DAIMLER AG v. HERBERT HEINZ HORST LEIDUCK AND ANOTHER

HCA 4089/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4089 OF 1994

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D E C I S I O N

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1.  This is an appeal against a decision of Master Lung made on 11 March 2010.  Master Lung ordered the withdrawal of six interrogatories administered by the defendants on the plaintiff on 29 January 2010 and refused an oral application by the defendants to amend their Points of Claim made in the course of the hearing on 11 March 2010.  

The background

2.  The plaintiff is a car manufacturer.  The 1st defendant is a businessman.  The 2nd defendant is a company incorporated in Hong Kong and was, at the material times, 99% owned by the 1st defendant and controlled by him. 

3.  The plaintiff entered into an agreement with one Intercontinental Resources Société Anonyme Monégasque (“IRSAM”) on 9 July 1993.  The agreement was for IRSAM to facilitate a sale by the plaintiff of 10,000 passenger cars manufactured by the plaintiff for US$870 million.  IRSAM was represented by the 1st defendant in the negotiation of the contract.  It was to receive a commission of US$20 million if the proposed sale should be concluded.  This sum was paid by the plaintiff to IRSAM in advance as initial financing for the proposed sale.  However, IRSAM had to return this US$20 million with interest at 9.5% to the plaintiff if the proposed transaction was not effected by 31 October 1993 and the consideration of US$870 million not received by the plaintiff by 1 December 1993.  As security for the return of the US$20 million plus interest, IRSAM gave the plaintiff a bank guarantee of US$5 million and a promissory note for US$21,055,055.55.  The promissory note was guaranteed by the 1st defendant. 

4.  The proposed sale of cars did not materialise and the promissory note was not honoured by IRSAM or the 1st defendant.  The plaintiff then brought various proceedings against the 1st defendant for the recovery of the money due.  The plaintiff also brought this action with a view to secure the assets of the 1st defendant in Hong Kong. 

5.  It was alleged that an investigating magistrate of Monaco, Monsieur Jacques Lefort (“Lefort”) had made a finding that US$6 million of the US$20 million paid by the plaintiff to IRSAM had been used to settle a loan due from the 2nd defendant and another entity to a bank.  Based on this alleged payment, the 2nd defendant was also sued in this action. 

6.  The plaintiff also obtained a Mareva injunction against the 1st and 2nd defendants on 29 April 1994.  The injunction contained the usual undertaking by the plaintiff to pay damages to the defendants if this court should be of the opinion that the defendants have suffered by reason of the injunction which the plaintiff ought to pay. 

7.  However, the bank’s lawyer, by a letter dated 6 May 1994, confirmed that this loan of US$6 million had not been repaid as a whole by the 2nd defendant or the other entity.  The allegation relied on by the plaintiff in obtaining the Mareva injunction against the 2nd defendant was therefore untrue.  By a letter of 14 May 1994, the plaintiff’s solicitors told the defendants’ then solicitors:

“We have now received instructions from our client following a report by its Paris lawyer on the banking records in the possession of the Investigating Magistrate. 

This report indicates (contrary to earlier information which had been provided by the Magistrate) that the loan in question has not been repaid out of the funds advanced to the 1st Defendant by our client. 

Accordingly, we will discharge the Mareva injunction against the 2nd Defendant.  …  We will confirm the position to the Court at the hearing on 17 May and we have asked Counsel not to attend in order to avoid unnecessary costs. 

We will not seek to resist the order for costs in favour of your client provided you can confirm there will be no claim for damages pursuant to our client’s undertaking.  Given that ordinary business transactions have continued we would not have thought your client has suffered any loss and if you can confirm as requested, then an order could be made by consent on 17 May without the need of argument before the Court.”

8.  The defendants’ solicitors replied by a letter of 16 May 1994:

“We refer to your letter of 14 May and today’s telephone conversations between Mr Carolan and Mr Clarke. 

We confirm our agreement that our client will not be claiming damages pursuant to your client’s undertaking and that your client will pay our client’s costs and disbursements on an indemnity basis. 

Accordingly, you will draft a Consent Order dismissing your client’s injunction and there will be no need for either party to instruct Counsel.”

