PAUL'S MODEL ART GMBH & CO KG v. U.T. LTD AND OTHERS

CACV 139/2005

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 139 OF 2005

(ON APPEAL FROM HCA 1501 OF 2000)

______________________

J U D G M E N T

______________________

Hon Cheung JA :

Specific discovery 

1. This is an appeal by the 4th defendant against an order of Sakhrani J requiring it to give specific discovery of documents to the plaintiff.

Facts

2. The plaintiff was a manufacturer and seller of die cast scale models of cars and motorbikes (‘models’).

3. The 1st defendant was a manufacturer of moulds for the production of models and a manufacturer of such models.

4. The parties had conducted business for a number of years and eventually entered into an written agreement dated 28 December 1996 (‘the Agreement’) to regulate their business activities.  The Agreement was for a duration of 10 years and the relevant terms of the Agreement were :

1)	The parties agreed that they would not produce products which are in competition with each other’s products. [Clause 6.8]
2)	The parties agreed to avoid selling any of the products produced by 1st  defendant or the plaintiff to a purchaser whom they knew or ought to have known might re-sell these products outside the countries specified in the Agreement.  [Clause 6.10]
3)	The plaintiff was appointed by the 1st defendant to be
	(1)  the sole and exclusive distributor of specific products of the 1st defendant (‘the 1st defendant’s products) in Germany and Belgium.
	(2)  the sole and exclusive selling agent for the 1st defendant’s products in some specific countries (‘the Agency Territories’).
	[Clause 6.12]
4)	The 1st defendant agreed to pay the plaintiff 5% of the received amounts of the 1st defendant’s product sold to purchaser in the Agency Territories. [Clause 6.13]
5)	The 1st defendant agreed that it would avoid selling any the 1st defendant’s products to any person whom the 1st defendant reasonably believed might resell them in Germany, Belgium and other countries where the plaintiff was the agent of the 1st defendant’s products.[Clause 6.14]

5. The 2nd and 3rd defendants were the majority and minority shareholders respectively of the 1st defendant.  They were also its directors.  They were also parties to the Agreement.  By Clause 6.15 they agreed that they shall cause and procure the 1st defendant to comply with clause 6 of the Agreement which included the clauses I have referred to in paragraph 4 herein.

The claim against the 1st , 2nd and 3rd defendants

6. The plaintiff claimed that

1)	the 1st defendant’s products and plaintiff’s products referred to in the Agreement were manufactured by a Li Ke Toy Co. Limited (‘Li Ke Toy’) a company controlled by the 1st , 2nd and 3rd defendants.
2)	The 2nd and 3rd defendants caused and procured the incorporation of the 4th defendant and also the incorporation or setting up of subsidiaries of the 4th defendant.  These subsidiaries bore the name ‘Gateway’ (collectively known as the ‘Gateway Companies’).
3)	The 1st , 2nd and 3rd defendants had in breach of the Agreement, since the incorporation of the 4th defendant, ‘embarked on a course of conduct to circumvent their contractual obligations to the plaintiff as provided for by the Relevant Clauses (of the Agreement), in particular the plaintiff’s sole and exclusive distributionship and selling agent rights’.

The claim against the 4th defendant

7. The 4th defendant was joined as a party to the action subsequent to the claim against the 1st , 2nd and 3rd defendants.  The cause of action against the 4th defendant was based on the tort of unlawful interference with contract. 

The order

8. The judge ordered the following documents to be disclosed as can be seen from the amended schedule attached to his order :

