LAU WING YAN AND OTHERS v. CHU KONG AND OTHERS

HCA 2562/2014

[2018] HKCFI 1115

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2562 OF 2014

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D E C I S I O N

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THE APPLICATIONS

1.  The following applications are before this Court:

(a)  The plaintiff’s summons for leave to the parties to adduce expert evidence on the profits that could have been generated by the 4^th plaintiff from the commercial operation of the vessel as per the terms as set out in the summons; and

(b)  The 1^st and the 3^rd defendants’ (“the defendants”) applications for leave to amend their Amended Defence and Defence respectively as per the drafts annexed with the summons.

2.  The applications are contested and the parties are legally represented.[1]

3.  The parties agree that the applications for amendments to the Defences should be dealt with first as they will affect the determination of expert evidence.  I will do so accordingly.

THE AGREED FACTS

4.  The parties agree to the facts as set out in the written submissions of the defendants below:

“ (1)  D4 was the registered owner of a vessel named Grain Pearl (“Vessel”) since December 2012 until 2015 when the Vessel was sold;

(2)  P1, P2 and P3 and D1, D2 and D3 were collectively the “ultimate shareholders of D4” (on Ps’ case) or “beneficial owners of the Vessel” (on D1/D3’s case) while D5 (a BVI company) was the sole shareholder of D4;

(3)  At all material times, P4 maintained a relationship with D4 in respect of the Vessel:

(a)  Ps contend that P4 was the “commercial manager” of the Vessel; and

(b)  D1/D3 contend that P4 was “commercial agent or in house chartering broker” of D4;

(4)  In particular, it is Ps’ case that P1, P2, P3 and D1, D2 (being the “ultimate shareholders” or “beneficial owners”) agreed on terms of the “operation and management of the” Vessel in the form of a “First Agreement” and a “Second Agreement”.  D1/D3’s case is that no such agreement existed.

(5)  In around November 2014, D4 terminated the above relationship between D4 and P4, in relation to which:

(a)  Ps contend that this was in breach of the “First Agreement” and the “Second Agreement”; and

(b)  D1/D3 contend that D4 was entitled to do so, given, amongst other things, P4’s failure to account to D4 for revenue generated by the Vessel as a result of the Vessel being chartered out to various third parties.

(6)  Ps further make a number of allegations against Ds, including that D1 caused D4 to issue a lien notice on 5 December 2014, asserting a lien on certain cargoes in question (“the “Cargoes”).”[2]

DISCUSSION

The amendments applications

5.  The plaintiffs take issue with the following:

(a)  The proposed “green” amendments in the draft D1’s Re-Amended Defence at §§15.b, 16.d, 16.e.iii, 16.f.iii and 49; and

(b)  The corresponding proposed “red” amendments in the draft D3’s Amended Defence, at §§15.b, 16.d, 16.e.iii, §16.f.iii and 49.

6.  The proposed amendments at §§15.b, 16.d, 16.e.iii & 16.f.iii amendments relate to the alleged “market practice” and “trade practice”.

7.  The proposed amendments at §49 are made for the purpose of adding a new plea of mitigation, in response to P4’s claim for damages.

Paragraph 49

8.  It will be convenient to deal with §49 on the new plea of mitigation at this initial stage as this is a short point.  The defendants rely upon the authority of Hsu Ming Chi v. Lam Shu Chit and Others (Unreported, HCCL 8/2013, 22 October 2014) at §§14-15 (per Ng J).  The court held that if the proposed amendment is bound to fail, no leave should be given, taking the proposed amendment at its highest, following the case of Bank of China v Leigh Hardwick (unrep., HCA 1110/2006, 28 August 2013 per A. Chan J. at §2)

9.  I agree with Mr. Wong, S.C. for the plaintiffs that P4 has no duty to sell the vessel.  In fact, I do not think it has the authority to do so, the decision being within the province of the beneficial owners themselves.