9.  An order by consent of the plaintiff and the 2nd defendant was then made on 17 May 1994 setting aside the Mareva injunction as against the 2nd defendant with cost to the 2nd defendant on an indemnity basis.

10.  On 23 July 2007, the 1st and 2nd defendants took out a summons pursuant to the undertaking of damages in the Mareva injunction for an enquiry of the damages suffered by them by reason of the Mareva injunction and for payment of such damages. 

11.  However, in the case of the 2nd defendant, it had made the settlement agreement with the plaintiff through their solicitors on 16 May 1994, as referred to above, that it would not claim damages from the plaintiff pursuant to the plaintiff’s undertaking in the Mareva injunction.  The 2nd defendant therefore seeks to set aside this agreement.

12.  The defendants filed their Points of Claim on 11 April 2008.  They pleaded that it was one Phillip Yip (“Yip”) who purportedly agreed on behalf of the 2nd defendant not to claim damages from the plaintiff pursuant to the undertaking.  At that time the 1st defendant, who was another director of the 2nd defendant, was imprisoned in Monaco.  The 1st defendant also said in an affidavit dated 7 January 2008 that it did not know about this settlement agreement until after the event. 

13.  The Points of Claim also pleaded that the Mareva injunction against the 2nd defendant was obtained by the plaintiff fraudulently, knowing the basis to be untrue, and with intent to damage the business of the 2nd defendant, and hence the commercial interest of the 1st defendant who owned 99% of the shares of the 2nd defendant.  It pleaded that the plaintiff had bribed Mr Lefort, the Monaco magistrate, with a passenger car, and Mr Lefort in return provided the false information that US$6 million of the US$20 million had been used to pay off a loan due from the 2nd defendant and another entity to a bank.  This false information was then used by the plaintiff to obtain the Mareva injunction against the 2nd defendant.  This alleged fraud is hereafter called “the Lefort fraud” for convenience.

14.  However, the Lefort fraud is not the basis for vitiating the settlement agreement as it did not cause the making of the settlement agreement.  The Points of Claim pleaded another alleged fraud.  It pleaded under the heading “Particulars of fraud vitiating the agreement not to claim damages” that the settlement agreement was made by Yip on behalf of the 2nd defendant as a result of a promise given by the plaintiff to Yip of future business dealings with the plaintiff.  For convenience, this alleged fraud is hereinafter called “the Yip fraud”.

15.  The plaintiff filed an affirmation of one Rene von Sampson-Himmelstjerna (“RVS”) on 14 April 2009 to oppose the defendants’ application for enquiry.  RVS said in paragraph 17:

“I also note that the Mareva against IRC was based on the findings of an investigating magistrate in Monaco, Monsieur Jacques Lefort, that US$6 million (out of the US$20 million advanced under the IRSAM agreement) was used by Banque Nagelmackers 1749 Luxembourg to settle a loan of the same amount granted to IRC and another party.  Such findings were later found to have been misunderstood by the Plaintiff’s solicitors in Paris, who conveyed the same to the Plaintiff’s solicitors in Hong Kong.  …”

The Interrogatories

16.  On 29 January 2010, which was some nine months after the filing of the affirmation of RVS by the plaintiff, the defendants served six interrogatories in relation to paragraph 17 of RVS’s affirmation requiring the plaintiff to answer them.  The interrogatories read:

“(a) State the exact wording that was used by Lefort in conveying his findings of the usage of US$6 million (out of the US$20 million advanced under the IRSAM agreement) to the Plaintiff’s solicitors in Paris;

(b) Identify the documents that were used or referred to by Lefort in conveying his findings of the usage of US$6 million (out of the US$20 million advanced under the IRSAM agreement) to the Plaintiff’s solicitors in Paris;

(c) State the understanding of the Plaintiff’s solicitors in Paris of such wording used by Lefort;

(d) State why and how such findings were misunderstood by the plaintiff’s solicitors in Paris;

(e) State the exact wording that was used by the Plaintiff’s solicitors in Paris when conveying such findings to the Plaintiff’s solicitors in Hong Kong; and

(f) State how the Plaintiff later found out about such misunderstanding.”

