Statements of Truth, as he knew or must have known that the HK Centres were not opened or operated by MHK.

22.  The plaintiff stated in the Grounds that the false Subject Admission as verified by the Statements of Truth had interfered with the course of justice in some material respects in that: (1) the plaintiff was induced to enter into the Tomlin order and schedule on the false basis that the Subject Admission is true; (2) the schedule to the Tomlin order was rendered ineffective as MHK was unable to provide complete financial or royalty reports in respect of the 12 HK Centres; (3) MHK was unable to comply or fully comply with the post-termination obligations in the Tomlin schedule and was unable to make any payment to the plaintiff; and (4) the order and judgment of Master K Lo was set aside and the enforcement summons was contested by MHK, and significant time and costs have been wasted as a result.  It was further alleged that the defendant knew or must have known of the likelihood of the false Subject Admission interfering with the administration of justice before or when he caused the admission to be made, as the number of learning centres operated by MHK was a critical piece of information.

The Judgment

23.  At the outset of the hearing before the judge, the plaintiff withdrew its reliance on §6(a) of the statement of claim and the admission of this paragraph in §40 of the defence as part of the “Subject Admission”. This is of material significance, as shall be explained.  As a result of the withdrawal, the “Subject Admission” the judge was asked to focus on at the trial consisted simply of §5 of the statement of claim (that, to the best of the plaintiff’s knowledge or information, MHK “opened and operated” the 12 HK Centres) and §7 of the defence (that §5 of the statement of claim is admitted)^[8].

24.  The judge applied the law as stated in Numeric City Ltd v Lau Chi Wing [2016] 4 HKLRD 812 at §35, and held that in citing a person for contempt for making a false statement under Order 41A rule 9 of the Rules of the High Court^[9], the plaintiff must prove each of the following three elements beyond reasonable doubt: (1) the falsity of the statement in question; (2) the statement has or would have interfered with the course of justice in some material respects; and (3) at the time it was made the maker of the statement had no honest belief in the truth of the statement and knew of its likelihood to interfere with the course of justice.

25.  The judge found in favour of the plaintiff that each of the three elements are established beyond reasonable doubt. In so doing, he accepted the submission of Mr Anson Wong, SC (who appeared for the plaintiff below and on appeal)^[10] that the inconsistency or lack of clarity of the statement of claim as alleged by the defendant’s counsel is “simply a non‑issue”^[11], given that the defendant had no difficulty in understanding §5(b) of the statement of claim and had stated in §50 of his affirmation^[12] that the Subject Admission is “an unqualified admission”^[13].  And “even assuming (but without accepting) that there is any inconsistency within the Defence” – in contradistinction to the submission that there is inconsistency in the statement of claim – the judge agreed with Mr Wong that the defendant’s argument should be rejected as the Subject Admission before the court is “a clear and unequivocal admission that the HK Centres were opened and operated by [MHK]” and the alleged inconsistency in the defence “in no way qualified or affected the clear admission in paragraph 7 of the Defence/Amended Defence”.^[14]

26.  The judge also rejected the defendant’s argument that a false admission in a pleading, as opposed to a false averment, cannot give rise to contempt, as there is simply no legal basis for such an artificial distinction^[15].

A novel situation

27.  Order 41A rule 9 applies to all documents which are verified by a statement of truth. Order 41A rule 2(1) specifies the documents which must be so verified.  They are a pleading, a witness statement, an expert report and any other document verification of which in accordance with Order 41A is required by any other provision of the rules thereunder or by a practice direction^[16]. Order 41A rule 4(1)(a) provides that a statement of truth is a statement that “the party putting forward the document believes that the facts stated in the document are true”.

28.  Neither Mr Wong nor Mr John Yan, SC (who appeared for the defendant on appeal)^[17] has found any decided case in which a false admission in a pleading verified by a statement of truth had given rise to a finding of contempt of court. This does seem to be a novel situation^[18]. 

