XCHRX SEACLIFF LTD. v. DECCA LTD. AND OTHERS

HCMP 4900/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4900 OF 2000

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J U D G M E N T

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1. The Shanghai Centre is a development in Shanghai comprising shops, offices, residential apartments, a hotel and an exhibition centre. It is and has at all material times been operated and managed by the plaintiff (Seacliff) a Hong Kong registered company which is a joint venture owned by a number of corporate investors.

2. Seacliff managed and paid for capital improvements undertaken between 1995 and 2000. The budgeted costs were US$49 million. Management of the refurbishment was originally undertaken by inhouse personnel of senior rank. The Chief Finance Officer surnamed McNett was to play a prominent role. For reasons not clear Seacliff came to engage the 5th defendant (Benswick) to participate in the management of the refurbishment. Benswick is and was at all material times a Hong Kong registered company owned and controlled by a man surnamed Howe.

3. By or shortly after the project was complete, in early 2000, the plaintiff came to realise that it had exceeded the budget. It had cause to believe that there were irregularities including the misappropriation of funds. It appointed an independent company called Kroll Associates (Asia) Limited to undertake an investigation. A chartered accountant named Alexander Duperouzal (Duperouzal) was put in charge.

4. It was soon apparent that McNett had helped himself to large amounts of money in cash advances which could only have been without authority and improper. In addition both McNett and Howe had claimed and been paid large amounts of money for expenses in connection with the project which smacked of unauthorized expenditure for personal use. And then, shortly after the investigation got underway, McNett disappeared suddenly, and has not been heard of since.

5. An investigation running parallel to that of Duperouzal's has revealed that the budget has been overspent by US$35 million and that in fact the total cost should have been US$41 million, leaving US$43 million unaccounted for. Duperouzal has also found a number of unexplained unusual features about the project which included:

(a) that there is a paucity of records justifying payments made by Seacliff, some of them substantial;

(b) that there appears to be no commercial or other good reason why Benswick was appointed to manage the project;

(c) that a number of PRC registered companies appear to have been used as conduits for the passage of money without good cause or reasonable explanation. Through them approximately US$42 million has been channelled and then paid to Benswick purportedly thence to various suppliers, but there are insufficient records to verify these.

6. Duperouzal's investigation to date points to large scale commercial fraud implicating McNett, Howe and perhaps others.

7. Certain of the irregularities uncovered have included what on the face of it appears to be a duplication or even triplication of payments made for the supply and installation of marble, provided by the 1st defendant (Decca). As an example Decca was paid direct by the plaintiff an invoiced charge of HK$16.831 million. But the plaintiff was also debited for this amount by Benswick on the basis that it paid Decca. Further, sums totalling RMB$30 million were channelled through one of the PRC companies purportedly for marble supplied, but there are wholly inadequate records to explain or justify the outlay. There has also been difficulty in finding out what has been paid for carpeting, the supplier of which was the 2nd defendant (Tai Ping) because of an apparent instruction to route payments through a PRC company. But this cannot be ascertained because so much of documentation supporting this is non-existent or has gone missing.

8. Duperouzal sought the assistance of Decca and Tai Ping requesting copies of documents, records, correspondence and so on as may help his enquiries. He claims there has been partial, ineffective response from both suppliers, at least as at October 2000.

9. It was Howe who told Duperouzal that many of the payments made by Seacliff in the course of the project to the PRC companies were then routed through Benswick's accounts with the 3rd defendant (the Hong Kong Bank) to pay the suppliers. Howe has on request provided some information and documents, but his co-operation has been selective and limited. Duperouzal says much vital detail has not been and is unlikely to be forthcoming, at least voluntarily.

10. The investigation has uncovered that McNett used the 4th defendant (Credit Lyonnais) through which he channelled funds derived from the Shanghai Centre. Further, he was in control of a BVI Company called MBM Investments Limited (MBM) which at one stage held deposits "in the low 7 figures in US dollars", thus in excess of US$1 million. An inspection of bank statements and records of accounts in the names of McNett and MBM would likely be of assistance to trace the present whereabouts of funds rightfully Seacliff's.

