KHARMA GREATER CHINA LTD v. KHARMA INTERNATIONAL B.V.

HCA 545/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 545 OF 2013

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D E C I S I O N

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The applications

1.  By Summons dated 7 December 2016, Kharma International B.V. (“D”) makes this application to:

(a)  restore its Counterclaim after it was provisionally struck out by this Court by reason of D’s failure to appear at the Case Management Conference (“CMC”) on 7 September 2016 (the “Reinstatement Application”); and

(b)  extend the time for D to serve its provisional expert report for another 35 days (the “Extension of Time Application”).

2.  The applications are contested by Kharma Greater China Limited (“P”).  The parties are legally represented.[1]

3.  P’s primary position is that both applications should be dismissed.  Alternatively, the counterclaim should only be restored with the following conditions imposed:

(a)  security in the sum of HK$589,125 be paid into Court within 28 days; and

(b)  D should serve its provisional expert report subject to an unless order.

The background

4.  The factual background below is not disputed.

5.  Pursuant to an Exclusive Distributorship Agreement (the “Agreement”), D appointed P as the exclusive distributor for the sale of Kharma Products[2] in the PRC, Hong Kong, Macau, Cambodia, Vietnam and Laos for a period of 5 years from 1 January 2010[3].

6.  P commenced this action against D for a breach of the Agreement by: -

(a)  wrongfully terminated the Agreement and replaced P as the exclusive distributor in or about early March 2013;[4]

(b)  supplying defective Midigrand Speakers to P[5]; and

(c)  being late in the delivery of Kharma Products and/or simply failing or refusing to supply and/or deliver the same ordered by P[6].

7.  D, on the other hand, alleges that P was in breach of the Agreement by: -

(a)  promoting some alleged Inferior Products which were said to be confusingly similar in appearance to Kharma Products and infringing D’s Trade Marks[7];

(b)  manufacturing and/or promoting and/or offering for sale and/or supplying headphones and other products under the brand name of “K-Acoustic”[8]; and

(c)  unreasonably withholding orders to be placed with D[9].

8.  D contends that it was entitled to terminate the Agreement and counterclaims against P for:

(a)  breach of the Agreement[10];

(b)  infringing the use of D’s Trade Marks[11]; and

(c)  passing off[12].

The relevant legal principles

9.  Both parties refer to the then Registrar Q. Au‑Yeung’s decision on this issue: World Chinese Business Investment Foundation & Ors v Shine Rainbow Marketing Ltd & Ors [2010] 2 HKC 294:

(a)  The applicant has to show good reasons as to why it failed to attend the CMC. This can include mistake/oversight of a solicitor [§12].

(b)  The applicant has to satisfy the Court that it ought to exercise its discretion to restore the claim. This is a wide enquiry, and can cover issues such as merits and history of compliance [§§17-21].

(c)  If the decision is to restore, whether or not conditions should be imposed. This can include security for costs [§§22-24].

10.  D further relies upon the following Decisions:

(a)  Wishing Star Ltd v Etrema Co Ltd (unrep., HCA 656/2010, 29 January 2014) at §53, where consideration is given to the fact “There was no evidence that P’s absence was intentional or contumelious.”

(b)  Wong Kar Gee Mimi v Applied Development Holdings Ltd [2016] 1 HKC 350 at §30 where the court found “The objective circumstances impress me that Wong’s inadvertence did not originate from her disregard of the proceedings”

(c)  Leung Kwai Ying v Luk Man Yeung (unrep., DCCJ 1104/2013, 9 October 2015) where the court found that the application was taken out of time.  However, the defendant had raised the same issues in the Defence as he had pleaded in the Counterclaim.  To strike out the Counterclaim would not prevent the same issues to be adjudicated in the main action. As such, the learned Deputy District Court Judge said at paragraph 36 “It appears that it will not be conducive to the administration of justice to bar the defendant from maintaining his Counterclaim.”

(d)  Lei Tao v Yenhon (HK) Display Company Limtied & others (unrep., HCA 1197/2012, 2 September 2016) where the court found the plaintiff had failed to make out good reasons for his absence and why the court should restore his claim. [29].  However, the learned Deputy High Court Judge did restore his claim on the reasons that the same issues would be heard in the 1^st defendant’s petition for winding up the plaintiff, raising the same issues.  He found “…that the interest of the administration of justice would, in the circumstances, be served by allowing the plaintiff to restore his claim.” [35]

Discussion – the Reinstatement Application

11.  It is quite clear from the Decisions of the above cases that the courts are abiding by Order 1A of the Rule of the High Court.  Order 1A, rule 2 provides:

“(1)  The Court shall seek to give effect to the underlying objectives of these rules when it—

(a)  exercises any of its powers (whether under its inherent jurisdiction or given to it by these rules or otherwise); or

(b)  interprets any of these rules or a practice direction.

