LOERIE INVESTMENTS LTD v. LIU HONG SHU

HCA1908/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1908 OF 2007

----------------------

----------------------

-------------------------------------

REASONS FOR DECISION

-------------------------------------

1.  By summons filed on 21 October 2008, the defendant applied for discovery and production of the following documents:

(1)  Legal opinion given by a PRC lawyer, Mr Lai, (“Lai’s PRC Legal Opinion”), which the defendant says was referred to in the 2^nd Affirmation of Wong Lam Ping, pursuant to Order 24 rule 10 of Rules of the High Court (RHC); and

(2)  All documents that the plaintiff had served together copies of the ex parte Injunction Order dated 5 June 2008 (“Injunction Order”), including the cover letter and any translation of the Order, on any individual or legal entity, pursuant to Order 24 rule 7, RHC.  For ease of reference, I shall refer to this class of documents as the documents relating to the Injunction Order.

2.  At the hearing of the summons, the defendant no longer pursued the application in respect of Lai’s PRC Legal Opinion. The only dispute between the parties on this part of the application is on costs.

3.  After hearing counsel, I granted the application in respect of the documents relating to the Injunction Order together with costs of and incidental to the application, including the costs for the application relating to Lai’s PRC Legal Opinion.  My reasons appear below.

The action

4.  The dispute in this action arose out of an agreement (“the Agreement”) dated 14 December 2006 made between the parties for the sale and purchase of the defendant’s 90% shares in a company called Ever Sure Industries Limited (“Ever Sure”). 

5.  Ever Sure is a company incorporated in Hong Kong.  Its main asset is in the 100% shares or equities it holds in a PRC company called Beihai Southern Paradise Land Industries Development Co Ltd (“BSP”).  BSP is the registered owner of certain parcels of land in Beihai, PRC (“the Lands”).  In short, the main asset of Ever Sure is its interest in the Lands.  

6.  Under the Agreement, completion was due to take place on 31 August 2007. However, that did not come about.

7.  On 6 September 2007, the plaintiff brought this action to seek specific performance of the Agreement.  The defendant had filed a Defence and Counterclaim.  A number of defences were raised, including that the Agreement was invalid or unenforceable by reason of uncertainty and illegality.

8.  Shortly after the commencement of the action and in September 2007, the plaintiff applied for an injunction, which was disposed of by consent.  As a result, the defendant gave an undertaking that he would not deal with his shares in Ever Sure without giving prior notice to the plaintiff.

The Injunction Order

9.  On 5 June 2008, the plaintiff applied ex parte and obtained the Injunction Order. 

10.  In essence, the Injunction Order restrains the defendant from exercising his rights as shareholder or director of Ever Sure for the purpose of selling or alienating the Lands to other people.  It is clear from both the terms of the Injunction Order and the affirmations in support that the object or purpose of the Injunction Order is the sale or alienation of the Lands.  The Injunction Order does not operate to prohibit the defendant from exercising all his rights as shareholder or director of Ever Sure.  It also does not prohibit the defendant from managing or operating the business of Ever Sure or BSP.   

11.  On 6 June 2008, the plaintiff issued an inter partes summons for the continuation of the Injunction Order.  This is opposed by the defendant. On 4 July 2008, the defendant applied by summons to set aside the Injunction Order and also for certain interlocutory injunctions against the plaintiff.  The substantive hearing and determination of the two summonses are pending. 

Lai’s PRC Legal Opinion

12.  The application for the Injunction Order was supported, among others, by the 2^nd Affirmation of Wong Lam Ping made on 5 June 2008 (“Wong’s 2^nd Affirmation”).  Mr Wong is the Executive Chairman of the plaintiff’s holding company and is in charge of the plaintiff’s affairs.

13.  The defendant’s application for discovery of Lai’s PRC Legal Opinion arose out of paragraphs 40 and 48 of Wong’s 2^nd Affirmation.

