XCHRX FIL LEVERAGED US GOVERNMENT BOND FUND LTD. AND OTHERS v. THE TCW GROUP INC. AND ANOTHER

HCCL 231/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.231 OF 1999

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J U D G M E N T

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The applications

1. There is before the court, by summons dated 10 November 1999, an application by the plaintiffs in these proceedings for leave to amend the Writ and Statement of Claim by substitution of the existing Statement of Claim by an Amended Statement of Claim.

2. This application for leave to amend was made in response to the defendants' summons, dated 10 September 1999 wherein an order was sought striking out the Statement of Claim filed on 26 September 1998, and for dismissal of the action pursuant to Order 18, rule 19(1)(a), (c) and (d) and/or the inherent jurisdiction of the court.

3. In the event, the plaintiffs did not seek to maintain the original pleading, and the argument during this hearing devolved solely upon the plaintiffs' application to amend in terms of the proposed substitute Amended Statement of Claim. In this regard, the application was strongly resisted, Mr Carr QC on behalf of the defendants characterizing the new pleading as a "dense and complex document".

4. Before turning to the argument, I should perhaps make brief reference to the background facts and the progress of this litigation to date.

The factual background

5. In broad terms, this is a claim by the plaintiffs which established and ran certain investment funds, namely, the FIL Leveraged US Government Bond Fund Limited ("Bond Fund") and the MSL Fund. These Funds specialize in the trading of mortgage-backed securities and associated financial instruments.

6. The defendants are Californian fund managers whom, it is said, were engaged by the plaintiffs to advise and invest the fund assets and whom, it is claimed, caused substantial losses to these funds by reason, inter alia, of fraudulent misrepresentation, breach of contract and breach of fiduciary duty.

7. This brief description belies the very considerable detail inherent in a case, the progress of which has had a somewhat chequered history. This claim was originally instituted in the United States in June 1995. In fact, I am told that it progressed through pleadings, depositions and discovery, until in 1998 the defendants' application to stay the proceedings on the ground of forum non conveniens was upheld, the Californian court accepting the contention that Hong Kong was the proper forum for the trial of this action.

8. Accordingly, in September 1998 this Hong Kong litigation was commenced, and, in substance, as Mr Bleach SC for the plaintiffs pointed out, it is fundamentally the same action based upon the same facts that the defendants have been dealing with now for fully three years.

9. With regard to the progress to date of the present Hong Kong proceedings, the pleadings were constituted by December 1998, and Further and Better Particulars were provided for both claim and defence. A Consent Order dated 30 April 1999 laid down a detailed time-table up to and including exchange of witness statements (other than experts) on or before 31 October 1999. However, the relatively smooth progress of the case towards trial was disrupted when, on 17 August 1999, Messrs Baker & McKenzie, on behalf of the defendants, wrote a lengthy and detailed letter attacking the Statement of Claim and inviting amendment to deal with the issues raised therein.

10. This invitation was declined by those advising the plaintiffs, and accordingly the defendants' summons to strike out the pleading was issued on 10 September 1999. This was followed by a discovery summons issued by the plaintiffs on 4 October, which was itself followed by the defendants' application, by summons dated 12 October, seeking a stay of all matters outstanding pending the outcome of the defendants' strike out application.

11. In mid-October, this court was able to advance the scheduled early February hearing date for the defendants' strike out summons, the hearing of the present application taking place over four days in mid-November, attended by leading counsel on both sides and involving a significant amount of paper.

The proposed substitute Statement of Claim

12. Mr Bleach SC has not sought to defend the original Statement of Claim which, I understand, was drawn by counsel in London. However, as the plaintiffs' initial skeleton argument makes clear, what he and Mr Reyes have sought to do is to 'revisit' the existing pleading, with the aim of clarifying the necessary averments which sound in misrepresentation, breach of contract, breach of fiduciary duty and damages, so as to conform with the well known Order 18, rule 7 rubric that "every pleading must contain and contain only a statement in summary form of the material facts on which the party pleading relies for his claim but not the evidence by which the facts are to be proved, and the statement must be as brief as the nature of the case admits".

