EVER YEAR INTERNATIONAL LTD v. TSUI YIU KWONG

DCMP 3379/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 3379 OF 2014

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DECISION
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1. Does Order 28, rule 7, Rules of the District Court (“RDC”) apply after an action commenced by originating summons is converted into an action as if begun by writ so that a defendant to such an action is nonetheless required to obtain leave or otherwise seek directions from the court under the same rule before he can mount a counterclaim against the plaintiff with or without addition of any non-party?

2. Both the plaintiff by original action (“Ever Year”) and the 1^st defendant by counterclaim (“Yat Kwong”), albeit separatelyadvised, answer this question in the affirmative, hence their similarly framed applications under O28, r7 and/or O18, r19, RDC for striking out the counterclaim of the defendant by original action (“TYK”) against both Ever Year and Yat Kwong. Meanwhile, extension of time for filing and service of a reply and defence to counterclaim in the case of Ever Year and of a defence to counterclaim in the case of Yat Kwong pending disposal of their respective applications is sought. 

BACKGROUND

3. For the present purpose, I need only go into a little bit of the background to the present dispute involving natural brothers.  Ever Year commenced these proceedings against TYK by way of originating summons under Order 113 for an order for possession of the captioned property (“Workshop”) of which Ever Year is the registered owner since 2002.  TYK, Yat Kwong and Tsui Woon Kwong (“Woon Kwong”) are natural brothers.  Currently, Yat Kwong and Woon Kwong are the only shareholders and directors of Ever Year.  Back in 2002, however, another member of the Tsui’s family was holding two of the three paid-up shares of Ever Year on trust for TYK and Yat Kwong respectively.  In February 2007, TYK’s share was transferred to Yat Kwong.  One other share was issued to Woon Kwong subsequently.

4. At the first hearing of the originating summons on 22 January 2015, Master S P Yip ordered these proceedings to be continued as if begun by writ and gave directions for the plaintiff to file and serve a statement of claim by 23 February 2015.  As to subsequent pleadings, the learned master directed the same to be filed and served in accordance with the RDC without giving a specific timeline for the same.  As to costs, the master ordered Ever Year to pay TYK’s costs of the originating summons and his affirmation filed in the O113 proceedings (“Costs Order”). In April 2015, TYK filed and served a defence and counterclaim.  Ever Year and Yat Kwong take issue not with the time TYK took to do this but with the inclusion therein of his counterclaim.

5. Ever Year appealed against the Costs Order.  In May 2015, Deputy District Judge W Y Ho allowed the appeal and replaced the Costs Order by an order for costs to be in the cause.  In deciding against there being any substantial factual dispute which would render the Ever Year’s decision to commence these proceedings by originating summons inappropriate, the learned deputy judge commented on the merits (or want of merits) of TYK’s case as revealed by his affirmation filed in the O113 proceedings (“TYK’s affirmation”).  There was no further appeal therefrom.  Then came the present application by each of Ever Year and Yat Kwong.

ORDER 28, RULES 7 AND 8, RDC

6. The main thrust of the arguments of both Mr. Frederick Chan, counsel for Ever Year and Mr. Derek Chan, counsel for Yat Kwong is that leave is required under O28, r7(2) before TYK’s counterclaim can be filed and TYK’s counterclaim is liable to be struck out under O28, r7(3) as it was filed without first obtaining leave/directions. 

7. O28, r7, RDC stipulates that:

“ (1) A defendant to an action begun by originating summons who has acknowledged service of the summons and who alleges that he has any claim or is entitled to any relief or remedy against the plaintiff in respect of any matter (whenever and however arising) may make a counterclaim in the action in respect of that matter instead of bringing a separate action.

(2) A defendant who wishes to make a counterclaim under this rule must at the first or any resumed hearing of the originating summons by the Court but, in any case, at as early a stage in the proceedings as is practicable, inform the Court of the nature of his claim and, without prejudice to the powers of the Court under paragraph (3), the claim shall be made in such manner as the Court may direct under rule 4 or 8.
(3) If it appears on the application of a plaintiff against whom a counterclaim is made under this rule that the subject-matter of the counterclaim ought for any reason to be disposed of by a separate action, the Court may order the counterclaim to be struck out or may order it to be tried separately or make such other order as may be expedient.