29.  On appeal, Mr Yan adopted the argument made by his predecessor before the judge and contended that the judge erred in law in holding that an admission in a pleading can constitute a false statement for the purpose of Order 41A rules 4 and 5.  It was contended that an admission in a pleading cannot be a statement of fact for the purpose of the regime for verifying pleadings on pain of contempt, as this runs counter to the adversarial nature and underlying objectives of civil litigation.  The argument was along these lines:

(1)  Prior to the introduction of Order 41A, a defendant was free to admit as much of the plaintiff’s case as he saw fit, whether for reasons of procedural economy or otherwise.  The basic rules of pleading were designed to encourage admissions with a view to narrowing the parties’ differences and saving time and costs.  A defendant should owe no duty to the plaintiff to verify the plaintiff’s positively pleaded case that the defendant may find pointless in challenging, especially on pain of punishment.  The introduction of Order 41A did not change these well-established rules of pleading.

(2)  An admission does not state a fact but simply signals the position or intention of a party not to contest a particular allegation of the other side.

(3)  The threat of contempt proceedings is designed to be a disincentive against a party pleading a dishonest case.  A defendant who simply admits the plaintiff’s case is not putting forward any case of his own.  Besides, it can hardly be dishonest for a party to admit an allegation of the other side even if done knowingly as it would just make the opponent’s life easier and his correspondingly harder.  The difficulty of withdrawing an admission in a pleading, as well as the costs consequence in the event this should be allowed, would be sufficient deterrent against the making of an untrue admission.

(4)  The cases considered by the judge (Governing Body of Charterhouse School v Hannaford Upright [2007] EWHC 2718 (TCC); Avrahami v Biran [2013] EWHC 330 (Ch); Co‑Operative Group Limited v Carillon JM Limited [2014] EWHC 837 (TCC)) were concerned with applications to withdraw admissions in a pleading and does not provide support to the judge’s conclusion that admissions fall to be treated in the same way as averments for present purpose.

30.  An admission to an averment of the other side is not simply a statement of position that no issue would be taken as to the proof of an averment or allegation.  The judge is correct in holding that even though a party would not be put to proof of such part of his case that is admitted in the pleading of the opposite party, the effect of an admission in a pleading is that by the admission, the opposite party “admits the truth of the whole or any part of the case of any other party” (Order 27 rule 1).  In relation to an admission in response to an averment by the other party, what the responding party is concerned with is “whether what is alleged against it is true”, and “no question arises of it being able to prove or disprove the allegation evidentially distinct from the question as to whether the allegation is or is not true”.  Hence, when considering whether a party should be allowed to withdraw an admission to an averment of the other side, it is incumbent to explain why he no longer contends that that which has been admitted is true (Bayerische Landesbank Anstalt Des Offentlichen Rechts v Constantin Medien AG [2017] EWHC 131 (Comm) at §§22, 63 and 79).

31.  A statement of truth verifies the truth of the facts in an admission in the same way as the truth of the facts in an averment. As the judge has put it, “in both cases, the party making the admission or averment is positively affirming that the fact being admitted or averred is true.”^[19]

32.  I reject Mr Yan’s argument set out above.  There is no reason in principle why a person who made a statement of truth to verify a false admission of a fact stated in a pleading may not be committed for contempt, provided that his admission as to the fact is clear and unqualified.

Is there a clear and unqualified admission

33.  As mentioned, the judge took the view that the Subject Admission before him is “an unqualified admission”, as this was the phrase deployed in §50 of the defendant’s affirmation.  Whether the admission is indeed unqualified is not dependent on how the defendant characterised it, but on a fair and proper reading of the relevant averments in the statement of claim and how the response to those averments was made in the defence.  Besides, even on a proper reading of the defendant’s affirmation, when §50 is read in context with a large part of the earlier paragraphs in which he complained of inconsistent, erratic and loose language in the statement of claim (§§6 to 8, 18 to 25), it could not fairly be said that the defendant had recognised and acknowledged that the admission in the defence was “unqualified”.

34.  I have mentioned earlier that at the outset of the trial, the plaintiff abandoned its reliance on §6(a) of the statement of claim and the admission of this paragraph in §40 of the defence as part of the “Subject Admission”.  For the present purpose of considering whether an unqualified admission has been made, it is necessary to bring back these paragraphs which the plaintiff chose not to rely on and also to look at other relevant paragraphs in the two sets of pleadings in HCA 1012/2015.

