XCHRX TUANYI FURNITURE MANUFACTURER LTD. v. MIN XIN INSURANCE CO. LTD.

HCA17305/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.17305 OF 1999

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D E C I S I O N

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1. This is an appeal from a decision of Master M. Yuen dated 22 February 2001.

Background

2. The plaintiff was an owner of a furniture factory in the mainland. On 1 May 1999, much of the factory was damaged by fire. The plaintiff's claim is against its insurers for loss and damage arising from the fire. Much of the furniture, either manufactured or partially manufactured was lost. The claim is in the approximate sum of $5 million. The insurance company's original defence was based on an alleged misrepresentation about the structure of the premises, made at the time the policy was taken out. Nonetheless, based on a loss adjuster's report, the defendant made a payment into court in the sum of $1.2 million, in July 2000.

3. However, in the latter part of 2000, the defendant's further investigation into the claim caused them to change their defence. In November 2000, an application was made for leave to amend the defence to plead fraud. Leave was granted. In December 2000, a summons for security for costs was made by the defendant on the basis that the plaintiff is a foreign company. This is not in dispute.

4. Finally, in February 2000, the defence notified the plaintiff (by letter) that it was abandoning its defence of misrepresentation altogether and was defending the claim solely on the ground of fraud. The substance of the fraud being, as pleaded, that approximately $300,000 worth of the claim was fictitious, in that it related to items of furniture which the plaintiff had never had in the premises at the time of the fire. At the same time, the defendant issued a summons applying to withdraw its payment into court.

The learned Master's Order

5. Master Yuen found for the defendant. They were permitted to withdraw the payment in and the plaintiff was ordered to provide security in the sum of $200,000 which was intended to reflect the defendant's costs up to the time of hearing before the Master. These orders are now appealed by the plaintiff. The two issues, (a) the payment out and (b) the security for costs are related and connected. Mr Benjamin Chain, for the plaintiff, indicated that he has no strong views on the payment out. His clients could have accepted it but did not. It was rejected. In isolation, they would not object to the money being withdrawn by the defendant. However, he rightly contends that the "payment out" summons should not prejudice the plaintiff's resistance of the "security" summons. For this reason, and because the principles to be applied are different, I shall deal with them in turn.

(a) Payment out

6. Mr Chain complains that the application to withdraw the payment out was made later than it should have been and was made to lend support to the security for costs summons.

7. Having heard the competing submissions, I am satisfied that, although the application could have been made when leave was sought to amend the defence, the defence should not be prevented from taking the money out of court, simply because it was applied for later. The actual abandonment of the misrepresentation defence was not made till February 2001, about three months after the amendment to plead fraud was made. The summons for the payment out coincided with the abandonment of misrepresentation.

8. I am satisfied that a good reason for the withdrawal has been shown, namely a change in circumstances leading to a different defence. Fraud is not just another string to the defence bow, it is a different arrow that is going to be fired. I am also satisfied that the decision to defend the case on fraud rather than misrepresentation was made when, or soon after, the defendant became aware and confident of the evidence in support of it. This is not a case where the defence have revalued their case and now think that too much money has been paid in. Neither it is a case where the plaintiff is saying it wants further time to consider whether or not to accept it. In a nutshell, the plaintiff has rejected it and the defence case is entirely different to the case upon which it decided to make the payment in.

9. The learned Master's decision to give leave to the defence to withdraw the payment in cannot be faulted.

(b) Security for costs

10. Given the court's decision on the "payment out" summons, the issues relevant to the "security for costs" summons must now be revisited de novo in isolation.

11. The plaintiff is a mainland company, which for the purposes of this summons means a foreign plaintiff. Ordinarily, a foreign plaintiff will be ordered to provide security for the defendant's costs, should it lose, but not automatically. The court must strike a balance when exercising its discretion. A number of factors may be weighed in that balance. Would the plaintiff's claim be stifled by such an order? What are the respective merits of the claim? Would the defence be prejudiced by having to resist a claim with no prospect of getting their costs should they be successful? These are some of the competing factors.

