READY SET GOAL LTD (IN LIQUIDATION) AND ANOTHER v. KAY-EL (HONG KONG) LTD

HCA 223/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 223 OF 2013

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D E C I S I O N

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THE APPLICATION

1. This is the plaintiffs’ application for discovery pursuant to O.24, rr. 3 & 7 RHC for the defendant to make specific discovery by :

a.  serving an affidavit stating whether it has or has at any time had in its possession, custody or power any documents in the classes specified in the Schedule attached to the summons and if the documents or any of them have been but are not now in possession, custody or power, stating when it parted with the same and what has become of the same;

b.  inspection by the plaintiffs of those documents;

c.  filing and serving a further and better list of documents relating to the classes of documents in the Schedule; and/or

d.  making an affidavit verifying the list of documents filed by the defendant.

2. The plaintiffs submit that they would also rely upon rule 10 as the defendant has, in the Amended Defence at paragraphs 57 and 58 agreed to compile and produce and disclose such accounts and documents to the 1^st plaintiff insofar as the defendant is able to do so.  This will not prevent the defendant from arguing its case today.

3. There are six categories of document in the Schedule.  Category one is agreed by the defendant.  The disputed categories are:

Category 2:   the underlying documents relating to the entries in the defendant’s accounting ledgers regarding KLGZ, Inside Kay-El LLC, Premier and VHR Investments Limited in respect of the iGoal business, and the annual reports of KLHK/REP;

Category 3:   contractual documents and correspondence relating to orders, price, negotiations, quality control, payment, title, defects and rework costs between the defendant, the PRC factories and Global Air relating to iGoal business;

Category 4: documents relating to the finance facilities allegedly provided under the MOU referred to in paragraph 33.2.5 of the Amended Defence, underlying documents for the trust receipt and loans made in connection with iGoal business including loans to Global Air;

Category 5: records of (a) quality control records and inspection, including procedure manual, inspection reports, production records and inspection records; and (b) the technical changes or improvements made to the iGoals; and

Category 6: emails referred to in document D330 and bank statements corresponding to defendant’s ledgers.

4. In gist, the defendant opposes this application on the ground that the plaintiffs intend to fish for further materials in a desperate attempt to rectify the defective case they have pleaded.”[1]  These grounds will be examined below.

FACTUAL BACKGROUND

5. This matter had come before me on the plaintiffs’ application for leave to adduce expert evidence and I had given my Decision on 18 November 2014.  I shall refer to the factual background as set out in my previous Decision, supplemented by the factual issues as raised by the defendant in the written submissions.

6. Mr. Thomas Caswell, a director and shareholder of the 1^st plaintiff, was the inventor of a portable inflatable goal known as the “iGoal”.

7. Between August and November 2006 the 1^st plaintiff and the defendant had orally agreed (“the Agency Agreement”) that the defendant was appointed agent of the 1^st plaintiff for the purposes of, inter alia, identifying potentially suitable manufacturers of the iGoal and ensuring that the manufacturer had suitable quality control and other processes in place, so as to ensure that the iGoals were manufactured satisfactorily.  The defendant would receive a commission of 10% of the value of the orders placed by the 1^st plaintiff.

8. The 1^st plaintiff had purchased 30,000 iGoals under two sales contracts.  The 1^st plaintiff alleged that 60% of the goods under the respective sales contracts were found defective.  The defects of the iGoals under the first sales contract are that the iGoals were poorly assembled and air leaked from the plastic joints at the corners and the handle on the pumps supplied as part of the iGoal were weak or had fractures and they snapped during normal usage.  The defects of the iGoals under the second contract are that there were leakages at the corners by reason of excessive compression in the manufacturing causing the plastic to crack and on certain of the iGoals, the nets were fitted either too tightly or too loosely.

9. The 1^st plaintiff alleged that the defects were caused by breach by the defendant of the Agency Agreement for failing to take reasonable steps to ensure good quality of the iGoals manufactured by the manufacturer and to ensure that the manufacturer had the suitable quality control procedures for good quality in accordance with the 1^st plaintiff’s requirements.

10. Alternatively, the 1^st plaintiff pleaded that it purchased the iGoals from the defendant direct and the defendant had been in breach of the implied terms of merchantable quality for the iGoals under section 16 of the Sale of Goods Ordinance, Cap. 26.

