OHED WINES (HK) LTD AND OTHERS v. FUNG LAI KWAN WINDY AND OTHERS

HCA 1531/2016 and
HCA 1532/2016 (Consolidated)

[2019] HKCFI 2566

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOs 1531 AND 1532 OF 2016

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(Consolidated by Order of Master Ho dated 5 March 2019)

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REASONS FOR DECISION

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A. Introduction

1.  The defendants appeal from a decision of Master Kate Li dated 28 February 2019 in which the Master refused to grant unless orders in relation to discovery and, instead, accepted the undertakings made by the plaintiffs to produce the classes of documents listed in an annex to the Master’s order.

2.  The defendants contend that it was wrong for the Master to refuse to grant an unless order, or the order for specific discovery which was sought in the alternative, in light of the plaintiffs’ persistent failure to comply with previous orders for discovery dating back to October 2017.

3.  The order sought on this appeal is that unless the plaintiffs do give discovery of various classes of documents specified, the claim in the action be dismissed with costs, or alternatively certain paragraphs of the Statement of Claim be struck out.

4.  As a further alternative, an order is sought for specific discovery, together with a verifying affidavit.

5.  At the end of the hearing, following considerable discussion between the parties and the court as to the appropriate order, I refused to grant an unless order, but I did make an order for specific discovery.  The reasons for making that order were largely articulated during the course of discussion, but I set them out briefly in these reasons for my decision.

B.  Background

6.  The 1^st and 2^nd plaintiffs are companies carrying on business trading wine.  The 3^rd plaintiff, Mr Pang is the ultimate shareholder of the 1^st and 2^nd plaintiffs.  He appeared before me in person and because of the fact that he is named himself as a plaintiff I heard his submissions, and I have accepted that they are submissions made also on behalf of the 1^st and 2^nd plaintiffs despite the fact that those plaintiffs are limited companies.

7.  The statement of claim is long and complex, containing many and varied allegations relating to joint ventures, verbal agreements, variation agreements and loans made between the various parties.  I do not purport to set out or address each and every allegation.  It is not necessary.

8.  Essentially, the defendants have joined together in business in order for the 3^rd defendant to sell wine under a brand known as “CARINA LAU”, taking advantage of the well-known name of the 2^nd defendant.  The plaintiffs sold the wine on behalf of the defendants between June 2015 and May 2016 (“the Agency Period”), but thereafter authorisation was apparently withdrawn.  The plaintiffs have sued the defendants for an “operational service fee” calculated at 15% of the Gross Revenue of the 3^rd defendant during the Agency Period, which the plaintiffs say was HK$19,797,080, as well as other various sums incurred during the course of the business or otherwise said to be due.

9.  The defendants have counterclaimed, amongst other things, for unreturned sale proceeds allegedly wrongfully withheld, and damages for conversion of wine inventories.

10.  The documents which the defendants seek essentially relate to the records of sales of all of the wines during the Agency Period as well as thereafter.  The proposition of the defendants appears to be that in fact far more wine has been sold, particularly after the end of the Agency Period and the defendants are entitled (by way of counterclaim) to check all the figures for sales and to an account of the revenue generated from the sales.

C.  The plaintiffs’ failures in discovery

11.  Discovery in this action has a long history.  It has been set out in the affidavits which were before me and in the skeleton argument of the defendants in this appeal.

12.  I am satisfied that the plaintiffs have not diligently complied with their discovery obligations, although I do not seek to set out every instance of non-compliance in these reasons.  They have been summarised in paragraph 20 of the defendants’ skeleton argument.

13.  As a result I am satisfied that some sanction is appropriate as against the plaintiffs for their continued non-compliance with those obligations.

14.  Mr Pang stressed before me that as far as he was concerned the plaintiffs had done everything that they reasonably could, at least recently, to comply with their obligations.  He explained to me the great financial strain that the action was having upon the plaintiffs, and that many of the staff had left.  As a result, the burden fell to him personally and he was not able to operate the computers and the software in a way which would allow him properly to check the work that his staff had previously done in relation to discovery.  He stated that he was doing his best and he believed that he had done all that he could.

15.  Following the order made by the Master, the plaintiffs served their 5^th supplemental list of documents, in which they purported to comply with the undertakings given to the Master. 

16.  Despite that 5^th supplemental list of documents, the defendants contend that the appeal is significant for two primary reasons:

(1)  First, if the order of the Master is overturned the costs order she made will need to be revisited, with the clear implication that the defendants believe that they should be awarded their costs.

(2)  Secondly the defendants do not accept that the plaintiffs’ 5^th supplemental list of documents discloses all the documents sought in the summons before the Master, or which were offered pursuant to the undertakings given.  And unless order granted on appeal would have the utility of requiring an affirmation from the plaintiffs and probably securing the disclosure of further documents.

D.  Analysis

17.  As to those two propositions, the question of costs does not inevitably follow.  Costs are always in the discretion of the court and for reasons which I will articulate further below I decided that the costs below should remain as ordered by the Master, although the costs of the appeal should be paid by the plaintiffs on an indemnity basis.

18.  As to the second reason, I have accepted that further discovery should be given, but I do not accept that an unless order is appropriate.

19.  My brief reasons are as follows.

20.  The claim made by the plaintiffs, to the extent that it is related to the volume of sales made, was confirmed by Mr Pang to be limited to 15% of HK$19,797,080, and that this was the total sales made during the Agency Period.  The defendants’ case, as I understand it, is that there was in fact greater sales. Therefore the defendants do not contest the figure of HK$19,797,080 in the sense of contending that it is too high.  Rather, they appear to accept that figure (and the 15% which is being claimed) but suggest that more revenue was generated which should have been paid to them, with the concomitant consequence that more would be owed to the plaintiffs in respect of their 15% entitlement.