(Emphasis added)

8. O28, r7, RDC provides that:

“ (1) Where, in the case of a cause or matter begun by originating summons, it appears to the Court at any stage of the proceedings that the proceedings should for any reason be continued as if the cause or matter had been begun by writ, it may order the proceedings to continue as if the cause or matter had been so begun and may, in particular, order that any affidavits shall stand as pleadings, with or without liberty to any of the parties to add thereto or to apply for particulars thereof.”

9. Both counsel take the view that the procedure prescribed by O28, r7(2) remains applicable even after the proceedings have been ordered to continue as if begun by writ. 

10. Both counsel rely on Ng Wing See & Ors v Chang Chi Ching [1973] HKLR 170, with Mr. Frederick Chan quoting extensively from the speeches of McMullin and Huggins JJ, to support the argument that TYK must apply for specific directions under O28, r7(2) to be followed by an explicit determination by the court before he could effectually mount a counterclaim. 

11. With the greatest respect, both counsel have read too much into this rule.  A court rule does not exist for its own sake.  It exists because it serves a purpose.  As the underlined parts of O28, r7(2) reproduced above show, this rule serves to facilitate the resolution of a defendant’s counterclaim against a plaintiff within the proceedings commenced by originating summons without requiring the defendant to commence a separate action.  In order for the court to deal with such a counterclaim, however, the rule requires a defendant to take the first opportunity to inform the court of the nature of his intended counterclaim so that the court can give proper directions under rule 4 if the court sees fit to deal with the same within the very same proceedings without converting the same into a writ action.  As Mr. Samuel Chan, counsel for TYK rightly pointed out, what O28, r7 requires is that a defendant should inform the court of the nature of his intended counterclaim so that the court can give directions either under O28, r4 or O28, r8.  It is not meant to burden a defendant with a requirement to obtain leave for mounting a counterclaim.  Where appropriate, the court may instead of giving directions as aforesaid strike out such a counterclaim or order the same to be tried separately under O28, r7(3).  This special power to strike out will be discussed further below.

12. It is of note that the Court of Appeal in Ng Wing See, supra, was dealing with the proper construction of O28, r7 as a relatively new procedure back then for counterclaiming in an action commenced by originating summons.  As McMullin J said at p193:

“ The point for decision is within a narrow compass and is concerned with the interpretation principally of Order 28 rule 7 of the Rules of the Supreme Court under which it is open to a defendant in an action commenced by Originating Summons to raise a counterclaim in the same action… the procedure by way of Originating Summons is sui generis and is, in certain important respects, very different from that governing proceedings commenced by way of writ or otherwise. I believe therefore that the answer to the present problem is to be found in the wording of the rule itself.”

(Emphasis added)

13. There the appellate court allowed the defendants’ appeal as the court below refused to give directions for mounting a counterclaim under O28, r7(2) as sought by the defendants at the hearing of the originating summons but nonetheless proceeded to adjudicate upon the defendants’ counterclaim and dismissed the same in the course of hearing the originating summons.  Having expressed their view on the proper procedure under O28, r7, the Court of Appeal allowed the appeal on the grounds that the first instance judge’s failure to follow the proper procedure had resulted in there never being a counterclaim and, consequently, in a denial of justice to the defendants.

14. Among the quotations from Ng Wing See, supra,one can readily find passages which indicate the rationale behind the requirement for court directions under O28, r7, that is, to ensure that an intended counterclaim by a defendant is adjudicable within the compass of theproceedings begun bythis particular originating process.  For instance, McMullin J said at pp194-196:

“ …until the second stage has been reached and until directions have been given and complied with the claim cannot be said to have been formally constituted…and it awaits the court's direction to achieve an adjudicable form.

  … A defendant proposing to counterclaim under Order 28 rule 7 has a duty to put before the court all matter necessary to enable the court to adjudicate upon the preliminary question of the competency or bona fides of his claim. I would think, however, that where it was prima facie a sustainable claim, and one which might justly be disposed of in the action the court would be obliged to let it proceed and then it would become necessary to give directions as to how it was to proceed.”

