FINANCIAL HOLDINGS (BVI) LTD v. CHAD C. HOLM AND OTHERS

HCA 2545/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2545 OF 2016

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D E C I S I O N

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THE ISSUES

1.  This is a run-of-the-mill application for extension of time to file and serve a pleading.  Ultimately the questions which this court has to consider are whether any extension of time should be granted for the 2^nd Defendant to file and serve his Defence (and Counterclaim, if any)[1], and, if so, whether it should be made on an “unless” basis.

2.  As I will explain further below, a question has arisen in the course of the parties’ discussion on the grant of an extension before this application was made.  The question is: for the purpose of protecting the Plaintiff’s right in applying for an unless order at a later stage against the 2^nd Defendant, is it necessary for the agreed extension of time for the filing of the 2^nd Defendant’s Defence and Counterclaim to be incorporated in a court order or is it adequate for such an extension by consent to be recorded in writing pursuant to Order 3 rule 5(3) of the Rules of the High Court?  The Plaintiff’s solicitors (“L&A”) took the view that a consent order is necessary.  The 2^nd Defendant’s solicitors (“S&S”) did not agree.

3.  Now that an application to the court has been taken out, it does not matter as to which party’s view is correct.  Having said that, I will deal with this question anyway in this Decision as it has been argued by the parties.

THE MATERIAL FACTS

4.  This action was commenced on 3 October 2016.  As the 2^nd Defendant’s acknowledgment of service was filed on 17 October 2016, the Plaintiff was required to file and serve its Statement of Claim by 31 October 2016.  However, in the end, the Plaintiff was only able to do so on 15 December 2016, presumably after extensions of time not only granted by the court but also agreed to privately by the Defendants[2].  The deadline for the filing and service of the 2^nd Defendant’s Defence and Counterclaim therefore fell on 12 January 2017.

5.  On 12 January 2017, the 2nd Defendant took out a summons for extension of time which was granted by consent on 19 January 2017.  Time was as a result extended to 13 February 2017.

6.  On 26 January 2017, a Notice of change of solicitors was filed on the 2^nd Defendant’s behalf.  S&S became the 2^nd Defendant’s solicitors on record. As S&S needed further time to file and serve the 2^nd Defendant’s Defence and Counterclaim, it wrote to L&A on 3 February 2017 and asked for more time.  This initiated a series of correspondence exchanged between the parties.

7.  Because of the importance of the content of the correspondence between the parties’ respective solicitors, it is necessary to set out those correspondence as follows:

S&S’s letter dated 3 February 2017

“We refer to the captioned proceedings and the Order of Master Hui extending the deadline for the filing of D2’s Defence to 13 February 2017.

As you are aware from the Notice of Change of Solicitors served on you on 26 January 2017, we have been instructed to act on behalf of the 2^nd Defendant in place of Messrs. Gall. Given the recent change of handling solicitors and the time needed to transfer the files, which coincides with the Chinese New Year holidays, we propose that the deadline for the filing of D2’s Defence be extended by 30 days (i.e. to 15 March 2017).

Please let us know by return whether your client agrees to the proposed extension.  We will then circulate a Consent Summons for your endorsement.”

L&A’s letter dated 3 February 2017

“We refer to your letter to us of even date.

Kindly note that we are amenable to a time extension for 21 days on an unless order basis, subject to the usual costs order of HKD800 payable to our client forthwith.

Please kindly prepare and send over a draft Consent Summons for our comments/agreement as soon as possible.”

S&S’s letter dated 8 February 2017

“We refer to your letter of 3 February 2017.

Our client is prepared to accept the 21 day extension you offered but this should not be made on an unless order basis. The time for our client to prepare the Defence overlaps with the holiday season and our firm has only been recently instructed to take over the defence. We have therefore asked for a reasonable time to acquaint ourselves with the issues and the history of the proceedings. In this regard we note that your client has had a total of 55 days extension in filing the Statement of Claim and there was no suggestion by the parties to apply for an unless order.

We also ask that there be no order as to costs as we trust that this matter can be disposed of efficiently between the parties.

Please let us know by 9 February 2017 whether your client agrees to a 21 day extension on the above conditions.”

L&A’s letter dated 8 February 2017

“We refer to your letter to us of even date.

We are instructed that our client can accept a time extension for 21 days (i.e. 21 days from 13 February 2017, which will take it to 6 March 2017) without the unless order condition.