10.  In Mega Yield International Holdings Ltd v Fonfair Co Ltd (unreported, HCA 948/2009, DHCJ Woo, 5 March 2013, §33), the court held on mitigation as follows:

“On mitigation of damage, the relevant law can be found in Chitty on Contracts, 31st Ed, Vol 1 “General Principles” (“Chitty”) paras 26-077 to 26-079.  The claimant is to take all reasonable steps to mitigate his loss consequent upon the breach. The onus of proving the claimant’s failure to have taken certain steps to avoid some part of his loss is on the defendant, who must show that the claimant ought as a reasonable man to have taken certain steps to mitigate his loss. However, the claimant is not “under any obligation to do anything other than in the ordinary course of business”; the standard is not a high one, since the defendant is a wrongdoer.”

11.  It is the parties’ pleaded case that the authority to sell the vessel remains with the other plaintiffs other than the 4^th plaintiff.  It is also agreed in the pleadings that the beneficiaries, including the defendants had argument over the terms of the offer and the sale was not put through.  In the circumstances, it is unrealistic to hold the 4^th plaintiff liable for not selling the vessel to mitigate the loss.  The defendants submit that they can change the pleading to hold the 1^st to the 3^rd plaintiffs liable for mitigation. But this is not possible because now the claim is between the 4^th plaintiff and the defendants and the defendants themselves are the beneficiaries, who had dispute with the plaintiffs over the offer of sale.

12.  The defendants’ proposed amendment of paragraph 49 is bound to fail.  As such, the proposed amendment should not be allowed.

Paragraphs 15.b, 16.d, 16.e.iii & 16.f.iii amendments

13.  The plaintiffs have raised the grounds of objection of (1) undue and unexplained delay; (2) the terms of “market practice”, “standard practice” or “trade practice” are not particularized and (3) the amendments being defective, irrelevant and/or unnecessary for the fair disposal of the matter.

14.  The defendants’ argument is that the proposed amendments are relevant to the issues of whether there were oral agreements and the terms of such oral agreement; there is nothing new about the reliance on ‘market practice’, ‘standard practice’ or ‘trade practice’, which have already been canvassed in existing pleadings and witness statements and this is consistent with the plaintiffs’ witness statements.

15.  The plaintiffs rely upon the following authorities in support of their argument:

(a)  Raytech Industries Co Ltd v Leung Wai Kit (unreported, HCA 1360/2011, DHCJ Le Pichon, 16 May 2014 at §§16-17, 30-32).  In this case, the main emphasis was on the conduct of the defendant. The court found that the defendant was deliberately delaying the matter by taking out specific discovery application, but ultimately withdrew it at the last minute; did not progress through the various Case Management Conferences; if the application for amendment (to plead limitation) were allowed, there would be further delay of two years, causing significant prejudice to the plaintiff[3]. The court also held that “Ultimately it is a question of weighing up the various competing factors. I do not consider that absent the proposed amendment, the real question cannot be tried….”  It was on those bases she dismissed the appeal against the Master’s refusal of the defendant’s application for amendment.

(b)  Hesson Development Ltd v Tang Ki Fan Tso with Tang Tin Kwai as Manager (unreported, HCA 5584/1998, Chu J. (as she then was) 30 September 2003) where the court required explanation for the delay, otherwise it could not determine whether the amendment was occasioned by genuine mistake or otherwise.  [7] As a general principle, pure delay will not be sufficient to bar an application to amend, but this, coupled with the lack of particulars and other factors, the court would refuse to exercise its discretion to allow the application for amendments.  [13]

16.  The defendants rely upon the authority of

(a)  Crema v. Cenkos Securities plc [2011] 1 WLR, 2078 at paras. 42-43 and 45:-

“The Belize case confirms that a court must consider all the background knowledge which would be reasonably available to the parties when deciding whether or not a wholly written contract is to be interpreted so as to contain a term which is implicit. The same must be true of a contract which is partly oral and partly in writing or even wholly oral. Only in that way can a court be put in the position of being what Lord Hoffmann calls the ‘reasonable addressee’ in the Belize case at [18]. It seems to me that it must follow that, in either case, a court will be entitled to receive independent expert evidence of what ‘market practice’ is if that is relevant background knowledge for the purposes of interpreting the terms of the contract, both explicit and implicit. Contrary to the submission of Mr Page, I think that this will be particularly so if there is a dispute about the ‘market practice’ between the rival parties to the litigation.