11. The defendant denies liability on the grounds that firstly, it made no admission to the defects; it was informed that only some of the products had defects; secondly, it was only responsible to cause the manufacturer as chosen by the 1^st plaintiff to manufacture the iGoals, following the directions of the 1^st plaintiff or Mr. Caswell.  Since Mr. Caswell was responsible to test and approve the quality of the iGoals, the defendant is not liable for the defects as identified.  The defendant also denied that it was the principal seller of the iGoal products.[2]

12. The plaintiffs also allege that the defendant (as the plaintiffs’ agent) failed to identify a manufacturer who could produce the iGoal products at the “best price reasonably obtainable”[3].

13. The plaintiffs also plead that the Defendant was in a position of conflict in that it had a financial interest in the manufacturer in Mainland China and has made secret profit from its position as the 1^st plaintiff’s agent[4].

14. The defendant denies all these allegations.[5]

The issues in dispute

15. The plaintiffs have identified the issues in dispute as whether the defendant

“(a) was a seller of (defective) iGoals to the 1^st Plaintiff, or alternatively acted as agent for the 1^st Plaintiff in respect of those sales contracts (Paragraphs 15 to 34 of the SOC [8-13];

(b) breached its agency duties to the 1^st Plaintiff, in particular, by failing to secure the reasonably best possible prices for iGoals and ensuring adequate quality control during the iGoal manufacturing process, (Paragraphs 35 to 38 of the SOC [13-14]);

(c) had financial interests which conflicted with its fiduciary duties (as agent) to the 1^st Plaintiff (Paragaphs 39 to 41 of the SOC [15-16]; and

(d) made secret profits from its agency for the 1^st Plaintiff (Paragaphs 39 to 41 of the SOC [15-16]).”[6]

16. The defendant has no quarrel with the plaintiffs over the above issues in dispute.  It reminds this Court that in the context of discovery, the relevance of an issue could not be dictated by a party unilaterally placing it in its pleadings (see Allington Investments Corp & Ors v First Pacific Bancshares Holdings Ltd & Anor [1995] 2 HKC 139, 144G-H; Chinacast Education Corporation & Ors v Chan Tze Ngon [2014] 5 HKC 277, 298D para. 40c).  In Allington the Court of Appeal had held: “Even if the opposing party has failed to apply to strike out an irrelevant allegation in the pleadings of the other side, he is not barred from taking the point in an application for specific discovery that the allegation made in the pleadings is irrelevant to the subject matter of the action and ought to be disregarded for the purpose of discovery.  The court is certainly not bound to take account of any immaterial or irrelevant averment of fact improperly inserted into the pleadings by a party.”  Hence, in the present case, the substance of the pleaded issues has to be examined.[7]

17. The defendant also emphasizes that the scope of the proposed discovery is too wide and not precise, referring to Fuji Photo Film Co Ltd v Carr’s Paper Ltd [1989] RPC 713, 715, lines 20-35; Re Estate of Ng Chan Wah, deceased, (unrep. HCAP 5/2003, Chu J (as she then was), 5 March 2003).  On this ground alone, as the defendant submits, this application should be dismissed.[8]

18. Finally, the defendant submits that this Court should give effect to the underlying objectives of the rules and procedures and has a residual discretion to define the scope of discovery on the basis of necessity and proportionality (see Billion Lead Investment Limited v Union Joyce Limited, HCMP 2145/2011, unrep., 14 December 2012, Mimmie Chan J, para. 16 and Man Mi Sang v Man Shek Tong, unrep., HCA 881/2012, 24 October 2014, Registrar Lung).

19. The plaintiffs have no dispute with the above legal principles applicable to this application. Bearing in mind of those legal principles, I shall now discuss the categories of documents in dispute in this application.

DISCUSSION

20. It is trite law that the burden is on the plaintiffs to make out a prima facie case:

(a)  that there is in existence a specified document or class of documents;

(b)  that the party against whom the order is sought has or had the document in his possession, custody or power;

(c)  that the document or class of documents relates to a matter in question in the action; and

(d)  that discovery thereof is necessary either for disposing fairly of the cause or matter or for saving costs.

