LAL IMP. EXP. S.A. v. UTANIKO (HONG KONG) LTD

DCCJ 1907/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1907 OF 2010

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BETWEEN

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R U L I N G

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1.  There is before me a summons taken out by Utaniko (Hong Kong) Limited, the defendant, seeking security for costs on the basis that the plaintiff, Lal Import Export SA, a company incorporated in Paraguay, is an overseas corporation.

Background

2.  Much of the evidence in the present application is not in dispute.  The plaintiff on 1st June 2010 filed a statement of claim.  It was a short two-page document claiming US$65,000 in damages.  The defendant filed its defence on 22 July 2010.  Again it was a fairly short document, a four-page defence.

3.  On 23rd July 2010, the defendant sought security for costs pursuant to Order 23 of the rules of the District Court.  On 26 August 2010, the plaintiff then applied for summary judgment by way of Order 14 proceedings.  On 17th September 2010, the registrar directed that the application for Order 14 be heard prior to the Order 23 application, and that the Order 23 application be heard immediately after.  

4.  For the purpose of the summary judgment proceedings, three deponents filed affidavit and/or affirmation evidence.  The matter then came before Her Honour Judge H C Wong on 16th December 2010.  The learned judge there delivered an extempore ruling whereby she summarised the issues and her reasons for ordering conditional leave to defend.  She said this:  

“1. The plaintiff asks for summary judgment under Order 14 against the defendant for this sale of goods dispute.

 2. It is not disputed that the plaintiff placed an order for mobile phones to be delivered to Paraguay in South America where the plaintiff had fully paid for after the defendant issued a commercial invoice addressed to the plaintiff.  The plaintiff’s customers did not receive the goods ordered.  In fact, they were never delivered by the defendant. 

3. The defence raised was that the order placed had been revised. Furthermore, the payment made by the plaintiff was applied and used against payment for another order for goods that the plaintiff’s agent Shadi Farhat had ordered and did not pay for.  It was on Shadi Farhat’s instruction that the money the plaintiff paid to the defendant was diverted and transferred to settle a different order of goods. 

4. The defendant claimed that this was known to the plaintiff and the plaintiff did not disagree with this diversion of fund.  In short, the defendant’s defence is that the plaintiff had an agent who gave a different set of instructions for the payment that the plaintiff sent to the defendant.  As the plaintiff was silent on those new instructions, the defendant went ahead and applied the plaintiff’s payment to settle Shadi Farhat’s goods. 

5. The sale contract between the plaintiff and the defendant was originally a sales order belonging to Shadi Farhat which was transferred to the plaintiff.  The defendant therefore claimed that he had reasons to believe that Shadi Farhat was either the agent for the plaintiff or the plaintiff was the paying agent for Shadi Farhat.  That was the reason the defendant gave for taking the instructions from Shadi Farhat and applying the money the plaintiff sent for goods ordered by the plaintiff to pay for the goods Shadi Farhat had ordered earlier.

6. I find the defendant’s defence shadowy because there were direct communications between the plaintiff and the defendant’s staff, yet many of the emails exchanged between Shadi Farhat, Kaswani and the defendant’s staff were not copied to the plaintiff, from what has been disclosed in the exhibits in the defendant’s affidavit.   On the other hand, there are other areas of fact which the plaintiff failed to explain that led to the full payment for goods which were different from the original order.

7. For this reason, I find that there are triable issues raised.  As I am not trying the case on affidavit at an Order 14 proceeding, I will order the defendant be given conditional leave to defend on the condition the defendant pay the sum claimed by the plaintiff into court within 14 days, failing which the plaintiff will be at liberty to enter judgment against the defendant.”

5.  There was no appeal against that order, and on 30th December of the same year, the monies were duly paid into court.

6.  The security for costs application then came before Deputy District Judge Wilson Chan on 17th March 2011.  There, the learned deputy judge recited some of the matters which were canvassed in Her Honour Judge H C Wong’s judgment.  He further held as follows, paragraph 11 onwards:

“11. It is trite law that on an application for summary judgment, a condition of paying some or all of the money or damages claimed into court, or giving security, is imposed only where there is a good ground in the evidence for believing that the defence set up is a sham defence or the court is prepared very nearly to give judgment for the plaintiff, otherwise unconditional leave to defend would be granted. (see: for example, Hong Kong Civil Procedure 2011, Vol. 1, Practice Note 14/4/16 at page 246)

12. In the present case, there is no appeal from the Order 14 judgment of Her Honour Judge H C Wong.  There is nothing to gainsay the express finding by the learned judge that the defence put forward by the defendant is ‘shadowy.’  Using the language of  Rogers VP in the Sunchase case supra, I cannot approach the defendant’s case on the basis that the defendant has a bona fide defence.  At best, it can only be described as ‘shadowy.’

