PACIFIC DUNLOP GARMENTS LTD v. FUNDAMENTAL GLOBAL LTD AND OTHERS

HCA 1655/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1655 OF 2008

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D E C I S I O N

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INTRODUCTION

1. I have before me three summonses taken out by the plaintiff for hearing at the pre-trial review: (1) summons dated 9 May 2012 seeking to have the issue of liability tried before the trial of the issue of damages ('Split Trial Summons'); (2) summons dated 9 May 2012 seeking leave to adduce expert evidence ('Expert Evidence Summons'); and (3) summons dated 10 May 2012 seeking leave to join another party and for the purpose of that application only leave to disclose the defendants’ witness statements ('Joinder Summons'). 

Background

2. The plaintiff is a company incorporated in Hong Kong. The defendants are companies incorporated in the British Virgin Islands ('BVI').  Together, the defendants held 100% of the shares in Eunice Lingerie Limited ('Eunice HK'), a company incorporated in Hong Kong.  At the material time, Eunice HK held, and presumably still holds, all the shares in Eunice Lingerie (Zhongshan) Limited ('Eunice Zhongshan'), a company incorporated in the People’s Republic of China ('PRC').  Eunice Zhongshan in turn owns a landed property in Zhongshan ('Property').

3. On 18 January 2006, the parties entered into an agreement for the sale and purchase of 100% of the shares in Eunice HK ('Agreement') for $31,500,000.  Under clause 2 of the Agreement,    the plaintiff shall pay a non refundable deposit of $540,000 upon signing the Agreement on 18 January 2006 and twelve further non refundable monthly instalments of $180,000 from 1 March 2006 and a final instalment of $28,800,000 on 1 June 2007 or such later date as agreed by the parties.  Clause 4 of the Agreement provides:

'The [plaintiff] has the option to acquire all of the shares of [Eunice HK] which owns all of the shares of [Eunice Zhongshan] at the final instalment of HK$28,800,000 on 1^st June 2007, or such later time if delays are caused by the [defendants] in effecting the transfer of the said shares or the said [Property]. [The defendants] will provide the necessary and reasonable warranties in such transaction including:

(a list of warranties)

Should issues arise in transacting the shares which cause unacceptable risks to either the [plaintiff] or the [defendants], then both parties agree to transact to sale and purchase of the sale [Property] instead of the shares. The purchase price will be the same as the sale of shares.

Each party will bear its own share of any duties, taxes and charges as imposed by the relevant Authorities in Hong Kong and China.'

4. Pursuant to clause 2 of the Agreement, the plaintiff paid all the instalments, except the final instalment of $28,800,000 when a dispute arose between the parties as to whether unacceptable risks would arise in transacting the shares.  The plaintiff purportedly exercised the option under clause 4 to transact the sale and purchase of the Property.  The defendants refused to transfer the Property on the ground that the plaintiff was in repudiatory breach of the Agreement for not paying the final instalment.

5. On 4 September 2008, the plaintiff commenced proceedings against the defendants.  During the course of this litigation but unknown to the plaintiff, the defendants transferred all their shares in Eunice HK to Kylin Prosper Limited ('Kylin') on 5 November 2009. Kylin is also a company incorporated in the BVI.  The transfer was not disclosed in any of the defendants’ witness statements filed after the said transfer.  Neville Chan and Chris Yeung who were the only directors of Eunice HK prior to the transfer continued to be its only directors after the transfer.  The transfer was only discovered by the plaintiff in April 2011 upon a company search of Eunice HK.

Significant procedural events

6. One of the thrusts of the defendants’ objections is that the plaintiff’s applications are made at a very late stage and well after the case was set down for trial.  Mr Chua SC, counsel for the defendants, referred me to the following procedural events, which he submits are significant.

7. On 12 November 2010, the plaintiff issued a summons for expert directions.  On 18 May 2011, upon the plaintiff’s own application, leave was granted to the plaintiff to withdraw that summons.

8. In its listing questionnaire dated 11 May 2011, the plaintiff confirmed that it did not intend to take out any other interlocutory applications and that all steps that ought to be taken to prepare the case for trial have been duly taken and complied with. 

9. On 28 June 2011, the plaintiff applied to set the case down for trial.  The trial of this action was set down for six days starting on August 2012 and will commence in eighty-eight days.  The plaintiff’s applications are made at a very late stage.

10. The general thrust of the defendants’ objection is that the applications are plainly made against the underlying objectives of the Civil Justice Reform ('CJR'), do not help increase cost-effectiveness, do not ensure expeditious disposal of the case, do not ensure fairness between the parties, do not promote reasonable proportion and procedural economy and do not contribute to the fair distribution of the court’s resources.  I shall bear these in mind when I come to consider each of the plaintiff’s applications in turn.

