XCHRX ROSSLYN SERVICES LTD. v. MILIBOW ASSETS LTD. AND OTHERS

HCA 3810/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3810 OF 2000

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J U D G M E N T

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Introduction

1. These are two sets of proceedings scheduled to be tried together on 29 October 2000. But there were as at the date of this hearing a number of outstanding interlocutory applications, including the joinder of a defendant to counterclaim in one, amendments to pleadings and consequential directions in both, applications for further and better particulars, and for discovery, and a challenge to interrogatories. They were consolidated to be heard together, two days being set aside. I shall come to them shortly, after summarising the history.

History

2. Milibow Assets Limited (Milibow) is a subsidiary, indirectly, of Cheung Kong (Holdings) Limited. Rosslyn Services Limited (RSL) and Dooyang Hong Kong Limited (DHK) are subsidiaries, indirectly, of Dooyang Corporation in Korea. Milibow was initially the sole shareholder of Wellko Industrial Limited (WHK). WHK was then and is now the sole shareholder of Dooyang Wellko Shoe Factory Limited (DG Wellko). Wellko Industrial (BVI) Limited (WBVI) was then and is now owned as to 48.125% each by Milibow and RSL. (The remaining 3.75% is owned by a third party investor which plays no part in these proceedings).

3. In 1993 DG Wellko built and fitted out a factory to make sports shoes in Dongguan, PRC. Upon completion it was agreed that WBVI should use the factory and plant for the purpose of making and supplying sports shoes, and to that end WBVI contracted with Nike. The co-shareholders of WBVI governed their relationship in a joint venture agreement executed in May 1993 (the 1993 JVA). At the same time WBVI contracted with Milibow for the use of DG Wellko's factory and plant in a document called the Operation and Management Agreement (the O & M Agreement). The O & M Agreement provided for a fee to be paid by WBVI to Milibow called a rental fee. The O & M Agreement was scheduled to run for a period of five years subject to extension as agreed by the contracting parties. The factory was not, as it turned out, ready for occupation and operation until the following year, and it was subsequently agreed that the rental fee would begin from May 1994.

4. In 1996 Milibow came to sell 50% of its shareholding in WHK to a third party which turned it over to DHK. DHK and Milibow governed their relationship in a joint venture agreement (the 1996 JVA) and a document called the Deed of Adherence, dated respectively June and July 1996. That included, inter alia, DHK's right to half of the rental fee payable by WBVI.

5. Against that background the partners in both the 1993 JVA and 1996 JVA fell out.

6. Milibow claimed default by DHK under the 1996 JVA and default by RSL under the 1993 JVA. It then purported to invoke the respective joint venture agreements and exercise an option to purchase the shares of the defaulting parties in WHK and WBVI respectively at a price to be determined by valuation conducted by the auditor of both companies, Messrs Deloittes Touche Tohmatsu (Deloittes). DHK and RSL deny being in breach giving Milibow the right to purchase their shares and say the valuations carried out by Deloittes are fundamentally flawed.

7. Milibow filed a writ against DHK (action HCA 3810/2000) claiming specific performance of the transfer to it of DHK's shares in WHK at the price fixed by Deloittes. DHK by its existing defence denies Milibow is entitled to the relief it claims. Furthermore, it counterclaims for half of the rental fee due to it but not paid since April 1998 and specific performance of certain of the provisions of the 1996 JVA not performed by Milibow.

8. RSL in turn issued proceedings against Milibow as 1st defendant, WBVI as 2nd defendant and the named 3rd, 4th and 5th defendants, being directors of WBVI appointed to represent Milibow. By that action (HCA 3994/2000) RSL seeks an injunction restraining all defendants from completing the transfer of RSL's shares in WBVI to Milibow and orders invalidating Milibow's claim to be entitled to pursue such transfer. Milibow and the other defendants deny the claim and counterclaim for a declaration that Milibow is entitled to a transfer of RSL's shares in WBVI at a price established by valuation, carried out in compliance with the 1993 JVA.

