EASY WATCH PRODUCTS MANUFACTORY CO LTD v. EPSON PRECISION (HONG KONG) LTD

HCA 3943/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3943 OF 2002

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J U D G M E N T

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1. This is an application by the Defendant in these proceedings, Epson Precision (Hong Kong) Limited, by summons dated 26 November 2003 for further security for costs in relation to its defence of these proceedings which have been brought against it by the Plaintiff, Easy Watch Products Manufactory Limited.

2. Security for costs in the amount of HK$280,000 has already been provided pursuant to a consent order made by Master Woolley on 20 March 2003, which made it clear that such security was given in respect of the Defendant's costs up to the stage of discovery in this action, and that the Defendant was to be at liberty to apply for further security for costs which might be incurred thereafter.

3. The background to the proceedings can be briefly stated. The Plaintiff is (or more accurately was, since it is no longer trading) a manufacturer of watch cases. The Defendant is a company which deals in watches. Among the lines of watches in which it deals is the well-known Seiko brand of watches. Since about 1982, the Plaintiff has manufactured watch cases for the Defendant. The Plaintiff's claim in these proceedings falls into two parts.

4. The first (and smaller) part concerns repair and maintenance costs in respect of machinery supplied to the Plaintiff by the Defendant, which was used by the Plaintiff to manufacture watch cases for the Defendant. It is said that since some time before 1988 until about January 1993, the machinery in question was maintained by the Defendant at its own expense. However, the Plaintiff says that in about January 1993, it was agreed that in future the Plaintiff should carry out any repairs and maintenance that might be necessary, initially at its own expense, but that the Defendant would reimburse the Plaintiff for the costs which the Plaintiff incurred. The Plaintiff claims that it has incurred costs totalling slightly in excess of RMB3.1 million (including the salaries of technicians employed by it) between 1993 and 2002, but that despite requests for reimbursement, no payment has been made to it by the Defendant. This claim is disputed by the Defendant, which denies that any such agreement was made, and raises a number of other defences to the claim for reimbursement.

5. The second (and much more substantial) part of the Plaintiff's claim arises out of an alleged agreement, which the Plaintiff says was entered into at meetings in October 1996 and January 1997 and which is recorded in notes of those meetings. According to the Plaintiff, under this agreement, the Plaintiff agreed to make a substantial investment to set up a special production line for the exclusive manufacture and supply of watch cases to the Defendant, and the Defendant in return agreed to place orders for at least 100,000 watch cases per month with the Plaintiff. The Plaintiff says that soon after the special production line was set up, the Defendant failed to place the promised level of orders, and in consequence the Plaintiff was unable to maintain the operation of the special production line, which had to be closed down. The Plaintiff says that there was a shortfall of some 1.7 million pieces in the orders placed from the beginning of 1998 until the production line finally closed down in September 2001. The Plaintiff quantifies its losses at some HK$34 million, made up of a capital loss on its investment in the production line of some HK$19 million, and losses of profits on the watch cases that should have been, but were not, ordered of $15 million.

6. The Defendant denies liability on this claim also. It appears from its Defence and Counterclaim that the Defendant denies the oral agreement alleged by the Plaintiff. It says that while the meetings relied upon by the Plaintiff took place, these were only negotiations, which culminated in the making of a written agreement between the parties which was signed in August 1997 and February 1998 by the Defendant and Plaintiff respectively. The Defendant says that the relationship between the parties in respect of the special production line was governed by this written agreement, and that it did not ever undertake to place any minimum level of orders with the Plaintiff. The Defendant says that it was in fact the Plaintiff that was in breach of its obligations under this written agreement, because of failures to meet the Defendant's production requirements in respect of quality and delivery, and that this was the reason for its not placing more orders than it in fact did. The Defendant says that had it not been for this, the Defendant would have placed orders to meet the maximum capacity of the production line. The Defendant goes on to raise a counterclaim, based on the additional costs to it of having to obtain watch casings at greater expense from elsewhere. The amount of the counterclaim is some HK$33 million.