The issues

11. The key issues in this case are:

(1)  whether the plaintiff was in repudiatory breach of the Agreement;

(2)  what were the circumstances which gave rise to the plaintiff’s alleged exercise of the option to purchase the Property;

      and

(3)  whether such circumstances would constitute unreasonable risks.

THE JOINDER SUMMONS

Introduction - The applications

12. The joinder summons includes an application for leave     to join Kylin as a party ('joinder application'), leave to amend the concurrent writ of summons ('amendment application'), leave to serve the amended concurrent writ of summons out of the jurisdiction on  Kylin ('service out application'), leave to use the defendants’ witness statements for the purpose of these applications and some consequential directions.  Mr Chua SC does not object to the use of the witness statements for the above purpose. Leave was therefore granted to the plaintiff to use the witness statement of Neville Chan who is a director of the 1^st defendant, the witness statement of Lee Chi Keung who is a director and shareholder of the 2^nd and 3^rd defendants, the witness statement of Anita Chan who presumably is a staff of the 1^st defendant and the witness statement of Chris Yeung who is a director of Eunice HK and the authorized representative of Eunice Zhongshan.

The joinder application

13. The joinder application is presumably made pursuant to Order 15 rule 6(2)(b)(i), ie that Kylin is a person who ought to have been joined as a party or whose presence before the court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon. 

14. The basis of the plaintiff’s application is that the defendants transferred their shareholding in Eunice HK to Kylin in bad faith in order to render themselves judgment-proof against specific performance of the sale and purchase of the Property.  Mr Yeung, counsel for the plaintiff, submits that while pleading in paragraph 19 of their defence and counterclaim that the defendants were not in a position to specifically perform any agreement for the sale and purchase of the Property which is owned by Eunice Zhongshan and that such sale and purchase of the Property is governed by the laws of the PRC, the defendants did not disclose their subsequent sale of the shares in Eunice HK seven months after filing their defence and counterclaim and did not seek to amend that pleading.  He argues that the defendants’ witnesses certainly knew about the transfer but deliberately withheld the information in their witness statements filed after the date of the transfer.  He submits that this is cogent evidence on which the inference that the defendants acted in bad faith to defeat the plaintiff’s claim for specific performance of the sale and purchase of the Property and that Kylin is a nominee holding the shares of Eunice HK on behalf of the defendants could be drawn.      Mr Yeung relies on Jones and another v Lipman and another [1962] 1 WLR 832 as authority in support of service out on Kylin. 

15. Mr Chua SC makes submission objecting to the joinder application and service out application as a whole.  Insofar as is relevant to the joinder application, it seems that his objections are that the application is made late in the course of the proceedings and misconceived.  I shall deal with the substantive objections first.

16. Firstly, Mr Chua SC argues that Kylin is neither a necessary nor proper party on the basis that the sale of the shares in Eunice HK    to Kylin is entirely irrelevant to the key issues to be tried, that there is   no need to join Kylin to determine how the Agreement is to be construed, that it is not necessary to make Kylin a party in order to determine the defendants’ counterclaim that the plaintiff was in repudiatory breach of the Agreement.  He argues that it may be open to the plaintiff, if it sees fit, to commence a separate action against Kylin and that must not be done  at the expense of the present trial. 

17. I think Mr Chua SC completely misses the basis of the plaintiff’s application for joinder.  The basis of the plaintiff’s application is that the shares in Eunice HK which owns Eunice Zhongshan and which in turn owns the Property have been transferred to Kylin as nominee of the defendants.  Without a judgment binding on Kylin, the plaintiff will be deprived of the remedy of specific performance requiring the defendants to transfer the Property to the plaintiff.

18. Next, Mr Chua SC argues that Jones v Lipman only identifies a remedy to a plaintiff but does not supply a cause of action.  In my view, it is not necessary for the plaintiff to show it has a cause of action against the party to be joined.  What it has to show is that the presence of a third party before the court is necessary to ensure that all matters in dispute are effectively dealt with: see Hong Kong Civil Procedure 2012, Vol 1, paragraph 15/6/6, T.S.B. Private Bank International S.A. v Chabra  [1992] 1 WLR 231; [1992] 2 All ER 245.  On the evidence now available, particularly that Neville Chan and Chris Yeung who were directors of Eunice HK continued to be its directors after the transfer of its shares to Kylin, the inference may be raised that Kylin is holding the shares of Eunice HK as nominee of the defendants for the purpose of avoiding specific performance of the Agreement should the plaintiff succeeds in the action.  Therefore, the presence of Kylin is necessary to ensure all matters in dispute between the plaintiff and defendants be effectively dealt with.  The application is well within Order 15 rule 6(2)(b)(i).