13. In the course of his argument, Mr Bleach SC conceded that the original pleading was less than satisfactory in a number of respects, but asserted that in respect of all the causes of action, such defects as had existed now had been rectified. So that whilst the plaintiffs' view was that none of the defendants' complaints would have justified a full strike out, the Statement of Claim with its three sets of accompanying particulars was "cumbersome and by no means user friendly", and accordingly it had been decided simply to produce a "more efficient" document in terms of the substitute pleading. Mr Bleach emphasized, however, that all necessary and material facts that appeared in the original Statement of Claim are to be found in the substitute pleading, and that otherwise the causes of action (with the exception of the plea of negligence, which had now been abandoned) were identical. Mr Bleach submitted that all possible difficulties had now been answered, and concluded that "whatever complaints the defendants may have had about the original pleading, the substitute pleading can leave the defendants in no doubt about the case they have to meet".

The defendants' criticisms

14. The approach adopted by Mr Carr QC for the defendants initially involved not only criticism of the pleading qua pleading, but initially also was mounted on the basis that the document in itself constituted an abuse of process, and as such should not be permitted pursuant to the court's inherent jurisdiction. In the absence of appropriate affidavit evidence, however, this latter argument met with no favour, and Mr Carr, in my view appropriately, chose not further to pursue this line of argument. He was, however, at pains to reserve his position on this issue.

15. This left what, for want of a better term, I shall refer to as 'mechanistic' criticisms as the focus of the defendants' opposition to the application for leave to amend. In this regard, it is probably fair to say that little of the plaintiffs' revised pleading escaped Mr Carr's critical eye, the broad thrust of which was that, in a complex commercial matter, the pleading, even in revised and improved form and after having addressed a number of the original criticisms, remained embarrassing and defective. In particular, it was asserted, the pleading had not eliminated the defects within the original narrative style, given the pleading of various events said to give rise to a number of causes of action and the use of a cumulative method of cross-reference and incorporation, so that the result was one of confusion rather than clarity. Descriptive compression diminishes argument, but that at any rate was the gist, against the background of which detailed arguments were developed with regard to the individual causes of action prayed in aid by the plaintiffs.

16. Thus, Mr Carr QC took the opportunity to dissect at some length the allegation of agency, the case as to misrepresentation and breach of contract as applying both to the Bond Fund and the MSL Fund, and further criticized the method of pleading damage and existence of the claim as to punitive damages. In fact, in the context of this review, only the plea of breach of fiduciary duty escaped relatively unscathed, albeit it was suggested that the existence or otherwise of such duties collateral to the pure contractual claim could 'more appropriately' be dealt with by way of a preliminary issue, and that in any event this cause of action was improperly formulated and, in common with other elements of the case, was pleaded by reference to large numbers of other paragraphs that were primarily utilized for quite different purposes. The overall result,Mr Carr submitted, was that the defendants frequently found themselves in a position of difficulty in understanding precisely the case that had to be met.

17. It followed, argued Mr Carr, that the appropriate course was for the court to refuse leave to amend in terms of the proposed Amended Statement of Claim and to order that the plaintiffs make a fresh application for leave to amend, omitting those allegations which were 'incontestably bad'.

18. So much, then, for the broad lines of the debate.

The relevant approach

19. Although the plaintiffs' application is now couched in the form of leave to amend in terms of a proposed revised pleading, so that the focus is no longer upon the strike out of all or part of an existing pleading, the change in the nature of the application does not materially affect the court's broad approach, although undoubtedly it served to preclude some of the defendants' original complaints, and further possessed the advantage of affording the plaintiffs two bites of the cherry in argument.

20. It follows therefore, as a matter of general approach, that leave to amend normally should be given unless the court is satisfied that the defects of which complaint is made are of sufficient moment so as to justify the refusal of such leave. It must follow, also, that the mindset adopted by the court on such an application is essentially macro rather than micro and that, in evaluating the complaints made, the court should be satisfied that the applicant is not demonstrating an undue propensity for embarrassment, but, to the contrary, that genuine difficulties have occurred or will occur absent appropriate amendment. In this context, a prime consideration must be to ensure as far as reasonably possible that the trial of a detailed and complex action can be clearly and fairly conducted, and that if this objective be thought to be unobtainable upon the present state of the pleadings, then the court should be proactive in ensuring that matters are straightened out before the case proceeds further.

21. In this connection, the observations of Bokhary JA (as he then was) in Aktieselskabet Dansk Skibsfinansiering v. Wheelock Marden & Co. Ltd [1994] 2 HKC 264 are particularly apposite :

"None of the basic rules of pleading have anything to do with technicality. All of them have everything to do with practical justice. They have always been of importance. Never before as much as now. For these days, there are more and more cases so vast and so complex that they push practically to its limit our system's capacity effectively to cope with them. Any laxity in their proper management, whether in regard to pleadings or anything else, can all too easily result in such cases spinning into confusion if not chaos - even before trial but especially at trial. The present case, for the trial of which half a year has been reserved, is such a case..."