7. At the hearing, neither Mr Chan, who appeared for the Defendant, nor Ms Yiu, who appeared for the Plaintiff, sought to make anything of the strength or weakness of either side's case. This was clearly right, for it is clear that the outcome of these proceedings is likely to turn on the evidence which will be adduced at trial, including evidence from as many as 13 witnesses of fact. This is not a case in which it is possible, at this stage, to say any more than that both the claim and counterclaim appear to be bona fide claims, to which there are equally bona fide defences.

8. The proceedings have now reached the stage where discovery seems to have been substantially completed. The Plaintiff has recently made an amendment to its further and better particulars of the Statement of Claim. It appears that the parties will now proceed to the preparation and filing of witness statements, after which the matter can be set down for trial. There is no suggestion on either side at this stage that the matter will not, or may not, proceed to trial. The presently estimated length of the trial is 10 days.

9. Against this background, the Defendant now seeks further security for its costs of these proceedings, up to and including the trial, in the amount of HK$2.4 million odd - the exact amount is HK$2,404,425. This figure is net of the HK$280,000 which has already been provided by way of security. The application is made pursuant to section 357 of the Companies Ordinance, which provides:

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

10. Ms Yiu, appearing for the Plaintiff, does not dispute that the Plaintiff will be unable to pay the Defendant's costs if the Defendant is successful in its defence of the action. She therefore accepts that I can, if it is appropriate to do so, make an order for security against the Plaintiff. However, she submits that I should not exercise my discretion by making an order for security in this case, because this would have the effect of stifling the Plaintiff's genuine claims against the Defendant.

11. Ms Yiu also made certain submissions as to the quantum of security that should be ordered if I were not with her on this submission. I will deal with those submissions later.

12. So far as Ms Yiu's primary submission as to stifling is concerned, the parties were agreed that the relevant principles are as stated in Keary Development Ltd v. Tarmac Construction Ltd [1995] 3 All ER 534 at pages 540-542, which have been adopted in Hong Kong in Wing Hing Provision, Wine & Spirits Trading Company Ltd v. Hanjin Shipping Company Limited [1998] 4 HKC 461 at 464A-F. I do not think it necessary to set out these principles in full. However, for present purposes the most relevant seem to me to be those referred to in numbered paragraphs 2,3 and 6 in the judgment of Peter Gibson LJ in the Keary case. These paragraphs were helpfully summarised by Deputy Judge Poon in Vigers Hong Kong Ltd v. Junsa Development Ltd (unreported, Court of First Instance, Deputy Judge Poon, 28 April 2003) as follows (at pp. 6-7 of the judgment):

"	(2)	The possibility or probability that the Plaintiff would be deter from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.
	(3)	The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.
	...
	(6)	Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where these can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation."

13. In this case, Ms Yiu says that the effect of ordering security would be to stifle the claim because the evidence shows that the Plaintiff is no longer trading, so that it will not be able to raise funds from future operations, or by borrowing from its bankers, and that the Plaintiff has only slightly in excess of HK$1 million in its bank account. This is deposed to in a recent affirmation of one of its directors, Mr Cheng Chun Ming. Mr Cheng goes on to say that none of the shareholders and directors of the Plaintiff are able or willing to raise money to fund the current legal proceedings, and that he has confirmed this with the other two shareholders and directors.

14. In my view, while the evidence certainly suggests that the Plaintiff will not be able to fund these proceedings from its own resources, it falls far short of what is needed to demonstrate that it is probable that the claim will be stifled. As was pointed out by Peter Gibson LJ in the Keary case, the court should consider not only the Plaintiff's own resources, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. He pointed out that this information is likely to be peculiarly within the knowledge of the Plaintiff company, so that it would be for the Plaintiff to satisfy the court that it would be prevented by an order for security from continuing with the litigation.