19. On the issue of delay in taking out the joinder application, Mr Chua SC argues that the plaintiff became aware of the transfer      of the shares in Eunice HK as early as April 2011 but it was not until   10 May 2012 that it took out the application, a delay of thirteen months.  He submits that to allow the application would be contrary to the underlying objectives of the CJR.  There is really nothing that could be said in favour of the plaintiff.  The only explanation for the inaction is that the plaintiff does not wish to alert the defendants lest they would take other steps to defeat the plaintiff’s interest.  This is hardly convincing.   If the plaintiff is concerned that the defendants will take such steps,     it could have applied for injunction enjoining the defendants and   Eunice HK from allowing Eunice Zhongshan dispose of the Property.  The application for joinder will have to be made at some stage, the earlier the better.

20. The joinder application is basically an issue between the plaintiff and Kylin.  The plaintiff is at liberty to proceed against whoever party it desires and whenever it so desires, subject to there being no prejudice caused to the existing defendants.  It is clearly in the interest of justice that Kylin should be added as a party.  The application should be allowed, if the trial day will not be prejudiced as a result.  There are eighty-eight days before the trial of the action.  The most likely defence of Kylin is that it is a bona fide purchaser for value without notice.  That is probably the highest Kylin can make of its defence.  The share transfer took place not too long ago.  Witnesses and documentations in support should be readily available.  Also, it must not be overlooked that the defendants were parties to the transfer of the shares in Eunice HK and the defendants’ witnesses are also possibly witnesses for Kylin.  Allowing for the usual time taken for filing of defence and reply, discovery, filing of witness statements and one unsuccessful application by Kylin to set aside the service, it is likely that these procedures will be completed before the trial date.  As for CJR considerations, if as the events turn out, the procedures could not be completed in time such that the trial date is at risk, the plaintiff will have to decide whether to proceed against Kylin or to pay the costs of its inaction. Accordingly, I grant the joinder application together with the amendment application and consequential directions. 

Legal principles applicable to service out of the jurisdiction

21. The service out application is an ex parte application which concerns Kylin only and in respect of which the defendants have no right to be heard.  Mr Chua SC, however, advanced arguments in opposition.  Those arguments may be advanced by Kylin if an order for service out of the jurisdiction is made and Kylin is desirous of setting it aside under Order 12 rule 8.  However, out of abundance of care, I heard those arguments on the legal principles which are of assistance to my decision.

22. The plaintiff relies on Order 11 rule 1(c), (d)(iii) and (e) for the service out application.  It is well settled principle that an applicant for leave to serve out of the jurisdiction must show that his case falls clearly within one or other of the sub-paragraphs of Order 11 rule 1(1) and the standard of proof is on a good arguable case: Hong Kong Civil Procedures 2012,Vol 1, paragraph 11/1/7 and 11/1/8.  Counsel are in disagreement on two propositions.  Firstly, Mr Chua SC submits that in respect of these sub-paragraphs under rule 1, the plaintiff has to show that the party sought to be served is a party to the contract with the plaintiff which is the subject matter of the action.  Secondly, he submits that the plaintiff must show it has a good arguable case, ie on the material available that it has a much better argument than the opponent.

23. With respect, Mr Chua SC’s first proposition is no longer correct.  It used to be assumed that the contract must be one made between the plaintiff and the party sought to be served.  But this is     no longer the case.  In Hong Kong Civil Procedures 2012,Vol 1, paragraph 11/1/21A, the learned editors wrote:

'Requirement of a contract – Previous commentary in this work had stated on the basis of Finish Marine Insurance Co Ltd v Protective National Insurance Co [1989] 2 All ER 929 that the contract must be between the plaintiff and the defendant, but this was doubted in Schiffahrtsfesellschaft Detley von Appen GmbH v Voest Alpine Intertrading GmbH & Ors, The Jay Bola [1997] 1 Lloyd’s Rep 179 at 187 and is has been held under the CPR that this reads something into the rules that is not there, Greene Wood & McLean v Templeton Insurance Ltd [2009] EWCA Civ 65. In Hong Kong it is only in limited circumstances that a non-party would have any claim to enforce, etc a contract, for example where the defendant is an assignee or a subrogated insurer and thereby bound by a jurisdiction or arbitration clause in the contract entered into by its assignor or insured, Schiffahrtsfesellschaft Detley von Appen,above, at 187 and where the contract is made in Hong Kong but governed by a law under which third parties may enforce benefits in their favour, for example English law.

Where the plaintiff alleges a contract between himself and one defendant or another or someone else, he does not need to establish on the balance of probabilities that the contract is with the party sought to be served out: The Ines [1993] 2 Lloyd’s Rep 492 and Brody Ltd & Anor v Chu Kong Shipping Enterprises (Holdings) Co Ltd (unrep, HCCL 354 of 1996) [1998] HKEC 930.'