21.  Consequently I cannot see that it is appropriate to grant an unless order in relation to a failure to give discovery of documents going to a sales figure which is not challenged in the sense of it being said that the sales did not occur. 

22.  Mr Pang also confirmed that he did not make a claim for any remuneration relating to the period after the Agency Period.  Once again therefore, it seems to me to be disproportionate to make an unless order dismissing a claim which is unrelated to the discovery sought.

23.  The discovery sought at best for the defendants goes to their ability to prove their counterclaim for additional revenues over and above the amount stated, both within the Agency Period and post the Agency Period.  Hence discovery remains relevant, but it is not appropriate to make it an unless order dismissing the claim if it is not complied with.  There is no logical connection between the discovery and the claim.

24.  As the Court of Appeal has stated in Bruce James Stinson v Gu Ming Gao [2018] HKCA 10, per Kwan JA (as she then was) at paragraph 58, when referring to Mitora Pte Ltd v Agritrade International (Pte) Ltd [2013] 3 SLR 1179:

“ The court emphasised [in Mitora] that the immediate purpose of an unless order is ‘not to punish conduct but to secure a fair trial in accordance with the due process of law’ (§45), and stated that the draconian sanction of striking out a litigant’s claim or defence in its entirety should not be the default consequence of an unless order as it would effectively deprive the litigant of its substantive rights on account of a procedural fault (§46). The guidelines for a ‘more calibrated use’ of such orders are conveniently set out in §45:

‘(a)  ‘unless orders’ stipulating the consequence of dismissal should not be given as a matter of course but as a last resort when the defaulter’s conduct is inexcusable;

(b)  the conditions appended to ‘unless orders’ should as far as possible be tailored to the prejudice which would be suffered should there be non-compliance; and

(c)  other means of penalising contumelious or persistent breaches are available, including but not limited to

(i)  awarding costs on an indemnity basis;

(ii)  ordering the payment of the plaintiff’s claim or part thereof into court where the defaulting party is a defendant …;

(iii)  striking out relevant portions of the defaulting party’s statement of claim or defence rather than the whole;

(iv)  barring the defaulting party from adducing certain classes of evidence or calling related witnesses; and

(v)  raising adverse inferences against the defaulting party at trial.’”

25.  The conditions appended to the proposed unless order as suggested by the defendants would not be tailored to the prejudice which would be suffered should there be non-compliance.  As I have stated the conditions relate to striking out of the claim whereas the prejudice will not relate to the claim but would relate to the counterclaim.

26.  Essentially for those reasons I do not believe that an unless order is appropriate.

27.  However, given my acceptance of the lackadaisical approach to the plaintiffs’ discovery obligations during the course of this action it is appropriate to do what I believe is proportionate and appropriate in an attempt to bring discovery in this action to its rightful conclusion.  It may well be the case that the plaintiffs, through the 5^th supplemental list of documents have in fact disclosed everything that they have available.  I would be surprised if that were the case but I pass no comment on that.  The 5^th supplemental list of documents was not supported by an affidavit in the normal way.  Therefore in my view it is appropriate that the plaintiffs should be given a final opportunity to serve a list of documents which includes all the documents that they have in their possession custody and power in relation to the categories of documents that are sought.  That final list of documents should be supported by an affidavit in the normal form.  The existence of such an affidavit should be the end of the matter on discovery.

28.  This action is clearly moving very slowly.  I do not know entirely the reasons for it, but in my view the matter should be brought to trial as soon as reasonably possible.  Any further delay should be avoided and that includes, in my view, unnecessary interlocutory applications.  I am conscious that the plaintiffs have alleged that the defendants are using the processes of the court in order to delay the resolution of the action and to exhaust the plaintiffs’ funds.  I have no idea whether this is in fact correct and do not make any comment upon it.  My comment on the need to bring this matter to trial as soon as possible reflects only the fact that the writs were issued in 2016, and the action is still only at the discovery stage.  On any view that is not an expeditious resolution of this dispute.  All parties must make a conscious effort and take positive steps to move the action forwards with expedition.

E.  Costs

29.  As to costs, during the course of argument it became clear to me that the costs position as ordered by the Master had become somewhat complex due to the length of time that it had taken to bring the summonses before the Master, and various amendments that had been made to those summonses by the defendants during the course of that period.  Without a full and detailed analysis of all of those issues, which would take considerable time and require the court to investigate in detail the history of the summonses going back to around October 2017, any variation of the order for costs made by the Master would be somewhat arbitrary.

30.  On an appeal of this nature, there is a rehearing of the matter that came before the Master and the court will give the weight which the previous decision of the Master deserves, without being bound by it.  In my view the very detailed decisions of the Master as to costs deserve to be given considerable weight.  The defendants did not identify to me why the decisions were wrong as a matter of principle, and simply relied upon what they suggested was their “win” of the appeal in order to justify a departure from the decision of the Master.  I do not believe that that is appropriate in the circumstances.  The Master accepted undertakings that the plaintiffs would give further discovery.  The order that I have made on this appeal is not significantly different from what the Master ordered, save that it has not been made by way of undertakings and the further discovery is required to be backed by an affidavit.  The defendants have therefore gained more than they achieved before the Master, but they have not achieved what was clearly their ultimate objective, namely an unless order.

31.  In all those circumstances in my view it is appropriate for the detailed costs order of the Master to stand, but the disapproval which the court has expressed of the way in which the plaintiffs have approached their discovery obligations should be reflected in an order for indemnity costs of the appeal to be paid.  Therefore I made no order as to the costs before the Master but ordered indemnity costs to the defendants of the appeal.