15. In this case, the Plaintiff has seen fit only to make the bare assertion that its shareholders and directors are unable or unwilling to fund the litigation. No attempt has been made to indicate what assets the shareholders have available to them, or as to the sources of finance that might be available to them. Simply as an illustration of this, I would note that the Defendant has been able to show that the Plaintiff and another company called Canjoint Company Ltd (of which two of the Plaintiff's shareholders and directors are also shareholders and directors) own industrial premises which appear to be mortgaged to the Bank of China. However, the Plaintiff has not seen fit to provide evidence of the value of these properties, or of the outstanding amount of the debt to the bank. It may therefore be that some funds could be raised from these properties. Quite apart from this, there is simply no information as to the financial position and ability to raise funds of the Plaintiff's shareholders and directors. I am quite unable to say that the evidence put forward by the Plaintiff is sufficient to justify me in concluding that they would be unable to find the money with which to fund the action, if they were inclined to do so.

16. Moreover, it seems to me that Mr Chan is right in saying that in general, unwillingness of the backers of a company to put up funds to enable it to proceed with a claim which it is making should be afforded little, if any, weight when considering whether or not a claim will probably be stifled if security for costs is ordered. This is particularly so where, as here, it would seem that the Plaintiff is no longer operating and that the only persons likely to benefit from a successful claim are its shareholders. In such a case, their professed unwillingness to fund the claim should not, in my view, be regarded as an impediment to the making of an order for security, particularly where the court, as here, cannot be satisfied on the evidence presented that they are actually unable to do so.

17. I do not overlook the possibility that there may be cases in which it is possible for the court to infer from the evidence that the consequence of making an order for security is that the claim will probably be brought to a halt. However, in my view, this is not such a case. The Plaintiff has chosen to put forward only very limited evidence as to the resources which might be available to it from its shareholders. No other factors or circumstances beyond its own impecuniosity have been referred to. In these circumstances, I do not think that I can be satisfied that the making of an order for security would have the probable result that the claim will not continue.

18. I therefore consider that some security for costs should be ordered. I turn now to consider the quantum of security that should be required of the Plaintiff.

19. As to this, Ms Yiu submitted first that security should only be ordered up to trial, but not to the end of trial. She drew my attention to the fact that the action was still at a relatively early stage, or at least was still some way from trial, that the court has a full discretion as to the stage to which and amount in which security should be ordered that the Defendant would be free to make a further application for security at a later stage if necessary, and that in any event an order for more than about HK$600,000 (which was the amount that she submitted should be awarded down to the beginning of trial) would have the effect of stifling the claim.

20. Dealing with the last of these points first, it seems to me that in the light of my rejection of the argument that the claim as a whole would be stifled by an order for security, and the reasons I have given for coming to that view, the suggestion that an order of security of over HK$600,000 would stifle the claim is one that cannot succeed. Given that I am not satisfied that the Plaintiff will be unable to raise funds from sources other than its own assets with which to meet any order for security, I do not see that this argument, placed in this context, takes matters any further.

21. So far as Ms Yiu's other points are concerned, it seems to me that while I could order security to be given to a stage short of the end of these proceedings, given that I am not satisfied that an order for security would have the effect of stifling the proceedings, and that the Plaintiff has not provided an adequate evidentiary basis for any assessment to be made of the funds which might in fact be available to it from other sources, such as its shareholders and directors, there is no reason in principle why I should not order security down to the end of trial now. Moreover, I bear in mind that to require the Plaintiff to make further applications will involve additional expense, and it is not suggested that the matter is likely, for whatever reason, not to get to trial. In these circumstances, it seems to me that it would be appropriate at this stage to order a sufficient level of security to see the Defendant through to the end of the trial.

22. Ms Yiu also submitted that some discount should be given for the fact that the Defendant had a counterclaim which she suggested was based on completely different facts from the Plaintiff's claim. While I would accept that there will be cases in which some, possibly substantial, discount should be given for the fact that the Defendant is, in addition to defending the claim, putting forward a counterclaim of its own, I do not think that this is a case in which anything other than a very modest discount can properly be given. In my view, it is clear from the pleadings that the Defendant relies on substantially the same facts both in defence of the Plaintiff's claim and in support of its own counterclaim. The Defendant's case, as I understand it, is that the agreement between the parties in relation to the special production line is not to be found in the agreement alleged by the Plaintiff, but in the written agreement relied upon by the Defendant, and that it was the Plaintiff's breaches of this agreement that resulted in the Defendant ordering the quantity of watch cases which it did. In these circumstances, it seems to me that the situation here is similar (although perhaps not identical) to that in Petromin v. Secnav [1995] 1 Lloyd's Rep 603, where the success of the claim would mean failure of the counterclaim, and vice versa. I accept that in this case, however, some part of the Defendant's costs of the counterclaim (principally the evidence as to quantification of its losses) will not be relevant to the Plaintiff's claim, and that the Plaintiff should not in principle be required to give security to cover this part of the costs of the counterclaim. However, any discount which should be given for this element should, in my view, be a small one.