22. Whilst in substantially the same vein, Lord Roskill in Ashmore v. Corporation of Lloyd's [1992] 1 WLR 446 observed thus :

"In the Commercial Court and indeed in any trial court, it is the trial judge who has control of the proceedings. It is part of his duty to identify the crucial issues and to see that they are tried as expeditiously and as inexpensively as possible. It is the duty of the advisers of the parties to assist the trial judge in carrying out his duty. Litigants are not entitled to uncontrolled use of the trial judge's time. Other litigants await their turn. Litigants are only entitled to so much of the trial judge's time as is necessary for the proper determination of the relevant issues...."

23. Although the present litigation does not attain the scope and complexity of the ADS saga, there is no doubt that the difficult subject-matter and wealth of detail will invoke a heavy burden upon both litigants and court in trying the issues raised, and for this reason in my view it is crucial not only that the playing field is defined with reasonable clarity, but that the goal posts are seen to be fixed firmly in place.

The decision on the application

24. Notwithstanding the considerable efforts of present counsel for the plaintiffs to refine and improve the original pleading (for the drawing of which they were not responsible), I am inclined to think that such desired clarity has not thus far been attained, and I have decided to refuse the plaintiffs' application.

25. As indicated during the hearing, in light of the nature of the application before the court I am disinclined to comment upon each and every of the myriad of criticisms aimed by Mr Carr at the revised pleading, nor am I minded to become drawn into the considerable factual complexities presented by this case. I should, however, express my appreciation to both sides for the extensive written submissions, both before and after the oral argument, which have been of considerable assistance.

26. After reflection upon the main issues raised, that which I consider to be of the most importance, and that which has been decisive in the context of this application, is the issue of fraud. The claim in misrepresentation as now put forward is confined to a claim in fraudulent misrepresentation, negligent misrepresentation having been abandoned. I bear firmly in mind that each and every representation alleged variously to have been made by the defendants is said to have been made fraudulently, and it is tolerably clear (and Mr Bleach does not shrink from this) that the practical significance of this plea lies in the fact that the exemption clause in the contracts of engagement of TCWFM as investment adviser has no application to fraud. Hence, no doubt, Mr Carr's submission that there appears to have been a certain temptation on the part of the original draftsman to identify a cause of action which might prevail over the effects of this exemption clause.

27. Whether or not that be the case, our case law is replete with observations from eminent judges as to the special pleading requirements attaching to a plea of fraud, and to emphasize the point Mr Carr has set out in his skeleton argument passages from the judgments ADS v. Wheelock Marden, op.cit., and in particular the views on the point expressed by Mortimer and Bokhary JJA, wherein is emphasized the necessity to plead allegations of fraud "distinctly and with the utmost particularity".

28. Against this doctrinal background, Mr Carr contrasted the manner in which the case on fraudulent misrepresentation has been pleaded, the broad approach being to set out (at paragraph 7) the seven alleged 'core' representations and thereafter (at paragraphs 8 to 18) to set out the misrepresentation case for the period leading up to the Bond Fund agreement, and (in paragraphs 24 to 32) to plead the case for the period after that agreement. Mr Carr strongly attacks the 'core' representations said to emanate from the Rangely Trust and TCW brochures as having been 'glossed', as being 'of unclear ambit' and, in terms of the misrepresentations based on the Rangely Trust brochure, as being 'incontestably bad'.

29. For present purposes, however, the more important practical criticism, which in my view would tend to render the fraud claim something of a moving target at trial, is the method of pleading whereby, after identifying the 'core' representations in paragraph 7, subsequent allegations of misrepresentation, in differing contexts, are said to consist of statements made which 'repeated' or 'affirmed' some or all of the representations pleaded in paragraph 7, or alternatively were statements made which constituted representations 'consistent with and/or implicit in' some or all of such representations.

