HONEY BEE ELECTRONIC INTERNATIONAL LTD v. GOLDEN LUCKY CO LTD

CACV 405/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 405 OF 2006

(ON APPEAL FROM DCCJ 5125 OF 2003)

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REASONS FOR JUDGMENT

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Hon Cheung JA delivering reasons for judgment of the court :

1. On 23 March 2007 at the conclusion of the plaintiff’s appeal, we allowed the appeal and granted leave to the plaintiff to re-amend its statement of claim.  These are the reasons of our decision.

The plaintiff’s claim

2. The plaintiff claimed that it had entered into an agreement with the defendant for the purchase of three used machines.  In respect of the first two machines the plaintiff paid a deposit of HK$383,000.  In respect of the third machine a deposit of HK$216,000 was paid. 

3. The plaintiff claimed that it was a term of the agreement that the second machine ‘having been used for three years and have around 80% new’ and the first machine was described as ‘very new’.  In breach of the terms of the agreement the first and second machines delivered by the defendant were ‘of substantial usage and were very old’.  Further the machines were not in good working condition and were not of merchantable quality.

4. The plaintiff claimed that there was a wrongful repudiation of the agreement by the defendant which the plaintiff was entitled to accept.  The plaintiff asked for the return of the deposit for the first and second machines in the sum of HK$383,000 less HK$54,000 which was to be treated as further payment for the sale of the third machine.  There was no complaint by the plaintiff in respect of the third machine. 

The first amendment

5. The plaintiff had applied to amend the statement of claim by alleging that the agreement in respect of the second machine was void for illegality and infringed public policy.  This was how the plaintiff pleaded the case :

‘17.     In the further and/or in the alternative, and by reason of the condition of the Agreement as pleaded under paragraph 5(e) above, the Plaintiff is entitled to reject the Second Machine in any event it is averred that the Agreement, at least to the extent concerning or of the Second Machine is void for illegality and that its enforcement for any alleged “forfeiture” is contrary to public policy, in that, the alleged “consensus” relating to the Second Machine was obtained by the Defendant for the purpose of defrauding the government of Hong Kong Special Administrative Region and the government of the People’s Republic of China and the Plaintiff by deceiving them as to the true nature of the alleged goods (i.e. the Second Machine) and the transaction effected, by pretending the same to be a lawful transaction and by inducing them to believe that the true nature of the identified Second Machine and the transaction was lawful and/or legitimate whereas in fact the true nature of the Second Machine was only “goods for further process （來料加工）” and was illegal to be sold to the Plaintiff, as alleged, and such purported transaction or agreement for sale was also illegal and/or against public policy in either or both jurisdictions.’

6. H H Judge Chow refused to grant leave to amend on the ground that the plaintiff had not pleaded the law of Mainland China and hence it had failed to demonstrate how the agreement was rendered illegal or against public policy in China. 

The second amendment

7. The plaintiff later sought leave to amend paragraph 17 again.  It relied on the same cause of action namely, the agreement for the second machine was void for illegality and its enforcement was contrary to public policy.  It specifically pleaded Rules 50 and 57 of the Foreign Enterprise Law Practice Rules of Mainland China, Rule 154 of the Criminal Law and Rule 54 of the Contract Law of Mainland China.  The terms of the proposed amendment were as follows :

‘17.     In the further and/or in the alternative, and by reason of the condition of the Agreement as pleaded under paragraph 5(e) above, the Plaintiff is entitled to reject the Second Machine in any event it is averred that the Agreement, at least to the extent concerning the Second Machine is void for illegality and that its enforcement is contrary to public policy, in that, the purported sale and/or delivery of and concerning the Second Machine as identified and described by the Defendant in the relevant Chinese Custom Import Manifest No. 010259974 and the purported transport and packing documents was and amounted to a fraud to the government of the Hong Kong Special Administrative Region and that of the People’s Republic of China, as the Defendant by the aforesaid documents induced the relevant authorities of both the government of the Hong Kong Special Administrative Region and that of the People’s Republic of China to believe that the Second Machine was equipment, spare part or material imported for further process 來料加工which does not attract custom duties under and by virtue of Rule 57 of the Foreign Enterprise Law Practice Rules of the People’s Republic of China 中華人民共和國外資企業法實施細則 (“the Practice Rules”), whereas the Second Machine so purportedly sold or delivered in fact and in its true nature were not anything for further process but imported goods from a foreign capital enterprise 外資企業 which does attract custom duties and can not be used for sale pursuant to Rule 50 of the Practice Rules.

Particulars of Illegality

(a)      The purported sale and export of the Second Machine by the Defendant as smuggling conduct, criminal in nature, to the Plaintiff under the Agreement is prohibited and illegal by Rule 154 of the Criminal Law of the People’s Republic of China.

(b)      The contract under which the smuggling conduct and infringing goods are involved is null and void and of no effect under and by virtue of Rule 54 of the Contract Law of the People’s Republic of China.

(c)      In the premises, the Agreement concerning the Second Machine was and is null and void and of no effect, and was and is illegal and unenforceable against the Plaintiff.’