35.  I will first set out the relevant parts of the statement of claim with my comments.

Statement of claim

36.  §§2 and 3 pleaded the two kinds of learning centres under the RFA, being the RFCs (owned or operated by the Regional Franchisor) and the FCs (established and operated by franchisees licensed by the Regional Franchisor pursuant to franchise agreements as per Exhibit D to the RFA), and the different obligations in relation to the RFCs and FCs.  The RFCs and FCs are collectively called “Mathnasium Centres”.

37.  §§5 and 6 are material and they are set out in full:

“5. Pursuant to the terms of the RFA and/or using the Mathnasium System and/or the Marks,

a. on or about 1 June 2010, [MHK] opened, or licensed others and caused to open, the first Mathnasium Centre in Olympian City in Hong Kong;

b. since then, to the best of the Plaintiff’s knowledge or information, [MHK] opened and operated in excess of ten “Mathnasium Centres” in Hong Kong, including but not limited to the following locations in the following sequence:

i. Shop 36D-F, UG/F Olympian City, No 11 Hoi Fai Road, West Kowloon, Hong Kong;

ii. Shop A10, No 18 Hong On Street, Kornhill, Hong Kong;

iii. Shop 201, Level 2, Park Central, Tseung Kwan O, New Territories, Hong Kong;

iv. Shop 89, 1/F, Laguna Plaza, Laguna City, Lam Tin, Hong Kong;

v. Shop 155-157, Laguna Mall, Hung Hom, Hong Kong;

vi. Shop 302, 3/F, Marina Square East, South Horizons, Hong Kong;

vii. Shop 508A, 5/F, Jubilee Square, Fotan, New Territories, Hong Kong;

viii. Shop 4/F, Banyan Mall, No 863 Lai Chi Kok Road, Hong Kong;

ix. Shop 606, Universal Trade Centre, No 17-19 Caine Road, Hong Kong;

x. Shop 223-225, 2/F, No 33 Marble Road, Hong Kong;

xi. 4/F Kowloon City Plaza, No 128 Carpenter Road, Kowloon City, Hong Kong;

xii. Shop A26, Ma On Shan Centre, No 1 On Chun Street, Ma On Shan, New Territories, Hong Kong (collectively “HK Centres”); and

c. [MHK] continued to use the Marks and/or association with the Mathnasium System on promoting the business conducted by the HK Centres, including by its website at “www.mathconcept.com”.

Breach 1: Failure to report

6. Since May 2012, [MHK] has wrongfully failed to provide royalty reports and/or with full and accurate information to the Plaintiff in accordance with the provisions of the RFA.

Particulars of Breach

a. To the best of the Plaintiff’s knowledge, pursuant to Clause 3.1 and Exhibit B of the RFA, by July 2014 and to the best of the Plaintiff’s knowledge and belief until the date of this Statement of Claim, [MHK] has opened or caused to be opened all twelve of the HK Centres.

b. Pursuant to Clause 11.2 of the RFA, [MHK] purportedly submitted reports to the Plaintiff which indicated, subject to information on the precise dates, that [MHK] opened, or permitted to be opened or operated, or franchised the following of the HK Centres in the following periods:

i. the first of the HK Centres between June 2010 and April 2012;

ii. the second of the HK Centres between May 2012 and June 2012;

iii. the third of the HK Centres between July 2012 and December 2012;

iv. the fourth of the HK Centres between January 2013 and February 2013;

v. the fifth of the HK Centres between March 2013 and June 2013;

vi. the sixth and seventh of the HK Centres between July 2013 and December 2013; and

vii. the eighth of the HK Centres between January 2014 and April 2014;

c. By an email dated 6 February 2013, [the defendant] of [MHK] wrote to a Mr Dan Karp of the Plaintiff where [the defendant] stated that as of that time, [MHK] had opened or caused to be opened, or franchised at least five centres, as set forth above. The number of the HK Centres set forth above was reported by [MHK] to the Plaintiff through April 2014 in different communications, but [MHK] failed to submit proper reports and provide other information through that date.