See paragraph 11 of Deak and Company (Far East) Ltd. v N.M. Rothschild and Sons Limited & Others CA [1981] HKC 78

Category 2

21. The defendant opposes this category on the following grounds[9]:

a.  The plaintiffs have not justified their relevance and necessity;

b.  On the allegation of conflict, the plaintiff’s case is based upon “a most obscure and empty allegation that D “had some financial interest in the factory” and made “secret profits from its position as [P1’s agent]” without any particulars at all in support (see SOC, para. 39 [A/15]).”

c.  It is a fishing expedition as the facts pleaded in §40 of the Statement of Claim do not give rise of any inference to be drawn for secret profit;

d.  The names of the companies were not pleaded in the Statement of Claim; and

e.  Plaintiffs ask for all “the underlying documents relating to the entries in the Defendant’s accounting ledgers” in respect of those companies without identifying the proper scope of documents sought.

22. It must be right that the court is not bound by the irrelevant reference in the pleadings and can refuse to make an order of discovery.  Although the defendant has not applied to strike out the plaintiffs’ allegation, which is irrelevant to the main issue, the court has the discretion not to order discovery.  Allington Investments Corp & Ors.

23. However, this matter has developed to a stage where not only the impugned pleadings had not been struck out, the defendant had provided ledgers, which made reference to these companies.  The principles in Peruvian Guano case will come into play. It is difficult to say that the exercise is fishing because the defendant had prepared the ledgers, making reference to the companies.  The plaintiffs have, in Mr. Rose’s 2^nd affidavit, said that the defendant’s accounting ledgers related to the 1^st plaintiff[10], which was not refuted by the defendant.[11]

24. As to the proper scope of documents sought, they are related to the 1^st plaintiff.  As such, the scope is defined and is not oppressive.

25. This category should be allowed.

Category 3

26. The defendant complains that it had already supplied many documents to the plaintiffs relating to Global Air’s involvement.[12]  The plaintiffs have also explained the reasons why they are suspicious of Global Air’s involvement in Mr. Rose’s 2^nd affidavit.[13]  Those reasons are supportive of the plaintiffs’ allegations of the defendant having been in breach of fiduciary duty as an agent for the 1^st plaintiff.  It is true that there is no definition of “the best price” in the pleadings or the affidavit.  But in principle, the agent is under a duty to obtain the best price for its principal.  What is the best price must depend on the market condition or circumstances relevant to the product or commercial reality prevalent at the material time.  It requires the defendant to carry out certain consideration of those commercial circumstances before coming to a decision of the fair price for the product.  The plaintiffs are not asking for documents relating to the potential manufacturers.  This term is not stated in category 3.  As to the complaint that the name of Global Air was not mentioned in the pleadings, it has to be borne in mind that the court does not apply the legal principles in a mechanistic manner.  Rather, it applies the legal principles in accordance with the different circumstances relating to the matters in dispute for the administration of justice between the parties in accordance with the authorities.

27. Relevance must be defined “by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and defence to it in the broadest sense and not to the detailed particulars of either claim or defence.” by Deputy High Court Judge H Wong SC in Chan Hung v Yung Kwong Chung (unrep. HCA 216 & 217/2004) At paragraph 27 of the judgment, the Deputy Judge further said: “With respect, I agree with Colman J.  For the purpose of discovery, the relevance of a document should not be solely tested against the detailed particulars pleaded by the parties.  It is the pleaded case of the parties in the broad sense that one should be concerned with.  A document may be generally relevant to a party’s case as pleaded (many so-called “background documents” are of this nature) although its relevance cannot be specifically pinned to some pleaded particulars.  For discovery purpose, the pleadings have to be looked at broadly.”, which was adopted in Billion Lead Investment Ltd.

28. Adopting the above approach, it is difficult to say that the plaintiffs are oppressive in asking for the documents relating to Global Air in view of the plaintiff’s explanation mentioned above.

29. The defendant argues that it had disclosed the relevant documents.  However, it can be observed that the documents it mentioned in the affidavit of Mr. Mahtani do not match all the documents in category 3.  The defendant is required to make an affidavit whether it had disclosed all those documents; or if any of those documents are not in its possession, custody or power, it can put the facts in his affidavit.

30. This category is relevant for the fair disposal of the issues in disputes between the parties and they should be disclosed by the defendant.

