LAU CHI WANG JAMES AND OTHERS v. IP FOOK CHUEN THOMAS AND ANOTHER

HCA 18950/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 18950 OF 1998

(Consolidated by the order of Master Poon dated 16 December 1998)

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J U D G M E N T

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1. This is an appeal by the 1st and 2nd defendants against the decision of Master B. Kwan made on 12 September 2002 ordering that their summons to set aside the judgment dated 30 November 2001 be dismissed with costs to the plaintiffs.

2. The dispute between the parties is in relation to a joint venture to develop property.

The plaintiffs' claims

3. The plaintiffs allege in the re-amended statement of claim that there was a partnership between themselves and the defendants ("the second partnership") to develop Tai Pak Terrace at 36, Sands Street through a company called Lucky Wealth Development Ltd. ("LWDL"). The initial parties to the joint venture ("the first partnership") used LWDL as the corporate vehicle to carry out the joint venture. The defendants used a company under their control, Oxometric Ltd., to hold 30% of the shares of LWDL. HK$40.9 million was injected into LWDL by way of shareholders' loans to finance the joint venture. In view of differences arising between the initial partners to the joint venture the defendants chose to buy out the shares of the other partners for HK$10.5 million but the defendants did not have sufficient funds to buy out the initial partners' shares. The partners valued LWDL at HK$15 million as of 30 June 1996 for the buy out.

4. In around May 1996 the 1st defendant approached the 1st plaintiff and offered a 30% share in a new partnership between the 1st plaintiff and the defendants with the defendants jointly owning 70%. Although 30% of HK$15 million would amount to $4.5 million the 1st defendant asked for a premium of HK$100,000 so that the asking price for the said 30% share was HK$4.6 million. He also told the 1st plaintiff that the project would be completed in less than one year and that he would personally guarantee that the 1st plaintiff would obtain a return of not less than 70% on his investment. The 1st plaintiff agreed on behalf of himself and the other plaintiffs to take up the 30% share in the partnership and to pay HK$4.6 million. This was the second partnership.

5. The HK$4.6 million was paid by the plaintiffs to the defendants by a number of cheques between June and August 1996. Between September and December 1996 the plaintiffs further contributed a total of HK$858,743.10 being 30% of the interest paid by LWDL on loans.

6. The plaintiffs also allege that on 23 November 1996 the defendants had secretly and without their knowledge entered into an agreement with two subsidiary companies of Chi Cheung Investments Limited ("CCIL"), a publicly listed company, to sell the entire project for HK$100 million. On 12 December 1997 completion of the project took place and the agreed consideration of HK$100 million has been paid.

7. It is alleged by para. 37 of the re-amended statement of claim and as particularized therein that the second partnership earned a profit of HK$82,138,202.09 and that the plaintiffs are entitled to the sum of HK$24,641,460.63 being 30% of the same.

8. The primary claims of the plaintiffs as set out in the prayer for relief (1) to (6) are for declarations, a proper and true account to the plaintiffs of the income and expense of the second partnership, all other necessary accounts and enquiries for tracing the properties, monies and funds of the second partnership and payment of all sums found to be due from the defendants on the taking of such accounts. The alternative claim is for the sum of HK$24,641,460.63. There is a further alternative claim for the sum of HK$9,279,863.27 under para. 39 of the re-amended statement of claim on the guarantee for a return of not less than 70% on the plaintiffs' investment.

The defence

9. The defendants although admitting that there was an agreement between them and the 1st plaintiff denied that there was a partnership between them. The defendants, however, say that in about end May or early June 1996 the 1st defendant told the 1st plaintiff that the net asset value of the joint venture was HK$40 million at the time. The 1st defendant told the 1st plaintiff that if he was interested to take up a 30% share in the project he should pay at the outset HK$12 million and that he would be required to make further contributions in the course of the completion of the project. He was told that further funding of about HK$17 million would be required and the 1st plaintiff was required to contribute about HK$5.1 million being 30% of HK$17 million. The 1st plaintiff agreed.

