STATEVIEW INTERNATIONAL LTD v. LIU BAOSHUN

HCA 162/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 162 OF 2010

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BETWEEN

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J U D G M E N T

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Introduction

1.  This judgment deals with:-

(a)   the plaintiff’s application taken out on 21 June 2010 for summary judgment;

(b)   the defendant’s application taken out earlier on 14 June 2010 for security for costs.

2.  The plaintiff (“Stateview”) commenced this action in February 2010, relying on two agreements both dated 5 July 2004 (one agreement is known as the “patent transfer agreement” and the other the “contract of the transfer of patent application right”) (collectively “the Jul 2004 agreements”).

3.  The statement of claim describes the defendant (“Liu”) as the inventor of a drug called “Aildenafil” for treating impotence or erectile dysfunction (“the ED drug”).  Liu is alleged to have wrongfully refused to transfer the patent ownership and other rights to Stateview in accordance with the Jul 2004 agreements.

4.  Liu denies the claim and asserts that he never signed the Jul 2004 agreements.  According to him, they are forged documents.

Summary Judgment

5.  Stateview contends the above defence to be an incredible fabrication; hence the application referred to in para 1(a) above.

6.  It is undisputed:-

(1)   Stateview was incorporated in April 2004;

(2)   its directors and shareholders include a Mr Qiu Rihui (“Qiu”) and a Mr Wang Jiazhen (“Wang”);

(3)   Liu was introduced to Qiu and Wang in 2001 or 2002 and they (together with others) entered into a discussion for investing in the development and production of the ED drug;

(4)   Liu became a director and shareholder of Stateview in Jun 2004 and remained so until his directorship was terminated by Stateview’s board in May 2010.

The parties seem to agree that an agreement has (or some agreements have) been reached.  But they differ over which the governing contract(s) was/were.

7.  It is also undisputed Liu has received payments from Stateview: RMB5 million on 12 October 2004 and RMB400,000 in 2005.

8.  Given the above, Statement argues that:-

“[given] the fact that [Liu] has signed share transfer agreements (not denied), received substantial consideration as part and parcel of the transactions (not denied) and failed to make a timely complaint (or indeed any complaint other than a denial of the legitimacy in the pleadings ... ), [Liu’s] prospects for succeeding at trial are ... hopeless” (para. 9, Stateview’s skeleton arguments).

9.  Liu’s opposition can be summarized as follows. Stateview bases both this action and the summary judgment application on the Jul 2004 agreements only.  However, in the pre-action letter, Stateview referred to an agreement dated 19 June 2004 (but not the Jul 2004 agreements) where Stateview was not a contracting party.  Further, since 2002, numerous documents in the nature of agreements concerning the ED drug (many having different terms) have been signed; most of them were however not signed by Stateview.

10.  Further to the above, Liu asserts in his affirmation that he would not transfer the patent in the ED drug unless a RMB20 million transfer fee is paid.  His case is that the parties’ contractual relationship was to be governed by (1) an agreement called “關於用枸櫞酸愛地那非新藥專利所有權設立海外公司的協議書” dated 17 May 2004 signed by Liu, Qui, Wang and another person, but not Stateview (“the May 2004 agreement”), and (2) an agreement called “關於愛地那非新藥專利權轉讓事項的補充協議書” dated 9 October 2004 signed by Liu, Qiu, Wong and Wang, but not Stateview (“the Oct 2004 supp agreement”).

11.  The price stated in both of the Jul 2004 agreements was HK$10.  On the other hand, the May 2004 agreement stipulated (among other things) that the total price was RMB20 million payable in 3 instalments of RMB5 million (in October and December 2004) and RMB10 million (in April 2005).  The same consideration of RMB20 million payable in 3 instalments was also stipulated in the Oct 2004 supp agreement.

12.  Liu alleges that Qiu and the others failed to pay the 31 December 2004 instalment (RMB5 million) in accordance with the Oct 2004 supp agreement (and another agreement which Liu has misplaced).  Instead, they asked for time extension for doing so.  This resulted in the execution of an agreement dated 29 December 2004 (“the Dec 2004 further supp agreement”).