24. In Brody Limited & Anor And Chu Kong Shipping Enterprises (Holdings) Company Limited & Another which was relied on by the learned author, after holding that the party sought to be served is a necessary and proper party under rule 1(c), Stone J said at paragraph 11:

Having reached this firm conclusion, there is, in the circumstances, perhaps no need for present purposes to finally decide the interesting arguments put forward under the contractual head, and in particularly, the approaches of Saville J. (as he then was) in The Ines [1993] 2 LLR 492, and the decision of the High Court in Finnish Marine Insurance Co. Ltd. v. Protective National Insurance Co. [1990] QB 1078.  Suffice to say that I do not think they are in conflict to the degree suggested by Mr Kerr.  In Finnish Marine, op cit., the learned Deputy Judge held that a contract with a third party did not fall within O.11, r.1(1)(d)(ii), whereas Saville J. (op. cit at 495) was, I think, merely pointing out that the precise words of the rule (i.e. r. 1(1)(d)) should not be subject to the implied requirement of establishing, at the outset, that the contract in question is one to which the party sought to be served is a party, holding merely that in cases of dispute as to whether or not a proposed defendant is a contractual party, the case will not be a proper one for service out unless the Court was of the view that the question of the identity of the contracting parties and the alleged breach raised issues which it is fair to all concerned should be tried in England.  As Saville J. pointed out (at page 495):

".... Where there is a real dispute as to who is party to a contract it is ex hypothesi not likely to be possible satisfactorily to decide at the outside which contention is probably correct, for such a dispute by its nature calls for a trial for its proper determination.  If the rule required a plaintiff to prove on the balance of probabilities that the one party rather than the other was the contracting party then in anything but the simplest case leave could not be granted, even though it was clear that the plaintiff had a good case against the one or the other which justice dictated should be tried out in England.  It would follow that in a case where leave was being sought to serve both out of the jurisdiction, neither could be served, even where it was clear that the one or the other was liable as the contracting party.  This can hardly have been the intention behind the rule ...." '

Thus in both The Ines and Brody Ltd, the proposition that the party sought to be served need not be a party to the contract in issue is obiter.

25. I think there can be no simple or single answer to the unduly vague or broad question whether the party sought to be served must be   a party to the contract which is the subject matter of the action.  It all depends on the particular sub-paragraph of rule 1 under which leave for service out is sought.  Thus, the answer lies in the true construction of Order 11, particularly rule 1.

26. To obtain leave for service out of the jurisdiction, a plaintiff has to show that his claim falls within one of the sub-paragraphs of rule 1.  Sub-paragraphs (c), (d) and (e) are pertinent in relation to a claim in contract or a claim affecting a contract.  These sub-paragraphs provide as follows:

'(c) the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto;

(d) the claim is brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which ¾

(i) was made within the jurisdiction, or

(ii) was made by or through an agent trading or residing within the jurisdiction on behalf of a principal trading or residing out of the jurisdiction, or

(iii) is by its terms, or by implication, governed by Hong Kong law, or

(iv) contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of the contract;

  (e)  the claim is brought in respect of a breach committed within the jurisdiction of a contract made within or out of the jurisdiction, and irrespective of the fact, if such be the case, that the breach was preceded or accompanied by a breach committed out of the jurisdiction that rendered impossible the performance of so much of the contract as ought to have been performed within the jurisdiction.'

27. Rule 1(c) allows service out so long as one party has been served whether within or out of the jurisdiction and the party sought    to be served is a necessary and proper party.  There is not the slightest mention whether the party sought to be served has to be a party to the contract which is the subject matter of the litigation.

28. Rule 1(d) gives jurisdiction to serve out if the claim is brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of contract, provided that the contract meets certain qualifications.  In a nutshell, the qualifications are that the contract has a sufficient Hong Kong connection, being one made within the jurisdiction or made by or through an agent trading or residing within the jurisdiction on behalf of an outside principal, or is a contract governed by Hong Kong laws, or a contract which expressly gives jurisdiction to the Court of First Instance of Hong Kong. There is no mention that the party sought to be served must be a party to the contract in issue, or is a person who may be related to the contract or in any way likely to be affected by the contract or must be a person against whom a remedy is sought. 

29. Under rule 1(e), the court may order service out if the claim is brought in respect of a breach committed within the jurisdiction of    a contract whether made within or out of the jurisdiction.  There is no requirement that the contract must have a Hong Kong connection, nor is there any requirement that the party sought to be served must be a party to that contract. 

30. But of course, it stands to no reason that if a dispute arose out of or relating to a contract which has a Hong Kong connection, then someone out of the jurisdiction who has no connection whatever with the contract, or its breach, or the remedies sought may be served with the legal process under rule 1(d) and put either under an obligation to set aside that service or to suffer the costs and inconvenience of being made a party to the litigation.  Similarly, it is ridiculous that because someone committed a breach of contract in Hong Kong, then another person out of the jurisdiction may be likewise served with the legal process.  That could not have been the intended effect of these two paragraphs. 