11. Against this background, on 22 September 2000, Seacliff filed an originating summons, naming Decca, Tai Ping, the Hong Kong Bank and Credit Lyonnais as the four defendants, seeking production of documents as specifically named and described for the purpose of assisting it in establishing fraud and running to earth those responsible, and as a means of tracing funds which Seacliff might be entitled to recover. The application amounts to a pre-action claim for discovery, for there are no proceedings yet underway. Seacliff's stated position is that this is a necessary prerequisite to identify the wrongdoers and formulate to the required acceptable level of preciseness its pleadings. The application was brought under section 21 of the Evidence Ordinance, Cap. 8(EO), and invoking the court's inherent jurisdiction to make the orders sought.

12. Benswick with notice of the application, applied to be joined, and was made 5th defendant by order of 12 December 2000. Seacliff's application was set down for hearing, two days reserved, on 12 March 2001.

13. Meanwhile, there was a preliminary matter to deal with. Benswick following its joinder made application that the summons as it affected the Hong Kong Bank be struck out upon the grounds that the court had no jurisdiction to make the orders asked for. The matter came on for hearing on 1 March 2001 and on 5 March I handed down a judgment dismissing Benswick's application. Following that, there being insufficient time for Benswick to file its affidavit in opposition to Seacliff's application and for Seacliff to reply, the action against the Hong Kong Bank has been adjourned to be dealt with in the future.

14. Seacliff's application for the meantime is directed against Decca, Tai Ping and Credit Lyonnais.

15. When the hearing began, Mr Harris, counsel for the plaintiff, told me that the issues with Tai Ping had been resolved. Since service of the application Tai Ping had volunteered a large amount of material. Those additional documents Seacliff wanted sight of have been agreed and the terms of discovery settled, and I was invited to make what is commonly known as a Tomlin order by consent. I made such order.

16. I was also shown a letter from those representing Credit Lyonnais which stated that there would be no opposition to the orders sought against it and no representation, Seacliff to meet the bank's costs.

17. Mr Hung representing Decca opposed the application.

18. At the outset Mr Harris made a summary of those documents Seacliff currently wants sight of, submitting, in effect, a draft order, in which Seacliff is referred to as P and Decca as D1, as follows:-

"1. All agreements and/or documents recording any agreements entered into between D1 and any incorporated or unincorporated company, partnership, sole proprietorship or individual ("Person" or "Persons") in connection with the Works* pursuant to which D1 received payment. (P is principally interested in contracts with P, the Chinese companies or Benswick.) (*defined as the major refurbishment begun in 1995 and concluded in 2000)

2. All quotations and/or estimates provided by D1 to any Person or Persons in connection with the Works.

3. All invoices and/or interim payment applications and/or any other request for payment made by D1 to any Person or Persons in connection with the Works.

4. All documents showing how much D1 was paid, whether in the form of cash, cheque, bank transfer, goods or services, credit or the cancellation of a liability or howsoever, in connection with the Works and by who, how and when such payments were made.

5. All documents recording or evidencing any payments, whether in the form of cash, cheque, bank transfer, goods or services, credit or the cancellation of a liability or howsoever, made by D1 to Panyu Li Shi Hua Textile Industrial Co. Ltd. and/or Guangdong Sheng Xinhui Shi Hua Bang Industrial Co. Ltd. and/or Guangzhou Chang De Trading Co. Ltd. and/or Guangdong Li Hong Li Trading Co. Ltd. and/or Benswick International Limited and/or Michael McNett and/or Paul Howe and in the case of each of them their agents and/or employees or any Person and/or Persons known by D1, or which D1 has reasonable grounds to suspect might be, owned and/or controlled by each of the aforesaid." (the first five companies referred to are the PRC registered companies I have referred to at page 3)

19. At the hearing Mr Harris said that disclosure was not sought through section 21 EO and that the plaintiff's application is founded on the court's inherent jurisdiction to order in terms sought. He also said that for the avoidance of doubt Seacliff was prepared to undertake to meet the reasonable costs of disclosure of documents sought. An undertaking has now been filed.

20. The argument against discovery being ordered pre-action is that it falls within the "mere witness" rule. This was referred to by Lord Reid in Norwich Pharmacal v. Customs & Excise [1974] AC 133. In this case the plaintiff sought discovery from the defendant of the names and particulars of those it had reason to believe had committed breaches of copyright, there being no other means of identifying the alleged wrong doers. Lord Reid said at p. 173:-

"But it is argued for the respondents that it was an indispensable condition for the ordering of discovery that the person seeking discovery should have a cause of action against the person from whom it was sought. Otherwise it was said the case would come within the "mere witness" rule.