14.  After referring to the defendant’s assertion that the planning permits for some parcels of the Lands did not stipulate the maximum plot ratio and there was no new planning permits for the other parcels of the Lands such that the consideration for the Agreement could not be ascertained before completion, Mr Wong said in paragraph 40: “On this question, I have asked PCW to seek a PRC legal opinion. I was advised by 黎柏 亮of 廣柬恒通律師事務所 (Lai’s PRC legal opinion). Legally, I would like to say the following:- …”.  He concluded in paragraph 41 that the expiration of planning permits and the planning notices did not affect the validity of the Agreement. 

15.  Then in paragraph 48, after referring to the defence that the Agreement was void and unenforceable or illegal on account of certain PRC laws, Mr Wong stated: “In view of the above new allegation, I have also asked the PRC lawyer to deal with them in Lai’s PRC Legal Opinion and to provide me a copy of the relevant PRC Laws.  According to Lai’s PRC Legal Opinion, all the PRC Laws cited by the defendant [sic] were irrelevant to the transaction covered by the Agreement. …”

16.  On 19 June 2008, the defendant’s solicitors (BM) wrote to the plaintiff’s then solicitors (PCW), requesting for “a copy of Lai’s PRC legal opinion (if any)”.  Met with no response, BM followed up by letter dated 2 July 2008.  The respective solicitors had a telephone conversation on 4 July 2008.  According to PCW’s letter dated 7 June 2008, what they had told BM during the conversation was: “if there ‘existed’ such written legal opinion or if it was so intended, such would have been exhibited to Wong’s 2^nd Affirmation.”   Subsequently on 14 July 2008, PCW wrote to BM, saying that when Mr Wong signed the affirmation on 5 June 2008, “there was no finalized written legal opinion received from Mr Lai” and that Mr Lai had been asked to finalise his legal opinion in writing, which would be exhibited in due course.

17.  Two months later on 23 September 2008, BM wrote to the defendant’s present solicitors (RB) requesting the plaintiff “to confirm if the document referred to as ‘Lai’s PRC Legal Opinion’ in paragraphs 40 and 48 of Wong’s Second Affirmation existed in written form, whether in draft or otherwise, at the time of the making of Wong’s Second Affirmation”.  RB replied on 25 September 2008 that they would take instruction from the plaintiff and revert as soon as possible.  RB, however, did not get back.  Nearly a month later on 21 October 2008, the defendant issued the present summons.

18.  Shortly before the return day of the summons and on 3 November 2008, RB wrote to BM, stating that what Mr Wong said in paragraphs 40 and 48 of the 2^nd Affirmation was based on oral legal advice of Mr Lai and that at the time of the making of the 2^nd Affirmation, the plaintiff only had a legal opinion of Mr Lai in draft form that was obtained in January 2008.  A copy of the draft was enclosed with the letter.

19.  In light of what was said in RB’s letter and the disclosure of the draft legal opinion, the defendant does not proceed further with this part of the discovery application, but asks that the costs to be paid by the plaintiff. 

20.  The plaintiff, on the other hand, contends that the costs should be paid by the defendant.  The main thrust of the plaintiff’s argument is that Wong’s 2^nd Affirmation does not contain a clear reference or allusion to the existence of a written legal opinion by Mr Lai.  Mr Li, who appeared for the plaintiff, conceded that there might be some ambiguity in paragraphs 40 and 48, but said there was no reference to a written legal opinion. 

21.  In my view, on a fair reading of the words in paragraphs 40 and 48 of Wong’s 2^nd Affirmation, they are capable of being understood as containing references to a written legal opinion given by Mr Lai.  It is true that when BM first requested for the document, they had used the words “if any”, which may suggest they were not totally certain that there was a written legal opinion.  However, the lack of positive responses from the plaintiff and the subsequent replies given by PCW had contributed to the confusion. In particular, the letter dated 14 July 2008 left a distinct impression that there existed a written legal opinion by Mr Lai, albeit in draft form. 

22.  Mr Li submitted that PCW’s replies did not advance the defendant’s case on this part of the application because he would not be entitled to have the draft legal opinion disclosed to him.  But PCW had never raised this in the replies.  In any case, as Mr Chan for the defendant pointed out, by deploying part of the legal opinion in Wong’s 2^nd Affirmation, albeit in draft form, the plaintiff had waived any privilege it may have on the whole document, unless the other parts of the document deal with an entirely different subject matter.