12. I think it is useful in this case, as a first step, to take a superficial look at the respective merits. The initial approach to be adopted to the question of merits is as stated by Browne-Wilkinson VC in Porzelack KG v. Porzelack (UK) [1987] 1 All ER 1074 at p.1077 :

"Under O 23 r 1(1)(a) it seems to me that I have an entirely general discretion either to award or refuse security, having regard to all the circumstances of the case. However, it is clear on the authorities that if other matters are equal, it is normally just to exercise that discretion by ordering security against a non-resident plaintiff. The question is what, in all the circumstances of the case, is the just answer.

The matters urged before me have spread over a fairly wide field. First, there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in the Supreme Court Practice 1985 Vol. 1 para.23/1-3/2, which says : '... A major matter for consideration is the likelihood of the plaintiff succeeding ...'. This is the second occasion, recently, on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action. I do not think that is a right course to adopt on an application for security for costs. The decision is necessarily made at an interlocutory stage on inadequate materials and without any hearing of the evidence. A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.

Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then, that is a matter that can properly be weighed in the balance. Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed. But, for myself, I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure."

13. In the present case, it cannot be discerned whether one case is obviously stronger than the other. The defence say they have expert evidence in support of their allegation that a number of chairs which have been claimed for could not have been in the factory at the time of the fire. The plaintiff, on the other hand says that, (a) there was no dishonesty; and (b) if an inflated claim was innocently made, it only represented about 1% of the total claim. The defence say it was at least 6% or $300,000 which, if true, is a significant fraud. Mr Chain concedes that if the defence discharge the high burden on them to prove a significant fraud then, under the terms of the policy, the defendant would not be obliged to pay out anything under it.

14. Given that the merits argument does not fall clearly on one side or the other, it should be put to one side and cease to be a factor in determining whether to exercise the discretion or not.

15. The next factor is to consider whether an order will stifle a genuine claim. I have already stated that whether or not the claim is "genuine" is not a matter which can be decided at this stage. Nonetheless, the court should still consider if the claim will be stifled, unless it is a plainly bad claim. The emphasis, however, is "will be" stifled, not might or could be stifled. Mr Chain relied, in part, on an affirmation, filed the day before the appeal, which purported to set out the current parlous financial state of the plaintiff. Mr Mohan Bharwaney, for the defendant, not surprisingly, objected to it on the basis that its filing was so late and that it contained no information which could not have been placed before the Master. The court read it on a "de bene esse" basis.

16. Having considered the relevant matters, I am satisfied that the learned Master correctly exercised her discretion in ordering security. As Mr Bharwaney pointed out, this is a foreign company, not an individual. There is no evidence about the source of the plaintiff's funding of the litigation so far. Nor is there evidence that it will certainly run out of funds if security is ordered. In such circumstances, the balance to be struck falls on the side of the party who, without security, would be forced to make a commercial decision whether or not to continue its defence, virtually knowing, it will not get paid if it wins.

Quantum

17. The question now arises, how much should be ordered. The defence solicitors' original estimate for all its costs (by letter to the plaintiff's solicitors) was $900,000. A more recent draft bill of costs estimates $1.4 million. I have no hesitation in saying that the draft bill is excessive. The learned master ordered $200,000 being an assessment of costs up to the hearing before her. I have been invited by both counsel to reconsider the quantum. I propose to do so only to the limited extent of increasing the award so as to take account of this appeal in which the plaintiff has been unsuccessful. I therefore propose to leave the award at what, no doubt the learned Master considered to be a manageable level.

18. Should the defence make another application prior to trial, it is possible that the plaintiff's arguments about the merits of their case will have improved to an extent that a future tribunal may be persuaded not to order any further security. It is the sort of case which should be reviewed as it progresses.

19. In all the circumstances, the security ordered will be increased to $300,000. That apart, the learned Master's order stands. The costs of the appeal and below shall be to the defendant.