d. By an email dated 27 January 2014, in an attempt by [MHK] to cure the then existing breach(es) of Clause 11.2 of the RFA, [the defendant] of [MHK] purported to file to the Plaintiff a report dated 26 January 2014 regarding [MHK’s] business under the RFA for the period of May 2012 – December 2013.

e. However, wrongfully and/or in breach of the provisions of the RFA, in particular Clauses 5.3 and 11.2, [MHK] failed to report fully the figures and other information that [MHK] was required to report for the relevant Mathnasium Centres, and failed to report any franchise sales completed over that period as [MHK] was obligated to do.

f. By another email dated 17 May 2014 from [the defendant] of [MHK], [MHK] purported to provide the Plaintiff with a further report for the period of January 2014 to April 2014.

g. However, wrongfully and/or in breach of the provisions of the RFA, in particular Clause 11.2, [MHK] failed to report fully the figures and other information that [MHK] was required to report for the relevant Mathnasium Centres.

h. As a result, and in addition to the other problems that [MHK’s] inadequate reporting has caused, the Plaintiff has been unable to determine the full extent of the money that the Plaintiff is owed from [MHK] under the RFA.”

38.  §7 pleaded the second breach of MHK, which was the failure to enter into “Exhibit D Agreements”.  It was alleged that “in establishing or operating, or permitted to establish and/or operate Mathnasium Centres in Hong Kong, include those HK Centres”, MHK wrongfully failed to enter into written agreements with any of the franchisees, and failed to obtain the plaintiff’s consent for any variation of contract terms with the franchisees.

39.  §8 pleaded the third breach of MHK, which was the failure to pay royalties. Among the particulars of breach, it was alleged in §(c) that “prior to May 2012, pursuant to the terms of the RFA, [MHK] claimed to have opened and/or operated or caused to be open and operated at least two of the HK Centres.”

40.  §11 pleaded the fourth breach of MHK, which was the failure to comply with post-termination obligations. §11(a) alleged that “after termination of the RFA and until the present pleadings, [MHK] has continued to operate and/or permit to be operated the HK Centres”.

41.  I have italicised those parts of the statement of claim to which I will draw attention.

42.  It is pertinent to note these averments in the statement of claim:

(1)  §5(b) is the only paragraph in which it was alleged that MHK “opened and operated” in excess of ten Mathnasium Centres including the 12 HK Centres; in other words, that these centres were RFCs. In all other parts of the statement of claim, it was pleaded in the alternative, as italicised, that the Mathnasium Centres were opened by MHK, or caused or permitted to be opened or operated or franchised by MHK; in other words, that these centres were RFCs alternatively FCs.

(2)  Insofar as §5(b) alleged that the Mathnasium Centres including the 12 HK Centres were RFCs, this is inconsistent with the allegation in all the other paragraphs in which it was pleaded in the alternative that they were FCs.

(3)  Of the particulars of breach alleged in relation to the failure to report in §6, the emails of MHK pleaded in §§6(c), (d) and (f) reported only FCs; the obligation pleaded in §6(e) to pay monthly royalty fee received by the Regional Franchisor from franchisees under clause 5.3 was in relation to FCs; the obligation pleaded in §§6(e) and (g) of the Regional Franchisor to submit, or where appropriate to require franchisees to submit, to the plaintiff royalty reports and franchising operations reports was in relation to both RFCs and FCs.  Thus, in relation to the first breach of failure to report, the allegations of breach were not made on the basis that all the Mathnasium Centres were RFCs.  Some of the allegations were apparently made on the basis that they were FCs.

(4)  In relation to the second breach of the failure to enter into Exhibit D Agreements, this was only in relation to FCs. Insofar as the Mathnasium Centres were said to include the HK Centres, this is inconsistent with the averment in §5(b).

Defence and counterclaim

43.  MHK pleaded to §§5 and 6 of the statement of claim in §§7, 8 and 40 of the defence and they read as follows:

“7. Paragraph 5 is admitted.”

“8. Regarding Paragraph 5(c), [MHK] avers that such use of the Marks and/or association with the Mathnasium System on promoting the business conducted by the said HK Centres, including by the website www.mathconcept.com, are at all material times in accordance to the terms of the RFA and/or with the Plaintiff’s consent, permission, or license.”