I think that there has been a good deal of misunderstanding about this rule. It has been clear at least since the time of Lord Hardwicke that information cannot be obtained by discovery from a person who will in due course be compellable to give that information either by oral testimony as a witness or on a subpoena duces tecum. Whether the reasons justifying that rule are good or bad it is much too late to inquire: the rule is settled. But the foundation of the rule is the assumption that eventually the testimony will be available either in an action already in progress or in an action which will be brought later. It appears to me to have no application to a case like the present case. Here if the information in the possession of the respondents cannot be made available by discovery now, no action can ever be begun because the appellants do not know who are the wrongdoers who have infringed their patent. So the appellants can never get the information.

To apply the mere witness rule to a case like this would be to divorce it entirely from its proper sphere. Its purpose is not to prevent but to postpone the recovery of the information sought. It may sometimes have been misapplied in the past but I see no reason why we should continue to do so.

But that does not mean, as the appellants contend, that discovery will be ordered against anyone who can given information as to the identity of a wrongdoer. There is absolutely no authority for that. A person injured in a road accident might know that a bystander had taken the number of the car which ran him down and have no other means of tracing the driver. Or a person might know that a particular person is in possession of a libellous letter which he has good reason to believe defames him but the author of which he cannot discover. I am satisfied that it would not be proper in either case to order discovery in order that the person who has suffered damage might be able to find and sue the wrongdoer. Neither authority, principle nor public policy would justify that."

21. Referring then to authorities on the principle Lord Reid went on to say at p 175:-

"They seem to me to point to a very reasonable principle that if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers. I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did. It may be that if this causes him expense the person seeking the information ought to reimburse him. But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.

I am the more inclined to reach this result because it is clear that if the person mixed up in the affair has to any extent incurred any liability to the person wronged, he must make full disclosure even though the person wronged has no intention of proceeding against him. It would I think be quite illogical to make his obligation to disclose the identity of the real offenders depend on whether or not he has himself incurred some minor liability."

22. There are exceptions to the 'mere witness' rule.

23. The court will properly be entitled to order discovery before any proceedings brought where the alleged tortfeasor's identity can only be assertained by this means; Norwich Pharmacal is authority for this.

24. It is also within the jurisdiction of the court to order discovery by way of a tracing exercise to establish where the proceeds of fraud have got to; see Bankers Trust Co. v. Shapiro [1980] 1 WLR 1270.

25. And the rule has no application in discovery against a third party sought after judgment has already been entered against the wrongdoer; see Mercantile Group A G v. Aiyela [1994] QB 366.

26. It is Seacliff's case that those it suspects may have committed fraud against it have escaped detection by failing to keep and retain proper records and books of account and so on. Assistance from those who contracted to provide goods and services is required not solely for the purpose of a tracing claim but also to establish how much was spent on the capital improvements in order to ascertain the nature and extent of the fraud. No other source is available. Only by this means will it be able to work out what money may have been misappropriated, how and by whom.

27. Mr Harris argues that the exceptions to the 'mere witness' rule are not restricted to particular facts or narrow principles, but may be applied wherever in particular circumstances the disclosure sought is necessary for justice to be done. He referred me to P & T Limited [1997] 1 WLR 1309. In that case the plaintiff sought discovery against his former employer for details of allegations made against him to enable him to bring an action against the author of them. Sir Richard Scott V-C. said at p 1318:-

"The present position is that it is not possible for the plaintiff to know for certain whether he does or does not have a viable cause of action against the informant. He does not know what was the information that was supplied. As I read his affidavit, he is confident that he had committed no act justifying the description of gross misconduct, but until he knows what it is that he is said to have done his position in that regard will remain inchoate.

In that respect his position is not the same as that of the plaintiff in the Norwich Pharmacal case [1974] A.C. 133. In the Norwich Pharmacal case the plaintiff was able to demonstrate that tortious infringements of patent rights were being committed. It did not know by whom. It did not know whom to sue. But that there was tortious conduct against it was not in question. In the present case it is in question whether a tort has been committed against the plaintiff. He believes that it has. The purpose of any order I make, as I suppose of any order that a judge ever makes, is to try to enable justice to be done. It seems to me that in the circumstances of the present case justice demands that the plaintiff should be placed in a position to clear his name if the allegations made against him are without foundation. It seems to me intolerable that an individual in his position should be stained by serious allegations, the content of which he has no means of discovering and which he has no means of meeting otherwise than with the assistance of an order of discovery such as he seeks from me. It seems to me that the principles expressed in the Norwich Pharmacal case, although they have not previously been applied so far as I know to a case in which the question whether there has been a tort has not clearly been answered, ought to be applicable in a case such as the present."