9. In HCA 3994/2000 RSL sought and was granted an interlocutory injunction, ex parte at first instance. The injunction remains in force. Milibow agreed not to apply for a discharge but upon the basis that the parties would go before the listing judge and ask for an early trial date. They did so, and on 21 February 2001 the trial was fixed to be heard on 29 October 2001, eight days reserved. According to Mr Carolan, representing before me both DHK and RSL, this was on the express understanding with both judge and the opposing side that expert (accountants') reports were still to be exchanged and consequential amendments to the pleadings likely to be applied for. He told me that RSL's report was available in May but the other side's was not until June. The applications to amend the pleadings were made and filed on 29 June and 18 July respectively.

The Applications

10. As it transpired the two days allocated for all outstanding matters proved to be insufficient time. In the event and after consultation it was agreed that I should hear argument on and deal with the two applications for amendment of the pleadings and the joinder with consequential directions. As in any event it was anticipated that the discovery and so on would be likely affected by the outcome of these applications it was agreed that they should be adjourned and fitted into the diary where and if possible before the trial date.

11. Of the two applications, the first is by DHK in which it seeks leave to amend its defence, join WBVI as a 2nd defendant to counterclaim and then expand its counterclaim setting out its cause of action against WBVI. The second is by RSL in which it seeks leave to amend its statement of claim.

The law

12. The grant or refusal of leave to amend pleadings where (as in these cases) leave is required, is a discretionary one. The general principle is that leave to amend should be given where to do so would determine the real questions and controversy between the parties.

13. A convenient statement of the applicable principles is to be found in the House of Lords' decision in Ketteman v Hansel Properties Ltd [1987] 1 AC 189 in the speech of Lord Brandon at 212 F-H:

"First, all such amendments should be made as are necessary to enable the real questions and controversy between the parties to be decided. Secondly, amendments should not be refused solely because they have been made necessary by the honest fault or mistake of the party applying for leave to make them: it is not the function of the court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights. Thirdly, however blameworthy (short of bad faith) may have been a party's failure to plead the subject matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party. Fourthly, there is no injustice to the other party if he can be compensated by appropriate orders as to costs."

14. One of the determinative factors is the materiality and relevance of the proposed amendment.

15. It is with these factors in mind that I now come to consider in turn the two applications.

Application for Leave to Re-amend Defence, Join a 2nd Defendant to Counterclaim and Amend Counterclaim (HCA 3810/2000)

16. The primary defence already pleaded by DHK is that DHK was not in breach of the 1996 JVA; but if it was, Milibow's right to exercise the call option had lapsed or expired.

17. The first series of amendments sought was to expand on the particulars; see proposed paragraphs 7(iii) to (vii).

18. They are, summarized:

7(iii) Milibow did not tender the so-called 'prescribed price' when exercising the option;

(iv) a so-called 'pledge agreement' entered into by DHK (being the primary ground of complaint by Milibow) was not enforceable;

(v) the creation of a pledge is not in any event a breach of the 1996 JVA by its terms (clause 10);

(vi) Milibow was itself in breach of the 1996 JVA;

(vii) The auditor of WHK failed to determine the prescribed price as governed by the 1996 JVA.

19. Mr Yuen, representing before me Milibow, opposed the granting of leave to add all these sub-paragraphs.

20. He said:

7(iii) is immaterial. A failure to tender the price would have nothing to do with whether the right had 'lapsed or expired'. That was an obligation which concerned completion;

(iv) provides no particulars as to why the pledge agreement is unenforceable;

(v) arises from a misunderstanding or a mis-reading of clause 10;

(vi) raising allegations of breach by Milibow has no bearing on Milibow's rights to exercise its option;

(vii) deals with an obligation of the auditor not Milibow. Furthermore, the 'prescribed price' is an issue which arises after the exercise of the option.

21. My view stems primarily from the fact that these amendments are to add to the particulars upon which DHK seeks to rely at trial rather them to introduce a new defence. Whether or not they can be sustained at trial will be matters to be considered and decided then. I propose to allow all the amendments.

22. The subsidiary defence of DHK is that the valuation of the shares undertaken by Deloittes was defective. In addition to grounds of conflict of interest and failure to comply with the provisions of the 1996 JVA it now wishes to expand on those grounds; see proposed paragraphs 12(iv), (vi) to (ix).