23.  The plaintiff was further offered an opportunity to clarify the position by BM’s letter dated 23 September 2008, which sought confirmation of whether the Lai’s PRC Legal Opinion referred to in Wong’s 2^nd Affirmation existed in written form.  Yet, the plaintiff chose to give a holding reply when there should be no difficulty in simply answering that it did not. It was only after the defendant issued the summons and shortly before the return day of the summons that RB gave a clear indication of the position.

24.  In the circumstances, the defendant was plainly justified in making the application for discovery of Lai’s PRC Legal Opinion.  It is through no fault of the defendant that the application was not pursued to the end.  The costs of and incidental to the application should therefore be paid by the plaintiff to the defendant in any event, to be taxed if not agreed.

Documents relating to the Injunction Order

25.  I turn now to the application for discovery of documents relating to the service of the Injunction Order.  The discovery was sought in connection with the plaintiff’s inter partes summons for the continuation of the Injunction Order and the defendant’s application to discharge the Injunction Order.   

26.  The plaintiff has raised three principal objections to the application.  They are: First, the documents sought are irrelevant.  Second, no useful purpose is served by the discovery application.  Third, the application is oppressive in that it may expose the plaintiff to risks of civil contempt proceedings.  I shall deal with issues in turn.

(1)  Relevance of the documents

27.  The defendant says that the documents sought to be discovered are relevant to the motive and fides of the plaintiff in obtaining the Injunction Order.  Part of the defendant’s case in his application to discharge the Injunction Order is that the plaintiff had abused the process of the Court in using the Injunction Order for collateral purposes.  One of the collateral purposes that the defendant has identified is that the plaintiff has used the Injunction Order in the Mainland as indirect proof of its alleged interests and rights in Ever Sure and BSP. 

28.  The defendant says, and it is not disputed, that the plaintiff had served the Injunction Order on and/or given notice of it to various third parties. The third parties include China Legal Service (Hong Kong) Limited (“CLS”), Bank of China (Beihai Branch) and various government authorities in the Mainland. The defendant had identified in schedule 1 to the present summons, nine of the entities that had been served with the Injunction Order.  According to the defendant, these entities had nothing to do with the subject matter of the Injunction Order, namely, the Lands and any possible sale or alienation of it by the defendant.  The defendant considers that the service on irrelevant third parties, without any indication of an intention to do so when applying for the Injunction Order, is a mis-use of the Injunction Order and a breach of the duty to act with the utmost good faith.

29.  In further support of the application, the defendant points out that the Chinese translation of the Injunction Order prepared by the plaintiff is incorrect and has misrepresented the scope and effect of the order.  In June 2008 after obtaining the Injunction Order, the plaintiff brought a claim against the defendant and BSP in the Guangxi Higher People’s Court.  In the statement of claim, the plaintiff referred to the Injunction Order as indirect proof of its interests and rights in the assets and corporate documents of BSP and Ever Sure, and enclosed a copy of the Injunction Order as evidence.  The accompanying Chinese translation suggests that the Injunction Order restrains the defendant from exercising all his rights as shareholder and director in Ever Sure, including the sale and alienation of the Lands.  The Injunction Order, however, only restrains the defendant from exercising his right to sell or alienate the Lands. 

30.  The defendant also says that the mis-use of the Injunction Order had caused him prejudice. It is said that CLS was led to believe that there was a shareholders dispute in Ever Sure and CLS had, in light of the Injunction Order and pending litigation, refused to carry out authentication of documents of Ever Sure.  This had caused delay to the defendant in defending the plaintiff’s action in the Guangxi’s Court. 

31.  As said, the plaintiff accepts that it had disclosed the Injunction Order to CLS and other parties.  It also does not appear that the plaintiff disputes that the Injunction Order had been served on or disclosed to the other entities identified in schedule 1 to the summons.  However, the plaintiff is silent as to whether apart from the parties identified by the defendant, there are other parties who had been served with or notified of the Injunction Order. 