8. The matter came before Deputy District Judge W C Li.  He refused the application to amend.  Judge Li was of the view that the re-amendment was not relevant and was not made in good faith.  The plaintiff appealed against the decision.

Exercise of discretion

9. As the appeal is concerned with the exercise of a discretion by a judge, this Court will not interfere with the decision unless the discretion was exercised by reference to wrong principles or was plainly wrong.

10. We were of the view that the discretion was wrongly exercised and that we were entitled to exercise it afresh. 

Principleson amendment

11. It is sufficient for the purpose of this appeal to identify the following principles on amendment :

First, it is a guiding principle of cardinal importance on amendment that generally speaking, all such amendments ought to be made ‘for the purpose of determining a real question in controversy between the parties to any proceedings....’ per Jenkins LJ in G. L. Baker Limited v. Medway Building and Supplies Limited [1958] 1 WLR 1216 at 1231.

Second, leave is readily granted, in respect of application to amend made before the trial or hearing, on payment of the costs occasioned, unless the opponent would be placed in a worse position than he would have been if amendment had been served in the first instance, see paragraph 20/8/10 Hong Kong Civil Procedure 2007.

The present case

12. The present application was an application made before hearing.  No trial date has been fixed yet.  The judge did not seem to have considered this important fact.  Two matters seemed to have been taken into account by the judge.  First, the plaintiff did not file expert evidence in support of its claim on illegality and it did not plead the specific provision of the law that was being relied upon.  Second, it did not explain why there was delay in the application.

Expert evidence and specific law

13. In respect of expert evidence, in our view it is not necessary for the plaintiff to provide such evidence at this stage of the proceedings. Further in our view the plaintiff had sufficiently pleaded by way of particulars the relevant Mainland Chinese law in support of its claim for illegality and breach of public policy.  It had identified the specific sections of the relevant law it intended to rely upon.  There is no requirement to plead the contents of the law.

14. Whether the plaintiff can substantiate this plea will be a matter of evidence to be considered at the hearing.  In our view it is not appropriate at this stage to go into the substantive merits of the plea itself unless the defendant can demonstrate that the plea on illegality is plainly unarguable and hence there is no point in allowing the amendment.  In the present case smuggling was pleaded by the plaintiff and breach of relevant Mainland Chinese law was relied upon.  The defendant just cannot demonstrate that this plea is doomed to failure.  One way to test the matter is that had this plea been raised at the very beginning, the defendant can hardly succeed in striking out this plea.  While generally speaking foreign law is to be proved by way of expert evidence, the texts of Mainland Chinese law are now readily available in Hong Kong and it has not been shown by the defendant that the Mainland Chinese law relied upon by the plaintiff is wholly irrelevant to the plaintiff’s claim.  The judge was of the view that the point was unarguable.  This is wrong and cannot be the proper approach in dealing with interlocutory applications well before the hearing. 

Explanation

15. In general, it is not necessary for a party seeking to amend a pleading to support the application with an explanation by way of affidavit except in exceptional circumstances such as withdrawing an admission or where there has been substantial delay in applying for an amendment which may cause prejudice to the other party in proceeding with the case if an amendment is allowed.  This is not the situation here.                 

16. The case of Tang Shun Hay v. Jetline Co. Ltd. and others [2000] 1 HKC 417 relied upon by the defendant is a rather unusual case.  In that case the plaintiff joined a defendant as a party after the limitation period.  The defendant applied to strike out the joinder on the basis that the action was time barred.  The application was refused by the judge.  The defendant filed its defence without pleading limitation.  Then at the pre-trial review hearing the defendant applied to amend the defence by relying on limitation.  He did not file an affidavit in support and there was no explanation as to why the defence of limitation was not pleaded in the first place.  The judge refused the application to amend.  The decision was affirmed by this Court (Godfrey and Rogers JJA).  As Godfrey LJ held delay on its own is not sufficient to justify a refusal of grant of leave to amend, there must also be prejudice to the opponent of the party seeking leave to amend.  The Court found that on the facts prejudice would be caused to the plaintiff if leave to amend were to be granted.  It therefore upheld the judge’s exercise of discretion.  This case cannot be treated as of general application to other situations.

17. In the present case the application to amend was first taken out two years five months after the commencement of the action.  There was no doubt delay but this would not itself be sufficient.  Prejudice to the defendant was not shown.

Bad faith

18. Bad faith was relied upon.  This imposed a very high burden on the part of the defendant.  Apart from delay, there is nothing to show the presence of bad faith.  The plaintiff is seeking the return of the deposit.  It must be in its interest to pursue its case expeditiously.  While the defendant also seeks a counterclaim, it is only seeking the sum of HK$27,000 after taking into account the value of the machines and the deposit which it said was entitled to forfeit.  Mr. Kennedy Wong, counsel for the defendant, did not press this point at the appeal.

Conclusion

19. In our view the amendment was properly made.  Accordingly we allowed the appeal and granted the amendment.  We ordered the defendant to pay the plaintiff the costs of the appeal and the two hearings before the judge.  The plaintiff is of course required to pay for the costs incurred and thrown away by the amendment and the costs of any consequential amendment.