However, we insist that your client should pay HKD800 to our client, which is the usual costs order for a time extension application. As you should note, a costs order of HKD800 was also imposed on our client for his earlier time extension application to file his SOC.

Hence, we see no reason that your client can be granted a time extension with no order as to costs.

Should you agree on the above, please kindly prepare and send over a draft Consent Summons for our comments / agreement as soon as possible.”

S&S’s letter dated 9 February 2017

“We refer to your letter of 8 February 2017.

As the parties are now able to agree a time extension of 21 days for the filing of the Defence without an unless order, there is no need for an Order of the Court to that effect (Order 3 rule 5 of the Rules of the High Court).

Given that no Summons has to be filed or heard, we do not see any basis for your client to seek costs from ours. The relevant rule has been put in place to facilitate settlement of matters like this in a cost-effective manner. We do not agree that your request for HKD800 is ‘the usual costs order for a time extension application’ where no application to the Court is required at all.

Our client maintains the above position but, being conscious of avoiding unnecessary costs on this issue, our client is prepared to pay your client HKD800 to have this resolved.  Please confirm it is the position of your client to insist on the payment of HKD800 notwithstanding the points we set out above.”

L&A’s letter dated 9 February 2017

“We refer to your letter to us of even date.

As you know and as made doubly clear in our letter dated 3 February 2017, we have required any agreement to be encapsulated formally via a Consent Summons. Hence, we do not share your view that ‘there is no need for an Order of the Court’ and that therefore no costs order should be imposed on your client.

Again, please kindly send over a draft Consent Summons for our comments without further delay (i.e. within the next 2 days).  Failing that, we shall proceed to apply for Default Judgment in due course.”

8.  Instead of preparing a draft consent summons for L&A’s comments, S&S took out a time summons on the next day (10 February 2017).

ORDER 3 RULE 5(3), RHC

9.  Before I deal with the 2^nd Defendant’s application for extension of time, as aforesaid, I would deal with the question set out in paragraph 2 above.

10.  It can be seen from the correspondence between the parties that they have agreed (at the very least, in principle – please see further discussion on this at paragraphs 27 and 28 below) that the time for the filing of the 2^nd Defendant’s Defence and Counterclaim could be extended for 21 days without an unless order.  However, L&A has insisted that any agreement had “to be encapsulated formally via a Consent Summons”.

11.  It is unclear from the said correspondence as to why L&A thought it necessary to have a consent summons, since it has been provided in Order 3 rule 5(3) of RHC that:

“The period within which a person is required by these rules, or by any order or direction, to serve, file or amend any pleading or other document may be extended by consent (given in writing) without an order of the Court being made for that purpose.”

12.  It was only in the hearing that Mr. Leung for the Plaintiff explained that a consent summons was required because it was his view that any failure to meet a deadline which was extended by mutual agreement would not be counted when the court considers whether an unless order should be made against the 2^nd Defendant in future.  Mr. Leung relied heavily on the case of Hytec Information Systems Ltd. v. Coventry City Council [1997] 1 WLR 1666 which, he submitted, had been followed by various Court of First Instance decisions.[3]  The part of the judgment which he emphasised (which was also reproduced in paragraph 3/5/6 of volume 1 of the Hong Kong Civil Procedure 2017) reads:

“...An unless order was an order of last resort, not made unless there was a history of failure to comply with other orders...” (emphasis added) (per Ward L.J. at 1674H)

13.  It was Mr. Leung’s submission that because of the use of the words “other orders”, the “history of failure” must be in relation to previous court orders before such failures would be considered in the other party’s application for an unless order. Hence, he submitted that if the extension of time was given by virtue of the mechanism provided by Order 3 rule 5(3) of RHC without a court order, the court cannot take such an extension into account.

14.  With respect, I do not accept this submission.

15.  Firstly, it should be borne in mind that Hytec Information Systems Ltd. (supra) is a case on striking out proceedings following a party’s failure to comply with an unless order.  The English Court of Appeal’s focus was not on whether an unless order should be made in the first place.  It is thus dangerous to lay too much emphasis on the general principles summarised therein in the circumstances of the present case.

16.  Secondly, the general principles explained by Ward L.J. in his judgment in Hytec Information Systems Ltd. (supra) should not be interpreted as if they were statutory provisions.  In fact, this point has been made very clear in the English Court of Appeal’s judgment itself.