13.  Qiu and the others allegedly breached the Dec 2004 further supp agreement again by not paying the instalment thereunder either.  By letters sent in October 2005 and January 2006, Liu chased for payment (as stated above, RMB400,000 was also paid).  Finally, by a letter dated 25 May 2006, Liu informed Qiu and the others the agreement(s) was/were terminated by reason of breach.

14.  Liu also alleges that Qiu and the others unsuccessfully used various unlawful means in the Mainland to attempt to get hold of the ED drug since then.

15.  During the hearing, Stateview complained that some of the points raised by Liu have not been pleaded.  On the other hand, as stated above, Liu emphasised the manner in which Stateview’s case was pleaded.

16.  The law regarding a plaintiff’s position in a summary judgment application is trite:-

“The statement of claim must be complete and good in itself; any defect or omission ... cannot be corrected or supplemented by the plaintiff’s affidavit ... If the defect is one of substance, the application for summary judgment will be dismissed ... ”: Hong Kong Civil Procedure 2010, Vol. 1, para. 14/1/5 (see also the procedure for amending the statement of claim after the issue and service of the summons: para. 14/1/6).

The plaintiff’s supporting affidavit:-

“[verifies] by reference to the facts stated in the statement of claim ... The affidavit need not set out all the particulars, nor verify the facts except by reference to the statement of claim ... ”: Hong Kong Civil Procedure 2010, Vol. 1, para. 14/2/6.

In other words, the plaintiff can only proceed on the basis of the case pleaded in the statement of claim.

17.  There is no such legal restriction on the defendant’s part, although any change of stance can be taken into account when the court is considering if the defendant has been able to discharge the burden cast upon him by Ord 14 and Ord 86 to show that the matter ought to be tried.

18.  Applying the above principles to this application, I find that Liu has discharged the burden of showing that this action ought to be tried.

19.  If the points raised by Liu were treated as putting forth a defence that Stateview has no locus standi to sue because the Stateview was not a contracting party to the May 2004 agreement or the Oct 2004 supp agreement, it is true such a line of defence has not been pleaded.

20.  However, I do not understand Liu to be putting forth such a defence in this application.  In effect, Liu’s case in this application is that, because the contemporaneous documents show that the governing contracts may well be the May 2004 agreement and/or the Oct 2004 supp agreement.  The terms of those agreements were quite different from those of the Jul 2004 agreements.  Accordingly, his defence that he never entered into the Jul 2004 agreements and the Jul 2004 agreements were forged documents is a “real or bona fide defence” or is “reasonably capable of belief” or “believable” and is not “frivolous or practically moonshine”: see those (and other similar) phrases in Hong Kong Civil Procedure 2010, Vol 1, para 14/4/9.

21.  Considered in such light, those points have been legitimately raised by Liu.

22.  By reason of the matters aforesaid, and that the primary relief sought by Stateview is declaration orders to the effect Stateview is the owner of the copyright in the materials relating to the ED drug and the trademark owner of the same (and other related relief), this is a case where Liu should be given leave to defend this action.

23.  Despite Stateview’s argument to the contrary, I do not find it appropriate to impose condition(s) for leave to defend.  On the contrary, because the summary judgment application was taken out after Liu has made known his defence, this application falls within Ord 14 r 7(1) and Ord 86 r 6.  Accordingly, this application is dismissed.

24.  Because I am able to determine this application on the merits, it is unnecessary to consider whether this application, which involves the ownership of a patent, should fall under Ord 14 or Ord 86.

Security for Costs

25.  It is undisputed Stateview was incorporated overseas.  Stateview also accepts that it was set up “for the specific purpose of holding the intellectual property rights in [the ED drug]” (2^nd affirmation of Wong Kin On dated 9 July 2010 (“Wong affm”)).

26.  Liu makes this application contending that Stateview is ordinarily resident outside Hong Kong; namely, it is an overseas company having no (or no known) substantial presence or assets in Hong Kong.

27.  Stateview opposes this application firstly on the ground that its central management and control is local.  Liu accepts that Stateview’s place of ordinary residence is to be determined by reference to the location of its central management and control, but contends that the same is not local.