31. In my view, read as a whole, the scheme intended under Order 11 rule 1 is that where the party to be served is a party to the contract which is the subject matter of the litigation, the court has jurisdiction to order service out under rule 1(d) provided that the contract has a Hong Kong connection or under rule 1(e) if the breach was committed in Hong Kong.  But, notwithstanding that the party sought to be served is not a party to the contract, the court also has jurisdiction to order service out under rule 1(c) if that party is a necessary or proper party to the litigation.  This may arise, for example, where a remedy may be available against the party sought to be served or where the subject matter of the dispute has fallen into the possession of the party sought   to be served.  These examples are not exhaustive.  The test is whether  that party is a necessary or proper party to the litigation.  Whether he is   a party to the contract is besides the point.  These rules may overlap.  There may be factual situations where a party may be liable to service out under a number of sub-paragraphs of rule 1.

32. Application for leave is made ex parte. If leave is granted, the party served may apply to have the leave set aside at an inter parte hearing under Order 12 rule 8.  At the ex parte stage, what the plaintiff has to prove is that it has a good arguable case for service out against the party to be served under one of the sub-paragraphs of rule 1 in order that the court will not exercise its discretion to set aside the order to serve out of the jurisdiction.  A good arguable case means one in which the plaintiff has a much better argument on the material available: see Canada   Trust Co and Others v Stolzenberg and Others [1998] 1 WLR 547 (CA) at 555F-G.  The plaintiff has to achieve this higher threshold rather than  just showing an arguable case to trigger the court to invoke its long arm jurisdiction and put the party to be served under the obligation of having either to set aside the service under Order 12 rule 8 or to subject itself   to the costs and inconvenience of having to participate in the litigation.   'A good arguable case' means a good arguable case under the appropriate sub-paragraph of rule 1.  This must necessarily include, where the application for service out is made under rule 1(d) or (e),     'a good arguable case' in respect of the cause of action in addition     to a good arguable case that the requirements under the appropriate   sub-paragraph of rule 1 are met.

33. At the ex parte stage, 'a good arguable case' is synonymous with 'a strong argument' as the application is made in the absence of the party sought to be served who will not be able to advance any argument in opposition.  A balancing will be required at the inter parte stage when the party served applies to set aside the order for service out.  Even then, it must not be overlooked that the arguments from the two sides are to be weighed in the interlocutory context on the basis of affidavits and the court must not permit the exercise to develop into a mini trial on affidavit evidence.  In the interlocutory context, 'a good arguable case' means   no more than a much better argument on the material available.

Service out under Order 11 rule 1(c) ground

34. The plaintiff relies on rule 1(c).  The 1^st to 3^rd defendants have been duly served.  The issue is whether the plaintiff has shown     it has a good arguable case that Kylin is a necessary or proper party.   The basis of the plaintiff’s application is that as a result of the transfer   of the shares in Eunice HK, Kylin is holding the shares as nominee of  the defendants.  Relying on Jones v Lipman, Mr Yeung argues that    the corporate veil of Kylin should be lifted and Kylin be ordered to specifically perform the Agreement.  Hence, without a judgment binding on Kylin, the plaintiff will be unable to specifically enforce the sale   and purchase agreement of the shares in Eunice HK or the Property.  Thus Kylin is a necessary or proper party to the action.

35. In Jones v Lipman, the vendor of property agreed to sell freehold land to the purchaser.  While pending completion, he sold    the land and transferred it to a company which he acquired and of which he and a clerk of his solicitors were the sole shareholders and directors.    The court ordered specific performance compelling the vendor and the company to convey the land to the plaintiff.  Russell J said at 445:

'The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.'

36. Mr Chua SC seeks to distinguish Jones v Lipman from the present case on the basis that the land concerned in that case was   within the jurisdiction, that it was not a case of service out of the jurisdiction and that there was admission by counsel for the vendor    and the company that the land was transferred solely for the purpose    of defeating the purchaser’s right to specific performance leaving the purchaser with a monetary claim for damages. I do not think these distinctions material.

37. Kylin is a BVI company.  The plaintiff could have no means of ascertaining who its shareholders are.  However, Neville Chan and Chris Yeung remained as directors of Eunice HK after the transfer of   its shares to Kylin.  It is not unusual in the case of a take-over for the management of the company taken over to remain in situ, at least  initially. However, Mr Yeung submits that this fact and the defendants’ concealment of the transfer is sufficient to raise the inference that Kylin is the defendants’ nominee in holding the shares in Eunice HK.  Given the circumstances of this case, particularly that the defendants concealed its disposal of the shares in Eunice HK, the inference could be drawn that Kylin is a façade or a puppet of the defendants used to perpetrate fraud or evade legal obligation and liability to complete the sale and purchase of the Property and to leave the plaintiff with an empty judgment if it is successful in this action: see Winland Enterprises Group Inc And Wex Pharmaceuticals Inc and Acro Pharm Corp, CACV 154/2011.  In the circumstances, on the material available, I am satisfied that the plaintiff has shown a good arguable case that the corporate veil of Kylin should be lifted and a good arguable case that its claim is within Order 11 rule 1(c).