10. According to the defendants the 1st plaintiff was in breach of the agreement as he was only able to pay HK$4.6 million by 9 August 1996 leaving a shortfall of HK$7.4 million outstanding out of the HK$12 million payable at the outset.

11. On demand being made to pay the HK$7.4 million and the further funding of HK$5.1 million the 1st plaintiff told the 1st defendant that he and his associates had problems raising the full amount and offered to pay 30% of the interest payable by LWDL to its bank until the full outstanding sum of HK$12.5 million ($7.4 million + $5.1 million) had been paid. The 1st plaintiff also promised to make good the deficit of $11,641,256.90 in three months' time. The defendants were forced to accept the proposal ("the Varied Agreement").

12. In breach of the Varied Agreement the 1st plaintiff was unable to make any further payments. The 1st plaintiff agreed that the 1st defendant should find a buyer to buy out the project by purchasing the shares of LWDL which he did. The defendants on or about 23 November 1996 entered into an agreement to sell the shares of LWDL to New Compton International Ltd., a subsidiary of CCIL, and the 1st plaintiff was informed of the same in early December 1996. It is denied that there was a secret sale. There is also a counterclaim as it is the defendants' case that there was a loss on the disposal of the project and the sum of HK$670,603 is counterclaimed as particularized in para. 46 of the counterclaim .

The order for specific discovery of documents

13. On 21 September 2001 Master Au-Yeung ordered the defendants to file an affidavit disclosing whether they had possession custody or power of the documents specified in the Schedule to the order. The defendants appealed against that decision. However, on appeal to Suffiad J he dismissed the appeal and affirmed the Master's order. The 14 days' period to comply with the order given by the Master was to run from the dismissal of the appeal on 31 October 2001.

The 'unless order'

14. Upon expiration of the 14 days' period the plaintiffs took out a summons for an 'unless order' that the defendants do file an affidavit for specific discovery of the documents as ordered by Master Au-Yeung and affirmed by Suffiad J. That summons was returnable on 23 November 2001 before Master B. Kwan.

15. On 20 November 2001 the defendants' former solicitors filed an affirmation of the 1st defendant. This was said to be made and filed in pursuance of the order of Master Au-Yeung and affirmed by Suffiad J. It is also stated there that the affirmation was made and filed on behalf of the 2nd defendant as well who authorized the 1st defendant to do so. The 1st and 2nd defendants are husband and wife. There was, however, no application made for an extension of time to file and serve the same out of time.

16. The defendants' former solicitors sent a fax at 5.41 p.m. on 22 November 2001 to the solicitors for the plaintiffs stating that since the 1st and 2nd defendants had filed and served its affirmation on 20th November 2001 they asked for their letter to be produced to the court to "excuse our attendance" on 23 November 2001 in order to save time and costs. The plaintiffs' solicitors wrote back on the same day expressing the opinion that the order for specific discovery had not been complied with.

17. The defendants' former solicitors did not appear before Master B. Kwan on 23 November 2001. They had not reached any agreement with the plaintiffs' solicitors and should have appeared at the hearing on 23 November 2002. They were the solicitors on record for the defendants and ought to have appeared to maintain the stance that the affirmation of 20 November 2001 was in compliance with the order for specific discovery of documents.

18. The Master made an 'unless order' ordering that "unless the 1st and 2nd defendants do by 30th November 2001 4.00 p.m. file an affidavit" giving the specific discovery ordered by Master Au-Yeung and affirmed by Suffiad J, the defence be struck out and the counterclaim be dismissed and judgment be entered for the plaintiffs.

19. Unfortunately, however, the 'unless order' did not comply with Practice Direction PD16.5 in relation to 'Peremptory Orders'. It is clear that according to the Practice Direction where the party ordered is not present the wording should be "Unless within ...... days of service of this order". The order as sought and as drawn up by the plaintiffs' solicitors failed to comply with the Practice Direction. But that failure did not make the 'unless order' an irregular order (see my judgment dated 3 November 1998 in Wong Chi Hung, Augustine-Michael also known as Michael Wong v. Tse Yuen Yee Irene (HCA 4864/95). The 'unless order' was, however, only drawn up and entered on 3 December 2001 and by the time that it was entered and served on the defendants' solicitors the deadline of 30 November 2001 for compliance had already passed.

