XCHRX SIS INTERNATIONAL HOLDINGS LTD. v. CHS ELECTRONICS, INC.

HCMP7341/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.7341 OF 1999

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D E C I S I O N

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1. This is an appeal by the plaintiff against the Order of the master made on 27 April 2000 ordering that these proceedings, begun by Originating Summons, be converted into an action begun by Writ with consequential directions. In this appeal, the plaintiff seeks to set aside the Order and the consequential directions and asks for an Order that the Originating Summons be listed for argument before a judge together with consequential directions.

Background

2. In these proceedings, the plaintiff seeks to enforce two Share Charges dated 11 March 1998 and 11 June 1999 given by the defendant in favour of the plaintiff to secure the due performance by the defendant of certain obligations under an Acquisition Agreement dated 20 February 1998 and a Deed of Variation dated 2 June 1999.

3. Briefly stated, the background is as follows. The plaintiff, the defendant and a Gold Sceptre Limited entered into the Acquisition Agreement whereby the defendant would acquire 80% of the shareholding in a company known as SiS Distribution Ltd ("SiS DL") at the price of US$70,400,000 to be paid by the defendant to the plaintiff.

4. The first Share Charge dated 11 March 1998 was created to secure the defendant's performance of its obligations, including the payment obligation, under the Acquisition Agreement. It is a first legal charge over all of the defendant's rights and interest in the 80% shareholding in SiS DL. The defendant only paid US$28,160,000 under the Acquisition Agreement but could not pay the balance. The parties then entered into a Deed of Variation to provide for a new mechanism for the payment of the balance of the purchase price. The second Share Charge was created on 11 June 1999 over the defendant's share in SiS DL to secure the performance of its obligations under the Deed of Variation, including the payment obligation. The defendant paid US$500,000 under the Deed of Variation but made no further payment. The plaintiff therefore took out these proceedings claiming, inter alia, the payment of the outstanding amount, and an order for foreclosure.

5. The defendant does not dispute that it has not paid the balance of the purchase price and has therefore not performed its obligations under the Acquisition Agreement and/or the Deed of Variation. The defendant's defence is that there is an implied term under the Acquisition Agreement to the effect that the defendant's obligation to pay is conditional upon the compliance by the plaintiff of its obligations under the Acquisition Agreement. As the plaintiff has been in breach of some of the clauses in the Acquisition Agreement, the defendant is excused from its payment obligation. The defendant also argues that the issue as to whether the plaintiff is in breach of the Acquisition Agreement is a dispute which, under Clause 12.4 of the Acquisition Agreement, has to be resolved by arbitration proceedings.

6. On 20 April 2000, the defendant issued a Notice under Originating Summons seeking a stay of these proceedings pending arbitration and, alternatively, directions for the action to be continued as if begun by Writ and for the further conduct of the action.

7. The Originating Summons and the defendant's Notice came before the master at a 15 minutes' hearing on 27 April 2000. Without hearing substantive arguments, the master ordered that the action be converted into an action begun by Writ and gave directions for the filing of pleadings, discovery and exchange of witness statements. The master did not hear the defendant's summons and had not made any order on it.

Reasons for the decision

8. The plaintiff's contention in this appeal is that it is premature for the master to make the Orders and that she ought to have afforded the parties an opportunity to present their case before deciding that the Originating Summons procedure is inappropriate. The defendant supports the master's orders and does so on three main grounds. Firstly, it is argued that the Orders are justified as a matter of good case management in view of the volume of documentary exhibits concerned. Secondly, the defendant argues that it has raised triable issues that necessitate adjudication by means of a trial. Thirdly, in view of the arbitration clause in the Acquisition Agreement, it may be appropriate for the parties to set out their case in pleadings before the court considers whether to grant a stay.

9. There can be no doubt that a master or judge has wide power under Order 28 of the Rules of the High Court when dealing with an Originating Summons at the first appointment. He can either give judgment for the plaintiff or dismiss the Originating Summons where the matter is sufficiently clear one way or the other. Alternatively, he may give directions for the further conduct of the proceedings, including ordering that the action be continued as if begun by Writ. He may also adjourn the hearing to enable the parties to fully argue their case before deciding on how to dispose of the Originating Summons.

10. The present case is clearly not one where the merits or weakness of the parties' case are so obvious or overwhelming that the Originating Summons can be summarily disposed of at the 15 minutes' hearing. The question then is whether the master should have afforded the parties an opportunity to present their full arguments or whether she could direct on the further conduct of the matter without hearing further arguments.

11. It is important to note that the defendant has sought under paragraph 1 of its Notice for a stay of these proceedings pending arbitration. In my view, this stay application should come before the determination of the Originating Summons. If the defendant succeeds in staying the action, then no order or direction need to be made under the Originating Summons. It will result in a waste of time and costs if the action were to be converted into a Writ action and pleadings filed only to find that the action should be stayed awaiting arbitration. On this consideration alone, any determination on the Originating Summons should be deferred to after an adjudication of the defendant's Notice. It is therefore premature to give directions for the further conduct of the Originating Summons when the stay application is at large.

