GUESS? INC. AND OTHERS v. LEE SECK MON AND OTHERS

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J U D G M E N T

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Kempster, J.A. :

1. On 18 December 1987 and at a time when pleadings were closed the plaintiffs in this action, Guess? Inc, a Californian corporation, and 4 brothers surnamed Marciano, issued a summons seeking as against the 1st to 6th defendants, the corporations being companies incorporated in Hong Kong, rather unusual relief. They sought an order.

"That upon the Plaintiffs' Solicitors and "Messrs. Touch Ross & Co., Hong Kong, certified public accountants, through Counsel for the plaintiffs being their Counsel for this purpose undertaking that they will not save with the leave of the Court or the consent of the 1st to 6th Defendants disclose the contents of the accounting records hereinafter referred to to any other persons, other than Counsel retained in the matter, or make use of such accounting records otherwise than for the purposes of the proceedings no 8CMP No 1417 of 1987 and 8CA NO 8604 of 1986, the 1st to 6th Defendants and each of them do forthwith produce for inspection by the Plaintiffs' solicitors and the said Messrs. Touch Ross & Co, Hong Kong, and permit them to take copies of the following accounting records of each of the 3rd to 6th Defendants set out in the schedule hereto".

The documents listed in the schedule were:

"(i) Audited Accounts for each of the accounting years ended 31st March, 1984, 31st March, 1985 and 31st March, 1986 respectively;

(ii) the detailed Profit and Loss Accounts as submitted to the Inland Revenue Department for each of the said three accounting years; and

(iii) the accounting books and records specified in paragraph 7 of the first Affidavit of James Desmond Collins-Taylor sworn on 17 December 1987 for each of the said three accounting years (insofar as they exist)".

Specified in that paragraph were

"All the books and records and audited accounts of the companies concerned - in particular - general ledger, sales day books, purchase day books, journal books, sales ledgers, costing records, purchase ledgers, and cash books".

2. The application in question followed the failure of these defendants to comply with a consent order as to discovery which had been made by Master Suttill on 31 March of that year. It was expressed to be made not in an Anton Piller context but pursuant to RSC Order 24 Rules 11 and 13 and it may be helpful to set out extracts from those rules as well as from Rules 1, 2 and 9.

"1. (1) After the close of pleadings in an action begun by writ there shall, subject to and in accordance with the provisions of this Order, be discovery by the parties to the action of the documents which are or have been in their possession, custody or power relating to matters in question in the action.

2. (1) Subject to the provisions of this rule and of rule 4, the parties to an action between whom pleadings are closed must make discovery by exchanging lists of documents and, accordingly, each party must, within 14 days after the pleadings in the action are deemed to be closed as between him and any other party, make and serve on that other party a list of the documents which are or have been in his possession, custody or power relating to any matter in question between them in the action.

9. A Party who has served a list of documents on any other party, whether in compliance with rule 2 or with an order under rule 3, must allow the other party to inspect the documents referred to in the list (other than any which he objects to produce) and to take copies thereof and, accordingly, he must when he serves the list on the other party also serve on him a notice stating a time within 7 days after the service thereof at which the said documents may be inspected at a place specified in the notice.

11. (1) If a party who is required by rule 9 to serve such a notice as is therein mentioned or who is served with a notice under rule 10(1)-(b) objects to produce any document for inspection -

then, subject to rule 13(1), the Court may, on the application of the party entitled to inspection, make an order for production of the documents in question for inspection at such time and place, and in such manner, as it thinks fit.

(2) Without prejudice to paragraph (1), but subject to rule 13(1), the Court may, on the application of any party to a cause or matter, order any other party to permit the party applying to inspect any documents in the possession, custody or power of that other party relating to any matter in question in the cause or matter.

(3) An application for an order under paragraph (2) must be supported by an affidavit specifying or describing the documents of which inspection is sought and stating the belief of the deponent that they are in the possession, custody or power of the other party and that they relate to a matter in question in the cause or matter.

13. (1) No order for the production of any documents for inspection or to the Court or for the supply of a copy of any document shall be made under any of the foregoing rules unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

(2) Where on an application under this Order for production of any document for inspection or to the Court or for the supply of a copy of any document privilege from such production or supply is claimed or objection is made to such production or supply on any other ground, the Court may inspect the document for the purpose of deciding whether the claim or objection is valid?

"Privilege", it should be observed; includes objection based on irrelevance Ehrmann v Ehrmann [1896] 2 Ch 826. It is significant that, in contrast with their application to "strike out" dated 13 July 1987, which they did not proceed the plaintiffs placed no reliance upon Rule 16 which reads:

"16. (1) If any party who is required by any of the foregoing rules, or by any order made thereunder, to make discovery of documents or to produce any documents for purpose of inspection or any other purpose or to supply copies thereof fails to comply with any provision of that rule or with that order, as the case may be, then, without prejudice, in the case of a failure to comply with any such provision, to Rules 3(2) and 11(1), the Court may make such order as it thinks just, including, in particular, an order that the action be dismissed or, as the case may be an order that the defence be struck out and judgment be entered accordingly.-"

Also canvassed in argument were Order 18 Rules 14:

"... (3) There can be no joinder of issue, implied or expressed, on a statement of claim or counterclaim...."

and 20:

"(1) The pleadings in an action are deemed to be closed-

(a) at the expiration of 14 days after service of the reply or...."

