K&L GATES v. NAVIN KUMAR AGGARWAL AND OTHERS

CAMP 202/2018

[2019] HKCA 350

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 202 OF 2018

(ON AN INTENDED APPEAL FROM HCA 1061/2011)

____________

____________

AND

(ON AN INTENDED APPEAL FROM HCA 349/2012)

_____________

____________

(Consolidated by the order of

Deputy High Court Judge B Chu dated 10 July 2013)

___________________

J U D G M E N T

____________________

Hon Lam VP (giving the Judgment of the Court):

Introduction

1.  This is the renewed application for leave to appeal against the decision given on 27 November 2017 (“the Discovery Decision”) by Lok J (“the Judge”) granting discovery order against K & L Gates (“the plaintiff”).  On 12 December 2018, the Judge refused to grant the plaintiff leave to appeal against the Discovery Decision.

2.  By a summons filed on 27 December 2018, the plaintiff renewed before this Court its leave application. The application was supported by a statement of 27 December 2018.

3.  The 9^th, 10^th, 11^th and 14^th defendants in HCA 1061/2011 are the only effective respondents in this renewed application.  Adopting the nomenclatures of the Judge, the 9^th and 11^th defendants are referred to as “the Venetian Defendants”; the 10^th and 14^th Defendants as “the Wynn Defendants”; and they are collectively referred to as the “Casino Defendants”.

4.  The Venetian Defendants lodged statement in opposition on 10 January 2019. The Wynn Defendants lodged statement in opposition on the same date.

5.  Counsel for the plaintiff lodged a short supplemental statement on 16 January 2019. This was objected to by the Wynn Defendants. Their counsel lodged a short supplemental statement on 28 January 2019.

6.  We granted leave and took the supplemental statements into account in processing the renewed application.

7.  The Judge handed down his reasons for refusal of leave on 23 January 2019 (“the Leave Decision”).

Background

8.  The background and the parties’ respective cases are set out in [2] – [13] of the Discovery Decision. For present purposes, we would only highlight as follows.

9.  The 1^st defendant in HCA 1061/2011, Navin Kumar Aggarwal, is a former partner of K & L Gates.  K & L Gates claimed that Aggarwal misapplied or misappropriated the funds in its client accounts for Aggarwal’s personal use.  It was further pleaded that some of the funds belonged to the clients of K & L Gates, but others belonged to the entities that were not its clients (“the Non-clients”). 

10.  According to K & L Gates, Aggarwal confessed that he had without its authority entered into escrow arrangements or loan arrangements with the Non-clients, causing them to transfer funds into K & L Gates’ client accounts.  The Non-clients subsequently instituted proceedings against K & L Gates for the return of the funds.  These proceedings were referred to in the Discovery Proceedings as the “Escrow Actions”.

11.  In the Escrow Actions, K & L Gates pleaded that the moneys from the Non-clients were personal loans by those Non-clients to Aggarwal. This plea was adopted by the Wynn Defendants in the Defence and Counterclaim in HCA 1061/2011 at paragraph 13B(3) and the Venetian Defendants in the Defence and Counterclaim in the same action at para 10(5)(b).

Grounds of Appeal

12.  In the draft Notice of Appeal annexed to the summons, the plaintiff relied on the following grounds for the intended appeal:

(1)  The Judge erred in principle in holding that it was relevant and necessary for the Casino Defendants to conduct a “fund flow analysis” on the transactions in K & L Gates’ client accounts;

(2)  Even if it was necessary to trace the source of the monies transferred into K & L Gates’ client accounts, the Judge was wrong to make the discovery order as the scope of the order was both excessive and oppressive;

(3)  The Judge was wrong in making discovery order in respect of the documents relating to the Escrow Actions because (inter alia), as argued in sub-paragraph (1) above, it was wrong to trace the source of the funds transferred into K & L Gates’ client accounts, and K & L Gates was subjected to implied undertaking not to disclose or use the discovery in Escrow Actions for collateral purpose;

(4)  The Judge erred in rejecting K & L Gates’ assertion that legal privilege applied to the email contained in item 73 of K & L Gates’ List of Documents on the ground that the emails predated Aggarwal’s confession;

(5)  The Judge erred in ordering discovery of the seizure list and the police statements in the criminal proceedings against Aggarwal based on the mere speculation that such documents might contain relevant information; and

(6)  The Judge wrongly applied the blue pencil test and, as a result, substantially rewrote the scope of the discovery applications.