28. In Re Greater Beijing Region Expressways Limited No 2 [2000] 2 HKC 118 the point was dealt with by Le Pichon J (as she then was). Headnote 2 reads:-

"(2) The Norwich Pharmacal principle was not limited to the disclosure of the identity of a wrongdoer, information might also be obtained and used in appropriate cases. Given a cause of action, an intention to seek redress would be enough to obtain discovery. The justification for discovery under Norwich Pharmacal lay in the fact that the information would not otherwise become available, so that to withhold relief would amount to a denial of justice. Such jurisdiction was to be exercised only if it was just and necessary to do so, and the information must be necessary for justice to be done."

29. As stated by Millett J in Lonrho plc v Fayed (No 2) [1992] 1 WLR 1 at 14A:

"The jurisdiction is founded on judicial necessity: its justification lies in the fact that the information will not otherwise become available, so that to withhold relief would amount to a denial of justice."

30. It is Mr Harris's case that Seacliff will be quite unable to piece together the jigsaw without the information now sought from Decca; in particular, how much Decca received and from whom. Otherwise it will have no means of establishing a fraud and no way of formulating a claim for recovery from the wrongdoers.

31. Seacliff's application against Credit Lyonnais invites my invoking the exception which allows a tracing exercise to be undertaken against a bank where there is evidence to presuppose that a customer has used it to harbour funds rightfully the plaintiff's.

32. In Bankers Trust v. Shapiro, the plaintiff sought discovery against a bank called 'The Discount Bank' in such circumstances.

33. Lord Denning MR, acknowledging this was new law, said at page 1282:-

"So here the Discount Bank incur no personal liability: but they got mixed up, through no fault of their own, in the tortious or wrongful acts of these two men: and they come under a duty to assist the Bankers Trust Co. of New York by giving them and the court full information and disclosing the identity of the wrongdoers. In this case the particular point is "full information".

This new jurisdiction must, of course, be carefully exercised. It is a strong thing to order a bank to disclose the state of its customer's account and the documents and correspondence relating to it. It should only be done when there is a good ground for thinking the money in the bank is the plaintiff's money - as, for instance, when the customer has got the money by fraud - or other wrongdoing - and paid it into his account at the bank. The plaintiff who has been defrauded has a right in equity to follow the money. He is entitled, in Lord Atkin's words, to lift the latch of the banker's door: see Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, 355. The customer, who has prima facie been guilty of fraud, cannot bolt the door against him. Owing to his fraud, he is disentitled from relying on the confidential relationship between him and the bank: see Initial Services Ltd. v. Putterill [1968] 1 Q.B. 396, 405. If the plaintiff's equity is to be of any avail, he must be given access to the bank's books and documents - for that is the only way of tracing the money or of knowing what has happened to it: see Mediterranea Raffineria Siciliana Petroli S.p.a. v. Mabanaft G.m.b.H. (unreported). So the court, in order to give effect to equity, will be prepared in a proper case to make an order on the bank for their discovery. The plaintiff must of course give an undertaking in damages to the bank and must pay all and any expenses to which the bank is put in making the discovery: and the documents, once seen, must be used solely for the purpose of following and tracing the money: covery. The plaintiff must of course give an undertaking in damages to the bank and must pay all and any expenses to which the bank is put in making the discovery: and the documents, once seen, must be used solely for the purpose of following and tracing the money: and not for any other purpose. With these safeguards, I think the new jurisdiction - already exercised in the three unreported cases - should be affirmed by this court."

34. Mr Hung in opposition began his submissions by putting Seacliff's application in perspective.

35. Decca provided goods and services over a period of some five years amounting to about $189 million in value. Compliance with the order asked for will amount to a massive undertaking to locate in Hong Kong and China the material sought, much of which by now may well be destroyed or archived. The disclosure application therefore is oppressive and thus unreasonable and should be turned down. And he queried whether Seacliff had demonstrated a real prospect that the information required might lead to uncovering a fraud and by whom. He defined Seacliff's claim as trumped up, speculative and founded only on the apparent latent realization that expenditure was over-budget. In the circumstances, he argued, I should dismiss the application.

36. He referred me to Attorney-General v Wellcome Foundation Limited [1992] 1 HKC. In the court below Kaplan J had ordered discovery against Customs and Excise (C & E) in circumstances where the strength of the plaintiff's case was somewhat uncertain, the discovery would have meant rummaging through tens of thousands of documents and there was nothing to say that after all that C & E would have found what the plaintiff was looking for.