30. Even on the assumption that the initial 'core' representations are themselves free of criticism, which is not the case, in my judgment such shorthand method of cross-reference and incorporation is unsatisfactory, and the more so in the context of a plea of fraud. In this connection, I agree with Mr Carr's argument that the formulation 'consistent with and/or implicit in' is for all practical purposes meaningless, that there is neither need nor justification for such referral back, and that if there is a separate representation on which it is intended to rely, then it is necessary for each such representation to be clearly and properly formulated. The desirability of pleading separate representations for separate aspects of the case is perhaps exemplified by the fact that the representations relied upon subsequent to the Bond Fund formation (at paragraphs 24-32) are said to amount to repetition or affirmation of the initial 'core' representations, yet it is difficult to appreciate how statements made at a different time and within a different context are capable of amounting to repetition or affirmation of some, or all, of the 'core' representations. It is further said, in my view justifiably, that the issue of the falsity of such latter tranche of representations is neither properly confronted nor particularized in paragraph 41. The attempted cure of the particulars of falsity point, by means of a further refinement in terms of a draft proffered during the hearing, alleging that falsity consisted of inconsistency with representations in the 'core' group, in my view provides an example of the difficulty inherent in 'tweaking' an unsatisfactory pleading in this manner, and served neatly to illustrate the difficulties that arise when this method of pleading is adopted.

31. The result of the foregoing, therefore, is that notwithstanding Mr Bleach's spirited contentions to the contrary, and notwithstanding the efforts made to reformulate, in my judgment the case in fraudulent misrepresentation is not pleaded satisfactorily. The respondent to the allegations is required, in effect, to play a version of 'catch as catch can' in order to pin down the plaintiffs' case in fraud before being in the position adequately to respond, whether such be in terms of the preparation of evidence or at trial.

32. This conclusion with regard to the fraudulent misrepresentation element of the case is sufficient to decide this application, and I have so decided specifically on this basis. That is not to say that I do not harbour misgivings over the adequacy of other aspects of the pleading, aspects which have been the subject of stringent criticism also, albeit absent the type of problem associated with the misrepresentation element of the case, whether these other matters would have been sufficient, cumulatively or in themselves, to warrant the refusal of leave is moot. In this connection, for example, I consider there is some substance in the complaint as to the deficiency of the particulars of the alleged agency of TCW Funds, that the pleading of contractual breach in relation to the Bond and MSL Funds could be improved, in that such is not pleaded by reference to the contractual terms allegedly breached, and that the connection between the factual assertions and the contractual terms is unclear and in some instances (for example, as to organizational and supervisory faults) appears to have a public and not a contractual base. In addition, it is difficult not to have sympathy with the complaint, given the allegation of misleading as to investment value, that not one instance of mispricing is particularized, reliance being based solely upon a chart prepared by an intended expert.

33. As I have earlier noted, however, I do not intend to comment upon each criticism or perceived fault. These matters have been fully ventilated, both in oral and written argument, and in any event there is something in Mr Bleach's riposte that simply because the case is pleaded in a way that Mr Carr does not like, it does not follow that the pleading is bad. This of course is fair comment, and may serve to minimize a multitude of perceived problems. What cannot be overcome, however, is the presently unsatisfactory, and practically difficult, plea of fraudulent misrepresentation. Even in the Commercial Court, with its general reluctance to accord undue importance to pleadings, this is an element of the case which, in my judgment, demands further detailed attention.

34. At the end of the day, therefore, I decline to give leave to amend in terms of the proposed Amended Substitute Statement of Claim. I think it fair to say that this document represents a considerable advance over the original pleading, now abandoned, but at the same time (and perhaps inevitably) the proposed substitute pleading has failed to surmount structural faults bequeathed, no doubt, by the original pleading. Had the case been re-pleaded 'from the ground up', I think it unlikely that there would have been room for the breadth of critical appraisal now heaped upon it, although I appreciate the dilemma faced by counsel who perceived the necessity to make necessary amendments in order to head off attack and obtain leave to amend, whilst at the same time maintaining some leverage as to costs. In the event, however, I regret that in my judgment neither aim has been successful.

Orders

35. As a result of this judgment, therefore, the following are the orders of the court upon this application.

36. On the plaintiffs' summons dated 10 November 1999

1. The application for leave to amend the Writ and Statement of Claim in terms of the proposed Amended Statement of Claim is refused;

2. There be leave to the plaintiffs to renew the application for leave to amend within 42 days from the date hereof;

3. There be an order nisi that the costs of the application for leave to amend be to the defendants in any event, to be taxed if not agreed, with a certificate for two counsel.

37. On the defendants' summons to strike out dated 10 September 1999

38. Given the confirmation by Mr Bleach SC that, in seeking to amend in the terms proposed, the original Statement of Claim has been abandoned, it must thus follow that :

1. The Statement of Claim filed herein on 26 September 1998 be struck out;

2. There be an order nisi that the costs of this application be to the defendants in any event, to be taxed if not agreed, with a certificate for two counsel.

39. I thank all counsel for their assistance.