23. I turn, therefore, to consider the amount of the security which should be ordered, on the basis that security should be ordered to the end of the trial. Ms Yiu directed a number of detailed criticisms as to the amount of the security sought, and suggested that the amount of the skeleton bill produced by the Defendant should be reduced. Mr Chan for the Defendant was content to accept the reductions suggested in all respects, up to trial, in respect of the profit costs claimed. On this basis, security in relation to the profit costs up to the beginning of the trial would stand at some HK$810,000. To this, said Mr Chan, should be added some HK$371,000 in respect of the profit costs associated with the trial, the reduced brief fee for counsel of HK$280,000, refreshers for 9 days totalling a further HK$360,000, and the other disbursements of HK$201,000 which were made up of translators fees of HK$44,000 and other counsel's fees of HK$157,000 in respect of appearances and work done before the trial.

24. Ms Yiu did not make separate submissions as to these further items. However, in my view, in considering what is a sufficient level of security, it is open to me (and appropriate for me) to consider these items as well. In my view, looking at the matter overall, it seems to me that while the translation fees and other counsel's fees are broadly acceptable, some reduction to the remainder of the profit costs, and disbursements for counsel's brief fee and refreshers is called for. So far as the profit costs in relation to trial are concerned, these appear to be based on 8 hours per day for an assistant solicitor attending court during the period of the trial, plus a further 20 hours in relation to correspondence with the Plaintiff and the Defendant. In my view, this is on the high side, and I think that a fair level of security would be about a total of 80 hours of the assistant solicitor's time. I would therefore reduce the figure of HK$371,000 by HK$58,000 (being HK$2,900 x 20 hours) to HK$313,000. So far as counsel's fees are concerned, the level of fees that is contained in the skeleton bill is to my mind such as would be charged by a very senior junior or a junior silk or, at any rate, such as might be allowed on taxation, in relation to counsel of that seniority. Mr Chan was unable to tell me precisely what level of seniority of counsel the Defendant proposed to instruct at trial. In these circumstances, it seems to me that having regard to the matter as a whole, a fair amount of security, as between the parties, would be based on a refresher rate of about HK$30,000 which on the basis of six days for preparation and the first day of trial and nine refreshers would produce a total of HK$450,000 in respect of counsel's fees for trial.

25. On this basis, the amount of security that I think should be ordered is HK$810,000 for profits costs, which Ms Yiu has accepted as appropriate, plus HK$201,000 for translation fees and counsel's fees other than for trial, and a further HK$313,000 for profit costs in relation to the trial and HK$450,000 for counsel's fees for trial. To this, I would add the HK$200,000 in respect of random disbursements contained in the Defendant's skeleton bill, which Ms Yiu did not challenge. This gives, I think, a total of some HK$1.793 million. Allowing for a small discount of about HK$100,000 for the additional costs involved in the counterclaim which should not require security, I would think that the appropriate level of security down to trial would be about HK$1.69 million. From this should be deducted the HK$280,000 which has already been provided, leaving a balance of HK$1.41 million, which I will round down slightly to HK$1.4 million.

26. Thus, for the reasons which I have given, it is my view that security for costs up to and including the trial of this action should be awarded, and that, in the circumstances of this case, a sufficient level of security which would be fair to both the Plaintiff and the Defendant is that additional security of HK$1.4 million should be provided. I will now hear counsel as to the terms which should be imposed in relation to the provision of security, and as to the costs of this application.