32.  The plaintiff justifies the service on the third parties on the basis that it acted on advice of PRC lawyer and that this was done to protect its interest.  Specifically, it is said that because the defendant had published advertisement and notice that contained false information about BSP, the plaintiff needed to inform the relevant parties in the PRC and also CLS of the development in order to redress the situation.  As to the parties served with the Injunction Order, it is said that they are “those required to be notified about the fact that the plaintiff has a claim of interest over the defendant’s shares in Ever Sure and that the defendant had [sic] made the false publication”.  The defendant does not accept the explanations offered by the plaintiff.

33.  The false information or publication that the plaintiff refers to is an advertisement or notice that the defendant caused to be published in the Behai Daily on 27 May 2008, which is to the effect that the business licence and company chop of BSP had been lost. The plaintiff says this is untrue as the company chop was previously given to it by the defendant, and that the defendant was making preparation for the disposal of the Lands.  This newspaper publication is one of the main matters relied upon by the plaintiff in applying for the Injunction Order.  The defendant denies that the advertisement or notice is false.  He disputes having given the company chop to the plaintiff and says that he genuinely believes that the chop and licence had been lost. 

34.  It is not for this Court in this application to resolve the dispute over the veracity of the advertisement or notice.  That is a live issue in the parties’ respective summons for continuation/ discharge of the Injunction Order.  Likewise, this application is not the occasion to decide whether the plaintiff is justified in serving or disclosing the Injunction Order to various third parties.  The plaintiff’s fides in obtaining the Injunction Order and whether it has mis-used the order are issues for the application to discharge the Injunction Order. 

35.  For the purpose of the present discovery application, what this Court is concerned with is whether the documents sought are relevant to the issues in the pending interlocutory proceedings.  Accordingly, it cannot be said that because the plaintiff has offered explanations or justifications for serving the Injunction Order on or disclosing it to the third parties that the documents sought cannot be relevant. 

36.  Mr Li explained that because there were a lot of manoeuvres by the defendant, who is said to be well connected to Mainland authorities, it had been necessary for the plaintiff to take action to protect its interest, including giving notice of the Injunction Order to third parties in the Mainland.  It is also said that service on CLS was justified because of its role and functions, including carrying out authentication, and that service on Bank of China was justified because it is one of BSP’s bankers. 

37.  These contentions are challenged by the defendant.  Among other matters, it is pointed out that in applying for the Injunction Order, the plaintiff had only stated the purpose to be the prevention of the sale or alienation of the Property.  The plaintiff did not appear to have informed the Judge at the ex parte hearing of the intention to serve the order to be obtained on third parties.  There was no indication that the order would be used to redress the problem caused by the defendant’s advertisement or notice or to substantiate the plaintiff’s rights or interest in Ever Sure or BSP.  The advice of the PRC lawyers is also said to be irrelevant to the proper use of the Injunction Order and the duty of good faith, which are matters of Hong Kong law.  In mounting these challenges, the defendant relies on the Full Court’s decision in In re an application by Liu Lee Yuk-ching [1982] HKLR 399 at 409F-410H, which adopted the principles set out in Z Ltd v. A-Z [1982] 1 QB 558 at 588G-589A.   Specifically, the Full Court held that applicants for injunction orders are under a duty in their supporting evidence to say on what third parties it is intended and reasonably necessary to serve a copy of the injunction, and that the breadth of intended service should be known and controlled by the court by suitable undertakings in the order. 

38.  In my view, the defendant has demonstrated that the plaintiff’s fides in applying for the Injunction Order and whether the plaintiff has mis-used the order and acted in breach of its duty of good faith, all of which are live issues in the pending interlocutory proceedings.  The defendant has also shown arguable grounds to challenge the plaintiff’s explanations or justifications for the service or disclosure of the Injunction Order on third parties.  The defendant further says that the documents are necessary to establish the extent and circumstances of the plaintiff’s service and use of the Injunction Order.  I agree.  The identities of the third parties to whom the plaintiff had served or disclosed the Injunction Order, the reason and purpose for the service or disclosure and the plaintiff’s description of the effect and scope of the Injunction Order are directly relevant to the issues of the plaintiff’s fides, the propriety of its use of the Injunction Order and any breach of the duty of good faith.