28.  Stateview relies on several factual matters in support of the above contention (see Wong affm for details).  I agree with Liu that these matters, whether viewed singularly or accumulatively, cannot provide that support.

29.  First, Stateview says that its board meetings were held, and book and accounts and business records are kept, at an office unit in Admiralty.

30.  I agree with Liu that the totality of the evidence shows that Stateview’s business is non-trading; the above-said address was for all practical purposes in the nature of a “correspondence” address (for lack of a better term).  That address was shared by Stateview with “numerous private companies”.  When a clerk of Liu’s solicitors went to the address, he did not see any signboard of Stateview.  The receptionist there need to ask other colleagues before she could confirm Stateview was located there.  The receptionist’s affirmation confirms her lack of knowledge of Stateview:-

“I copied down the name of Stateview [from the document shown by the solicitor clerk], and then I called Michelle Yu on the intercom. I asked Ms. Yu:

‘... (Is there a company here by the name [Stateview])?’

Ms Yu replied:

‘... (Yes. Talk to Patrick Jim.)’

I then called Mr. Jim and told him that there was a man asking about Stateview. Mr Jim came out to the reception shortly after ... ”.

31.  The said Mr Jim gave a vague description of his connection with Stateview.  He deposed:-

“I assist Wong Kin On, who is a director of [Stateview], the Plaintiff ... ”.

32.  Secondly, Stateview maintains a bank account in Hong Kong.  As Liu correctly points out, the balance kept in the bank account appears to be a relatively small sum.

33.  Finally, many of Stateview’s directors are not Hong Kong residents; they are either Mainland or overseas residents.

34.  Apart from the above factual matters, Stateview asks the court to exercise its discretion not to order security for costs to be provided by reason of the merits of the parties’ respective case.

35.  I shall not go into the details; in short, by reason of the matters set out above, I do not consider this to be a case where:-

“... it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure”,

or

“... [Stateview] demonstrated a very high probability of success”:

Hong Kong Civil Procedure 2010, Vol 1, para. 23/3/3 citing Sunchase International Group (China) Ltd. and Others v Vincor Group of Companies (Investment) Ltd. and Others [2004] 1 HKLRD 731 and Leslie Fay Companies Incorporation (t/a Breckenridge Sportswear Division) v Cheerio Ltd [1990] 1 HKC 463.

36.  Finally, there is no basis to show that Stateview’s claim may be stifled by the provision of security (for example, by reason of Stateview’s financial ability) or that this application is otherwise oppressive.

37.  Accordingly, I will exercise my discretion to order Stateview to provide security for Liu’s costs.  Liu has not specified the form of security in his summons; nor has Stateview indicated what the form of security should be.  Security of costs is usually provided either by payment into court or by bank guarantee(s).  Unless the parties lodge with court and exchange written submissions to the contrary within 7 days, security is to be provided by way of payment-in.

38.  Liu seeks security for costs to be provided up to the exchange of witness statements and expert reports.  The proposed amount of security is about $1.42 million.  Stateview argues that the amount claimed is excessive and proposes a reduction of about $670,000.

39.  Stateview argues that items such as overseas trip expenses are unnecessary, some of the items for communications are unreasonable and some other items (such as supplemental list of documents) are speculative.

40.  Apart from Stateview’s arguments, I also note that the amount is based on the charges of two fee earners, which is not what is usually allowable on party-and-party taxation.

41.  At the end, I consider a security in the sum of $500,000 to be appropriate.

42.  Subject to the above observations, I will make an order in terms of Liu’s summons.

Costs Order Nisi

43.  There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of both applications be paid by Stateview to Liu.

44.  I consider summary assessment of those costs to be appropriate.  For such purpose:-

(a)   Liu be at liberty to lodge with court and serve a statement of costs (or two separate sets of such statement, if necessary) within 7 days;

(b)   Stateview be at liberty to lodge with court and serve a statement of objection (or two separate sets of such statement (depending on the number of Liu’s statement of costs)) within 7 days thereafter.