In my experience, it has been common practice for the Commercial Court to hear evidence of ‘market practice’, which does not amount to evidence of an alleged ‘trade usage or custom’, in order to assist the court with a full understanding of the factual background to the proper construction of a written contract. The landmark decision of the House of Lords in Prenn v Simmonds reminded both judges and practitioners that written contracts were not to be interpreted ‘isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations'. Therefore, evidence of the factual background known to the parties at and before the date of the contract, including evidence of the ‘genesis' and objectively the ‘aim’ of the transaction, but not of negotiations, was admissible.

…

If expert evidence is admissible to provide the background against which to construe a wholly written contract, including the exercise of construction which involves determining whether there is an ‘implied term’ as analysed by Lord Hoffmann in the Belize case, then it seems to me that the same exercise must logically be permissible in the case of construing a partly written and partly oral contract. What the parties agreed, expressly or implicitly, can only be judged against the factual background they knew, which must include practices of any particular market in which they operate and in which the agreement was made” (emphasis added)[4]

(b) Hsu Ming Chi v. Lam Shu Chit and Others (Unreported, HCCL 8/2013, 22 October 2014) at §§14-15 (per Ng J):

“Leave is readily granted to amend before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail. While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation”

There is no dispute on the legal principles above.

17.  Mr. A. Wong, Senior Counsel acting for the plaintiffs argues that the authority of Crema does not assist the defendants because there is no issue of implied terms or construction of written terms on the existing pleadings.

18.  The defendants submit that the purpose of this case is to allow the court to have a full picture of the factual circumstances, including the market and trade practices in order to determine the credibility of the plaintiffs’ evidence in relation to the oral agreements.  But this is not the ratio decidendi of this case.  The ratio is on the circumstances for the court to infer any implied term of the contract.

19.  The defendants are insisting that there was no oral agreement between the 4^th plaintiff and the 4^th defendant and the plaintiffs’ pleaded First and Second Oral Agreements are flatly denied.[5]  The real issue between the parties is therefore whether there were First Agreement and Second Agreement orally made as alleged by the plaintiffs and pleaded in the Statement of Claim.  Since the defendants deny such oral agreements, the issues of the terms or the implied terms of a contract simply do not come into play.

20.  If the oral agreements are established by the plaintiffs, there will be question, as can be argued by the defendants, that should such terms be subject to the market and trade practices?  If they are, then there has to be expert evidence on what these market and trade practices should be.  The plaintiffs have in their written submissions said that their relationship was not of arm’s length.  As such, the market and trade practices are not as applicable as they are in the ordinary course of business.  On this issue, the defendants have raised no objection in their written submissions.

21.  I have to bear in mind what the plaintiffs have submitted to me this morning that the relationship between the 4^th plaintiff and the 4^th defendant is not an ordinary market relationship in that the 4^th plaintiff is the guarantor of the loans made by the bank for the purpose of purchase of the vessel.  It has the interest to ensure that the loan is to be repaid to the bank in accordance with the terms of the loan agreement.  The defendants have no dispute over this relationship.  In the circumstances, as submitted by the plaintiffs’ Senior Counsel, the dealings or agreement between the plaintiffs and the defendants are of special relationship, not an arm’s length as the ordinary market relationship.  As such, the so-called market or trade practice has no relevance to the dealings or agreements.  In any event, the market or trade practices can be overridden by the parties’ express agreement.

22.  As DHCJ Le Pichon said in her Decision in Raytech Industries Co Ltd, “Ultimately it is a question of weighing up the various competing factors. …”, which generally applies to the exercise of the court’s discretion in interlocutory applications, I shall adopt the same approach here.

23.  Having taken into consideration of the following factors, I decide to disallow the defendants’ application for the proposed amendments.

(a)  The defendants were in breach of Master Au-Yeung’s Order dated 11 September 2017 that they should take out all interlocutory applications on or before 30 October 2017.  They took out their application on 7 February 2018.[6]

(b)  Not only have the defendants not taken out an application for leave to take out the application out of time, they had not even told this Court the reasons for not being able to comply with Master Au-Yeung’s Order.

