SUN FOCUS INVESTMENT LTD v. TANG SHING BOR AND ANOTHER

HCA538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 538 OF 2007

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JUDGMENT

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1. This is an application of the plaintiff for leave to file a fresh statement of claim in this action. There is a chequered history to this action. There are no less than 3 judgments concerning the propriety of the statement of claim (“SOC”). This is the fourth.

Background

2. This action was commenced in March 2007.  The SOC was amended in January 2008 (“ASOC”).  Consequential amendments to the Defence and Reply were filed in February 2008.  By November 2008, witness statements had been filed by the parties.  In July 2009, the defendants applied to strike out the ASOC in its entirety.  The application was upheld pursuant to the Judgment of Recorder Shieh, SC dated 5 October 2009.  However, the action was not dismissed and the plaintiff was allowed to apply to file a fresh SOC. 

3. This the plaintiff duly did by Summons dated 15 October 2009 (“Summons”) and the application was heard before Mr Justice Chung who granted leave to the plaintiff to file a fresh SOC (“New SOC”) pursuant to a Judgment dated 10 September 2010.  Dissatisfied with the result, an appeal was lodged by the defendants against the Order of Chung J.  By a Judgment dated 23 December 2011, the Court of Appeal allowed the appeal and set aside the said Order.  Further, the Summons was remitted back to the court of first instance for determination of issues in relation to the Limitation Ordinance, Cap 347 (“Cap 347”).  Pursuant to the directions of Deputy High Court Judge Mimie Chan (as she then was), the court is to deal firstly with the arguments in connection with Order 25, Rule 5(5) (“O25, r5(5)”). 

ASOC

4. The dispute between the parties arose from a business venture in developing a piece of land in Shanghai for sale (“Project”). In a nutshell, the plaintiff’s complaint is that it had put up over HK$3.6 million as its contribution in the Project but was only repaid about HK$1.6 million.  It was wrongly told by the defendants that the Project was a loss-making one.  Two causes of action were pleaded in the ASOC.  The first one was based on a partnership agreement between the plaintiff and the defendants to invest in the Project via a joint venture company (“JVC”).  The parties behind the JVC were Shanghai Kong Tung Cheong Company, a Mainland company, the plaintiff and the defendants.  The second cause of action was based on misrepresentation, namely, the statement that “the JVC was operated at a loss of HK$20,220,907”. 

5. With respect, the ASOC was a poor piece of work.  The causes of action were not properly conceived, which is underscored by the fact that it was struck out.  However, in the course of the strike out application, it was clarified by the plaintiff (see para 10 of Judgment dated 5 October 2009) that its principal cause of action should in fact be :

“the nature of the plaintiff’s case is that the plaintiff was not intending to be a shareholder in the Joint Venture Company and it was simply relying on a contract, in personam, with D1 and D2 to the effect that, upon injection of monies by the plaintiff, D1 and D2 would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid.”

6. For purpose which will become apparent, I need to go a little further into the details of the ASOC.  Despite the absence of an express plea, it is clear from the substance of the averments in the ASOC that the plaintiff had little knowledge as to the details of the Project and it was acting upon the information given to it by the defendants who became directors of the JVC.  In particular, it was given two documents by the defendants which showed that the JVC had suffered a loss, namely, a profit and loss account of the JVC prepared by the 2^nd defendant (“D2 Account”) and an accountant’s report prepared by Shanghai Haijia CPA Co Ltd (“Haijia Report”). However, it was subsequently discovered by the plaintiff with the aid of its Mainland lawyers that the information contained in those documents was inconsistent with the contents of another accountant’s report prepared by Shanghai Xing Zhong CPA Co Ltd (“Xing Zhong Report”) which had been submitted to the Shanghai City Industrial and Commercial Administration Management Department for purpose of dissolution of the JVC.

7. The claim under the ASOC was based upon the information contained in the Xing Zhong Report.  According to such information, the JVC was profitable and the plaintiff was entitled to a share of the same with a balance of about RMB 16.8 million owed to it. 