(Emphasis added)

15. Both counsel refer to Yeung Kwok Fan & Anor v Standard Chartered Bank [2001] 4 HKC 486.  Mr. Frederick Chan further refers to Li Fung Kai v Fung Sau Lin (HCMP 919/2013), unreported, 9 September 2013.  Neither cases help to advance their argument any further as they relate to actions commenced by originating summons which were disposed of as such and without being converted into a writ action. 

16. Indeed, none of the cases cited by counsel are authorities for the proposition that O28, r7(2) applies even after the action has been converted into a writ action under O28, r8. 

17. I tested counsel’s proposition by asking this question: why should a defendant in an action ordered to be continued as if begun by writ be required to seek directions or even obtain leave before he can mount a counterclaim whereas a defendant in an action commenced by writ from day one is not so required?  Despite their best effort, neither counsel managed to answer this simple question.  Both counsel described O28, r7(2) as a filtering process for the court to scrutinize an intended counterclaim before allowing the same to proceed.  This I accept if, and only if, the intended counterclaim is to be heard within the proceedings commenced by originating summons.  But why should the court be scrutinizing a counterclaim after the action has been converted into a writ action when there is no such “positive vetting” mechanism in the RDC for an action commenced by writ?  To this question counsel had no answer other than maintaining that O28, r7(2) still bites after conversion of the action.  With respect, all I heard was nothing but a circular argument that a defendant has to obtain leave/directions because O28, r7(2) says so.

18. In his attempt to answer my question posed above, Mr. Frederick Chan referred me to the recent decision of Recorder Lisa K Y Wong, SC in Fong Meng Sung John v Luk Man Lok Rocky & Ors (HCMP 1959/2009), unreported, 7 September 2015. The question before the learned Recorder was which of the sub rules under Order 21, Rule 2,  Rules of the High Court (“RHC”) governs the discontinuance of an action commenced by originating summons but subsequently converted into a writ action.  At paragraph 24 of her decision, the learned Recorder took the view that the requirement in O28, r8(4), RHC to construe any reference in the rules to an action begun by writ as including a reference to a cause or matter or proceedings ordered to continue as if begun by writ is not an absolute requirement and does not apply if the context otherwise requires.  Mr. Frederick Chan relied on this case as persuasive authority for the proposition that there is no full relation back even after an action commenced by originating summons is converted into a writ action such that O28, r7(2) still applies after the conversion. 

19. In my view, Fong Meng Sung John, supra does not support such a proposition.  For one thing, the learned Recorder’s view must be understood in the right context. There the court was dealing with O21, r2, RHC which contains specific provisions for discontinuance of an action commenced by writ (O21, r2(1) to (3)) and one commenced by originating summons (O21, r2(3A)).  Plainly there is no need to construe the reference to an action begun by writ in O21, r2(1) & (3) to include an action commenced by originating summons but ordered to continue as if begun by writ.  For another, the learned Recorder is merely saying that O28, r8(4) does not apply if the context otherwise requires.  And the context there did require the exclusion of such a construction.  Back to the present context, there is simply no need to deploy the procedure prescribed by O28, r7(2) after the conversion, irrespective of the true position as regards relation back.

20. Mr. Frederick Chan’s reliance on Mr. Registrar Lung’s judgment in Au Yeung Wan & Anor v Tsui Sau Ying & Ors (HCA 484/2010), unreported, 28 May 2015 does not assist either.  There the court was dealing with a specific requirement for leave for issuing a third party notice under O16, r1(2), RHC.

21. As said, under O28, r7(3), the court may order a counterclaim to be struck out or tried separately or make such other order as may be expedient.  The power to strike out under this rule is exercisable if the court is not minded to allow an intended counterclaim to proceed in the same proceedings.  At the same time,it seems the court does retain general power to strike out under O18, r19 if circumstances so warrant.  As McMullin J said in Ng Wing See, supra, at pp194-195:

“ paragraph (3)...deals…with the court's special and limited power to strike out the claim upon the reasons stated in that paragraph...it would appear that the power given to the court by rule 7(3) is not quite the same as the power it has to strike out pleadings and indorsements under the provisions of Order 18 rule 19 since, by the nature of the procedure established under Order 28, no pleadings as such are yet before the court at the moment it moves to strike out under that rule, it is therefore not so much a power to strike out the claim as a power to refuse to let it proceed at all…