23. They are, again summarized:

12(iv) Deloittes were not validly appointed auditors, by virtue of there having been no AGM held at the relevant time to make the appointment;

(vi) the valuation was not undertaken timeously;

(vii) the valuation contains errors of principle and is not a fair reflection of the worth of the shares; inter alia Deloittes wrongfully assumed the O & M Agreement had terminated when by conduct of the parties it had not;

(viii) further or alternatively, DHK was denied the right it was due under the 1996 JVA to make representations to Deloittes and otherwise provide information;

(ix) a report upon which Deloittes relied of the worth of the land and buildings was a gross under-value.

24. Of these proposed amendments Mr Yuen said:

first, generally, where, as here, parties by contract agree to appoint a certain person to certify the value of something or other, the parties are bound by the valuation even if he makes a mistake, short of travelling beyond the scope of the contract, or there are questions of fraud or collusion; see Jones v. Sherwood Computer Services PLC [1992] 1 WLR 277. So, whether or not Deloittes is independent is wholly irrelevant.

25. On the proposed sub-paragraphs he said:

12(iv) is erroneous on the primary ground that Deloittes were validly appointed auditors not dependent upon the holding of an AGM and the validity was not at the material time challenged by DHK;

(vi) has no bearing because as long as the valuation was at a specified date, the date upon which it was prepared is irrelevant;

(vii) is denied. But even if there were errors the rule in Jones v. Sherwood applies;

(viii) is erroneous because the 1996 JVA did not entitle the defaulting shareholder to make representation;

(ix) is caught by Jones v. Sherwood.

26. In considering these proposed amendments it is appropriate first to examine Jones v. Sherwood, which is an English Court of Appeal case.

27. The parties had agreed to the sale and purchase of shares in a company at a price to be ascertained by reference to sales achieved by its subsidiary. The agreement provided that if the parties' respective accountants could not agree then the matter was to be referred to independent accountants to determine and report on the amount of sales. These accountants were to act as experts and not arbitrators and their determination was to be "conclusive and binding for all purposes". The plaintiff brought an action claiming, inter alia, that the report of the independent accountants was erroneous and of no effect. The defendant applied to strike out that part of the claim. The judge at first instance dismissed that application but it was overturned on appeal. Suffice, for now, to quote from the headnote:

"Held, allowing the appeal, that, where parties had agreed to be bound by the report of an expert, the report, whether or not it contained reasons for the conclusion in it, could not be challenged in the courts on the ground that mistakes had been made in its preparation unless it could be shown that the expert had departed from the instructions given to him in a material respect; and that, since the third firm of accountants had done precisely what they had been asked to do and there was no question of bad faith, their determination was not subject to challenge by the plaintiffs and the relevant paragraphs of the statement of claim would therefore be struck out (post, pp. 284F-G, 286H-287B, G, 288H, 289E-290A, D-E).

Campbell v. Edwards [1976] 1 W.L.R. 403, C.A. and Baber v. Kenwood Manufacturing Co. Ltd. [1978] 1 Lloyd's Rep. 175. C.A. applied.

Dean v. Prince [1954] Ch. 409, C.A. considered.

Burgess v. Purchase & Sons (Farms) Ltd. [1983] Ch. 216 disapproved."

28. Mr Yuen also claimed support from two Hong Kong cases; I believe only one is pertinent; that is Mayers v. Dlugash [1994] 1 HKC 755.

29. The parties had agreed to dispose of the assets of a company they equally owed by distribution between them, the distribution to be conducted by an independent third party. It was inconclusive as to whether this person was an arbitrator or an expert. The plaintiff sought his removal as if an arbitrator. Kaplan J was asked to rule on his status as a preliminary point. On the facts of the case he found he was an expert. He said at p 757:

"Arbitration is a tried and tested method of dispute resolution where the parties do not wish to litigate their differences before state courts. Expert determination, although having been used for centuries, is perhaps not so widely known. The classic features of expert determination are:

1. The expert makes a final and binding decision.

2. The decision can only be challenged in the most exceptional circumstances such as where the expert answers the wrong question (see Jones v. Sherwood Computer Services Inc [1992] 1 WLR 277, Campbell v. Edwards [1976] 1 WLR 403 and Nikko Hotels (UK) Ltd v. MEPC (1991) 28 EG 86).