New SOC

8. The New SOC is largely based upon the factual averments which were deployed in the ASOC.  The new pleading seeks to advance two causes of action.  Firstly, an oral cooperation agreement (“Agreement”) made between the plaintiff and the defendants in July 1993, along the line alluded to in para 5 above.  Two breaches of the Agreement are relied upon :

(a)  over-charging the JVC in respect of project management fees in favour of a company controlled by the defendants, Master Kingdom Co Ltd (“Master Kingdon”);

(b)  abandoning a loan (“Loan”) which was advanced by the JVC to a company controlled by the defendants, Macho Co Ltd (“Macho”).

9. It is alleged that based on the Xing Zhong Report and adding back the losses from the breaches of the Agreement, the plaintiff is entitled to a balance of just over RMB 3 million which represents its entitlement under the Agreement.  In the alternative, the plaintiff seeks an account of its entitlement under the Agreement and damages to be assessed.  The proper plea should be one of payment of the sum found due upon taking the account but nothing turns on this technicality.

10. The second cause of action found in the New SOC is breach of fiduciary duty arising from the relationship of principal and agent.  It is alleged that the defendants were acting as the plaintiff’s agent in respect of the Project.  In gist, it is alleged that the defendant had failed to protect the plaintiff’s interest in the Project and failed to act in good faith towards it. 

11. I have some difficulties with the plea of agency. In the New SOC it is alleged that there was an express term in respect of the agency.  It is formulated in rather unusual terms :

“8. The Cooperation Agreement contains inter alia the following express terms:-

…

(g)  There existed principal and agency relationship that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for its investment in the Shanghai Project.”

12. As an alternative, it is alleged that the agency was premised upon an implied term :

“10. Further or alternatively, by conduct and/or by reason of business efficacy and/or by giving effect to the unexpressed intention of the parties, there is an implied term of the Cooperation Agreement that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for its investment in the Shanghai Project.”

13. I have serious doubt whether the agency has been properly or adequately pleaded in the New SOC.  Mr Ma, who appeared for the plaintiff, did not seek to defend the inadequacy.  However, it appears that in recognition of the inadequacy Mr Ma has tried to remedy the same by advancing a plea of agency in the Reply as follows :

“10. The Plaintiff further avers that at all material times:-

(a) The 1^st and 2^nd Defendants had previous property development experiences in the PRC, and they were experienced investors and/or speculators in the PRC prior to the Shanghai Project.

(b) The 1^st and 2^nd Defendants intended to be (and were) responsible for the project management of the Shanghai Project via Master Kingdom.

(c) Further, the 1^st and 2^nd Defendants intended to be (and were) responsible for the management of the Joint Venture Company.

(d) The 1^st and 2^nd Defendants were responsible for the communications, contact and/or liaison activities with other investors from the PRC side.

(e) The Plaintiff relied upon the 1^st and 2^nd Defendants’ experiences and expertise to look after and/or protect its investment interest in the Shanghai Project.

(f)  By reason of the matters pleaded in the foresaid, there existed principal and agency relationship that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for the Plaintiff’s investment in the Shanghai project.”

14. It is not disputed that these new causes of action are, prima facie, time-barred in accordance with the provisions of Cap 347 by the time the Summons was issued.

Applicable law

15. For leave to amend to be granted in these circumstances, this court must abide by O25, r5(5), which in turn reflects the provisions of section 35(5) and (6) of Cap 347. O25, r5(5) provides :

“An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.”

16. For the present purpose, this court has to compare the ASOC with the New SOC to determine if the new causes of action arose out of the same or substantially the same facts. 

17. There is a recent court of appeal authority in which the law in this area has been considered – Moulin Global Eyecare Holdings Ltd (in liquidation) v Olivia Lee Sin Mei, CACV 155 & 161/12, p 23R-25T and 28N-Q :

“…[counsel] reminded the court of the dictum of Litton VP (as he then was) in Leung Kin Fook & Ors v Eastern Worldwide Co Ltd (No 2) [1997] 1 HKC 524 at 528C to D: ‘The words in O 20 r 5(5) are not to be narrowly construed: they should be given a broad and liberal interpretation in order to attain the objective of the rules.’ The policy of the statutory provisions was described by Hobhouse LJ in Lloyds Bank plc v Rogers, Court of Appeal (Civil Division) Transcript No 1904 of 1996 in these terms:

‘Section 35 contemplates that the introduced cause of action will be time barred. The policy of the section is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from the same facts. There is no indication in the drafting of the Act that there should be a further limitation on section 35. If there is any relevant prejudice to the party opposing the amendment, it can and should be had regard to on the exercise of the court’s discretion whether or not to allow the amendment.’