The judgment

20. Judgment dated 30 November 2001 was then entered on an ex parte application made by the 2nd affirmation of Chin Pak Hing, the plaintiffs' solicitor made on 18 December 2001. The judgment was sealed and filed on 21 January 2002. It is important to note that judgment was entered for the sum of HK$24,641,460.63 with interest thereon which was one of the alternative claims of the plaintiffs.

The application

21. By summons dated 27 February 2002 the defendants applied to set aside the judgment on ground of irregularity. According to the 1st defendant's affirmation made on 27 February 2002 the defendants were informed on or about 8 February 2002 that judgment had been obtained against them. The summons to set aside the judgment was issued shortly thereafter.

22. On 12 September 2002 Master B. Kwan dismissed the defendants' application to set aside but granted a stay of execution provided the notice of appeal was filed within 14 days.

23. Mr. Bell submitted that the judgment that was entered was irregular for two reasons. The first was that the plaintiffs' claim was a claim for an unliquidated demand but judgment was entered for $24,641,460.63. The second was that the 'unless order' was a time order and that as the 1st defendant had made and filed the affirmation of 20 November 2001 the plaintiffs should not have entered judgment on an ex parte basis but should have made an application for the same inter partes.

24. As to the first ground, it is stated in 6/2/4 of the Hong Kong Civil Procedure 2002 that :

“ A liquidated demand is in the nature of a debt, i.e. a specific sum of money due and payable under or by virtue of a contract. Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a 'debt or liquidated demand', but constitutes 'damages'."

25. Judgment was entered for the alternative claim in the sum of HK$24,641,460.63 said to be the plaintiffs' share of the profit made by the second partnership. However, the primary claims as I have mentioned were for declarations, a proper and true account of the income and expense of the second partnership, all necessary accounts and enquiries for tracing the properties, monies and funds of the second partnership and payment of all sums found due on the taking of the accounts.

26. By the order for specific discovery of documents the plaintiffs were also seeking further discovery of the income and expenses of the second partnership. The Schedule to the order of Master Au-Yeung specified the documents as follows :

“ 1. All documents relating to payment records of interest or capital e.g. deposits, transfers and cheques etc., if any, made by the 1st and/or 2nd Defendants and paid pursuant to the alleged Varied Agreement in respect of the development of the Property after 9th December 1996; and

2. All documents relating to records of receipts for payments made by the Purchaser/New Crompton International Limited ("NCIL") e.g. copies of bank deposits, transfers, and cheques etc. made by the Purchaser/NCIL and paid to :-

i) Rita Fu and/or Tom Ip's personal accounts including bank statements and passbooks of bank accounts maintained and controlled by 1st and 2nd Defendants from June 1996 onwards until final payment for the sale of the shares of LWDL; and

ii) LWDL and Oxometric."

27. It is abundantly clear that the amount of the profit or loss of the second partnership was something that required investigation although the plaintiffs claimed a specific sum in the alternative. It was not a specific sum of money due and payable under or by virtue of a contract. It was not a liquidated demand and judgment should not have been entered for the said sum of $24,641,460.63. In my view, the judgment entered was irregular.

28. As to the second ground, Mr. Bell submitted that the 'unless order' was at the very least substantially complied with by the 1st defendant's affirmation made and filed on 20 November 2001. He pointed out that there were set out in that affirmation 73 documents which were in the defendants' possession, custody or power and which fell within para. 1 of the Schedule to the order for specific discovery made by Master Au-Yeung. There were also set out a further 13 documents which fell within para. 2 of the said Schedule.

27. On the face of the 'unless order' it did not appear that the affirmation of 20th November 2001 was placed before Master B. Kwan on 23 November 2002. It is, however, clear that she must have known of the existence of such an affirmation as it was mentioned in the letter of 22 November 2001 from the defendants' former solicitors which was copied to the clerk to the Master. Whether the Master had read the said affirmation or whether the plaintiffs' solicitors referred to it at that hearing is unclear.