17.  Before Ward L.J. summarised the principles on whether a party’s case should be struck out upon this party’s failure to comply with an unless order, he had referred to (at 1674D – E) what Beldam L.J. stated in R.G. Carter (West Norfolk) Ltd. v Ham Gray Associates Ltd. (unreported), 21 June 1996, Court of Appeal (Civil Division) Transcript No.922 of 1996.  The followings are what Ward L.J. described as the “important words”:

“But, in any event, it seems to me that in the exercise of discretion it is wrong to regard guidelines which have been put forward to aid a judge in the exercise of his discretion as if in every case they had to be regarded as conditions precedent to the exercise by the court of its power. It is the essence of a discretion that it should be exercised flexibly and should not be limited or circumscribed by conditions. No doubt in the ordinary case the considerations put forward in guidelines suggested by this court will be given great weight, but they are not to be regarded as conditions.”

18.  That is the reason why Ward L.J. stated the followings as introductory remarks to what he believed to be the approach in dealing with a striking out application upon failure to comply with an unless order:

“In the light of my observations that each case really should be cited upon its own facts, it may be otiose to try and encapsulate what I understand to be the philosophy underlying this approach. It seems to me it is as follows.” (at page 1674 G – H)

19.  His Lordship then summarised the approach in seven points, and the first being the part which is now heavily relied on by Mr. Leung for the Plaintiff as quoted in paragraph 12 above.

20.  In the same case, Lord Woolf M.R. also had the following to say:

“The Supreme Court Rule Committee has wide powers of rule making. This enables the Rule Committee, not only to make the rules themselves, but from time to time to amend those rules when, in the light of experience, modification of those rules prove necessary so as to make the civil justice system work effectively. There are, however, situations where this court makes remarks in the course of a particular judgment which were intended to be, or are taken to be, the source of general guidance as to how a particular discretion given to the courts by the rules in wide terms should normally be exercised. Such guidance is extremely helpful since it allows courts up and down the country to achieve greater consistency which is an important feature of justice. However these remarks are usually either obiter or no more than an indication of the reasons for a decision in a particular case. The comments which are made in such a case are frequently picked up and repeated in judgments by other divisions of this court and that gives them greater authority.

This is all to the good subject to two qualifications. The first is the guidance may become treated with excessive respect so that they are regarded as exhaustive and enunciating principles of law. If this happens, there can be unfortunate consequences because situations which were not contemplated when the guidance was given might arise. If the courts follow the guidance blindly, it can result in decisions which are not in accordance with the requirements of justice where a decision which is in accordance with that requirement could otherwise be given if the general discretion which the rules confer were to be exercised...

...I therefore draw judges’ and practitioners’ attention to the principles set out in the judgment of Ward L.J. which for the future should be regarded as stating the general guidance which should normally be applied in this area, but subject to the qualifications which he made clear.” (at 1677H – 1678D and 1678G – H)

21.  With respect, when reading the judgment in Hytec as quoted in paragraph 12 above, L&A was committing the very mistake which Lord Woolf M.R. warned against. 

22.  Thirdly, as pointed out by Chung J in Kai Yip Air-Condition Engineering Company v Ma Hei Sun trading as Luen Wah Air Condition Engineering (HCA 2969/2000, unreported, 13 July 2001), it is within the court’s inherent jurisdiction to regulate its own procedure by, among other things, imposing unless orders (see paragraph 12 thereof).  In doing so, in my view, there cannot be any restriction as to what the court should consider.  The court must be entitled (and required) to take all circumstances into account.  If a defendant has failed to file his Defence after numerous extensions of time given by the plaintiff by letters, upon the defendant’s application to the court for a further extension, it would be bizarre for the defendant to suggest that the court should grant an extension without an unless order by reason of the fact that there has never been any breach of previous court orders, or to suggest that this is only the first application to the court.

23.  Fourthly, the purpose of Order 3 rule 5(3) of RHC is to provide a way by which the parties may safely agree on an extension of time without having the need to make an application to the court.  This purpose cannot be achieved if such an extension agreed upon by the parties is not going to be taken into account by the court when the appropriateness of an unless order is assessed. 

24.  Lastly, if Mr. Leung is right in that the court should not take extension of time agreed upon between the parties into account when considering subsequently whether an unless order should be made, in my view, this would amount to a breach of the court’s duty to manage cases actively in encouraging the parties to co-operate with each other in the conduct of the proceedings (see Order 1A rule 4(1) and rule (2)(a) of the RHC), as the court’s refusal to recognise extension of time agreed by consent would be discouraging parties to co-operate with each other in agreeing to extend time pursuant to Order 3 rule 5(3) of RHC.  It is exactly what is happening in this case.