17.  The plaintiff refused to answer the interrogatories and issued a summons on 12 February 2010 for an order that the interrogatories be withdrawn.  The summons was heard by Master Lung on 11 March 2010.  In the course of the hearing, and possibly for the purpose of dealing with the plaintiff’s argument of irrelevance, the defendants made an oral application to amend the Points of Claim by adding a further paragraph under the heading “Particulars of fraud vitiating the agreement not to claim damages.” 

The proposed amendment

18.  This further paragraph, as now engrossed in a draft Amended Points of Claim annexed to the Notice of Appeal dated 23 March 2010, reads:

“13A.  By non-disclosure of the facts of the fraud in obtaining the ex-parte Mareva Injunction as pleaded in paragraphs 8-13 above while admitting that the basis of the Mareva Injunction as against the 2nd Defendant was wrong, the Plaintiff has fraudulently misrepresented to the 2nd Defendant that the Mareva Injunction as against the 2nd Defendant was obtained on the basis of a bona fide mistake on the part of the Plaintiff.  In reliance on the fraudulent misrepresentation, the 2nd Defendant entered into the said agreement.  In the premise, the said agreement was vitiated by fraud.”

19.  Master Lung ordered the interrogatories to be withdrawn and dismissed the oral application to amend. 

The legal principles

20.  The defendants submitted that interrogatories which are relevant are admissible.  The test of relevance is the same as the Peruvian Guano principle.  They also accept that only such interrogatories that are necessary either for disposing fairly of a cause or matter or for saving costs will be allowed, and oppressive interrogatories should not be allowed.  (See Hong Kong Civil Procedure 2010, Vol. 1 at 26/4/7 and 26/4/11 - 26/4/12.)

21.  On amendment, the defendants’ reminded me that it should be allowed at any stage of the proceedings for determining the real question and controversy between the parties or for correcting any defect or error in any proceedings.  However late the amendment may be sought, it should be allowed if it would not cause any prejudice to the other side that could not be compensated with cost.  The court will also order the amendment if it is of the opinion that it is necessary for disposing of a cause or matter or for saving costs (Order 20, rule 8 of the Rules of the High Court.) 

Analyses of the arguments

22.  The Points of Claim in its present form pleads only the Yip fraud as a ground for vitiating the settlement agreement.  It does not plead that the Lefort fraud has anything to do with the making of the settlement agreement though it was the basis for the Mareva injunction against the 2nd defendant. 

23.  However, the interrogatories are all directed to elicit the details of the alleged misunderstanding of the alleged findings of Mr Lefort.  They are obviously for the purpose of weakening the explanation by RVS, in paragraph 17 of his affirmation, on how the plaintiff had erred in obtaining the injunction against the 2nd defendant, and to strengthen the defendants’ case that there was the Lefort fraud which led to the injunction against the 2nd defendant.

24.  These interrogatories may be relevant to show who was telling the truth on the cause for the injunction against the 2nd defendant.  But with the present Points of Claim, they are irrelevant as to how or why the settlement agreement was made.  Hence the defendants want to amend the Points of Claim by adding a new paragraph 13A.  This paragraph says that the settlement agreement was made as a result of the plaintiff’s fraudulent misrepresentation in that the plaintiff had failed to disclose to the 2nd defendant the Lefort fraud and had thereby fraudulently misrepresented to the 2nd defendant that the injunction against the 2nd defendant was obtained by a bona fide mistake. 

25.  By this paragraph the defendants seek to make the non-disclosure of the Lefort fraud as a cause for making the settlement agreement.  They want to rely on the non-disclosure of the Lefort fraud and the Yip fraud cumulatively and alternatively for setting aside the settlement agreement. 

26.  If the new paragraph 13A can be incorporated into the Points of Claim by way of amendment, then the six interrogatories will become relevant to the issue of setting aside the settlement agreement. 

27.  Mr Shieh, leading counsel for the plaintiff, argued against the amendment.  He said the defendants could never succeed in establishing what is sought to be pleaded in paragraph 13A.  He submitted that, for the purpose of argument, even if there was the Lefort fraud, there is no evidence that Yip had agreed on behalf of the 2nd defendant to enter into the settlement agreement because he thought that the plaintiff had obtained the injunction by a bona fide mistake. 

