INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

HCA774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

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BETWEEN

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JUDGMENT

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Introduction

1.  This is an application for specific discovery pursuant to RHC O.24, r.7.  It arises in the following circumstances.

2.  In this action, the plaintiff alleges that by an agreement made on or about 13 October 2006 the 5^th defendant agreed to sell to it 50,000 ordinary shares of the issued share capital of Group Benefit Development Limited (“GBDL”) for a consideration of HK$50.

3.  Notwithstanding that purchase of the shares by the plaintiff, the 5^th defendant is alleged to have sold the same shares subsequently to the 6^th defendant.  On 10 March 2007, the 1^st to 4^th defendants, as directors of GBDL, approved the transfer of the shares from the 5^th defendant to the 6^th defendant.

4.  Accordingly, the plaintiff advances a claim in equity alleging that since 14 October 2006, or at the latest, 16 November 2006 (when the bought and sold notes and instrument of transfer for the shares executed by the 5^th defendant in favour of the plaintiff were stamped), the 5^th defendant was, by virtue of the agreement for sale and purchase of the shares, a bare trustee of the legal title of those shares in GBDL for the plaintiff and therefore owed fiduciary duties to the plaintiff in respect of the shares.

5.  As against the 5^th defendant, the plaintiff claims damages for conversion of the title of the shares and also damages for breach of fiduciary duty.

6.  As against the 1^st to 4^th defendants, the plaintiff seeks injunctive relief against their approving the transfer or registration of transfer of the shares registered in the name of the 6th defendant without the consent of the plaintiff.  The plaintiff also seeks an injunction that the 1^st defendant take all necessary steps and provide all necessary documents to enable the 6^th defendant to transfer the shares back to the plaintiff.  Alternatively, the plaintiff seeks equitable damages in lieu of the injunctive relief.  Further or alternatively, the plaintiff claims damages for procuring or dishonestly and/or knowingly assisting the 5^th defendant (i) to convert a replacement share certificate issued in respect of the 50,000 shares, and (ii) to act in breach of his fiduciary duties.

7.  As against the 6^th defendant, the plaintiff claims a declaration that the 6^th defendant is holding the shares as constructive trustee for the plaintiff and injunctive relief to require the 6^th defendant to transfer the shares to it.  It also makes the same further or alternative claim for damages as advanced against the 1^st to 4^th defendants.

8.  It is material to mention that, in his Defence and Counterclaim, the 5^th defendant alleges that he was induced by misrepresentations made on behalf of the plaintiff to agree to transfer the 50,000 shares in GBDL to the plaintiff by way of gift.  The 5^th defendant maintains that, since the board of GBDL has not approved the transfer, the gift has been rendered imperfect.  The 5^th defendant avers that the plaintiff has no equitable interest in the shares.

9.  The plaintiff and the 5^th defendant have since agreed terms of settlement which are embodied in a Tomlin Order dated 22 December 2009.  The schedule to the order includes a term that the 5^th defendant shall pay the plaintiff a sum of HK$400,000 on the signing of the consent order “in full and final settlement of the Plaintiff’s claim against the 5^th Defendant in this action”.  It is also provided that the 5^th defendant shall provide the plaintiff with a witness statement conforming with the terms of a letter written by his solicitors dated 12 November 2009 on the signing of the consent order.

The application

10.  By summons dated 8 October 2010, the 1^st, 3^rd, 4^th and 6^th defendants (which I shall hereinafter refer to as “the applicants”) apply for an order that the plaintiff give discovery of the following specific documents set out in the schedule to the summons, which reads as follows :

“SCHEDULE

1. Documents created in the context of the negotiation and settlement (the “settlement”) between the Plaintiff and the 5^th Defendant culminating in the signing of the Tomlin Order dated 22^nd December 2009, including but not limited to exchange of correspondence between Solicitors for the Plaintiff and Solicitors for the 5^th Defendant and agreement between the Plaintiff and the 5^th Defendant made in writing or evidence in writing of the agreement between the Plaintiff and the 5^th Defendant.

2. Internal memoranda minutes notes and/or reports of the Plaintiff prepared about the discussion and decision on the settlement.”

11.  The applicants say that the fact of the settlement between the plaintiff and the 5^th defendant gives rise to a crucial issue, namely whether the plaintiff is still entitled to maintain its claim against the other defendants.  The applicants refer to MCC Proceeds Inc v Lehman Brothers Industrial (Europe) [1998] 4 All ER 675 at 686 as authority for the proposition that damages for conversion of a share certificate are the value of the shares.  They submit that, where damages for conversion are assessed on the footing that the claimant is being compensated for the whole of his interest in the goods, settlement of a claim for damages for the wrong extinguishes the claimant’s title to the interest.  They also submit that it would offend the rule against double satisfaction for a claimant compensated in full nonetheless to retain beneficial ownership of something for which he has already been compensated.