1.	Accounting records in respect of purchases by the 4th and 5th defendants of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the amended Statement of Claim.
2.	Purchase orders placed by the 4th & 5th defendants with Davidson Limited in respect of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the Amended Statement of Claim.
3.	Invoices from Davidson Limited issued to the 4th and/or 5th defendants in respect of the sale and supply of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the Amended Statement of Claim.
4.	Shipping documents, including bills of lading shipping instructions, and customs declarations in relation to the delivery of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the Amended Statement of Claim, to Germany and Belgium and the countries referred to as the Agency Territories set out in Schedule 4 to the Agreement between the Plaintiff and (inter alia) the 1st , 2nd & 3rd defendants, referred to in paragraph 9 of the Amended Statement of Claim.
5.	Certificates of Incorporation in respect of the 4th defendant.
6.	Statutory records of shareholders in the 4th defendant, including all records and documents held by the 4th defendant revealing the beneficial and legal ownership of shares in the 4th defendant since its incorporation.
7.	Invoices and receipts for paid invoices issued by those individuals, companies or firms responsible for and in respect of the incorporation of :
	(a)  the 4th defendant;
	(b)  the 5th defendant;
	(c)  Gateway Europe GmbH;
	(d)  Gateway U.K. Limited.
8.	Invoices and receipts in respect of Annual Company Secretarial fees for each of the Gateway Companies.
9.	Share certificates in respect of each of the Gateway Companies.
10.	Correspondence passing between the 1st , 2nd and/or 3rd defendants on the one part and Mr. Ibrahim and/or the Gateway Companies or any of them on matters touching and concerning licenses to manufacture and production of model cars of the description set out in paragraph 11 of the Amended Statement of Claim.
11.	Correspondence passing between the 1st , 2nd and/or 3rd defendants on the one part and Mr. Ibrahim and/or any of the Gateway Companies or any of them touching sales and shipment of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the Amended Statement of Claim, to Germany and Belgium and the countries referred to as the Agency Territories set out in Schedule 4 to the Agreement between the Plaintiff and (inter alia) the 1st , 2nd & 3rd defendants, referred to in paragraph 9 of the Amended Statement of Claim.
[Formerly #13]  12.	Orders placed by the 4th and/or 5th defendants with the 1st defendant for the production and sale of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description as set out in Paragraph 11 of the Amended Statement of Claim.
[Formerly #14]  13.	Invoices and receipts issued by the 1st defendant and/or Davidson Limited to the 4th and/or 5th defendants in respect of the production and sale of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description as set out in Paragraph 11 of the Amended Statement of Claim and the manufacture of all tooling, dies casts patterns and moulds used by the 1st defendant and/or Davidson Limited for such production.
[Formerly #15]  14.	Inter company memoranda, emails, and other correspondence between the Gateway Companies and Mr. Ibrahim including email correspondence emanating from the email address billy@gatewayglobal.com , Mr. Wayne Gears, Mr. Thomas Schmadalla and Mr. Nigel Gordon Stewart relating to:
	(a)  The acquisition of licenses from car manufacturers for the production and sale of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description as set out in Paragraph 11 of the Amended Statement of Claim;
	(b)  The production of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description as set out in Paragraph 11 of the Amended Statement of Claim and the manufacture of all tooling, dies casts patterns and moulds used by the 1st defendant and/or Davidson Limited for such production;
	(c)  The establishment of the Gateway companies; and
	(d)  The sales, shipment and delivery of 1/12 th , 1/18 th and 1/43rd scale die cast model cars of the description set out in Paragraph 11 of the Amended Statement of Claim, to Germany and Belgium and the countries referred to as the Agency Territories set out in Schedule 4 to the Agreement between the Plaintiff and (inter alia) the 1st , 2nd & 3rd defendants, referred to in paragraph 9 of the Amended Statement of Claim.
[Formerly #16]  15.	Employment contracts in relation to the persons appearing under the names “Billy”, Virginia Wilson, James Leigh and Patrick Cheng in the organisation chart of the 4th defendant exhibited as SPD-4(g) to the Affidavit of Seamus Patrick Donegan filed herein on 9 th March 2001.

The three categories of documents

9. The judge held and the parties also agreed that the documents that were sought against the 4th defendant can be divided into three groups.

1)  Sales, accounting and shipping documents of models : Items 1, 2, 3, 4, 12 and 13

2)  Incorporation and company documents : Items 6, 7, 8, 9 and 15

3)  Correspondence between the 1st , 2nd and 3rd defendants on the one part and Mr. Ibrahim and the Gateway Companies on the other part and also inter company correspondence between the Gateway Companies and Mr. Ibrahim : Items 10, 11 and 14.

10. The documents referred to in paragraph 8 herein bear reference to the 5th defendant.  The plaintiff had also sought discovery of documents against the 5th defendant but the application was dismissed by the judge.  Hence the reference to the 5th defendant in these documents should be ignored for the purpose of considering the 4th defendant’s appeal. 

Cause of action against the 4th defendant

11. Counsel for the 4th defendant, Ms Eu S.C. (who did not appear in the court below) had addressed us on the cause of action against the 4th defendant.  It is not necessary to go into details for the purpose of this judgment except to say that the tort of unlawful interference with contract by the 4th defendant must involve a breach of contract by the 1st defendant : Club Deluxe Ltd v. Club Metropolitan Ltd and others [1995] 2 HKLR 69 and Clerk & Lindsell on Torts, 18 th Ed, para 24-88 to 24-92.