28.  Yip has not filed any affidavit in this application and will not be called as a witness. 

29.  Mr Wong, leading counsel for the defendants, however argued that once the fraudulent misrepresentation is proved, it is presumed as a matter of law that it did induce the representee to enter into the transaction in question.  I am referred to Pan Atlantic Insurance Co. Ltd. and Anor v Pine Top Insurance Co. Ltd. [1995] 1 AC 501 at 542A and 551D, and Barton & Ors v County NatWest Limited [1999] LL R (Part 8) 408 at paragraphs 54 and 58.

30.  In Pan Atlantic Insurance Co. Ltd., the insured had the obligation to disclose to the defendant insurers a material circumstance.  They made no disclosure and the insurers were allowed to avoid the contract. 

31.  In Barton, there was evidence that a bank manager had made a misrepresentation to some prospective guarantors knowing the same to be false and intending the same to be relied on.  There was a presumption in law that the guarantors were indeed induced by the misrepresentation.  The bank failed to rebut the presumption.  The guarantors therefore succeeded in their claims of deceit based upon the fraudulent misrepresentation of the bank manager.

32.  The facts in the present case are different.  The plaintiff’s solicitors, in their letter dated 14 May 1994 to the defendants’ solicitors, only said that the report by the plaintiff’s Paris lawyers on the banking records in the possession of the magistrate indicated that the loan of US$6 million had not been repaid out of the US$20 million, and that was contrary to the earlier information provided by the magistrate.  The letter did not say how or why the wrong information was given earlier on by the magistrate.  There is also no evidence that the then solicitors of the defendants had asked how or why the magistrate had erred.  I do not think the plaintiff was then under any duty to explain to the 2nd defendant how or why the Mareva injunction was wrongly obtained and its solicitors did not do so.  There is also nothing to suggest that it was a material circumstance for Yip to consider whether the 2nd defendant should enter into the settlement agreement.

33.  Since there was no duty to explain and the plaintiff’s solicitors had made no representation that the injunction was obtained by a bona fide mistake or otherwise, there is no basis for the 2nd defendant to say that a non-disclosure of the alleged Lefort fraud by the plaintiff amounted to the plaintiff’s fraudulent misrepresentation of a bona fide mistake.  In the premises, the defendants will not be able to establish the alleged fraudulent misrepresentation as sought to be pleaded in the proposed paragraph 13A. 

Decision

34.  I therefore agree with Master Lung’s decision to reject the application to amend.  Without the amendment, the six interrogatories are also irrelevant to the issue of setting aside the settlement agreement.  I therefore also uphold Master Lung’s order that these interrogatories should be withdrawn.  The appeal is therefore dismissed.

Discretion

35.  I would go further to consider whether I would have exercised my discretion to allow the interrogatories had I allowed the amendment.  The plaintiff submitted that I should not allow the interrogatories as they were administered late and were therefore oppressive. 

36.  I would, however, agree with the defendants that despite the interrogatories were served some nine months after the filing of the affirmation of RVS, there were still a few months before the hearing for considering the issue of setting aside the settlement agreement.  The compass of the interrogatories is also a narrow one.  They do not require extensive enquiries of a large number of people or the consideration of a large number of documents.  Some of the answers should also be contained in some documents too.  Hence, RVS was able to depose to what he did in paragraph 17 of his affirmation. 

37.  Had I allowed the amendment I would have exercised my discretion in favour of the interrogatories as they may go to weaken the veracity of paragraph 17 of the affirmation of RVS and strengthen the defendants’ case that there was the Lefort fraud.  However, I have already decided against the amendment, and the defendants shall pursue their claim for setting aside the settlement agreement by relying on the Yip fraud only.

Costs

38.  I also make a cost order nisi that the defendants shall pay the plaintiff the costs of this appeal.  If there shall be no application to vary the cost order nisi within the next 14 days, the solicitors on both sides shall arrange with the listing officer for a 9.30 am hearing for me to conduct a gross sum assessment of the amount of costs payable.