(2)  In giving effect to the underlying objectives of these rules, the Court shall always recognize that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.”

12.  P does not dispute that D’s Counterclaim raises the same issues as for his Defence in respect of liability, which has to be dealt with even if the Counterclaim were struck out.  The Counterclaim should not be struck out unless it is clear that the Counterclaim has no merit.

13.  The Court of Appeal in The Real Estate Developers Association of Hong Kong v Building Authority (unrep., HCMP 1746/2014, Lam VP, 14 May 2015) adopted the decision of Lord Neuburger of the Supreme Court in HRH Prince Abdulaziz Bin Mishal Bin Abdulaziz Al Saud v Apex Global Management Ltd [2014] UKSC 64 that in the application for relief from any sanction for failure to comply with the Order, the court should not hear the merits on the matter unless it is so clear that there is no real answer to it. [18]

14.  From P’s written submissions, I do not find that this is a case where D plainly has no real answer to P’s claims.  The factual disputes as to whether the parties were in breach of the contract and the issue of passing off D’s goods must be resolved by the trial judge.

Discussion – condition of security for costs

15.  As to whether this Court should accept P’s proposition on imposing the condition of ordering D to pay $589,125, being the half amount for security for costs of the entire action, P submits that this is proper to do so, referring to: Hong Kong Civil Court Practice Issue 79 (February 2017) at [8880] pp.557-558.  I shall quote the relevant passage:

“On granting an application to restore a claim or counterclaim which has been provisionally struck out, the court is expressly empowered to impose ‘such conditions as it thinks fit’ … …Unless the non-appearance of the party which resulted in the provisional striking out it entirely excusable (for example, where caused by accident or illness), it is likely that the defaulting party will face an adverse (possibly enhanced) costs order, and perhaps an order for payment of money into court under Order 1B(3), as a condition of the claim or counterclaim being restored.”

16.  Order 25, r. 1C(4) RHC is the provision for imposing condition as the court thinks fit for restoring the Counterclaim.  The question is: what is the condition that the court should think fit to impose as condition for restoring the Counterclaim in this case?

17.  Here, P proposes half the amount for the security for costs, relying upon the following factors:

(a)  the continued delay caused by D’s contumelious default;

(b)  D is an overseas company;

(c)  The delay has also unnecessarily escalated the legal costs which P has to incur.  An example is that by failing to instruct a Hong Kong firm of solicitors to replace LL swiftly, P had to incur extra costs to serve relevant papers on D outside jurisdiction;

(d)  It is estimated that HK$589,125 would have to be incurred to defend the counterclaim up to and including the trial should the same be reinstated.  In particular, P would have to deal with the quantum of the counterclaim;

(e)  Insofar as D seeks to suggest the sum of HK$589,125 is unreasonable and excessive, security would be provided by payment into court and if more is paid into court than P is finally entitled to, the balance would be refunded to D;

(f)  The proceedings have already progressed to the exchange of witness statements.

18.  D opposes this proposal by saying that it is clear that the main issues within the Counterclaim would in any event have to be dealt with by P in establishing its Claim.  As such, this is not an appropriate case for ordering security for costs, and at the very least not 50% of total costs. Allowing the Counterclaim to be run will not materially prejudice P from a costs perspective.  In any event, D says that the quantum is excessive.

19.  In Bank of America National Trusts and Savings Association v Chai Yen [1980] 1 WLR 350 at p.353D, Lord Lane, delivering the advice of the Privy Council, said that “the essence of any rule of procedure must be fairness”.  The same is true of any rule of practice.

20.  Of all the above authorities cited by the parties, in my view, the court does not impose condition on the defaulting party as penalty or as hindrance to a fair trial of the issues in dispute between the parties.  According to World Chinese Business Investment Foundation & Ors, the court has to consider the merit of the Counterclaim.  If the merits of it is plainly so flimsy that only conditional leave should be given to it to pursue the Defence on condition that money should be paid into court, this is a good case where the court should consider making an order for payment into court for the restoration of the Counterclaim.  Of course, there should be other circumstances that may merit a condition of payment in. However, we shall focus on this case now.

21.  This morning, P has referred me to the authority of Lei Tao, in which the learned Deputy High Court Judge had ordered security for costs as a condition for allowing the plaintiff in that case to restore the claim. P submits that this Court should be guided by that decision. I should point out here that the discretion of a higher court on the special facts of the case should not be binding upon me.  I should be bound by the rationales and the legal principles decided by the higher court.  However, I have to bear in mind consistency in the exercise of the discretion.  I shall distinguish that case from this case for the reasons that first, the court in that case had found that the plaintiff’s non-attendance at the hearing was intentional and contumelious.  Second, the defendant had applied for security for costs before a Master, who had rejected the application. Such application can be considered by the learned Deputy High Court Judge.  When he considered all the circumstances of the matter, including the plaintiff’s conduct, which he was entitled to do, he had made the order as he did.