12. Despite Ms Eu’s submissions to the contrary, I think the plaintiff, for the purpose of the present application, had identified the 1st defendant’s breach of the Agreement.  It is fair to say that this may not be readily apparent on first glance of the Amended Statement of Claim, but reading the pleading as a whole, the breach of the 1st defendant can be seen from at least the following paragraphs of the particulars of breach pleaded in paragraph 16 of the Amended Statement of Claim :

‘h)       ......... the 1st Defendant did use tooling, previously used for making UT Ltd. Products, (i.e. the 1st defendant’s product) to produce essentially identical products for Gateway USA, Gateway UK, Gateway Europe (i.e. members of the Gateway Companies), the 4th Defendant and/or in the “Gate” and “Autoart” brands in order to avoid paying commission to the Plaintiff and in order to sell the same in Germany and Belgium.

k)      .........    the 1st Defendant caused and/or procured the Production Facilities (i.e. Li Ke Toy) and/or other factories to produce Die Cast Models falling within the ambit of “UT Ltd. Products”, as defined in Clauses 6.8, and Schedule 2 to the Agreement, in “Gate” and Autoart” brands (“the New Brands”) for the purpose of eventual sale and/or distribution of the same;

(i)  in Germany and Belgium to exclusion of the Plaintiff’s rights as sole and exclusive distributor under Clause 6.12 of the Agreement;

(ii)  in the Agency Countries without paying to the Plaintiff a sum equal to 5% of any amounts received from the sale or distribution thereof, to which the Plaintiff was entitled under Clauses 6.12 and 6.13 of the Agreement.

l)       (i)      ....... the 1st Defendant sold to the 4th Defendant.....

Die Cast Model Cars for the purpose of Gateway VVI selling and/or distributing the same to the exclusion of the Plaintiff as pleaded in sub-paragraph (k)(i) aforesaid and without paying the 5% commission to the Plaintiff as pleaded in sub-paragraph (k)(ii) aforesaid.

n)        ...... the 1st Defendant caused and/or procured the Production Facilities and/or other factories to produce 1/43 scale Autoart brand street cars and racing cars in breach of Clause 6.8 of the Agreement and Schedule 2 thereto, in particular but not limited to Range Rover, Lotus Turbo, Lotus Esprit, Mitsubishi Lander, Mitsubishi Pajero, Subaru Impreza and Toyota Corolla models, and 1/12 scale Autoart brand street car and/or racing car Mercedes Benz CLK GTR FIA GT 97 Champion;

o)      ...... the 1st Defendant sold the aforesaid 1/43 and 1 1/12 scale cars to the 4th Defendant for the purpose of the eventual sale and/or distribution of the same by the 4th Defendant in breach of Clause 6.8 of the Agreement and Schedule 2 thereto.’

The unlawful interference by the 4th defendant as pleaded

13. The plaintiff claimed in paragraphs 17(c) and (d) of the Amended Statement of Claim that the 4th defendant had unlawfully interfered with the Agreement by

1)  placing orders with the 1st defendant for the manufacture by Li Ke Toy and other factories of models so that the 4th defendant may sell and distribute them in Germany and Belgium to the exclusion of the plaintiff and also in the Agency Territories without the plaintiff being paid commissions.

2)  selling and distributing the models to parties in Belgium and Germany to the exclusion of the plaintiff and also in the Agency Territories without the plaintiff being paid commissions.

The defence of the 4th defendant as pleaded

14. It was denied by the 4th defendant that it had used the tools or that was incorporated under the direction and procurement of the 2nd defendant.

15. In respect of the allegation that it had placed orders with the 1st defendant and carried out sale and distribution of the models, it pleaded that :

‘ Save that it is admitted that the 4th defendant had prior to the end of November 2000 placed orders with the 1st defendant for the manufacture of its own die cast model cars, paragraph 17 sub-paragraphs c and d of the Amended Statement of Claim are denied and the plaintiff is put to strict proof thereof.’

Evidence of the 4th defendant

16. In opposing the application for specific discovery the 4th defendant filed an affidavit in which it stated that was an independent entity set up by a person called Jimmy Arifino Ibrahim (‘Mr. Ibrahim’). 

17. Since 1998 it had placed orders with the 1st defendant for the purchase of model cars for resale under the brand names of ‘Gate’ and ‘Autoart’.  Since 1999 the 4th defendant and the Gateway Companies had started to assist the 1st defendant in marketing and distributing the 1st defendant’s products in countries other than Belgium and Germany.