37. Litton JA (as he then was) said at p 169:-

"Here, Wellcome cannot assert as a fact that the Customs and Excise Department know the names and addresses of infringers. All they can say is that if the Department went through the tens of thousands of documents dating back to 1 January 1991 in their possession, they might be able to identify some infringers. But, of course, the entire exercise could be in vain, yet that is what the Department would have to do to comply with the judge's order. This, as it seems to me, is no more than a 'fishing request' by Wellcome: not, perhaps, precisely of the nature referred to by Lord Cross in Norwich Pharmacal at p 199D, but equally objectionable; and it would indeed be a 'thin end of the wedge', for once the Department is compelled to comply with Wellcome's request, similar requests by other trade mark owners would be irresistible.

The law has long distinguished the position of parties to litigation (against whom extensive discovery orders can be made) and the situation of 'mere witnesses'. As to the latter, the courts have been reluctant to subject them to the compulsive processes of law unless the interests of justice clearly so demands."

38. Referring to Kaplan J's orders as the 'third and fourth orders', he spoke of the 'mere witness rule' at p 170:-

"You cannot get discovery against someone who has no connection with the litigious matters other than that he might be called as a witness either to testify or to produce documents at the trial.

That is the fundamental rule. Norwich Pharmacal provides an exception. If Kaplan J's third and fourth orders were to be upheld, this court would have widened the relief available to would-be plaintiffs against innocent third parties well beyond the scope contemplated in Norwich Pharmacal."

39. The court unanimously allowed the appeal to discharge Kaplan J's third and fourth orders.

40. I come now to deal with Seacliff's applications; first against Decca.

41. One can readily understand why the orders at first instance in Wellcome Foundation Limited were held to be oppressive, unreasonable and inappropriate for C & E to have to comply with; furthermore, as Litton JA said, permitting Norwich Pharmacal discovery to go that far could open the floodgates.

42. But I do not find there is a proper comparison to be made with the facts of this case. Large though the project was and spread as it was over five years, it was not massive; a well-run, well-managed company such as Decca should have the systems in place and the resources and ability to run to earth relevant material without too much difficulty. Commonsense must prevail - Seacliff will be able to do without every piece of paper, as long as there is a proper record for it to examine.

43. Furthermore, with an exception I shall come to, I do not regard Seacliff's pursuit as a fishing expedition, and no more. It is more than mere suspicion Seacliff harbours, given the conduct of McNett, the unusual position of Benswick, the relationship with the Chinese registered companies, the paucity of records and the huge overspend, that there is a major fraud waiting to be uncovered for which the assistance of Decca, willingly or by order, is essential. And there can be no downside. Seacliff has formally undertaken to meet the reasonable costs that compliance will incur.

44. However, I do accept that the request at no. 5 of Mr Harris' proposed order needs separate consideration. Seacliff by this part of the application seeks disclosure of information about any payments at all made by Decca back to the plaintiff or those various entities named, on the basis that if there are any at all this itself would highlight a serious irregularity. Whilst conceding that there is nothing to suggest that Decca, either knowingly or innocently, was a party to such conduct, Mr Harris seeks to justify its inclusion because if there were in fact no payments as one would expect, then the answer is a straightforward denial. But if there were then details would be essential to uncover the fraud.

45. I do not find that justifies the inclusion of this part of the application. There being no indication at all beyond guesswork that there were any payments that went the other way - that is from Decca rather than to Decca - I believe that this part of the application should be withheld. But it goes without saying that this should not stop Decca disclosing the same of its own accord if something untoward comes to light during the course of its investigation, for there would be nothing to stop Seacliff from renewing its application if such evidence emerges. For the meantime, Seacliff shall be entitled to the orders sought from Decca, at nos. 1 to 4, in terms I leave it to the author to perfect; liberty to apply.

46. I come now to the application against Credit Lyonnais.

47. This can be shortly stated. I am satisfied that it falls squarely into the category of cases where, applying Bankers Trust v. Shapiro, discovery ought to be ordered, and I do so accordingly.

48. In respect of the application against Decca there shall be costs to Seacliff taxed if not agreed. In respect of the application against Credit Lyonnais there shall be costs to Credit Lyonnais taxed if not agreed.

49. These orders for costs are nisi at first instance.