APPLICATION FOR EXTENSION OF TIME

25.  I now turn to the 2^nd Defendant’s application for extension of time to file and serve his Defence and Counterclaim.

26.  It can be seen from the correspondence referred to above that the parties have agreed that the time for the 2^nd Defendant to file and serve his Defence and Counterclaim be extended to 6 March 2017 (without an unless order) and that the 2^nd Defendant would pay $800 costs to the Plaintiff. 

27.  However, Mr. Leung argued that the parties have not entered into any binding agreement as such because one of the conditions of such an agreement, namely, that the agreement has to be incorporated in a consent summons, has not been satisfied.  He referred this court to L&A’s letters dated 3 February 2017 and 8 February 2017 respectively and S&S’s letter dated 3 February 2017 in which the parties were clearly contemplating that the extension of time would be given by way of a consent order.

28.  While I accept that the parties did mention about the drafting of a consent summons, I do not agree that Mr. Leung could go so far as to say that there was no binding agreement in the absence of a consent summons.  If Mr. Leung wanted to have this effect, his firm’s letters should have been drafted in a clearer way. 

29.  If there was a binding agreement, I cannot see why the Plaintiff should be allowed to get away from it.

30.  Even if Mr. Leung was right in that the parties had not entered into any binding agreement as such, and that I have to consider the whole matter afresh, I would have granted the 21-day extension sought by the 2^nd Defendant without an unless order.  This is not a simple case.  Various allegations of breach of fiduciary and other duties have been made against the 2^nd Defendant. This court has also been told that other proceedings in the BVI and the Labour Tribunal in Hong Kong are also ongoing at the same time.  Obviously, time is required for the 2^nd Defendant’s legal advisor to consider all the papers before deciding how the 2^nd Defendant’s case should be pleaded herein.  Taking all matters into account, I consider that justice requires that another 3 weeks (counting from the original deadline of 13 February 2017) be given to the 2^nd Defendant for the preparation of his Defence and Counterclaim without any unless order.

COSTS

31.  Both parties have indicated that they would ask for the costs of this application – $800 for the Plaintiff and $4,800 for the 2^nd Defendant.  

32.  I would deal with the 2^nd Defendant’s costs first.  While L&A has misunderstood the legal requirement for an application for unless order, it does not mean that this application and the hearing were unavoidable.  It can be seen from L&A’s last letter that by 9 February 2017, the Plaintiff was still agreeable to a 21-day extension with $800 costs which S&S had indicated previously that the 2^nd Defendant was content with.  All the Plaintiff insisted was to have such terms incorporated in a consent summons.  If the 2^nd Defendant had agreed to this request, parties did not have to appear before the court at all. 

33.  However, the 2^nd Defendant chose to take out a summons.  According to S&S’s letter to the court which was issued on 15 February 2017, the 2^nd Defendant decided to take out this summons only because S&S believed “as a matter of practice and principle some guidance from the court would be beneficial”.  This further supports my view that this application and this hearing could have been avoided. In these circumstances, I do not think it is fair if the Plaintiff is required to bear the 2^nd Defendant’s costs of this application.

34.  I now turn to consider the Plaintiff’s costs.  As the correspondence above shows, the Plaintiff has always been asking for $800 costs only which has been agreed to by the 2^nd Defendant.  The fact that the Plaintiff is not asking for anything more than $800 in this application means that the Plaintiff is not asking for any costs in relation to the application by summons and the hearing on 16 February 2017.  In these circumstances, even though I have rejected Mr. Leung’s submissions on the legal requirement of an application for unless order, I think it is fair if the Plaintiff is awarded with the costs of $800 which is the usual rate for an application of this sort.  After all, the Plaintiff is the party which has been affected by the 2^nd Defendant’s seeking of indulgence. 

CONCLUSION

35.  By reasons of the aforesaid, I order that the 2^nd Defendant do have time extension up to 6 March 2017 to file and serve his Defence and Counterclaim.

36.  There should also be an order nisi that the costs of this application be to the Plaintiff summarily assessed at $800 payable by the 2^nd Defendant.  This order will become absolute if the court does not receive any variation application within 14 days, in which case such costs shall be payable within 14 days after the expiration of the first-mentioned 14-day period.