12. The defendant has argued that in view of the volume of exhibits involved in this action, it is appropriate for the action to be converted into a Writ action without deciding whether there were triable issues raised by the defendant. Accordingly, there was no need to adjourn the matter for argument. In support of this argument, Mr Niamatullah for the defendant, relied on the case of Wing Hang Bank Limited v. Crystal Jet International Limited and Others (unreported), CACV140/2000. Although the exhibit bundle in this case comes to more than 300 pages, the circumstances of the present case is rather different from that faced by the judge in the Wang Hang Bank case. In that case, the judge was facing 19 affidavits, some of which were described as massive in size, and documents of over 600 pages and the judge considered he could not decide the matter in the manner envisaged by the Originating Summons process. The Court of Appeal agreed with that view. In this case, the exhibits, while consist of many pages, comprise only several documents of which only small portions need to be referred to. There are only three affidavits and they are in no way lengthy. The issues appear quite clearly from the affidavits and are well-defined. There is no necessity for the parties to re-state their case and the issues by way of pleadings. Although there are factual disputes as to whether the plaintiff is in breach of the Acquisition Agreement and/or arguably whether the defendant has waived the breaches or is estopped from relying on the breaches, these are disputes that can be resolved by adopting the procedure under Order 28, rule 4(3).

13. As to the question of whether the defence raises triable issues, I agree with Mr Ng for the plaintiff that the question is whether it is so plain and obvious that the defendant has raised triable issues that require adjudication by the trial process, such that the parties need not be heard on the matter. I do not consider it to be such a clear cut case. The issue of whether there can be implied into the Acquisition Agreement a term that the defendant's payment obligation is conditional upon compliance by the plaintiff is a matter of construction. If this issue is resolved in favour of the plaintiff, then irrespective of the findings on the disputes regarding whether the plaintiff is in breach of the Acquisition Agreement and whether there is waiver and/or estoppel on the defendant's part, the plaintiff will succeed on the Originating Summons. The issue of implied term does not involve complicated questions of fact and law. It is not of such complexity or difficulty that it is not possible to resolve it under the Originating Summons procedure. Accordingly, the parties should be afforded an opportunity to present full arguments before a determination on the Originating Summons is made.

14. For the above reasons, the proper course to be adopted at the first appointment hearing is to adjourn the Originating Summons and the defendant's Notice for full argument. The appeal is therefore allowed. The Order of the master directing that the action be continued as if begun by Writ and the consequential directions on service of pleadings, discovery and exchange of witness statements are set aside.

The Notice under Originating Summons

15. The plaintiff had taken out a summons on 21 June 2000 seeking, inter alia, a dismissal of the Notice under Originating Summons. At the last hearing of this appeal, Cheung J adjourned the plaintiff's application to be heard after the appeal. The plaintiff in this hearing asks that paragraph 1 of the Notice which seeks a stay pending arbitration be dismissed. Mr Niamatullah resists the application and asks that the stay application be adjourned for argument.

16. I agree that it is implicit in the Order of Cheung J that the stay application is to be heard after the appeal hearing and that the defendant should have come to court prepared to argue it. Nevertheless, given Mr Niamatullah's clear intention that he had not so prepared and that some of the arguments on the merits of the stay application may be associated and intertwined with the arguments on the Originating Summons, I will adjourn the defendant's Notice for argument to be heard together with the Originating Summons.

Costs

17. The master had ordered the costs of the 22 April 2000 hearing against the defendant for the reason that the defendant's Notice was filed late. Neither the plaintiff nor the defendant seeks to disturb that. The defendant, however, resists the plaintiff's application for costs of this appeal on the basis that the directions were made by the master on her own volition. That may well be the case. But the defendant has chosen to oppose the appeal and has come to court today seeking to have the orders upheld. The defendant has failed in this appeal and costs should follow event.

Conclusion

18. The Orders I make are as follows :

(1) The appeal is allowed.

(2) The Order and directions made by the master on 27 April 2000, save in relation to the granting of leave for the filing of the Second Affirmation of Lim Kiah Meng and the costs of the hearing below, be set aside.

(3) The Originating Summons and the defendant's Notice under Originating Summons be listed for argument before a judge in chambers on a date to be fixed in consultation with counsel's diaries with one day reserved.

(4) Leave to the defendant to file and serve affidavit in reply to the Second Affirmation of Lim Kiah Meng, if so advised, within 14 days from the date hereof.

(5) No further affidavit be filed without the leave of the court.

(6) The costs of this appeal be to the plaintiff against the defendant, to be taxed if not agreed.