Service out under Order 11 rule 1(d)(iii) ground

38. The plaintiff also relies on Order 11 rule 1(d)(iii) on the basis that by implication the Agreement is governed by Hong Kong law.     Mr Yeung submits that the individuals representing the defendants in   the negotiation of the Agreement and who made decisions on behalf of the defendants are all Hong Kong citizens and that the communications by way of e-mails between the parties leading to the signing of the Agreement as well as the Agreement itself were written in English.  Hence, he argues that by implication the Agreement is governed by  Hong Kong law.  I should add two other considerations. Firstly, the plaintiff is a company incorporated in Hong Kong.  Secondly, and more importantly, Eunice HK, the shares of which form part of the subject matter of this litigation, is a company incorporated and situated in   Hong Kong.  However, on the true construction of rule 1, all these are besides the point.  In the absence of proof that the plaintiff has a cause  of action against the party sought to be served, that the Agreement has   a Hong Kong connection alone is not sufficient for the court to invoke this long arm jurisdiction.  Simply put, that the plaintiff and defendants are engaged in a dispute about a contract which has a Hong Kong connection is no justification that somebody who is not a party to that contract in the United States, for example, or in the BVI in the present context, should be ordered to defend the case.  If the party sought to be served is otherwise connected to the contract or responsible for its breach, a case for leave should be made out under rule 1(c).  With the material available before me, I am not satisfied that the plaintiff has shown a good arguable case that its claim is within Order 11 rule 1(d)(iii).

Service out under Order 11 rule 1(e) ground

39. The plaintiff also relies on Order 11 rule 1(e) in that the breach of the Agreement was committed within the jurisdiction.  The breach now alleged is the defendants’ failure to procure Eunice HK in Hong Kong to procure Eunice Zhongshan to transfer the Property to the plaintiff.  This argument is somewhat thin as the transfer of the Property has to take place in the PRC which was the place where the Property is located and where the breach was committed.  However, even if the breach was committed within the jurisdiction, Kylin is not a party to   the Agreement.  For similar reasons as explained in paragraph 38 above, the plaintiff has failed to show it has a good arguable case for service out under Order 11 rule 1(e) against Kylin.

Delay

40. On procedural objection, Mr Chua SC argues that there has been inordinate and inexcusable delay by the plaintiff in taking out the summons and that the application is plainly against the underlying objectives of the CJR.  For reasons as explained in paragraph 21 when considering the joinder application, the issue of delay has little bearing on an application for serving out.  The plaintiff has all the time it has under the Limitation Ordinance to prosecute its claim.  The delay is not a reason for not allowing service out of the jurisdiction.

Conclusion - The Joinder Summons

41. In respect of the Joinder Summons, I grant the joinder application, leave to amend the concurrent writ of summons, leave to serve the amended concurrent writ of summons on Kylin under Order 11 rule 1(c) and some consequential directions. 

42. Though the plaintiff is successful in the Joinder Summons,  it is guilty of inordinate delay.  The amendment application and service out application are made ex parte and it was not unreasonable for      the defendants to oppose the joinder application in view of the delay.   The leave granted is the result of indulgence on the part of the court.  Accordingly, I make no order as to costs of the Joinder Summons.

EXPERT EVIDENCE SUMMONS

Introduction - The expert evidence application

43. This is the plaintiff’s application to adduce expert evidence on the laws in the PRC in relation to:

(a)  loans from Eunice HK to Eunice Zhongshan;

(b)  waiver of loans advanced by Eunice HK to Eunice Zhongshan;

(c)  laws governing payment of property tax in the PRC;

(d)  enterprise income tax liability upon disposal of leasehold buildings;

(e)  payment of value added tax upon disposal of plants and equipments by Eunice Zhongshan;

(f)   payment of overtime wages to labourers employed by Eunice Zhongshan;

(g)  keeping of books of accounts of Eunice Zhongshan;  and

(h)  transfer of land use rights in the PRC.

44. The legal principles applicable to adducing expert evidence are well settled.  The expert evidence sought to be adduced must be relevant.  The test of relevance is whether the evidence is helpful to    the court in resolving a fact in issue in the case: see Hong Kong      Civil Procedure 2012, Vol 2 paragraphs J1/58/1 and J1/58/3.  The party seeking to adduce such evidence must demonstrate that there is a need  for such evidence: see Hong Kong Civil Procedure 2012, Vol 2  paragraph J1/58/8.