3. On 22 April 1988, before the summons in question had come on for hearing, Nazareth J gave leave to the plaintiffs to Re-Amend their Amended writ, both as to parties and to indorsement, and their Amended Statement of Claim; thereby disposing of an application by the 1st to 7th defendants to strike out the Amended Statement of Claim. The claims in the re-amended pleading differ in form and scope from those previously advanced. An order was also made that those defendants should file and serve Amended Defences and Counterclaims within two months of service of the Re-Amended Statement of Claim. The issues between all the parties were thus again at large and the scope of discovery rendered uncertain. As Hodson LJ said in Warner v Sampson [1959] 1 OB 297 at p 321:

"Once pleadings are amended, what stood before amendment is no longer material before the court and no longer defines the issues to be tried".

It is already apparent that a substantial part of the discovery earlier made on both sides has no further relevance.

4. Also before the summons in question came on for hearing and following application by the plaintiffs as against the 1st to 6th defendants for committal and writs of sequestration by reason of their failure prior, to the order of Nazareth J, to give proper discovery in accordance with the order of 31 March 1987, Mortimer J, on 15 July 1988 and by consent, made an order for further affirmations and inspection against those defendants with a view to making good their omissions. Such order in no way involved the participation of accountants in the process of discovery.

5. On 26 July Mortimer J granted the plaintiffs relief in the terms of their summons of 18 December 1987. Against his order in that regard the 1st to 6th defendants appeal.

6. At this juncture it may be appropriate briefly to provide some background to the action which was commenced by writ issued on 31 January 1986. The personal plaintiffs originally owned all the shares in the 1st plaintiff and the 9th defendant respectively. The 1st plaintiff designs and manufactures jeans and the 9th defendant, Gasoline Ltd, is licensed to manufacture copies of the 1st plaintiff's wares. In late 1983 the personal plaintiffs sold half the shares in the two companies to three brother surnamed Nakash. As between the two families the brothers Marciano were thereafter responsible for the operation of Guess? while the Nakash brethren directed the affairs of Gasoline Ltd; on behalf of which company the Marciano brothers claim to bring the proceedings. They have joined that company as a defendant because they own only a moiety of the shareholding.

7. At all material times the Makash brothers have owned a corporation which manufactures clothing called Jordache Inc through which they have done business with the 1st and 2nd defendants who in turn control the 2nd to 6th defendants. In order to secure appropriate quota for the export of clothing from Hong Kong to the United States of America the 7th defendant was incorporated. Its shares are owned by Jordache Inc and by Mr Joseph Nakash. The plaintiffs claim against the 1st to 8th defendants in the action is for damages for conspiracy, for breach of confidence, for infringement of copyright and for conversion, declaration of trust, accounts and an injunction. These are claims which reflect continuing litigation in the Californian Courts between the Marciano and Nakash brothers. The Nakash brothers are indemnifying the 1st to 6th defendants against the costs of giving discovery and had indemnified them in the context of the contempt proceedings.

8. "I proceed to state the obvious" said Lord Edmund-Davies in Air Canaday Sec of State for Trade [1983] 2 AC 394 at p 441:

"Under our Supreme Court Practice, discovery of documents between parties to an action with pleadings .... is restricted to documents relating to matters in question in the action'.... any document which, it is reasonable to suppose, contains information which may enable the party applying for discovery either to advance his own case or to damage that of his adversary, if it is a document which may fairly lead him to a train of inquiry which may have either of those two consequences, must be disclosed : see Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co [1882] 11 QBD 55, 63, per Brett LJ".

In my view the same test is applicable to entries in documents. This "obvious" proposition has been buttressed by a wealth of authority cited on behalf of the 1st to 6th defendants who have sealed up what they assert to be irrelevant entries in their relevant books of account in accordance with the practice recognised at least as long ago as 1792. Campbell v French 1 Anst 799. "Relevance", these defendants accept, is to be construed in the Compagnie Financière du Pacifique sense while the responsibility for bringing such "sense" home to individuals and corporations, by themselves inspecting the documents proposed to be disclosed so as to ensure that there are no omissions, rests fairly on the shoulders of their solicitors; the officers of the court. Myers v Elman [1940] AS 322: Woods v Martins Bank Ltd [1959] 1 OB 55; Rockwell Wachine Tool Co Ltd v Barrus (Concessionaires) Ltd [Practice Notel [1968] 1 WLR 693. This in no way detracts from the unique contribution which the parties themselves must make towards effecting proper discovery particularly in litigation having such complex ramifications in the tracing of design and pattern numbers as this. It is common ground that documents are the material of discovery and that those containing relevant entries must be disclosed.