18. It was also the 4th defendant’s case that the Gateway Companies had concentrated on the development of model cars of three different scales i.e. 1/12, 1/18 and 1/43.

19. The 1/18 models were manufactured by the 1st defendant until the end of November 2000 when it ceased operation and sold the factory and operation to a buyer in China.

20. The 1/12 and 1/43 models were manufactured by a factory called Davidson Limited (‘Davidson’).  The 1st defendant had never manufactured models of these two scales for the 4th  defendant and its companies.  However the 1st defendant would at the request of the Gateway Companies consolidate the products manufactured by Davidson and that of the 1st defendant for shipment purpose.

21. The 4th defendant accepted that in respect of the 1st category of documents it should disclose documents relating to the purchase of models from the 1st defendant and but only in respect of 1/18 models.  It, however, contended that documents relating to the purchase from Davidson of 1/12 and 1/43 models were irrelevant.

The evidence of the plaintiff

22. The plaintiff had put in evidence of Mr. Morot-Gaudry a former employee of a company owed by the 2nd defendant that it was the 2nd defendant who was instrumental in setting up the 4th defendant and the Gateway Companies.  The purpose was solely to bypass the Agreement with the plaintiff.  This was to be achieved by creating a fake company structure to re-brand the 1st defendant’s products (to deprive the plaintiff of its commission and exclusivity rights in Europe) and to compete head-on with the plaintiff by producing the same types of products for the Gateway Companies.

23. He also said that from his conversation with one Mr. Schmadalla who had helped the 2nd defendant with the scheme, Davidson was operated by the 2nd defendant and that ‘he uses an ex-employee as his front man to give the appearance of dissociation’.

The principles

24. The relevant principles for specific discovery under Order 24 Rule 7 of the Rules of the High Court can be summarised as follows :

(1)  There is no jurisdiction to make an order under RSC, O.24, r.7, for the production of documents unless

(a)  there is sufficient evidence that the documents exist which the other party has not disclosed;

(b)  the document or documents relate to matters in issue in the action;

(c)  there is sufficient evidence that the document is in the possession, custody or power of the other party.

(2)  When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure.

(3)  The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.  (See : Berkeley Administration v. McCelland [1990] F.S.R. 381)

The real issue of relevance

25. The real issue that has been focused at this hearing is whether the documents sought to be disclosed are relevant to the issues in this case between the plaintiff and the 4th defendant.  In this context the issue must be one identified in the pleadings : Sun Yuet Tai Ltd v. British American Tobacco Co. (H.K.) Ltd (CACV No. 95 of 1999).  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action : Allington Investments Corp & Others v. First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139.

The first category

26. Mr. Hingorani, counsel for the plaintiff, argued that an issue had indeed been raised in the pleadings on whether the 4th defendant had placed orders with the 1st defendant for the manufacture of the 1/18, 1/12 and 1/43 scale models.  This is on the simple basis that the plaintiff had alleged the 4th defendant had placed orders with the 1st defendant which was denied by the 4th defendant.  Further the 4th defendant had revealed that it had placed orders with Davidson for the 1/12 and 1/43 models.  Discovery of the first category of documents is required to show that the 4th defendant had indeed placed orders with the 1st defendant for all three scale models.

27.  Mr. Hingorani further submitted that the defendants had carried out a conspiracy to defraud the plaintiff.  The plaintiff was not privy to the covert operation and only came to know the details when a private investigator managed to obtain from the rubbish bin of the 1st defendant documents relating to the 4th defendant and the Gateway Companies and the business they intended to carry out.  None of these documents had ever revealed the existence of Davidson.  Mr. Hingorani did not accept Davidson even existed.  Alternatively he said Davidson must be an intermediate either for the 1st or 4th defendant in respect of the placing of orders by the 4th defendant with the 1st defendant.  He submitted that in view of the secrecy of the operation, the plaintiff could not and should not be asked to formulate a claim as to the position of Davidson.

My view

28. One must have certain sympathy with the position of the plaintiff but the rule for specific discovery is based on the requirement that an issue has been raised in the pleading which is relevant to the determination of the dispute between the parties.  In my view, even for the purpose of argument, an affidavit is to be regarded as pleading, the mere fact that the 4th defendant denied it had placed orders with the 1st defendant for the 1/12 and 1/43 scale models but only with Davidson will not by itself justify a discovery of the documents relating to the sale between the 4th defendant and Davidson.

29. The issue now defined by the pleadings is whether the 4th defendant had indeed placed orders with the 1st defendant and distributed these goods causing the 1st defendant to breach its contract with the plaintiff.  The burden of proof on this issue lies with the plaintiff.