The applicable principles

12.  There is no dispute between the parties as to the relevant applicable principles.  On an application under O.24, r.7, the court may require a party to make an affidavit stating whether any document or any class of documents has at any time been in his possession, custody or power if the document relates to one or more of the matters in question in the cause or matter.

13.  There are three prerequisites to the exercise of the Court’s discretion to make an order for specific discovery, namely :

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

(2)   The document or documents relate to matters in issue in the action; and

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

14.  Even if the prerequisites are established, the Court retains a discretion whether or not to order disclosure.  By virtue of O.24, r.8, the Court will not order discovery if it is of the opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.

Discussion

15.  The plaintiff submits that the evidence as to the existence of the documents of which discovery is sought is based on speculation and that it is not sufficient to demonstrate a prima facie case that the documents exist and are in the possession, custody or power of the plaintiff.

16.  What the applicant says in this regard is set out in paragraph 7 of the affirmation of Mak Ka Yan Claire dated 6 October 2010 made in support of the application.  That paragraph reads as follows :

“Before the Plaintiff and the 5^th Defendant arrived at their settlement, it is more likely than not that there has been correspondence back and forth for the negotiation; and recording the terms of offer and counteroffer that ultimately formed the basic terms of the settlement; and it is also quite possible that the Tomlin Order was made pursuant to some agreement made or evidence in writing between the Plaintiff and the 5^th Defendant. Such documents obviously exist but the same have not been disclosed. All these documents relate to matters in issue in the action and they are apparently in the possession, custody or power of the Plaintiff.”

17.  I do not think the applicant’s contention that the documents exist and are in the possession, custody or power of the plaintiff is mere speculation. In my view, it is most improbable that the settlement reflected in the consent order dated 22 December 2009 was not the result of some form of negotiation or correspondence between the respective solicitors of the plaintiff and the 5^th defendant. On the contrary, I consider it simply a matter of commonsense to infer that there must have been written communications between the plaintiff and the 5^th defendant’s respective solicitors and also written internal communications of the plaintiff concerning the terms of the settlement.  Settlements of the type reflected in the consent order do not, as a general rule, come out of the blue and are rarely, if ever, the result of pure oral negotiations.  In the present case, prior to the date of the consent order, the action had already been on foot for well over two and a half years and a number of interlocutory steps had already occurred.  In this regard, I note that : the 5^th defendant had already filed a substantive defence and counterclaim; the 5^th defendant had already made an application to strike out the prayer for damages for conversion; and the plaintiff had already made an unsuccessful application for summary judgment against the 5^th defendant.

18.  As to the need to demonstrate that the documents of which discovery is sought have not been disclosed, it is sufficient to note that the plaintiff has only filed one list of documents in this action, being the List of Documents dated 24 September 2009 and no such documents are listed there.  It is, of course, possible that the settlement agreement had not yet been reached between the plaintiff and the 5^th defendant as at the date of the plaintiff’s List of Documents but no further list of documents has been filed by the plaintiff.  In answer to a letter from the applicant’s solicitors dated 16 September 2010 inviting the plaintiff to file a supplemental list of documents, the plaintiff’s solicitors responded by letter dated 17 September 2010 stating their view that the request for discovery was groundless and confirming that the plaintiff would not make discovery as requested.

19.  The plaintiff also submits that the documents of which discovery is sought are, in the event, not relevant to matters in issue in the action.

20.  I have no hesitation in rejecting this contention.  By an amendment to their defence made on 10 February 2010, the applicants pleaded that by reason of the settlement reflected in the consent order, the plaintiff is no longer entitled to maintain its claim against the 1^st, 3^rd and 4^th defendants for the injunctive relief sought against them and the declaratory and injunctive relief sought against the 6^th defendant “in that the damage allegedly suffered by the Plaintiff in respect of the Subject Shares and its alleged equitable interest therein has been fully satisfied, thereby discharging all causes of action which the Plaintiff might previously have had against the Defendants”.  In the particulars under this plea, the applicants referred to clause 2 of the schedule to the consent order which stipulates that the 5^th defendant shall pay the plaintiff a sum of HK$400,000 upon the signing of the consent order in full and final settlement of the plaintiff’s claims against the 5^th defendant in this action.  The particulars plead that the HK$400,000 sum was paid on or about 21 December 2009 with the result that (a) the plaintiff’s alleged damage in respect of the shares has been fully satisfied so that all causes of action it had previously were thereupon discharged, and (b) if the 5^th defendant had ever divested himself of his equitable interest in the shares, the same has become vested back in the 5^th defendant.