(c)  Although the defendants may be right to say that they have the witness statements containing market and trade practices, the witness statements cannot take the place of the pleadings. See Hesson Development Ltd.  The defendants had not pleaded alternative defence that if the oral agreements are established, the terms are subject to market and trade practices.  If they had pleaded this, they have to set out what kind of market and trade practices that should be applicable to their cases.  This is necessary in order to limit the scope of argument for the preparation of the evidence for the trial.

(d)  The fact that the plaintiffs had mentioned “fairly common practice” and “one of the characteristics of the shipping industry” in their witness statements does not support the defendants’ argument because those terms were said under different context.  In any event, they will not entitle the defendants to make the proposed amendments.

(e)  The defendants’ defence to the alleged oral agreements is clear. They flatly deny the existence of such oral agreements.  The real issue of dispute between the parties is whether or not there was such oral agreements; and if so, what the terms are.  The proposed amendments to incorporate the term of “market practice” and “trade practice” is simply not relevant to the issues of dispute, taking into account of their special relationship, which the defendants do not dispute.  If the application is allowed, there will be further witness statements and expert evidence will be required. Here in the proposed amendments, there is no particulars on what aspects of the “market practice” and “trade practice” would be relevant to the issues in dispute.  If the defendants are genuine in their pleaded cases, they should be able to tell this Court what aspects of such market and trade practices should be involved.  The present pleadings will be asking the experts to set out all market and trade practices of this business.  This cannot be right.  Despite the plaintiffs having raised this issue of lack of particulars in the written submissions, the defendants have not supplied me with the particulars at this hearing.

(f)  As such, the proposed amendments will be inconsistent with O.20, r.8 (1A) of RHC, that is, they are necessary either for disposing fairly of the cause of matter or for saving costs.  Quite the contrary is true.

(g)  Further, in the case of Hui Yin Sang & Another v Tsoi Ping Kwan & Another (unreported, HCA 392/2008, T. Au J., 28 January 2010 §25(9) & (10)), the court held that one of the objectives of O.18, r.12A RHC “is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives.  The party also simply could not properly verify the pleading as he is now required to do.”

(h)  Ultimately, I consider that not allowing the proposed amendments will not affect the real issues of the disputes between the parties to be tried fairly at the trial.

The expert evidence application

24.  The defendants have no objection that assessment of damages requires expert evidence.  They only ask this Court to incorporate the issues relating to the market and trade practices in the expert evidence.

25.  The defendants further submit that even if this Court does not allow the proposed amendments to the pleadings, those proposed mandates for expert evidence should be adopted if the plaintiffs are to assess the damages.

26.  The plaintiffs have confirmed that they do not require those proposed mandates as proposed by the defendants because they are irrelevant.

27.  It is therefore the defendants’ application for those mandates to be incorporated into the directions for expert evidence. But the defendants have the difficulty because there is no application before me and such application, if made now, is out of time already. But the defendants have no explanation for this.

28.  Having considered the submissions of the plaintiffs, I agree that they do not require the defendants’ proposed expert directions.  This is very much a matter for the plaintiffs.

29.  I shall therefore accede to the plaintiffs’ request on their proposed expert evidence as set out in their summons.

Costs and order

30.  As to the costs of the applications, the costs follow the event and as agreed by the defendants, it should be certified for two counsel for the plaintiffs.  The plaintiffs have produced a bill of five pages.  The defendants ask for time to consider and make paper submissions within 14 days from the date hereof.  I agree.  No reply is required from the plaintiffs.

31.  The court now makes an order in terms as follows:

(a)  The defendants’ summons be dismissed;

(b)  The plaintiffs’ application for expert evidence is allowed in terms of the summons as amended (paragraph 7 deleted);

(c)  The costs of the application be dealt with in accordance with paragraph 30 above.

32.  By consent, this Case Management Conference is adjourned to a date to be provided by the Court not before October, 2018 before a Master and the parties shall file and serve the Listing Questionnaires for the hearing.  The costs of this Case Management Conference (30 minutes) shall be in the cause.