…

  If the court has the power to "strike out" the claim in the special sense which appears to be contemplated in paragraph 3, before the giving of any directions in relation to the manner in which the action is to be conducted, i.e. before the counterclaim has been pleaded formally, it would, in my view, be open to the court to strike out the counterclaim at the same stage of the proceedings by virtue of its general powers to strike out under Order 18 rule 19…” 

(Emphasis added)

22. In the final analysis, the court’s power to direct the proceedings to be continued as if begun by writ under O28, r8 is clearly an alternative to the regime under O28, r7 and the operation of the former is not subject to or conditioned upon compliance with the latter.  Of course, the existence of a counterclaim or the need to seek directions in respect of an intended counterclaim under O28, r7 does not inevitably require conversion of the proceedings to a writ action.  Ultimately, that turns on whether there are substantial factual disputes.  See Hong Kong Civil Procedure 2016 at §28/7/1 and Li Fung Kai, supra, at §52.   

ORDER 15, RULE 3, RDC

23. In my view, once the proceedings are ordered to be continued as if begun by writ, the operation of O28, r7(2) comes to an end and the general rules applicable to a writ action will come into play, subject always to the court’s specific directions for filing of pleadings and future case management.  Insofar as TYK wishes to add Yat Kwong as a defendant to his counterclaim against Ever Year, O15, r3 applies and no leave is required before such a counterclaim can be filed.  The only requirement is that Yat Kwong be said to be liable to TYK along with Ever Year in respect of the subject matter of the counterclaim or that TYK’s claim against Yat Kwong relates to the original subject matter of the action. 

24. O15, r3, RDC provides that:

“ (1) Where a defendant in an action who makes a counterclaim against the plaintiff alleges that any other person (whether or not a party to the action) is liable to him along with the plaintiff in respect of the subject-matter of the counterclaim, or claims against such other person any relief relating to or connected with the original subject-matter of the action, then, subject to rule 5(2), he may join that other person as a party against whom the counterclaim is made.

 (2) Where a defendant joins a person as a party against whom he makes a counterclaim, he must add that person's name to the title of the action and serve on him a copy of the counterclaim and, in the case of a person who is not already a party to the action, the defendant must issue the counterclaim out of the Registry and serve on the person concerned a sealed copy of the counterclaim…and a copy of the writ or originating summons by which the action was begun and of all other pleadings served in the action...”

(Emphasis added)

25. O15, r5(2), RDC provides that:

“ If it appears on the application of any party against whom a counterclaim is made that the subject-matter of the counterclaim ought for any reason to be disposed of by a separate action, the Court may order the counterclaim to be struck out or may order it to be tried separately or make such other order as may be expedient.”

26. Mr. Samuel Chan submits, and I agree, that TYK is claiming against Yat Kwong “along with” Ever Year “in respect of the subject matter of the counterclaim”.  In Amed Holding (HK) Ltd v Wong Sy Kee & Ors (CACV 171/2014), unreported, 11 May 2015, the Court of Appeal held that the relief sought in the counterclaim there was related to or connected with the subject matter of the main action.   At paragraph 6.11, Cheung JA says:

“ …One cannot and should not simply look in isolation at the form of the relief without looking at the factual background set out in the counterclaim, particularly at this stage of the proceedings when only pleadings have been exchanged.”

27. Mr. Derek Chan submits that O15, r3 contemplates a counterclaim against additional parties in proceedings commenced by originating summons and there is no reason why the procedure prescribed by O28, r7(2) does not apply to an intended counterclaim against a non-party.  Naturally, no authority is cited in support of this proposition.

28. Mr. Samuel Chan submits, and I agree, that the operation of O15, r3(1) is not subject to O28, r7 or any rules other than O15, r5(2) which gives the court powers to strike out a counterclaim or order a separate trial of the counterclaim similar to those under O28, r7(3).   As I see it, the very existence of O15, r5(2) points to the operation of O15, r3(1) and O28, r7(2) being independent of each other.  And the filtering process under each set of these rules ensures that only an adjudicable counterclaim is allowed to proceed within the proceedings commenced by either originating process, although O15, r5(2) operates only as a negative vetting mechanism.