3. The expert can be sued for negligence in the absence of an agreed immunity (Arenson v. Gasson Beckman Rutley [1997] AC 405).

4. The expert's determination cannot be enforced as an arbitral award."

30. Mr Carolan countered with another Hong Kong case, Donnett, William Edward v. Cheung Cheung Shiu [1988] 2 HKLR 454.

31. Parties in a sale and purchase of shares in a company were bound by the Articles to a price determined by valuation by the company's auditor. The plaintiff complained that the auditor, albeit honestly, arrived at a figure which was plainly wrong and should be disregarded.

32. McDougall J held on the facts that this was a proper case for the court to interfere, since the auditor had made a number of errors of principle in his valuation; he found for the plaintiff.

33. Mr Carolan also said there was support in a case of the Queensland Courts entitled Cairns Port Authority v. Department of Lands [1994] 1 QAR 663.

34. He handed up part only of the report of the reasons for the decision arrived at. It seems the dispute concerned a rent review based on the finding of a valuer acting as an expert, not an arbitrator.

35. Part of the summary reads:

"Whilst the question of fraud and collusion are reasonably explicable as being reasons for upsetting any valuation, the difficulty presently facing the courts concerns the matter of an error in valuation. This concerns a distinction between "a mistake as to the process of valuation" and "a mistake sufficient for there to be no valuation in accordance with the terms of the contract". In the former case, it is believed that a mistake as to the process of valuation is not reviewable. However, if the valuation proceeded upon a fundamentally erroneous basis, the question arises as to whether this valuation accords with the terms of the contract or lease (Legal and General Life of Australia Ltd v. A. Hudson Pty Ltd [1985] 1 NSWLR 314; Woolworths Ltd v. Merost Pty Ltd (1988) 14 NSWLR 300). Where an obvious error, for example in mathematical calculations, appears on the face of the valuation, it is thought that this would be reviewable for error (Gollin & Co Ltd v. Karenlee Nominees Pty Ltd (1983) 153 CLR 455). This is an obvious case. The real problem is determining what is merely a mistake as to the process of valuation and what is a valuation which has proceeded on a fundamentally erroneous basis, the latter suggesting substantial error. More recently, in the United Kingdom, in Jones v. Sherwood Computer Services plc [1992] 1 WLR 277 the Court of Appeal refused to permit the challenge of an expert's report unless it could be shown that the expert had departed from the instructions given in a material respect which would ultimately affect the result. It was stated by Dillon L.J. (at 284) that the real question was not what may be obtained from the valuation but whether it was possible to say from all the evidence before the Court what the valuer had done and why it was done. The less evidence available, the more difficult to draw conclusions and thus the more difficulty in challenging the ultimate result.

To summarise the position in Queensland, it would appear that there is ample authority for the following propositions:

- A valuation would not be binding if it is not the valuation the parties had agreed to which would only be the case if the valuer had made a serious fundamental error such as the valuation of the wrong area or a totally erroneous interpretation of the lease under which the valuation occurred.

- This principle would hold good both in respect of speaking and non-speaking valuations although in the case of the latter, there would have to be found compelling evidence to sustain the challenge.

- To what extent, subject to the above, a valuation could be set aside for error of law is still an open question as a valuer would be given a deal of latitude in the interpretation of the rental review clause in a lease, or a lease itself when considering any valuation pursuant to that lease.

- It seems tolerably clear that a valuation could not be set aside because of the valuer making an error in judgment which is a risk that the parties would have to take having agreed for an expert to undertake the process and for that expert's opinion to be final in the circumstances.

36. It seems to me, and I so find, that in the absence of clear cut authority by which this court would be bound under the Common Law rules of precedent, the extent to which Deloittes valuation may be impeached should properly be reserved for full argument at the trial.