30. The 4th defendant had in the defence stated that it had ordered goods from the 1st defendant only until November 2000.  It had further disclosed in the affidavits filed in the discovery proceedings that those goods were only in respect of 1/18 scale model.  On this basis documents relating to the placing of orders with the 1st defendant of the 1/18 scale models must be disclosed because they were relevant to the defined issue.  The 4th defendant had already disclosed those documents. 

31. If the 4th defendant simply say it had only placed orders with the 1st defendant for the 1/18 scale models without any elaboration, it is not required to disclose all its other trading records at the relevant time in order for the plaintiff to ascertain if the 4th  defendant had placed some other orders with the 1st defendant.  This is because the burden of proof lies with the plaintiff to show that the 4th defendant had indeed placed orders with the 1st  defendant and it cannot simply say to the 4th defendant ‘show me your records so that I may check if what you said was correct’.  The other trading activities carried out by the 4th defendant at that time were irrelevant to the defined issue unless these activities were also related to the unlawful interference by the 4th defendant with the 1st defendant’s contractual obligations towards the plaintiff. 

32. The position will be the same when the 4th defendant said that it had placed orders with Davidson of the 1/12 and 1/43 scale models.  The plaintiff is still not entitled to these documents.  This is because at the moment there is simply no issue being raised as to the position of Davidson.  The fact that it may be a company set up by the 2nd defendant is irrelevant unless the plaintiff has identified in the pleadings that Davidson is somehow connected to the plaintiff’s cause of action against the 4th defendant.  If the plaintiff itself is unsure about the status of Davidson, all the more the court should not be asked to speculate and order discovery so that the true position of Davidson may be ascertained.  This will become a case of fishing for evidence which is not the function of discovery.  For this reason the discovery of the first category of documents must be refused.

The second category

33.  I have already stated that the plaintiff had for the purpose of the present application identified the cause of action against the 1st and 4th defendants.  Likewise it had also identified the breach of contract of the 2nd defendant.  The nature of the breach by the 2nd defendant must be that it had in breach of clause 6.15 of the Agreement, not only not caused and procured the 1st defendant to comply with the restraint of trade provisions but that it had actually caused and procured the 1st defendant not to observe them.  This is the only logical way of reading paragraph 16 of the Amended Statement of Claim which pleaded that :

‘ In breach of the agreement..... the 1st , 2nd and/or 3rd defendants have ... embarked on a course of conduct to circumvent their contractual obligations to the plaintiff....’. 

34. This breach by the 2nd defendant in turn caused the 1st defendant to breach its obligations towards the plaintiff.

35. In my view an issue has been raised on whether the 4th defendant and its subsidiaries were incorporated by the 2nd defendant as part of the scheme involving a breach of contract by the 1st and 2nd defendants.  The incorporation and company documents relating to the setting up of the 4th defendant and its subsidiaries (which are foreign companies) must be disclosed. 

36. The plaintiff had conceded before the judge that it would provide the certificate of incorporation of the 4th defendant.  The only qualification is to the ambit of the nature of the statutory records of shareholders in the 4th defendant as identified by Item 6 of the amended schedule.  Ms Eu submitted that they fall foul of the requirement in Deak & Co. (Far East) Ltd v. NM Rothschild & Sons Ltd & Others (1981) HKC 78 in that these documents are not shown to be relevant because they belonged to a class (by reason of their character) but only because of their content and it would be oppressive to search for and discover voluminous documents in order to ascertain the content.  Mr. Hingorani recognised the ambit is too wide and will confine the records to share certificates, bought and sold notes and trust instruments relating to the beneficial ownership of the shares.  I agree that these will be the documents that should be disclosed under Item 6.

The third category

37. As to the third category of documents, the 4th defendant had explained in the 2nd affirmation of Mr. Ibrahim that it had disclosed the correspondence.  Since the plaintiff is not entitled to documents from the defendant relating to the 1/12 and 1/43 scale models which it said was placed with Davidson, the plaintiff is likewise not entitled to documents under this category.

Conclusion

38. Accordingly the appeal is allowed to the extent that the plaintiff is only entitled to the second category of documents as amended.

Costs

39. Although the 4th defendant only succeeded in opposing discovery of two of the three categories of documents, most of the arguments before us were focused on the first category of documents which it had succeeded in opposing.  I will make an order nisi that the 4th defendant is entitled to three quarters of the costs before us and below.

Hon Suffiad J :

40. I agree.