29. Mr. Frederick Chan relied on the Malaysian appeal case of Cheow Chew Khoon (t/a Cathay Hotel) v Abdul Johari bin Abdul Rahman [1995] 1 MLJ 457 as persuasive authority for saying that the usual provisions for filing and service of pleadings under Order 18 do not automatically apply upon conversion of an action commenced by originating summons.  He went on to submit that Master S P Yip’s direction for filing and service of pleadings subsequent to the statement of claim to be in accordance with the RDC would not entitle TYK to file and serve his counterclaim which cannot possibly be in accordance with the RDC without specific directions having been sought by or leave granted to TYK to file a counterclaim under O28, r7(2).  This argument is premised on the proposition that O28, r7(2) remains applicable after conversion of proceedings commenced by originating summons into a writ action.  For the same reasons as explained above, this argument does not hold water.  

30. Obviously the learned master had reposed trust in the good sense of lawyers in giving a general direction for the filing and service of pleadings subsequent to the statement of claim without giving specific deadlines for the same.  In hindsight, the giving of specific directions for the filing of a defence and counterclaim, if any and a reply and defence to counterclaim, if anywithin a certain timeline might well forestall the present argument by Ever Year and Yat Kwong, which stands in the way of these proceedings moving forward.

31. Insofar as each of the applications of Ever Year and Yat Kwong is premised on O28, r7(2), the same must therefore be dismissed.  For the same reason, I see no need to address counsel’s submissions as to whether what TYK stated in TYK’s affirmation can amount to an application for directions to bring a counterclaim or if the master’s direction for filing of subsequent pleadings can be taken as a direction for that purpose.

SEPARATE TRIAL FOR TYK’S COUNTERCLAIM?

32. Yat Kwong says in his supporting affirmation that he is only a director and shareholder of Ever Year and whatever personal dealings there may be between him and TYK would (or should) be restricted to themselves.  Ever Year as a separate legal entity should not be made liable to TYK under the latter’s counterclaim.  And both Yat Kwong on his own behalf and Woon Kwong on behalf of Ever Year say TYK should have filed a separate claim against Yat Kwong instead of joining Yat Kwong in these proceedings by way of counterclaim.

33. From the limited information revealed by the parties (and mostly by TYK) so far, it appears that the three brothers have a long-standing dispute not just over the Workshop.  At least three other properties have featured in the correspondence among them over the years.  And the Tsui’s brothers appear to have followed the practice of setting up shell companies to hold properties, Ever Year apparently being one such vehicle.  Without going deep into the evidence, I do think expedience dictates that the brothers’ disputes over the Workshop (with or without involving Woon Kwong), including whether Ever Year is holding the Workshop on trust for both TYK and Yat Kwong as beneficial owners in equal share, should be resolved in one single action rather than having TYK’s counterclaim tried separately, thereby running the risk of different courts making different findings as to facts or as to credibility of any person featuring in the dramatis personae, or as Mr. Samuel Chan put it, even complications arising from res judicata or issue estoppels.

34. It should be noted that it is only TYK’s counterclaim which is sought to be struck out but not the preceding defence which lays the foundation for TYK’s counterclaim.  This may be explained by the fact that both Yat Kwong and Ever Year (or rather, Yat Kwong and Woon Kwong as controllers of Ever Year) believe in the procedural irregularity of TYK’s counterclaim but are otherwise content with TYK filing a separate claim against Yat Kwong. 

35. The present application therefore appears to be a concerted effort to prevent the disputes among the brothers to stand in the way of Ever Year put up as the registered owner of the Premises to obtain vacant possession of the Workshop from TYK.  With TYK’s defence herein extant, however, the striking out of TYK’s counterclaim would not do away with the very same issues raised in TYK’s defence and it may well be that at the end of the day the court would have to order the joinder of Yat Kwong (or even Woon Kwong) into the present proceedings or otherwise direct any separate claim by TYK against Yat Kwong relating to the Workshop to be heard together, if not consolidated, with the present proceedings in order for all disputes among the brothers over the Workshop to be resolved at one go.