Category 4

31. The defendant agrees to either disclose the documents relating to the finance facilities provided under the MOU referred to in paragraph 33.2.5 of the Amended Defence by way of a supplemental list of documents or make an affirmation confirming if such documents are in the possession, custody or power of it.  The dispute is therefore only over all “underlying documents” for the trust receipt and loans provided.  The defendant argues that first, the plaintiffs’ case on agency is wholly inconsistent with their case that the defendant was the direct seller of the products; second, it is incumbent upon the plaintiffs to establish that the alleged trust receipts and loans related to the products in question.[14]

32. On the issue of pleadings, it seems that the plaintiffs are quite entitled to plead the alternative claims in the Statement of Claim.  See O.18, r.12A.  If the defendant intends to take issue on the pleadings, this issue should have been raised before discovery.  On the face of it, it seems that it is inconsistent for the plaintiffs to plead that the defendant was, at the material times, an agent on the one hand, and a seller of the iGoals to them on the other.

33. However, one must look at the facts of this matter as pleaded in the pleadings. The plaintiffs pleaded that the defendant was their agent.  But they also pleaded in paragraph 1 of the Statement of Claim that the defendant “KL” at all material times carried on business as a supplier of various goods, and also as an agent for persons wishing to acquire goods. (emphasis added)  To this pleaded issue, the defendant in its Amended Defence did not specifically deny the alleged capacities.[15]

34. The plaintiffs pleaded in paragraph 19 of the Statement of Claim that the defendant sold the iGoals to the plaintiffs in the alternative claim.  The defendant made a general denial of paragraph 19 in its Amended Defence.  See paragraph 24.  By paragraph 30 of the Statement of Claim, the plaintiffs alleged that the defendant sold the iGoals to the 1^st plaintiff in the course of business, to which, the defendant denied specifically that it had done so in the course of its business. See paragraph 36.  However, it further pleaded defence to the plaintiffs’ alternative claim as if it were the seller, relying on s.16(3) of the Sale of Goods Ordinance, an alternative defence to the alternative claim.[16]

35. It is therefore apparent that the defendant did have a dual capacity in its business, viz. as a dealer and an agent.  Whether the defendant at the material times acted as pure agent for the 1^st plaintiff or alternatively as the seller of the iGoals as alleged by the plaintiffs remains a live issue for the trial.

36. The plaintiffs explain the reasons for the trust receipts financing relating to the sale and purchase of iGoals and the underlying documents in Mr. Rose’s 2^nd affidavit.[17]  The defendant’s affidavit in response [129-130] at paragraphs 35-38 has not been able to say why the plaintiffs’ concern that the trust receipts would throw light on the true ownership of the iGoals is unnecessary.  This morning, I have been shown samples of those trust receipts, which do not bear the relationship of the defendant with the 1^st plaintiff, nor do they show the capacity of the defendant in relation to the goods pledged to the banks.  It is, of course, possible that the defendant allowed the bank to take title of the goods as the agent for the 1^st plaintiff.  However, it is uncertain whether the defendant had to disclose its capacity as the agent for the 1^st plaintiff and that it had to disclose its principal in the trust receipts.  The terms of the trust receipts will be evidence to show the true position of the defendant in relation to the iGoals.  Since the capacity of the defendant in the sale of the iGoals to the 1^st plaintiff is a live issue, the trust receipts and the underlying documents appear to be required for a fair trial of this issue.  The defendant had already disclosed the trust receipt loan advices to it from BNP Paribas and UCO bank for the payment of invoices and bills of exchange,[18] it will not be oppressive for the defendant to disclose the underlying documents in support of the loans for the iGoals only.

37. This category is allowed.

Category 5

38. The defendant does not dispute the existence of these records but has filed evidence that:-

“ (1) All the processes regarding quality control and inspection were conducted at the PRC factories and all the records were at all material times and are still kept there. The documents are therefore not in the possession, custody or power of D (see Mahtani’s 2^nd Aff, para. 39 [A/132]).

(2) D is not in possession, custody or power of any documents concerning technical changes or improvements made to the iGoal products save and except those sent by Paul Wang to P1 and D (which have all been disclosed) (see Mahtani’s 2^nd Aff, para. 40 [A/133]).”[19]

39. I tend to agree with the defendant that the plaintiffs’ assertion that the defendant may be in de facto control of the Second Factory by reference to the correspondence and the court documents it had recently obtained from the Second Factory is speculative in light of the defendant’s affidavit by Mr. Mahtani that the defendant no longer had the documents.  In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999 Chu J. 24 October 2003) at paragraph 16 said that challenge to the affidavit of documents made under O.24, r.10 could only be made “if it can be shown by admissions in pleadings or the contents of the affidavit itself or documents referred thereto that the affidavit is insufficient: Jones v Monte Video Co. (1880) 5 QBD 556 at 558.”  At §18 of the judgment it was held:

“… …At this interlocutory stage, this affidavit has to be accepted as conclusive, and the petitioners cannot seek to challenge or contradict it.”