47. Colman J discussed what could be relevant prejudice in this context in these decisions: Goode v Martin [2001] 3 All E R 562 at 566g to h⁹; P & 0 Nedlloyd B V v Arab Metals Co [2005] 1WLR 3733 at para 42¹⁰; and BP plc v Aon Ltd [2006] 1 Lloyd’s Rep 549 paras 52 to 55. I quote from the relevant passages in the last two cases:

‘42. ... The concept involved in ‘substantially the same’ in CPR r 17.4(2) must, in my judgment, involve something going no further than minor differences likely to be the subject of inquiry but not involving any major investigation and/or differences merely collateral to the main substance of the new claim, proof of which would not necessarily be essential to its success.’ (P & 0 Nedlloyd B V v Arab Metals Co)

‘52. At first instance in Goode v Martin [2001] 3 All E R 562 I considered the purpose of section 35(5) in the following passage:

‘Whether one factual basis is ‘substantially the same’ as another factual basis obviously involves a value judgment, but the relevant criteria must clearly have regard to the main purpose for which the qualification to the power to give permission to amend is introduced. That purpose is to avoid placing a defendant in the position where if the amendment is allowed he will be obliged after expiration of the limitation period to investigate facts and obtain evidence of matters which are completely outside the ambit of, and unrelated to those facts which he could reasonably be assumed to have investigated for the purpose of defending the unamended claim.’

…

54. The substance of the purpose of the exception in subsection (5) is thus based on the assumption that the party against whom the proposed amendment is directed will not be prejudiced because that party will, for the purposes of the pre-existing matters [in] issue, already have had to investigate the same or substantially the same facts.

55. It follows that if that party would not previously have had to investigate the same or substantially the same facts for the purposes of a pre-existing claim because he never had been party to such a claim, the prejudice which the exception assumes not to exist does indeed exist. If the amendment is allowed that party has to embark upon investigating a claim against him which arises out of facts which he would not previously have been concerned to investigate. Accordingly, in my judgment neither CPR 17.4(2) nor section 35(5) can be construed to have as wide a scope as that contended for by the Claimants. ... ’ (BP plc v Aon Ltd)

48. Thus, in considering whether the Share Repurchases Claim and the Convertible Notes Claim arose out of the same or substantially the same facts as a cause of action in respect of which relief has been claimed, I should consider whether the new facts required for these new causes of action would go no further than introducing ‘minor differences likely to be the subject of inquiry’ and would not involve any ‘major investigation’ which would not already have been undertaken in respect of the Dividends Claim.

…

56.  [counsel] submitted whether the new cause of action arose out of substantially the same facts as that already pleaded is ‘substantially a matter of impression’ (Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 at 1418D).  I would respectfully agree with Millett LJ (as he then was) in Paragon Finance plc v D B Thakerar & Co at 418g to h this may be so in borderline cases. In others, it must be a question of analysis.”

18. It is suggested by Mr Ma that there is a tension between the two court of appeal decisions of Leung Kin Fook and Moulin Global.  Mr Ma is concerned that the adoption of the “question of analysis” approach is more restrictive than the “broad and liberal interpretation [of the rules]”.  I do not believe that such concern is well-founded.  The court of appeal in Moulin Global did not see any inconsistency between the judgment of Leung Kin Fook, which was referred to in its judgment, and the “question of analysis” approach.  I believe that in the analysis to be carried out here, the court should not be over technical or restrictive so as to give effect to the dicta in Leung Kin Fook.

Analysis

19. I deal firstly with the Agreement.  One sees from a comparison between the ASOC and the New SOC that this claim replaces the one based on a partnership agreement.  On any reasonable analysis, this cause of action is very much founded upon the facts previously pleaded in the ASOC. This is well demonstrated by a helpful table of comparison annexed to Mr Ma’s skeleton submissions.  Mr Cheuk has, quite fairly, not tried to argue otherwise. 