(2)  Usefulness of the discovery

39.  The second objection of the plaintiff is that the discovery is not necessary for disposing the issue between the parties.  It is argued that the defendant already has the necessary information as to who had been served with the Injunction Order to enable him to challenge the plaintiff’s fides and good faith in obtaining the Injunction Order.

40.  Mr Li referred to the observations of Kaplan J in Tsoi Kay v Wu John Baptist [1992] 1 HKC 475 at 476I-477F on the undesirability of heavy interlocutory skirmishes, frequently in connection with discovery.  It is submitted that the discovery sought should not be allowed in that the documents are solely for the interlocutory applications and is not important to the main issues in the claim.

41.  I agree with the sentiments expressed by Kaplan J that interlocutory skirmishes are to be discouraged.  However, in the present case, there is no suggestion that the discovery exercise is an onerous one. The documents sought are also directly relevant to the central issues in the interlocutory application.  As Mr Chan put it, information on the number and identity of the third parties who had been served or notified of the Injunction Order and the terms in which they were informed of the Hong Kong court’s order are relevant to determine whether the plaintiff acted mala fides and in breach of its duty of good faith and had used the Injunction Order for collateral purpose.   In this connection, it is relevant to note that the plaintiff has kept silent as to who had been informed of the Injunction Order and whether apart from those identified by the defendant, there were other parties who had been served or notified of the Injunction Order.  I do not accept that the discovery is not necessary for disposing fairly of the issues between the parties.

(3)  Oppression

42.   The third objection raised is that the discovery is oppressive in that it may expose the plaintiff to risks of civil contempt.  In the affirmation filed in opposition of the application, the plaintiff’s solicitor had made a general statement that the discovery “infringes against the plaintiff’s right against self-incrimination”.  In his skeleton submission, Mr Li also made the point that the plaintiff is not obliged to make discovery of the documents sought on the ground of privilege against self-discrimination.  The privilege, however, has not been asserted by either Mr Wong Lam Ping, who made the affirmation in support of the ex parte application or any one else from the plaintiff.  There is also no elaboration of the basis on which the privilege is said to base.  Probably in light of these insurmountable difficulties, Mr Li raised a slightly different argument in his oral submissions.   He argued that the discovery sought is oppressive because it may potentially expose the plaintiff to civil contempt proceedings. 

43.  Mr Li had not elaborated on how the risk arose.  It remains a fact that there is no evidence on the full circumstances giving rise to the risk or potential self-incrimination. The court simply has no proper basis to consider the argument or to assess the risk, if any.  That aside, I also share the observations, albeit obiter, made in Crest Homes Plc v. Marks [1987] 1 AC 829 at 859D-F and Cobra Golf Inc v. Rata [1998] Ch 109 at 158C, that it would be unfair if privilege against self-discrimination is prayed in aid solely for the purpose of liability to civil contempt in the same proceedings in which the privilege is sought to be asserted.  In the present case, I do not accept it is oppressive to oblige the plaintiff to make the discovery sought.

Conclusion

44.  For the reasons set out above, I grant the defendant’s discovery application in respect of the documents relating to the Injunction Order.  The plaintiff asked for 14 days to comply with the order.  The defendant did not oppose, but asked that the time for him to file evidence in reply for the pending interlocutory applications to run from the date of the plaintiff’s compliance with the discovery order.  Accordingly, I made the following orders:

(1)  No order is made on paragraph 1(a) of the defendant’ summons filed on 21 October 2008 (“the defendant’s Summons”).

(2)  There is an order in terms of paragraphs 1(b) and 2 of the defendant’s Summons, save that the time for compliance be extended to 14 days from the date of the order.

(3)  The 21-day period for the defendant to file and serve evidence as provided for in paragraph 5 of the Order dated 6 November 2008 to run from the date on which the plaintiff complies with paragraphs 1(b) and 2 of the defendant’s Summons.

(4)  The costs of an incident to the application be to the defendant against the plaintiff in any event, to be taxed if not agreed.