“40. Subject to the sub-paragraphs hereunder and to the above paragraphs 10 – 40, Paragraph 6 is denied:

a. Subject to the above paragraph 8 of this Defence, Paragraph 6(a) is admitted;

b. Subject to the above paragraph 8 of this Defence, Paragraph 6(b) is admitted;

c. Save that it is admitted that [the defendant] of [MHK] had sent an email dated 6 February 2013 to Mr Dan Karp of the Plaintiff, the rest of Paragraph 6(c) is denied in that:-

i. The centres mentioned in the said email were not all opened and operated by [MHK]. They were franchisees as contemplated in the RFA;

ii. Various information as requested by Mr Dan Karp of the Plaintiff was already contained in and submitted by the said email dated 6 February 2013; …”

44.  It is unfortunate that the judge was asked to focus his attention on just the one sentence in §7 of the defence, which on the face of it would seem to admit §5 of the statement of claim without qualification.  The judge has erred in regarding the inconsistency or lack of clarity of the statement of claim raised by the defendant’s counsel as a “non-issue”.  It would not be right to read §7 of the defence in isolation.  On appeal, Mr Wong sought to persuade this court that there is no inconsistency in the pleadings that would undermine the clear admission in §7 of the defence, even if §40 of the defence were taken into consideration.

45.  I do not agree with Mr Wong. The plaintiff is within its rights to plead its case in the alternative.  If the plea that the Mathnasium Centres were RFCs alternatively FCs was made consistently in the statement of claim, there would not be a problem.  The problem arose with the inconsistent plea in §5(b), which alleged that in excess of ten Mathnasium Centres including the 12 HK Centres, they were opened and operated by MHK and hence they were RFCs. Although §7 of the defence admitted §5 of the statement of claim without qualification (including §5(b)), other parts of the defence, namely §§40(a) to (c), would immediately raise a reasonable doubt if it is indeed admitted that the Mathnasium Centres including the 12 HK Centres were opened and operated by MHK instead of being operated by the franchisees of MHK, particularly if one has regard to the history of reporting pleaded in the statement of claim that only FCs had been reported to the plaintiff.

46.  When the relevant averments in the statement of claim are read properly with the relevant responses in the defence, what would seem to be an unqualified admission in §7 of the defence is clearly shown not to be the case.  In the absence of an unqualified admission in the defence, the application to commit the defendant for making the statements of truth to verify false admissions of fact in the defence falls at the first hurdle.

47.  But that is not all. The judge failed to assess properly the evidence as to the circumstances how the admission in §7 of the defence came to be made.  Had he done so, he would not have found it proved beyond reasonable doubt that the defendant did not have an honest belief at the time in the truth of the facts pleaded in the defence and that the defendant’s case the admission in §7 was due to a mistake should be rejected in the entirety^[20].

The circumstances how the admission came to be made

48.  I have set out earlier §§8 and 40 of the defence.  It was pleaded in §§40(a) and (b) that “subject to the above paragraph 8 of this Defence”, §§6(a) and (b) of the statement of claim are admitted.  It is quite clear – and Mr Wong has not submitted to the contrary – that “the above paragraph 8 of this Defence” pleaded in §§40(a) and (b) was not meant to be the paragraph 8 that featured in the defence filed.  Instead, it should be the paragraph 8 in the draft defence as settled by Mr Yip of counsel but was deleted by the solicitor Mr Chan who also amended §7 in the draft to make a seemingly unqualified admission to §5 of the statement of claim.

49.  In Mr Yip’s draft, §§7 and 8 of the defence read as follows:

“7. Subject to paragraph 8 below, Paragraph 5 is admitted.

8. Only the centers mentioned in Paragraph [5(?), (?), …], are opened and operated by [MHK], the rest of the said “Mathnasium Centers” in Hong Kong, as stated in Paragraph 5 were franchisees under the RFA.”