29. Mr. Bell relied on Reiss v. Woolf [1952] 2 Q.B. 557. In that case there was an 'unless order' made for the delivery of further and better particulars of the defence by a specified time and date and that in default thereof two paragraphs of the defence should be struck out. The defendant delivered further and better particulars but it was contended that they were not a full compliance with the order. It was held that the order was a time order and particulars having been delivered within the stipulated period there had been no default and that the two paragraphs of the defence were not automatically struck out.

30. Somervell L.J. at page 559 set out what was decided by the judge, Devlin J. (as he then was), and said that it also expressed his own opinion. He said :

“ [The judge] referred to a passage from the judgment of Greene L.J. in Abalian v. Innous. ( That was an appeal dealing with the dismissing of an action. I agree with the judge that the same principle applies to an order striking out what are, or may be, the material paragraphs in the defence. The court in that case came to the conclusion that such orders must be absolutely and perfectly precise in their terms and, unless they were so, they were inoperative. Devlin J., applying that principle said this :

" If 'default' means default in the sufficiency of one or more of the answers I should not consider that the event was defined with precision; whether or not it had taken place might be the subject of a genuine conflict of opinion which could only be resolved by further adjudication. If I thought this to be the right construction of the order I should follow Abalian v. Innous ¹ and treat it as inoperative. The order can conform with the principle in that case only if it is treated as an order that is dealing with the time of compliance rather than with the mode of compliance. The order does fix a time very precisely, and I think it can and should fairly be construed as a time order. So construed , 'default' refers to default in the delivery of a document within the specified time. I do not, of course, mean that any document with writing on it will do. It must be a document made in good faith and which can fairly be entitled 'particulars'. It must not be illusory; that is the word used by Mr. Bankes in argument in Davey v. Bentinck ² . That is the test, in my judgment, and not, as the plaintiff contends, whether each demand for particulars has been substantially met. Applying that test, I think there has been no default." "

31. Somervell L.J. said also at page 560 that if a document was delivered about which the argument would be "Is it illusory?" then he thought that it might be the subject of a further application rather than an automatic striking out of the paragraphs.

32. The other two members of the Court of Appeal agreed with the judgment of Somervell L.J.

33. Mr. Thomson referred me to the English Court of Appeal's decision in QPS Consultants Ltd. v. Kruger Tissue (Manufacturing) Ltd. (unreported 10 September 1999) where the view was expressed that the position now is very different to that obtaining at the time of Reiss v. Woolf. Mr. Bell correctly pointed out, however, that the position in Hong Kong is clear as the Hong Kong Court of Appeal has applied Reiss v. Woolf. In Ka Wah Bank Ltd. v. Low Chung-song and another [1988] HKLR 451 at page 460 Fuad J.A. said :

“ I think that Reiss v. Woolf demonstrates that in all the circumstances the Bank was right to make the further application it did rather than attempting to treat the defence as having been struck out for failure to comply with the "unless" order and seeking to enter judgment in default of defence."

34. I accept Mr. Bell's submissions. I am of the view that the "unless order" was a time order. The plaintiffs' position is that there was not a full compliance with the order for specific discovery. The defendants' position is that full compliance has been made or at the very least there has been substantial compliance. In my view, it cannot reasonably be said that the discovery made by the 1st defendant by his affirmation of 20 November 2001 was illusory. There was a genuine conflict of opinion which could only be resolved by further adjudication on an application. The plaintiffs ought not to have entered judgment on an ex parte basis as was done here but should have taken out an inter partes application. I observe that even in the ex parte application by the 2nd affirmation of Chin Pak Hing at paragraph 5 he states that the affirmation of 20th November 2001 was "incomplete with vital documents missing". This was insufficient as the allegation was wholly unparticularised at the time of the entering of the judgment.

35. In all the circumstances I am satisfied that the entry of the judgment was irregular and that in the exercise of my discretion the judgment should be set aside. I do not think that it is appropriate in the circumstances to vary the judgment to one for an account and for damages to be assessed as was submitted by Mr. Thomson.