36. I therefore see no good reason for ordering a separate trial of TYK’s counterclaim either under O28, r7(3) or O15, r5(2), if this is what Ever Year or Yat Kwong is asking for.

SHOULD TYK’S COUNTERCLAIM BE STRUCK OUT?

37. In support of their application for striking out TYK’s counterclaim, both Ever Year and Yat Kwong rely heavily on the comments of Deputy District Judge W Y Ho on the merits of TYK’s case as revealed in TYK’s affirmation.  For the following reasons, this is misconceived.  

38. Where an application for striking out is based on O18, r19(1)(a), O18, r19(2) forbids the admission of any evidence. The court simply cannot go beyond the four corners of a pleading in deciding whether to strike out the same and it is only in plain and obvious cases that the court should exercise its summary powers to strike out pleadings.  There should be no trial upon affidavit. Disputed facts were to be taken in favour of the party sought to be struck out.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  And a reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered.  So long as the statement of claim (here TYK’s counterclaim) discloses some cause of action, or raises some question fit to be decided by a judge or jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out. See Hong Kong Civil Procedure 2016 at §§18/19/4 and 18/19/6. 

39. In my view, TYK’s counterclaim does disclose some cause of action or raise some question fit to be decided by a judge.  As Mr. Samuel Chan submits, TYK has pleaded and founded his case on Pallant v Morgan equity and common intention constructive trust and the documents referred to in various paragraphs of TYK’s defence and counterclaim point to acknowledgement by Yat Kwong and Woon Kwong of TYK’s interest in the Workshop. 

40. At the hearing today, Mr. Frederick Chan confined his argument for striking out to TYK’s procedural default in relation to O28, r7(2) without relying on O18, r19.  That being so, Ever Year’s application for striking out fails in limine for the reasons stated in the above.

41. Mr. Derek Chan fairly conceded that Yat Kwong’s application for striking out TYK’s counterclaim could not be based on O18, r19(1)(a) when the comments of the learned deputy judge could not be admitted as evidence.  He nonetheless invited this court to adopt the same comments in ruling on this application of Yat Kwong, presumably under the other limbs of O18,r19(1). 

42. Insofar as Yat Kwong is relying on O18, r19(1)(b) to (d), however, the problem is that neither Woon Kwong on Ever Year’s behalf nor Yat Kwong have in their supporting affirmations addressed the factual disputes raised by TYK regarding the Workshop.  All they have done is to refer this court to the judicial commentson the merits of TYK’s case on Pallant v Morgan equity (as disclosed in TYK’s affirmation but not in TYK’s defence and counterclaim) and say TYK’s case is unsustainable.  No attempt has been made to explain why, if at all, TYK’s counterclaim is liable to be struck out under O18, r19(1)(b) to (d). 

43. To be fair to TYK,he expressly stated at the outset in TYK’s affirmation that he objected to Ever Year commencing these proceedings by originating summons on grounds of there being substantial factual disputes before setting out his side of the story.  In commenting on TYK’s case on Pallant v Morgan equity, the learned deputy judge confined herself (and I say with respect, discreetly) to the contents of TYK’s affirmation (and not TYK’s defence and counterclaim already filed in court when the appeal was heard) in addressing the only question before the court, that is, whether Ever Year should be penalized on costs for adopting the originating process.  As such, these judicial comments should provide no basis for striking out TYK’s counterclaim under O18, r19(1)(b) to (d) either, especially when TYK’s defence and counterclaim clearly goes beyond Pallant v Morgan equity.   

CONCLUSION

44. In the circumstances, TYK’s counterclaim do stand and the application by each of Ever Year and Yat Kwong for striking out TYK’s counterclaim must be dismissed.

45. I grant each of Ever Year and Yat Kwong leave to file and serve a reply and defence to counterclaim or defence to counterclaim, as the case may be, within 28 days from the date hereof. 

46. Costs should follow the event.  There be an order nisi that Ever Year and Yat Kwong do pay TYK’s costs of their respective applications, to be taxed if not agreed with a certificate for counsel.