50.  Mr Yip provided an affirmation in these proceedings and also testified for the defendant at the trial.  The part left blank between square brackets and the question marks in §8 of his draft denoted particulars that he expected Mr Chan to take further instructions with the defendant before finalising and filing the defence.  Mr Yip mentioned not a few times in his oral evidence that it was two or three years later when he was asked to remember what was said by the defendant to him at the conference they had on 13 July 2015, that he no longer had his attendance note and papers and barely had clear recollections, that he tried to reconstruct what happened from the draft defence he prepared on 3 September 2015 and he found it difficult to segregate what he remembered from what he reconstructed from reading the draft defence^[21].

51.  Notwithstanding these shortcomings in Mr Yip’s evidence, which the judge is fully entitled to take into account, Mr Yip was certain that at no time did the defendant instruct him to make an unqualified admission as appeared in the filed version of the defence^[22].  He drew attention to the fact that the proviso in §8 was consistently repeated in other material parts of the draft defence, as in §§41(a) and (b) of the draft (which was re-numbered as §§40(a) and (b) in the finalised version but without any alteration, when §8 of the draft was deleted by Mr Chan) and pointed out that the deletion of §8 of the draft did not accord with his instructions from the defendant at the conference^[23].

52.  Mr Chan declined to meet with the defendant’s solicitors^[24] and was not subpoenaed by any party to testify at the trial.  He merely provided to the defendant’s solicitors a scanned copy of the draft defence and counterclaim with hand markings showing his deletion of the words “Subject to paragraph 8 below” in §7 of counsel’s draft and the deletion of the whole of §8 of counsel’s draft with the words written next to this deleted paragraph “confirmed all include”^[25].

53.  The defendant made an affirmation and gave evidence at the trial as to the circumstances in which he gave instructions to Mr Yip for the preparation of the defence at a conference with Mr Yip and Mr Chan on 13 July 2015 and how the draft defence was finalised at his meeting with Mr Chan at noon on 4 September 2015 after Mr Yip had provided a draft the day before. He asserted that he had informed Mr Yip and Mr Chan on 13 July 2015 that the HK Centres in §5(b) of the statement of claim were all FCs, that he had told Mr Chan on 4 September 2015 all the HK Centres were FCs, that Mr Chan had misunderstood him and thought that none of the HK Centres were FCs, and that he did not spot the mistake before signing off the final version due to the pressure of time as the defence had to be filed around 3 pm that day (because of an unless order) and the unfortunate miscommunication between him and Mr Chan^[26].

54.  The judge disbelieved the defendant’s evidence as to the instructions he gave to his lawyers for the preparation of the defence of MHK. He found discrepancies between the defendant’s evidence on what he told the lawyers at the meeting on 13 July 2015 and Mr Yip’s evidence^[27]. He took the view that the defendant “did not come clean” with his own lawyers and did not tell them that all the HK Centres were FCs and all were not operated by MHK, and this militates against the defendant’s case that the admission was made by mistake^[28].  He found the oral testimony of the defendant about the meeting with Mr Chan on 4 September 2015 “plainly unbelievable” because (1) the defendant could not explain satisfactorily why no mention was made in Chang’s 1^st affirmation that his lawyers had misunderstood his instructions or that he had no chance to read the finalised version before filing; (2) no mention was made in the defendant’s affirmation filed on 15 September 2017 that he was not given a copy of the finalised version of the defence before signing and this was only mentioned for the first time in his oral testimony; (3) he only mentioned for the first time in his oral testimony that he signed the statement of truth without having any opportunity to read the finalised version of the defence^[29].  The judge found it inherently improbable that Mr Yip and Mr Chan made “multiple mistakes in handling this simple issue despite [the defendant’s] clear instructions on two occasions”^[30].  The judge also took into account other submissions made on behalf of the plaintiff including the general credibility of the defendant^[31].

55.  The judge is entitled to take an unfavourable view of the defendant’s evidence, having had the benefit of receiving his oral testimony at the trial.  This court should not disturb his finding of primary fact as to the credibility of the defendant’s evidence unless in the rare case we could be satisfied that the trial judge has reached a plainly wrong conclusion on the facts.  It seems to us that the judge had misdirected himself as to the effect of material evidence which pointed the other way and does not support his conclusion.  In light of this misdirection, it is plainly wrong for the judge to conclude that the standard of proof beyond reasonable doubt has been reached for the defendant’s case of mistake to be rejected in the entirety.