21.  In the light of the pleading referred to above, there is no doubt, in my opinion, that the documents of which discovery is sought are plainly relevant to a matter in issue in the action.  The cases of Jameson v Central Electricity Generating Board [2000] 1 AC 455 and Heaton and others v Axa Equity & Law Assurance Society and others [2002] 2AC 329, in my view, support this conclusion.  Indeed, the latter case demonstrates clearly that the intention of the parties as reflected in the settlement agreement will be relevant to the question of whether a claim against concurrent tortfeasors has been satisfied by virtue of a settlement reached with one tortfeasor.

22.  A more substantive ground of objection to the application for  discovery, however, is the plaintiff’s reliance on the rule of evidence which excludes without prejudice correspondence and communications.

23.  In Rush & Tomkins Ltd v Greater London Council & Anor [1989] 1 AC 1280, the issue arose as to whether without prejudice correspondence leading to a compromise agreement between the plaintiffs and one of the defendants in that case was liable to be disclosed to the remaining defendant.  Lord Griffiths, with whom the other Law Lords agreed, held (at p.1305) :

“I have come to the conclusion that the wiser course is to protect ‘without prejudice’ communications between parties to litigation from production to other parties in the same litigation. In multi-party litigation it is not an infrequent experience that one party takes up an unreasonably intransigent attitude that makes it extremely difficult to settle with him. In such circumstances it would, I think, place a serious fetter on negotiations between other parties if they knew that everything that passed between them would ultimately have to be revealed to the one obdurate litigant. What would in fact happen would be that nothing would be put on paper but this is in itself a recipe for disaster in difficult negotiations which are far better spelt out with precision in writing.

If the party who obtains discovery of the ‘without prejudice’ correspondence can make no use of it at trial it can be of only very limited value to him. It may give some insight into his opponent’s general approach to the issues in the case but in most cases this is likely to be of marginal significance and will probably be revealed to him in direct negotiations in any event. In my view this advantage does not outweigh the damage that would be done to the conduct of settlement negotiations if solicitors thought that what was said and written between them would become common currency available to all other parties to the litigation. In my view the general public policy that applies to protect genuine negotiations from being admissible in evidence should also be extended to protect those negotiations from being discoverable to third parties.” (Emphasis added)

24.  Rush & Tomkins was cited with approval by Ribeiro J (as he then was) in Gross Fortune International Limited v Set Win International Limited, unrep., CACV192/1999, 29.10.99.

25.  It was submitted on behalf of the applicants that the rule in Rush & Tomkins only made admissions in the correspondence inadmissible but did not mean the documents themselves were not discloseable.  This submission cannot, in my view, stand with the passage I have cited from Lord Griffiths’ speech above.

26.  No basis has been put forward to justify lifting the without prejudice privilege rule so as to make the without prejudice correspondence and communications between the plaintiff and the 5^th defendant and the plaintiff’s own internal memoranda in respect of the settlement negotiations admissible in evidence.  That being so, I can see no proper basis for allowing the applicants to have sight of that inadmissible evidence by way of discovery.

27.  There is no doubt that the basis of the settlement between the plaintiff and the 5^th defendant is relevant to the issue of the entitlement of the plaintiff to continue to maintain its claim against the applicants.  The substance of the settlement agreement between the plaintiff and the 5^th defendant is set out in the schedule to the consent order dated 22 December 2009.  It will be a matter of submission in due course as to whether, given the terms of the settlement, it still remains open to the plaintiff to pursue its claims against the 1^st to 4^th defendants and the 6^th defendant.

28.  It was suggested in the course of submissions on behalf of the applicants that there might be open correspondence within the schedule to the summons that ought to be disclosed and for which privilege could not be claimed.  I am not satisfied that it has been shown that such open correspondence exists.  The more natural inference, in my opinion, is that documents of the type set out in the schedule to the summons would be without prejudice materials and therefore would be privileged.  Finally, I do not consider that the reference in the Tomlin Order to one specific letter from the 5^th defendant’s solicitors to the plaintiff’s solicitors would lead to a waiver of privilege attaching to that item of correspondence.  The schedule to the Tomlin Order is not a pleading or affidavit and reference to it does not, in my view, constitute a waiver of privilege.

Disposition and costs

29.  In the circumstances, I dismiss the applicants’ summons for specific discovery.

30.  Having done so, I would add that, as I have noted above, the plaintiff’s original (and only) list of documents was filed before the settlement was reached between the plaintiff and the 5^th defendant. It is plain that the plaintiff must file a supplemental list of documents in which reference is made to the without prejudice materials for which privilege has been claimed.  I direct the plaintiff to file a supplemental list of documents within 14 days of today’s date, such list to be verified by an affidavit or affirmation by the plaintiff.

31.  I will hear the parties on costs.