22.  Here in this case, P had not made any application for security for costs before.  Also, D’s conduct, though there being some delay, should not be classified as intentional and contumelious.

23.  P’s proposal of ordering D to pay half the amount for security for costs is not acceptable to me for the reasons as follows:

(a)  P has not made any application for security for costs under O.23, RHC;

(b)  The issue of whether security for costs should be made should come under the relevant legal principles and circumstances under O.23., which should be supported by affidavit evidence from both parties;

(c)  There is no evidence before this Court for such consideration;

(d)  In my view, it is wrong in principle to circumvent the relevant legal principles under O.23, simply because D has made this application for restoration of the Counterclaim;

(e)  Now D opposes this proposal and has raised the issue of quantum, this Court should not make the order as proposed without proper application and evidence before it.

24.  For the reasons above, I reject P’s proposal.

25.  P has not proposed other condition in the written submissions for my consideration.  In the circumstances, I grant leave to D to restore the Counterclaim without any condition.

Extension of Time Application

26.  On the Extension of Time Application, P agrees to allow D to have 35 days, as requested, to exchange its provisional expert report subject to an unless order.  The question is whether the Court should impose an unless order.  Unless order should not be made without history of non-compliance of the court's orders: §23 of K M Cheung & Co Solicitors (a firm) v Kung Ching (unrep., HCA 831/2011 Le Pichon DHCJ, 26 October 2012).  But "unless order" can be made at the Case Management Conference, without having regard to the history of non-compliance under Practice Direction 5.2 §29; §10 of GTC Industries Ltd & Others v Lee Man Hoi Ocean & Others (unrep., HCA 600/2012, 4 January 2013).

27.  D has no dispute over the procedural chronology as set out in P’s written submissions.  As such, this matter should receive more robust case management to ensure that the proceedings should progress the way they should.  D is obviously the cause for the delay in these proceedings. With the history of delays in the proceedings, I agree that an unless order is warranted.  D has no strong objection to this proposal.  So I order.

Costs and order

28.  As to the costs of this application, including the summons and the hearing today, P asks for costs for this application including the costs for today’s hearing, relying upon the authorities of World Chinese Business Investment Foundation [27], Wishing Star Ltd. [70] and Lei Tao [43(6)].  D asks this Court to consider the costs order made by Master Lo in Wong Kar Gee Mimi where she ordered the requesting party to pay all the costs up to the final preparation for the application and thereafter, the costs were awarded to the requesting party as she had succeeded her application for reinstating her claim.  D submits that this is akin to the application for amendment of the pleadings where the requesting party should bear the costs for the application, but the opposing party should bear the costs for losing the argument.

29.  Costs are very much at the discretion of the court, taking into consideration of all the circumstances of the case.  In the case of an application for amendment, which the law does not require any affidavit evidence in support except for allegations of fraud or defamation, which demonstrates that such application can be quite plain and easily seen from the amendments themselves.  See 20/8/4 of the White Book 2017.  For this application, it is clearly incumbent upon D to set out the reasons on affidavit to explain his reasons for his absence at the Case Management Conference in September 2016.  P is quite entitled to hold D to give the reasons and argue its case before the court.  Absence at the Case Management Conference is, under the relevant statutory provisions, a very serious matter indeed.  The Court should not pass a wrong message that such a misconduct is equivalent to an application for amendment of the pleadings, which is, by the conduct of the applicant, neutral without any evidence of abuse.

30.  For the reasons above, I adopt the majority decisions that the costs of this application, including the costs for today (with counsel’s certificate) be to P, to be assessed summarily under O.62, r.9A RHC to be $130,000 to be paid by D to P within 14 days from the date hereof.

31.  I shall make an order in terms as follows:

(a)  The Reinstatement Application is granted without any condition;

(b)  Unless D shall exchange the provisional expert report with P by 4:00 p.m. on 21 April 2017, D shall be debarred from adducing expert evidence at the trial thereupon.  P shall be entitled to serve the expert report on D forthwith; and

(c)  Costs of this application are as per paragraph 30 supra.

32.  For the case management, the next hearing should be a Case Management Summons hearing as the parties are not certain when to take out an application for expert evidence on quantum of damages and there would be an application for a split trial for passing-off claims.  The next Case Management Summons hearing is at 10:00 a.m. on 16 October 2017.