56.  The draft defence prepared by Mr Yip, in particular §§7, 8, 41(a) and (b), is material evidence, as these paragraphs would go to support the defendant’s case he did not give instructions to Mr Yip the HK Centres were all FCs.  The judge however regarded it as inherently improbable for Mr Yip to make a mistake and prepare a draft defence which suggested that only some of the centres were operated by MHK, if Mr Yip had indeed been told by the defendant that all the HK Centres were not operated by MHK^[32]. With respect, the judge had looked at this from the wrong end of the telescope and had taken this forensic point too far.  What is incontrovertible from the draft defence is that instructions were given by the defendant that of the HK Centres, a number of them were FCs.  This is an important premise as this is the first step of how it all started leading to the finalisation of the pleading.

57.  The judge then postulated it is “doubly inherently improbable” for Mr Chan to make the same mistake despite the defendant’s instructions to the contrary on 4 September 2015^[33].  Mr Chan did not give evidence.  The judge is entitled to reject the defendant’s evidence of what he told Mr Chan that day.  There is however produced in evidence the draft defence with Mr Chan’s markings thereon, indicating that Mr Chan failed to make any consequential alteration to other parts of the draft defence which were expressly stated to be subject to §8 of counsel’s draft when he deleted that paragraph.  There is nothing to contradict Mr Yip’s clear evidence that the deletion of §8 of the draft did not accord with his earlier instructions from the defendant.  At the very least, these matters should cast reasonable doubt as to whether Mr Chan had made no mistake at all about the defendant’s instructions and there was no miscommunication between them.

58.  The judge had approached the matter from the wrong premise that the defendant’s case entails the suggestion that his lawyers, Mr Yip and Mr Chan, made multiple mistakes in handling a simple issue despite his clear instructions given on two occasions.  When the evidence is properly analysed and assessed, the defendant’s case of mistake and miscommunication is not implausible.  At the very least, it could not be said that it had been established beyond reasonable doubt that the case of mistake should be rejected in the entirety.

Disposition

59.  For the above reasons, we have allowed the appeal against the finding of contempt.  The appeal against sentence does not fall to be considered.

60.  In light of our reasons for allowing the appeal, we do not think it necessary to deal with other grounds of appeal raised by the defendant or in the respondent’s notice of the plaintiff seeking to support the finding of contempt on the alternative basis that the defendant should be held liable for recklessness in verifying a false admission.

61.  We only wish to make one further observation.  One of the grounds of appeal is that the judge failed to apply an independent judicial mind in arriving at his decision in that of the 70 paragraphs in the Judgment, 61 paragraphs were a “near-verbatim reproduction and adoption” of the opening or closing submissions of the plaintiff’s counsel.

62.  It is unfortunate that the Judgment was written in such a manner that lend itself to a challenge of this nature.  Mr Wong referred this court to parts of the transcript of the trial showing that it is clear from the judge’s exchanges with counsel that he had kept an open and independent mind by asking relevant questions during the oral submissions^[34]. It would also appear from those parts of the transcripts provided to us that at the end of the testimony of a witness, the judge had followed up with his own questions, demonstrating his keen interest in the evidence received by the court^[35]. We do not think that a reasonable person apprised of all the relevant facts would conclude in this instance the judge had not put his mind to the issues and made an independent decision. Had it been necessary, we would have held that the presumption of judicial integrity and impartiality had not been replaced by the incorporation of substantial parts of the plaintiff’s submissions in the Judgment.  We would remind trial judges to adhere to the good judicial practice in judgment writing mentioned in Cojocaru v B C Women’s Hospital [2013] 2 SCR 357 at §50 and Choi Yuk Ying v Ng Ngok Chuen, CACV 230/2017 and CACV 39/2018, 20 February 2019, at §39.

63.  We will deal with costs on paper.  We give these directions for the parties to lodge submissions to deal with the question of the costs below and on appeal.  The defendant is to lodge his submissions of not more than five pages within 14 days of the handing down of this judgment, the plaintiff is to lodge its submissions of not more than five pages within 14 days thereafter, and leave is given to the defendant to make a reply of not more than three pages within seven days thereafter.