45. The crux of the parties’ dispute is that after signing the Agreement, the plaintiff discovered in the course of its due diligence exercise that acquisition of the entire shareholding of Eunice HK would cause unacceptable risks to the plaintiff as a result of which the plaintiff purported to exercise the option under clause 4 of the Agreement to seek transfer of the Property instead.  The unacceptable risks as pleaded in paragraph 9 of the statement of claim arose out of certain discrepancies in the draft audited report of Eunice HK and the 2006 audited report of Eunice Zhongshan relating to a shareholders’ loan by Eunice HK to Eunice Zhongshan.  In particular, in the draft audited report of Eunice HK, the auditors stated that they were unable to obtain sufficient documentary evidence to satisfy themselves as to the completeness and accuracy of the financial information relating to Eunice Zhongshan and expressed doubt as to the ability of Eunice HK to continue as a going concern.  In the witness statements of Ng Man Choong and Li Shiuan Yen, the plaintiff referred to regulatory and financial risks connected with Eunice HK and Eunice Zhongshan.  The plaintiff obtained an expert report on PRC law from Yan Tianhuai of G&D Law Firm dated 1 April 2012 setting out   the laws, regulations and administrative measures governing, inter alia, the eight items referred to in paragraph 43 above.  The plaintiff applies for directions relating to the filing of expert reports from both sides.   The defendants object to the application on the basis of irrelevancy,    the plaintiff’s delay and CJR considerations.

Relevance

46. Mr Chua SC argues that the expert report sought to be adduced does not start to help resolve any of the factual issues nor the key issue of construction of the Agreement which is a matter of law and not for expert evidence.  I respectful disagree.  One of the key issues is whether acquisition of the shares would constitute unacceptable risks to the plaintiff. The plaintiff has pleaded unacceptable risks as the reason for their exercise of the option and the facts which constituted the unacceptable risks.  The impact of PRC laws governing payment of property tax in the PRC, enterprise income tax liability upon disposal of leasehold buildings, payment of value added tax upon disposal of plants and equipments by Eunice Zhongshan and land use rights in the PRC are central to those facts which would constitute the unacceptable risks.  The expert evidence sought will certainly assist the court in understanding the plaintiff’s case as well as the defendants’ case.  Expert evidence is highly relevant.  I am only surprised that the application is made at this very  late stage.

Delay

47. On 12 November 2010, the plaintiff took out an expert direction summons seeking directions for filing of accounting and legal expert evidence relating to the matters now sought to be adduced.  However, the plaintiff did not proceed with that application and made    a joint application with the defendants to withdraw the expert direction summons on 18 May 2011.  Mr Chua SC submits that the plaintiff’s application at this late stage is an ambush or an attempt to delay the trial.

48. The plaintiff’s explanation is that after receiving Chris Yeung’s witness statement exhibiting bundles of accounting documentations and vouchers of Eunice Zhongshan, the parties’ solicitors discussed between 28 January and 6 May 2011 on the issue of drafting  of agreed expert directions. As the correspondence showed, while the parties had in mind both accounting expert evidence and PRC law expert evidence, the focal point was on accounting expert evidence.  However, the plaintiff’s solicitors took the view that the accounting documentations exhibited by Chris Yeung had not been available to the plaintiff at the material time when the plaintiff purported to exercise the option to purchase the Property and hence it was not necessary to adduce accounting expert evidence in relation to those accounting documentations. They were also concerned with the issue of costs involved.  Hence, they agreed with the defendants’ solicitors to withdraw the expert direction summons in favour of an early trial in view of another ongoing litigation between the parties in the PRC.  That only explains why the plaintiff did not proceed with obtaining accounting expert evidence, but not with abandoning PRC law expert evidence.

49. The only explanation the plaintiff now offers is that it has been advised by trial counsel that expert evidence on PRC law now being sought is relevant and necessary.  Putting it in another way, the only reason for the late application is the incompetency of the plaintiff’s legal team.  Expert evidence in a case like this is, of course, relevant and necessary. 

50. Mr Chua SC argues that the court’s discretion should not be exercised in favour of the plaintiff by reason of its delay and on CJR considerations.  He submits that the circumstances that give rise to the present application are almost on all fours with those in Chok Yick Interior Design & Engineering Co Ltd And Lau Chi Lun trading as    Chi Hung Construction Eng Co, HCA 1480/2008 where Lam J made it abundantly clear that an application for expert directions is not a mere formality but an integral part of the case management process.  Expert directions must be timeously and properly sought and fully complied with before the case is set down for trial.  Under the CJR regime, parties and their legal representatives must address the question of expert evidence after the close of pleadings, when they prepare their timetabling questionnaire in accordance with Practice Direction 5.2.  In order to narrow down the expert issues, the court will usually consider giving directions for expert meeting and preparation of joint report.  If a party envisages adducing expert evidence, he should obtain expert directions in the Case Management Conference.  An application made at the pre-trial review hearing would usually be too late to allow the above costs saving measures to be taken.  Hence, Mr Chua SC submits that the late application made by the plaintiff is an ambush or motivated by the desire to delay the trial and should not be allowed.