9. The cases illustrate a historical reluctance to order the disclosure of confidential material if admission or an answer to interrogatories will serve the purpose of the party seeking discovery equally well. They also show that a sworn claim to seal up an entry on the grounds of its irrelevance, albeit part of a relevant document, may not preclude an order to unseal if the court is reasonably satisfied that the claim involves misrepresentation or misconception as to the nature of such entry or that the deponent is not to be trusted on his oath. A-G, v Emerson [1882] 10 OBD 191; Jones v. Andrews [1888] LVIII LT(NS) 601. However, a heavy burden rests on the party seeking to impugn an oath, even as here an anticipated oath, and it could not be discharged nor an application requiring the admission of irrelevant material be granted simply, as Mortimer J put it, because these defendants "have lost credibility in discovery". The judge did not find himself persuaded that the sealed entries or undisclosed documents were relevant by reason, for example, of overwhelming presumption or inseverability. Pickering v Pickering [1883] 25 Ch D 247; Luscombe v Steer [1859] 37 LJ Ch 119.  On the contrary he was prepared to accept "that there will be entries in the documents which will not be relevant and which will be confidential". He concluded that by reason of their record in this field they must have failed to give proper discovery and, impliedly, have sealed up relevant entries. But even if the judge had been reasonably satisfied that relevant material had been sealed or relevant documents not disclosed the appropriate relief under Order 24 Rules 11 and 13 would have been to order a further affidavit. Jones v Andrews [1838] 58 LT 601 at p 604. Jurisdiction to go further could only have arisen, if at all, had Rule 16 been invoked.

10. Despite my view as to jurisdiction matters relevant to the exercise of discretion have fully been argued before us and it would seem appropriate to rule on them. As regards the accounts the discovery of these defendants was carried out and is being carried out by a reputable firm of chartered accountants on the basis of open instructions which, ostensibly at least, call for the application of Compagnie Financière principles of relevance. Such instructions were apt to give proper discovery from the books of account in accordance with the order, of the 31 March 1987 on the issues of conspiracy and breach of fiduciary duty since paragraphs 20 to 22 of the Amended Statement of Claim did not, on their face, suggest that the particulars were given only by way of example rather than as defining the parameters of the complaints. The instructions were nonetheless unsatisfactory in that they failed to indicate the general nature of the allegations made by the plaintiffs as regards infringement of copyright in paragraph 23 of the Amended Statement of Claim. A fortiori the instructions were unsatisfactory in relation to the re-amended pleading having regard to the terms of paragraphs 25, 33, 34 and 38. Despite these lapses in the field of discovery and the trenchant observations of Nazareth J and Mortimer J I am far from satisfied that the defendants, having been found guilty of contempt, their solicitors, whom Mortimer J found blameworthy, and their accountants, given revised instructions, all now fully apprised of their several responsibilities, are not in a better position to give proper discovery than the plaintiff's proposed task force. Into the bargain the plaintiffs seek further to re-amend their Writ and Statement of Claim both in a form already drafted and shown to this Court and in a manner calculated to widen the ambit of discovery.

11. Substantially the "Lamentable failures" of the 1st to 6th defendants occurred if relation to issues joined on the pleadings as closed 14 days after 19 June 1986 when the last reply and defence to counterclaim was served: Order 18 Rules 14 and 20. Weight given to this factor in the exercise of a related discretion can not readily be criticised. What, however, is contended before us, and I accept, is that Mortimer J failed sufficiently to take into account the reopening of the issues on the pleadings, the delay and difficulty in discovery caused to these defendants, prior to re-amendment, by the plaintiffs defective and imprecise Amended Statement of Claim, the significance of the "striking out" exercise and the probability that there would be separate trials of the issues going to liability on the one hand and to damages or an account on the other. "In normal circumstances said the judge "these would be powerful arguments".He omitted altogether, it seems, to consider the further likelihood that, if his order were implemented, the plaintiffs' accountants and solicitors would seek discovevery of all these defendants' supporting documents in furtherance of their investigation.

12. By reason of all the considerations canvassed the judge's exercise of discretion was vitiated and this Court is therefore entitled to exercise its own. To my mind there is no question of principle relating or the delegation of the duty of discovery demanding determination at this stage. Further, the unusual order made was not necessary fairly to dispose of the cause or matter or to save costs. On these grounds also I would allow the appeal and set the order of 26 July 1988 aside.

13. In the premises I do not feel it necessary to deal, at this stage at least, with separate submissions made in relation to the order for costs made below.

Cons, V-P :

14. I agree with my Lord and would allow the appeal on either of the two grounds he has indicated.

Clough, JA:

15. For the reasons given by Kempster JA I agree that the appeal should be allowed.