37. In respect of these proposed amendments new defences are pleaded. But I take the point that they could not have been properly formulated before the exchange of experts' reports, and the proximity to the trial date is the unfortunate consequence of a busy court timetable combining with a speedy date for trial having been asked for and given.

38. I propose to allow all these amendments as well.

39. The remaining amendments asked for by DHK are in its counterclaim. As presently pleaded, DHK's primary claim is against Milibow for its share of the rental fee paid by WBVI to Milibow but not passed on. The proposed amendments derive from its application to join WBVI as 2nd defendant to the counterclaim and pursue a claim from it direct for its share of the rental fee due but not paid.

40. The amendments comprise the addition of proposed paragraphs 19A to U. Paragraphs 19A to J set out the history and the relationships of the various parties as established by the 1993 and 1996 JVA's, the O & M Agreement and the Deed of Adherence. Paragraph 19K states that by conduct WBVI assumed the obligation to pay DHK or at its direction, its share of the rental fee and did so, from June 1996 to March 1998. Paragraph 19N records this figure - something over HK$18 million. Paragraph 19Q states that the O & M Agreement was not and has never been terminated; WBVI continued to be the sole and exclusive operator, and continued to be liable for the rental fee. Paragraph 19U claims it to be indebted to DHK in a sum precisely calculated to 31 March 2001 being something over HK$33 million, accruing thereafter at more than HK$0.9 million per month. The remaining amendments, including a prayer in this sum, are consequential.

41. In support of this part of the application Mr Carolan submitted DHK has in fact a right to join WBVI without leave but is obliged to seek leave in order to present the claim it now wishes to make against it. He said it is proper that there should be joinder, for the counterclaim is part and parcel of the same subject matter. He conceded it is late; however WBVI has had notice of the claim since June and yet has taken no steps to be represented and to oppose. Moreover Milibow as a co-owner has not been caught unawares.

42. Mr Yuen submitted that the application for joinder and added pleadings should be dismissed because they fail to establish an express or implied contract between DHK and WBVI; nor do they particularize why the conduct of the parties amounts to an assumption of liability. He also argued that to allow a very late application, which incorporates the introduction of a new party with the attendant exchange of pleadings and discovery, would inevitably be disruptive and put at risk the parties being ready for trial in October. He invited me to dismiss the application.

43. I have to say that it is this part of the application that concerns me the most, particularly because of the timing relative to the trial date. On the issue of delay, Mr Carolan has been unable to rely on the same grounds as those put forward to support the leave to amend those pleadings already dealt with, namely, that they could not have been properly formulated until the experts' reports had been swapped. And with the introduction of another party and claim and the further pleadings and discovery which may flow from that, Mr Yuen's concern about meeting the deadline for trial is not fanciful.

44. In the end I am disposed to exercise my discretion in favour of granting the application, because there was something to be said for dealing with the applications to amend in one go, and for the following reasons:

(1) the proposed new party and its co-owner Milibow have been on notice since June;

(2) it is already a party in proceedings to be tried at the same time;

(3) the claim against it arises from the same history of events, involving the same personalities;

(4) factually the issues are straight-forward, or at least have that appearance;

(5) there are still more than two months to go before the trial is due to begin; time enough for all preliminary matters to be dealt with, with due diligence exercised.

Leave to Re-amend Claim in HCA 3994/2000

45. RSL seeks to add new paragraphs 5A to G which provide, by way of background, a history of the relationships variously binding Milibow, DHK and WBVI as established by the 1996 JVA and the O & M Agreement. Paragraph 5H alleges that it was agreed that the O & M Agreement would terminate, at the earliest, on 30 April 1999 if not extended. Paragraphs 11A, 12A and 24A reveal the failed attempt by RSL to make representations before Deloittes proceeded to carry out this valuation. Paragraphs 28(iii) to (vi) allege further grounds that the call option exercised unde the 1993 JVA was invalid and 28A that there was no 'event of default' by RSL. Paragraphs 29(vi) to (xx), 29A and 29B provide additional grounds that Deloittes' valuation was defective. Paragraph 40A alleges that RSL was denied the opportunity of commenting on and verifying information set out in Deloittes' report.