DHCJ M. Ng in her Decision in Lee Sai Nam v Li Shu Chung & Ors (unreported, HCA 1711/2009, 10 January 2014), at §§55-57 had added another two factors, viz.(i) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (ii) an apparent exclusion of documents from discovery by a party under a misconception of the case.

In interlocutory proceedings, no mini-trial is necessary.  The court is required to come to a conclusion on the material before it.  Liaoyang Shunfeng Iron and Steel Company Limited (遼陽順鋒鋼鐵有限公司) & Another v Yeung Tsz Wang (楊梓鈜) & Another (unrep. CACV 234/2011 Hartmann JA 14 June 2012 §107).

40. The plaintiffs are unable to show any of the factors as stated in Chu J’s decision.  Mr. Rose for the plaintiffs has, however, referred to the correspondence between himself and Mr. Wang and Mr. Mahtani in relation to the daily production records and the procedures manual.[20]  Mr. Mahtani had dealt with those documents in his 2^nd affidavit.[21]  To resolve such discrepancies, a mini-trial may be necessary, which is not permitted. Liaoyang Shunfeng Iron and Steel Company Limited.

41. The plaintiffs argue that the defendant had not deposed as to when it had parted with the documents required and what had become of them. This has to be on the basis that the defendant had possession, custody or power of those documents.  The defendant has not said it had those documents.  It was given access to the documents when it was necessary to do so.  Mr. Mahtaini’s affidavits have dealt with the documents already.

42. As such, Mr. Mahtani’s affidavit is final. This category is dismissed.

Category 6

43. This category is relatively less controversial.

44. The defendant agrees to disclose the emails referred to in document D330 or make an affirmation to confirm if they are in its possession, power or custody (see Mahtani’s 3^rd Aff, para 6).

45. As confirmed by the defendant, the above should cover the documents specified in paragraph 44 of Mr. Rose’s 2^nd affidavit.

46. Mr. Rose complains that the defendant has not disclosed “all the defendant’s bank statements for the corresponding entries in its accounting ledgers, for example, cheques and remittance advices.[22]

47. The defendant argues that the plaintiffs are under a burden to specify the particular bank statements they need and to establish that such bank statements are relevant to any of the material issues and are necessary.  This must be the position, following the decision of the Court of Appeal in Deak and Company (Far East) Ltd.  The plaintiffs have not been able to tell why all the bank statements are relevant to the issues in dispute.  They fail to narrow down the issues for discovery, which would amount to a fishing exercise. See paragraph 9 of Mariner International Hotels Ltd. v Atlas Ltd. & Another (unreported, HCA10714/1998, 10752/1998 & 10821/1998 Burrell J. 18 January 2002)

48. This category is partly conceded by the defendant.  Other than those conceded, the plaintiffs should also be entitled to those documents as set out in paragraph 44 of Mr. Rose’s 2^nd affidavit.  The rest of this category is dismissed.

CONCLUSION, COSTS AND ORDER

49. As a conclusion, category 1 is conceded, categories 2, 3 and 4 are successful.  Category 5 is dismissed. Category 6 is partly successful as specified under paragraph 46 above.

50. As to the costs of this application, the costs should follow the event, with counsel certificate, to be assessed under O.62, r.9A.  Taking into account of the outcome of this application, the plaintiffs should have 65% of the costs, assessed at $115,000 x 65%=$74,750, to be paid by the defendant to the plaintiffs within 14 days from the date hereof.

51. I shall now make an order in terms as follows:

a.  As per paragraph 49, supra;

b.  Costs of this application be as per paragraph 50, supra.

CASE MANAGEMENT

52. Time for the defendant to comply with the order for discovery be 28 days from the date hereof.

53. Time for the plaintiffs to serve the expert report be extended for 56 days from 20 April 2015 and the time for the defendant to serve the expert report in reply will be extended accordingly.

54. Liberty to apply.

55. The Case Management Conference fixed for 10 June 2015 be varied to a date to be notified by the Registrar to the parties.

56. Costs of this case management be in the course. (15 min.)