20. However, Mr Cheuk argued that in the ASOC there was no claim in respect of the project management fee or the Loan.  Indeed, the allegations there were that the management fee was not in fact paid to Master Kingdom and that the JVC had not granted the Loan to Macho (see paras 16(c) and 25(g) of the ASOC).  Therefore, it cannot be said that the new cause of action based on the Agreement arises out of the same or substantially the same facts as pleaded in the ASOC. 

21. I believe there are two answers to Mr Cheuk’s contention. Firstly, in an exercise of the present nature, it is not unusual that the pre-amendment pleading is unsatisfactory and therefore taking too technical or restrictive an approach would mean that amendment is rarely permissible.  Such an approach is not consistent with the law set out above. 

22. Secondly, the substance of the plaintiff’s claim in the ASOC is that the JVC had made a profit and it is entitled to a share in it.  In order to adjudicate on the claim, the court will have to consider, inter alia, the D2 Account, Haijia Report and Xing Zhong Report.  The management fee and the Loan were covered in those materials.  Hence, it is inevitable that the court will have to consider those items in order to come a conclusion whether the JVC had made a profit.  Plainly, the defendants are alive to the need to deal with the finance of the JVC in these proceedings (see, eg, paras 11(a) and 16(e) of the old Amended Defence filed on 16 February 2008). 

23. In these circumstances, I hold that the amendments in respect of the new cause of action based on the Agreement is permissible under O20, r5(5).

24. For completeness, I should mention that it has been submitted by Mr Ma that the plaintiff is entitled to rely upon the defendants’ pleading for purpose of overcoming the O20, r5(5) hurdle.  He relied upon Limitation Periods by McGee, 6^th edn, para 23.022 (it appears that para 23.012 is also relevant).  However, I do not believe that the defendants’ pleading adds very much to the picture for the present purpose. 

25. I turn to consider the new cause of action based on agency.  This is a different kettle of fish.  As distinct from the case of action based on the Agreement, one cannot say that this is a reformulation of a claim based upon substantially the same facts. 

26. The alleged agency is one arose out of the circumstances pleaded in para 10 of the Reply.  For the present purpose, I am prepared to overlook the technical deficiency in that the plea should have been advanced in the New SOC instead of the Reply.  Mr Cheuk has not made any objection in that regard.  Further, I accept that the matters pleaded in paras 10(a) to (c) can be found in the ASOC.  The same cannot be said in respect of sub-paragraphs (d) and (e). 

27. In respect of sub-paragraph (d), as noted in para 6 above it may be implicit from the substance of the ASOC that the plaintiff had little knowledge of what went on with the Project and it was acting on the information supplied by the defendants.  Such a state of affairs might have been a matter of choice on the part of the plaintiff.  It is a quantum leap to allege that the defendants were responsible for the communication with the Mainland investors. 

28. As regards the reliance on the defendants by the plaintiff pleaded in sub-paragraph (e), there is simply no such allegation found in the ASOC and I cannot accept that it is a “minor difference likely to be the subject of inquiry”.  It is a key allegation which underpins the agency claim. 

29. For these reasons, I am of the view that sub-paragraphs (d) and (e) cannot withstand the O20, r5(5) test. 

30. I have considered Mr Ma’s submission that the court can blue-pencil the impermissible part of the New SOC.  I do not believe that in the absence of sub-paragraphs (d) and (e), the agency claim is viable. It is wrong for the court to exercise its exercise to allow an amendment which advances an unsustainable cause of action. 

Conclusions

31. For the reasons stated above, I hold that the new cause of action based on the Agreement is permissible under O20, r5(5) but not the one based on agency.  If required, I would give leave to amend accordingly. 

32. Regrettably, this may not be the end of the argument because the plaintiff is in a position to advance the latter cause of action if it succeeds on the argument based on section 26 of Cap 347 – concealment. 

33. How these matters should go forward is something which the plaintiff will have to consider after studying this judgment.  I believe that the appropriate order to be made is to give the parties liberty to apply.  I make an order nisi that the costs be reserved because the court will likely have a better picture once the section 26 point is dealt with.