13. This is similar to the situation in the case of Policyd S A De CV v Kwan Kim Hung trading as King Tai Company, HCA11225/1997 (Judgment dated 9 December 98) where Suffiad J dismissed the defendant’s application for security for costs after he had been granted conditional leave to defend.

14. Having considered all the relevant factors in this case and, in particular, the strength of the plaintiff’s case, in the exercise of my discretion in the matter, I have come to the view that no order for security should be ordered in the case.”

7.  Between that judgment and the application before me today, not too much progress has been made in the overall progress of the litigation although I am told that witness statements have now been exchanged, one witness statement from the plaintiff and one witness statement for the defendant.

The Present Application

8.  The summons before me was issued on 14th August 2012 and the reason which led to the present application, a second application for security for costs is as a result of communication between the plaintiff’s solicitors and the defendant’s solicitors.

9.  On 30th April 2012, the defendant’s solicitors wrote to the plaintiff’s solicitors and at paragraph 2 of their letter dated 30th April stated:

“It has come to our client’s attention from sources in Manaus that your client has ceased trading and is virtually penniless. If this indeed is the case we would like to know how your client intends to finance the further conduct of this litigation. As you are no doubt aware maintenance in champerty are actionable torts as well as criminal acts in Hong Kong. It is our client’s view that this litigation is being maintained by Harry Chan or some other third party who is not involved in the action.”

10.  The reply came on 11th May 2012 where, inter alia, the plaintiff’s solicitors stated:

“We confirm that our client is suffering from problems of cash flow and has difficulty in funding the litigation further. Therefore, a company known as Harry Chan & Company, a longstanding creditor of our client, will provide funds for future conduct of the captioned action.”

Has there been a material change of circumstances ?

11.  The first question which I need to determine is whether I should hear this renewed application for security for costs, bearing in mind that the same has been determined and refused by Deputy Judge Wilson Chan.  The question is therefore whether or not there has been a material change of circumstances.

12.  In the context of security for costs application, whether or not there has been a material change of circumstances, the principles have been helpfully set out in the judgment of Sakhrani J in Goal Setting Consulting Company Limited v Unigraphics Solutions Asia/Pacific Inc. [2006] 3 HKLRD 678 starting at 681C.  The learned judge there refers to Anderson & Anderson v Huang Kuang Yuan & Others [1997] HKLR 1360 where it was stated the:

“...security for costs was ordered on the third application and in the course of the trial. Keith J (as he then was) said at page 1365:

‘First, there had been previous unsuccessful applications for security.  Accordingly, for a subsequent application to be successful, there would have had to be at the very least a material change of circumstances since the previous applications had been dismissed.’”

13.  Sakhrani J further referred to a decision by Sir John Knox in Kristjansson v R Verney & Company & Another [1998] EWCA Civ 1029 at page 8 where it was stated that:

“‘...given the very wide discretion conferred by Order 23 rule 1, I can see no justification for an arbitrary rule that no second application for security can ever properly be made unless the first application was successful, in particular if circumstances have arisen since the initial refusal of security, which place a new complexion on the second application as compared with the first, there is no logical reason for denying the court the right to deal with that different application on its altered facts. There is nothing which I can see in Order 23 rule 1 which can be construed to do that.’

As to what may be considered a sufficient change in circumstances, Sir John Knox said at page 9:

‘It would, in my view, be undesirable to seek to define at all closely what the Rules of the Supreme Court have no doubt quite deliberately left at large in the circumstances in which it would be proper for the court to revisit security for costs after an earlier refusal.  Obviously, there must be a significant and relevant change of circumstances, otherwise there would only be a re-run of an existing scenario and that, for the reasons I have given, is not permissible. But I can see no logical reason for limiting the field of inquiry in any particular manner, not only for the reason that the rule is a very wide one, but also because it is important that the court should not be in any way fettered in considering what circumstances do justify a new approach.”

14.  Mr Wright submitted today that the material change of circumstances was either “the discovery of the plaintiff’s position” or “the plaintiff’s position” itself.  Whereas previously it had been understood that the plaintiff was based overseas and there would be difficulty in enforcing the costs order, now there was a new complexion, namely, that it was possible that the costs would not be recoverable or at least part of the costs would not be recoverable, having regard to the financial situation of the plaintiff.

15.  Mr Raymond Tsui accepted that there had been a change but submitted that it was not material.  What constitutes a material change would of course depend on the facts of each case.  