13.  By a letter dated 16 January 2019, solicitors for K & L Gates confirmed that all the grounds contained in the draft notice of appeal had been canvassed before the Judge in the substantive, as well as the leave applications.

Legal Principles

14.  Under section 14AA of the High Court Ordinance (Cap 4), leave to appeal from an interlocutory order or judgment shall not be granted unless the court is satisfied that:

(a)  The appeal has a reasonable prospect of success; or

(b)  There is some other reason in the interests of justice why the appeal should be heard.

15.  The discovery order made by the Judge is a case management decision.  This Court has repeatedly stressed that case management decisions are within the province of first instance judge and the appellate court should not interfere or substitute its own view as to what is reasonable for that of the judge unless it is satisfied that the judge’s decision was plainly wrong.  A party who seeks to challenge a case management decision faces a very high hurdle: he must show that the judge had gone clearly wrong and made orders which clearly involved an injustice or an inability for the trial court to carry out its task or had erred in principle or that the order was irrational: see Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at [31].

16.  With these principles in mind, we now turn to the plaintiff’s proposed Grounds of Appeal.

Discussion

Grounds 1, 2, & 3

17.  It is convenient to deal with Grounds 1, 2, and 3 together. 

18.  At [14] of the Discovery Decision, the Judge identified 7 issues to be dealt with at the trial, including issues (iii) and (iv):

“ (iii) The true nature and terms of the escrow arrangements, whether they were valid or whether Aggarwal had authority from K&L Gates to enter into such arrangements (so that they were binding on K&L Gates), and thus whether K&L Gates had title to the moneys received from the Non-Clients. These further raise the issue of whether the transfers to the Casino Defendants came from such moneys from the Non-Clients. This is because if the source of funds for the transfers were moneys that came from the Non-Clients, then K&L Gates has suffered no loss and cannot maintain the claim against the Casino Defendants in respect of the transfers. Those funds were simply the funds of the Non-Clients or Aggarwal.

(iv) Further, if K&L Gates successfully resisted the claims by the Non-Clients in the Escrow Actions, K&L Gates cannot then recover the same sums from the Casino Defendants.  Thus, the progress and merits of the Escrow Actions, including K&L Gates’ stance in resisting the claims by the Non-Clients are also relevant.”

19.  Mr Coleman SC, counsel for K & L Gates, submitted that the defence of the Casino Defendants was wholly unarguable. Relying on Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at p.572 and 559 and Bracken Partners v Gutteridge [2004] 1 BCLC 377, he contended that the plaintiff is entitled to sue for monies directly stolen from its own bank accounts and received by the Casino Defendants, regardless of who deposited the monies in the first place.

20.  With respect, this appears to be a half-baked attempt to strike out without any summons in the guise of resisting a discovery application. Further, as submitted by Mr Man SC and Ms Wong, in light of the plea as identified at [11] above, the position is by no means as straightforward and clear cut as Mr Coleman suggested. Since the plaintiff did not even mount a proper strike out application regarding that plea, the Judge was entitled to process the discovery application on the basis that the plea was at least arguable.  On that basis, the Judge was entitled to reach the view that the fund-flow analysis is necessary.

21.  As regards the complaint that the discovery order was excessive and oppressive, the Judge had duly taken account of the scope of discovery and its resource implications to the parties. As highlighted by the Judge at [10] of the Leave Decision, apart from the bare assertion that the scope of the discovery order was excessive, no particulars were given as to the difficulties faced by the plaintiff in producing the relevant documents.

22.  As pointed out by Mr Man, the start date of May 2007 was not arbitrary.  It was when Aggarwal first entered into escrow arrangements.

23.  We are not persuaded by Mr Coleman that there is any reasonably arguable ground to challenge the Judge’s exercise of discretion on the extent of discovery.  At [37] of the Discovery Decision, the Judge duly balanced the utility of this discovery against the costs of the exercise. He was the judge docketed for these actions and familiar with the issues in it: see [9] of the Leave Decision.  The general assertions of Mr Coleman in the statement of 27 December 2018 do not begin to put forward an arguable case for this Court’s disturbance of such exercise of discretion.

24.  Even if some documents obtained by the plaintiff in the Escrow Actions are subject to implied undertaking, Mr Man is correct in submitting that the issue of implied undertaking could be addressed at the stage of inspection: see Hollander: Documentary Evidence in Hong Kong para 8-033. 