36. Mr. Thomson also submitted that the 2nd defendant failed to comply with the 'unless order' as only one affirmation was made and filed by the 1st defendant on 20 November 2001. As she failed to make and file an affidavit or affirmation it was submitted that judgment was correctly entered against the 2nd defendant.

37. The order for specific discovery made by Master Au-Yeung as affirmed by Suffiad J. required the 1st and 2nd defendants to "file an affidavit". By paragraph 2 of the affirmation of 20 November 2001 the 1st defendant said that the affirmation was made and filed in pursuance of the order for specific discovery for himself and also on behalf of the 2nd defendant who had duly authorized him to do so.

38. Mr. Thomson submitted that the 2nd defendant ought to have filed her own affirmation. He relied on Clauss and another v. Pir [1987] 2 All E R 752 where it was held that the requirement that a party should serve his list of documents verified by affidavit was not something that could be delegated. It required the defendant to do something personally which could not be done by an attorney.

39. Mr. Bell submitted that the order for specific discovery was at the very least ambiguous in that it ordered "an affidavit" to be filed by the 1st and 2nd defendants.

40. The verification of documents by affidavit is a duty that is personal to a party in an action and cannot be delegated (Clauss and another v. Pir [1987] 2 All ER 752). That being so it must have been intended that each of the defendants should file an affidavit or affirmation giving the specific discovery of documents ordered. That is the true meaning of the order. As a matter of construction of the order for specific discovery I do not think that it was an ambiguous order.

41. I accept Mr. Thomson's submission that the 2nd defendant should have made and filed her own affidavit or affirmation giving the specific discovery of the documents ordered. As she has failed to comply with the 'unless order' the plaintiffs were entitled to enter judgment against her. But, as I have found, the judgment that was entered was irregular as the plaintiffs entered judgment for the specific sum of HK$24,641,460.63 and it should be set aside.

42. In my view there was, however, no intentional or contumelious failure by the 2nd defendant to comply with the 'unless order'. The defendants' former solicitors obviously took the view that the 1st defendant's affirmation of 20 November 2001 was in compliance with the order for specific discovery. They advised the defendants that by making and serving the said affirmation the defendants would have duly complied with the 'unless order' (para. 4 of the affirmation of the 1st defendant made on 27 February 2002). That was a mistake made by their former solicitors. The mistake of a party's solicitors should not be visited upon him if that could be avoided without injustice to the other party (Chiu Butt York v. Chiu Kwok Lim [1980] HKLR 459, Tan Eddy Tansil v.PT Bank Pembangunan Indonesia (Persero) [1996] 1 HKC 231).

43. It seems to me that although the 2nd defendant was in breach of the 'unless order' by failing to make and file her own affidavit or affirmation and as such failure was not intentional or contumelious, I ought to extend the time for her to make and file her own affidavit or affirmation in compliance with the order for specific discovery. I am prepared to extend the time for her to comply to 21 days from to-day.

44. In the circumstances the appeal is allowed and the order of Master B. Kwan made on 12 September 2002 dismissing the defendants' application to set aside the judgment with costs to the plaintiffs is set aside. I make an order that the judgment dated 30 November 2001 which was sealed and filed on 21 January 2002 be set aside.

45. I also make an order against the 2nd defendant that unless she does by 4 p.m. on 13 January 2003 file an affidavit or affirmation stating whether the documents or class of documents specified in the Schedule to the order for specific discovery of documents made by Master Au-Yeung dated 21 September 2001 are or have at any time been in her possession, custody or power and if the same or any of them having at any time been, be not now in her possession, custody or power, stating when she parted with the same and what has become of the same, her defence be struck out and her counterclaim be dismissed and judgment be entered for the plaintiffs against the 2nd defendant.

46. As the judgment has been set aside I also make an order nisi that costs of the hearing before Master B. Kwan on 12 September 2002 and of the appeal before me be costs to the defendants in any event.

1 [1936] 2 All ER 884, 888

2 [1893] 1 QB 185, 186