46. Mr Yuen submitted that paragraphs 5A to H are irrelevant as there is no claim for any fee under the O & M Agreement. paragraphs 11A, 12 and 24A are immaterial as the 1993 JVA did not provide for such representations. Paragraphs 28(iii) to (vi) make points which are in turn either not in dispute or wholly bad. Paragraph 28A lacks particulars.

47. The remaining amendments go to the validity of Deloittes' valuation to which his objections already voiced under HCA 3810/2000 were repeated.

48. In essence the most significant amendments are those going to the validity of the Deloittes' valuation. Having ruled in favour in HCA 3810/2000 I do the same, for the same reasons, in this. Paragraphs 5A to 5H present no surprises. No other proposed amendment could be said to be irrelevant or immaterial or prejudicial.

49. I grant the application to amend accordingly.

Costs

50. Before reciting the orders I want to make brief reference as to how I propose to deal with these, bearing in mind that the orders will be nisi at first instance. Subject to argument advocating a contrary course, I propose that they will be to Milibow in HCA 3810/2000 and to Milibow and the 3rd, 4th and 5th defendants in HCA 3994/2000, save and except that the costs of and related to the hearing shall, in HCA 3810/2000, be to DHK and, in HCA 3994/2000, be to RSL. I propose this course because I believe what has been described as the usual order where an application to amend is resisted but allowed is appropriate in both cases; see Hong Kong Civil Procedure 2001, 20/8/51.

51. The orders follow next.

Orders

52. As to HCA 3810/2000:

1. leave is granted to the defendant to join Wellko Industrial (BVI) Limited as the 2nd defendant by counterclaim;

2. leave is granted to the defendant to re-amend the Amended Defence and Counterclaim in form as attached to the summons of 29 June 2001 as revised within 2 days of the date of this judgment; (note: for the avoidance of doubt the revised form is at page 123 bundle B with the following amendments, namely, in 7(iv) the words 'failure of' are replaced by the word 'past', the word 'or' (line 3) is deleted and the words 'as a deed' are inserted after the word 'Defendant' (line 4), and in 7(vii), '(v)' is replaced by '(vi)');

3. leave is granted to the plaintiff to make consequential re-amendment to the Amended Reply and Defence to Counterclaim within 14 days thereafter;

4. there will be a mutual exchange of supplementary witness statements to be completed on or by 3 October 2001;

5. all other applications fixed to be heard on 20 August 2001 but not dealt with including those in HCA 3994/2000 are adjourned to be heard together on a date to be fixed before the designated trial judge, two days to be reserved (if possible);

6. there will be a pre-trial review in respect of this matter and HCA 3994/2000 to be dealt with on the same date as that fixed under paragraph 5 herein;

7. costs of and occasioned by this re-amendment of the Amended Defence and Counterclaim save and except the costs of the hearing itself shall be to the plaintiff taxed if not agreed;

8. the costs of the hearing shall be to the defendant taxed if not agreed;

9. the orders for costs in paragraphs 7 and 8 are nisi at first instance.

53. As to HCA 3994/2000:

1. leave is granted to the plaintiff to re-amend the Amended Statement of Claim dated 15 July 2000 as revised within two days of the date of this judgment; (note: for the avoidance of doubt the revised form is at p. 244 bundle B with the following amendment, namely, in 29B the word 'Defendant' (line 6) is replaced by the word 'Plaintiff');

2. leave is granted for the 1st, 3rd, 4th and 5th defendants to re-amend the Amended Defence and Counterclaim dated 22 July 2000 within 14 days thereafter;

3. leave is granted for the plaintiff to amend its Reply and Defence to Counterclaim dated 6 September 2000 within 14 days thereafter;

4. there will be an exchange of witness statements to be completed on or by 3 October 2001;

5. costs of and occasioned by the re-amendment of the Amended Statement of Claim save and except the costs of the hearing itself shall be to the 1st, 3rd, 4th and 5th defendants taxed if not agreed;

6. the costs of the hearing shall be to the plaintiff taxed if not agreed;

7. the orders for costs in paragraphs 5 and 6 are nisi at first instance.