Ground 4

25.  The plaintiff sought to resist the disclosure of item 73 of the plaintiff’s List of Documents by claiming legal privilege.  In this connection, the plaintiff failed to demonstrate to the satisfaction of the Judge that the item was privileged, see [68] of the Discovery Decision. Having read the evidence identified by Mr Coleman at footnote 7 of the statement of 27 December 2018, we agree with the Judge that the evidential basis for making a claim for legal professional privilege was clearly lacking. 

26.  There is no merit in the submission that the Judge should have given further opportunity to the plaintiff to give further explanation by affidavit.  As pointed out by Mr Man and Ms Wong, the inadequacy of the claim for privilege had been raised well in advance of the hearing, the plaintiff only had themselves to blame if they did not put forward adequate evidence to support their claim before the judge.  The burden of establishing the claim rests upon the party asserting the same: see West London Pipeline v Total UK [2008] 2 CLC 258 at [86].

Ground 5

27.  With respect to Mr Coleman, this ground is plainly unarguable. On a fair reading of [45] of the Discovery Decision, it is clear that the Judge considered the seizure list and the police statements in the criminal proceedings against Aggarwal satisfied the Peruvian Guano test and he did not find the discovery of these documents to be oppressive.  In so doing, the Judge applied the principles he discussed at [15] to [20] of the Discovery Decision.  In our view, no mileage can be gained by the plaintiff by reference to use of the word “may” at [45].

Ground 6

28.  As regards the complaint regarding the blue pencil test, with the greatest respect, we do not find it helpful to refer the exercise of discretion by a judge to refine the scope of discovery as the application of a blue pencil test. In this regard, the obiter references of Deputy High Court Judge Burrell in China Man-made Fiber Corporation v Goldman Sachs HCA 2756/2008, 30 March 2012, at [35] and A Chan J in Li Tak Yee Samuel v Societe Generale Bank and Trust HCA 2478/2009, 16 April 2013 at [42] and Deputy High Court Judge M Ng (as she then was) in Melvin Waxman v Li Fei Yu HCA 1973/2012 at [60] to a “blue pencil test” in the context of a discovery application should be read with caution.

29.  In Man Cheung International Traders Ltd v CLSA Ltd CACV 97/2007, 25 September 2007, at [41] where the Court of Appeal exercised the discretion to limit the scope of discovery when it considered the formulation by the applicant was unsatisfactory, no reference was made to the blue pencil test. 

30.  In the exercise of discretion by the court in a discovery application, as submitted by Mr Man, the overarching criterion is whether the refinement by a judge caused any unfairness or prejudice to the party ordered to give discovery.

31.  We accept that the court should not substantially reformulate an item or a class of documents in such a way that the application is transformed into one of a wholly different nature and character. At the same time, we agree with Deputy High Court Judge M Ng at [60] of Melvin Waxman v Li Fei Yu HCA 1973/2012 that where a request is too wide or imprecise but it has been fairly revealed to the respondent of the request that within the wide and imprecise request there is a proper request, the court can exercise its discretion to fine tune the scope of discovery without occasioning prejudice or unfairness to that respondent.  It is a matter of judgment call in deciding whether a case falls within the former or the latter situation. 

32.  In the present case, the Judge made clear in the Discovery Decision that he only decided on the broad principles and he invited parties to agree on the precise terms of the orders. 

33.  Having regard to the reformulations achieved through such process, we are of the view that the Judge was correct at [11] of the Leave Decision in holding that “K&L Gates has not even begun to identify palpable error of principle as to warrant intervention by the appellate court.”  In this connection, we agree with Mr Man that Mr Coleman’s belated reliance on the re-drafting of W1-W4, W5, W41 and W55 does not take the plaintiff’s case further. The allegation of enlargement of W5 is demonstrably without merit.   

Disposition

34.  Accordingly, there is no reasonable prospect of success in the intended appeal.  Nor do we see any other reason in the interest of justice that the intended appeal should be heard.

35.  We refuse to grant leave to appeal and there is no basis for granting any stay. We dismiss the summons of 27 December 2018.

36.  We also order the plaintiff to bear the costs of the Venetian Defendants (the 9^th and 11^th defendants in HCA 1061/2011) and the Wynn Defendants (the 10^th and 14^th defendants in HCA 1061/2011).  Having considered their statement of costs, we summarily assess the costs of the Venetian Defendants at the sum of $67,000, and the costs of the Wynn Defendants at $85,000.  

37.  We further make an order pursuant to Order 59 rule 2A(8) of the Rules of the High Court (Cap 4A), that no party may request this determination be reconsidered at an oral hearing inter partes.