51. I agree with the dicta of Lam J.  The court is entitled to rely on the parties’ solicitors to prepare their client’s case properly before trial.  A late application made shortly before trial bears the hallmark of ambush and delay and usually should not be allowed, even if its refusal may  result in difficulties to the party in advancing its case or defence.  However, the court does retain the discretion to allow such late application in very exceptional circumstances.  While bearing in mind the underlying objectives in Order 1A rule 1, the overriding consideration is interest of justice and fairness between the parties.  If interest of justice and fairness so requires, a late application will nevertheless be allowed, provided that the underlying objectives will not be compromised and   the opponent will not thereby be prejudiced.

52. The application is late, but I am not convinced that it is an ambush.  Nor do I think it is made with the purpose of derailing the trial.  Being the plaintiff, the plaintiff would have everything to lose by delaying.  It is a clear case of incompetence on the part of the plaintiff’s legal team.  Such expert evidence is at the core of the plaintiff’s case of unacceptable risk.  Depriving the plaintiff of the expert evidence would render it very difficult for the plaintiff to prove its case.  While allowing the application at this late stage is inconsistent with the underlying objectives of the CJR, the overriding consideration is justice and fairness to the parties.  If the defendants will suffer real prejudice, the late application will not be entertained.  The plaintiff should be left with a remedy against its own legal team.  If the defendants will not suffer real prejudice, technicality should not be allowed to prevail.  On the facts, the legal issues in respect of which expert evidence is being sought are very general issues, which is not difficult to obtain.  The expert opinion is unlikely to be controversial.  There are still eighty-eight days before trial.  The plaintiff has produced its own expert report.  If the defendants progress with reasonable despatch, their expert evidence will be available well before trial.  The defendants will not suffer any real prejudice.  In the circumstances, justice and fairness require that the application be allowed.  I therefore allow the application together with consequential directions.  This is very much an indulgence on the part of the court.  I make no order as to costs of the Expert Evidence Summons.

SPLIT TRIAL SUMMONS

53. By this summons, the plaintiff seeks an order that notwithstanding the order of Mr Registrar Lung dated 18 May 2011,   the issue of liability be tried before the trial of the issue of damages.   The defendants object to the application on the basis that as a general rule all issues arising in an action should be tried together and that the plaintiff has wholly failed to show any exceptional circumstances or special grounds for departure from this general rule.

54. The primary remedy sought by the plaintiff is specific performance of the Agreement, in particular the transfer of the Property to the plaintiff.  It also seeks an alternative remedy in damages.        Mr Yeung submits that the plaintiff’s alternative claim for damages has an added significance as a result of the transfer of the shares in     Eunice HK to Kylin.  Mr Chua SC argues that the plaintiff became aware of the transfer thirteen months ago and hence that transfer could not constitute exceptional circumstances or special ground to justify a    split trial.

55. In my view, the plaintiff has an obviously better argument for split trial than have the defendants.  As submitted by Mr Yeung,     a point not strongly disputed by Mr Chua SC, the plaintiff’s purpose of entering into the Agreement is to acquire the Property.  Unknown to the plaintiff, at least until April 2011, the defendant had transferred the shares in Eunice HK to Kylin seven months after the filing of their defence and counterclaim in which no indication was given about the transfer of the shares to another third party.  In respect of the Property, the defendants only pleaded that it was not possible to transfer the Property under   PRC law. Neither did the defendants’ witnesses disclose the transfer    in their witness statements filed after the transfer.  The primary remedy sought by the plaintiff is transfer of the Property.  On the face, by the transfer of their shares in Eunice HK to Kylin, the defendants put it beyond their power to specifically perform the Agreement in the event that the plaintiff is successful in this action.  If that turns out to be the case, the issue of damages will assume a much greater significance.   This is occasioned by the conduct of the defendants.  The defendants’ objection to split trial is primarily based on the plaintiff’s thirteen months’ delay.  If at the end of the day, specific performance is available to the plaintiff, there will be no need for a trial on quantum.  The plaintiff will have no claim for damages other than a nominal award and the defendants’ counterclaim for the balance of the price of Eunice HK will as a matter of course be allowed.  Trial on quantum will only become necessary if specific performance is not available.  When the plaintiff’s delay is weighed against the defendants’ conduct, it pales out of significance.  Accordingly, I allow the application.  The split trial will conveniently accommodate the additional time required for hearing expert evidence.  Again, because of the plaintiff’s delay in taking out   the application, I consider the application is allowed as an indulgence and make no order as to costs of the Split Trial Summons.

CONCLUSION

56. For the above reasons, the plaintiff’s applications for joinder, amendment of the concurrent writ of summons, service of the amended concurrent writ of summons out of the jurisdiction, adducing expert evidence and split trial are allowed together with consequential directions.  I make no order as to costs.  The costs of the Pre-trial Review be in the cause.

Mr Clemence Yeung, instructed by P.C. Woo & Co, for the plaintiff

Mr Chua Guan-Hock, SC and Mr Kam Cheung, instructed by Gallant Y.T. Ho & Co, for the defendants