16.  On the facts of the present case, I am prepared to accept that there has been a material change of circumstances, namely, that either the plaintiff has now become in a precarious financial condition or that if it had been so at the time of the hearing before Deputy Judge Wilson Chan, the defendant has only discovered this fact since the last hearing, and there is nothing before me to suggest that it ought to have been aware of that fact before.  I therefore now deal with whether or not it would be appropriate for me to exercise my discretion on the facts of this case to order security.

Exercise of Discretion

17.  Mr Wright accepted that although there is no inflexible rule or practice that a plaintiff resident abroad will be ordered to give security for costs, on the other hand, as a matter of discretion, it is the usual, ordinary or general rule of practice for the court to require the foreign plaintiff to give security for costs because it is ordinarily just to do so and this is so even though by the contract of the parties, the foreign plaintiff is required to bring the action in the jurisdiction.

18.  I do not understand this principle to be disputed (rightly, by Mr Tsui).  I agree that the fact that the plaintiff is resident abroad is plainly a relevant factor.  Indeed, it is often a weighty one.  One issue which I can dispose of briefly is the question of stifling.  Although it appears to have been suggested at an earlier stage that an order for security would stifle the plaintiff in pursuing this claim, it was now correctly accepted by Mr Tsui that there was no clear such evidence to that effect.  In fact, there is no affidavit evidence by the plaintiff or other evidence on oath to suggest that should an order be made, the plaintiff would be unable to comply with such an order, such that the claim would be ultimately struck out.  This is particularly so in the light of the acceptance by the plaintiff that Messrs Harry Chan & Co. have been and presumably will be funding part of this action.

19.  I should point out that in ordinary circumstances, I would accept that where a funder is funding the legal action of a plaintiff which appears to be impecunious, that would often be a factor, indeed a weighty one in favour of ordering security.  This is fair because one is dealing with funders who are prepared to fund an action in the hope that they would be able to receive directly or indirectly the benefits of an eventual judgment, but if the action is dismissed they would simply walk away. Of course the  funders may be held liable for costs but this would involve further potentially costly and lengthy proceedings which are unattractive.

20.  I should also dispose of a brief argument, albeit an ingenious one, by Mr Tsui, to the effect that the fact that the overseas plaintiff was impecunious should not be a factor which I should have regard to given that this application was brought under Order 23 rather than section 357 of the Companies Ordinance.  It seems to me that showing that the plaintiff is overseas allows the defendant to establish jurisdiction under Order 23.  Once jurisdiction is established, as it is not disputed in this case, it seems to me that the fact that the overseas plaintiff is impecunious is plainly one factor to have had regard to.

Conclusion

21.  I should say that in an ordinary case but for the factor relating to merits, I would have had little difficulty in making an order for security for costs given that the plaintiff is, one, overseas; two, apparently in difficult financial conditions; and, three, that the present action is being to some extent funded by a third party. 

22.  Then the final and important question is to have regard to the question of the merits.  As stated by the learned editors of the White Book, a major matter for consideration is the likelihood of the plaintiff succeeding, and in exercising its discretion, the court may take into account the merits of the plaintiff’s claim.  An order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.  Furthermore, parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.

23.  The same approach is illustrated in two different cases.  The first is a decision of Suffiad J in the case of Policyd which was cited by Deputy Judge Wilson Chan.  There, Suffiad J was influenced in refusing security for costs by the fact that there had been an order for conditional leave to defend.

24.  The other example is the case of Wing Fai Construction Company Limited (in liquidation) v Benefit Holdings International [2005] 3 HKC 164 where notwithstanding that plaintiff was in liquidation and it was obvious that should the plaintiff’s claim fail, there would be significant difficulties in the defendant being able to recoup all of its costs, the company being in liquidation.  DHCJ Louis Chan (as his Lordship then was) refused to order security on the basis that he considered there was a very high probability of success.

25.  On the present materials before me and having regard to the judgments of Her Honour Judge H C Wong as well as the judgment of Deputy Judge Wilson Chan neither of which has been appealed and to the other evidence before me (which on the merits is identical to that in the Summary Judgment application and O.23 application), it seems to me that the strong merits of the plaintiff’s claim are such that it would neither be fair nor just, having regard to all the factors set out above, to order security on the facts of this case.

26.  For those reasons, I dismiss the application for security for costs.

(Discussion re costs)

27.  I think having regard to all the circumstances, although I have found against Mr Wright, I did accept that there has been a material change of circumstances and having regard to that, I think in all the circumstances I will simply order costs of the application, including all costs reserved, be to the plaintiff in any event to be taxed if not agreed with certificate for counsel.